-----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, IG1EljLgdCjDyNLkgLaoVCgOFX7jfSuCuIGbXykhfUqKGugRnsU0qk4utvejjuEQ 9hvyujAwtlrIpaI3sd1GZA== 0001019687-03-000633.txt : 20030331 0001019687-03-000633.hdr.sgml : 20030331 20030331162102 ACCESSION NUMBER: 0001019687-03-000633 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 03631040 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-123102.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (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, 2002. 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 pursuant 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| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting common equity held by nonaffiliates of the registrant computed by reference to the closing sale price of such stock, was approximately $4,078,744 at June 28, 2002. The registrant has no non-voting common equity. The number of shares of the registrant's common stock, $0.0033 par value, outstanding as of March 14, 2003 was 21,576,788. DOCUMENTS INCORPORATED BY REFERENCE: NONE. ================================================================================ PART I PAGE ITEM 1. BUSINESS........................................................... 3 ITEM 2. PROPERTIES.........................................................22 ITEM 3. LEGAL PROCEEDINGS..................................................24 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...........46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............................................47 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................48 ITEM 11. EXECUTIVE COMPENSATION.............................................50 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS....................................57 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................59 ITEM 14. CONTROLS AND PROCEDURES............................................59 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...59 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE...............F-1 INDEX TO EXHIBITS.............................................................60 SIGNATURES ...................................................................66 CERTIFICATIONS................................................................67 EXHIBITS FILED WITH THIS REPORT...............................................69 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 wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware corporation formed in 1984 and based in the United States ("CXR Telcom"), and CXR, S.A.S.U., a company organized under the laws of France in 1973 and based in France ("CXR France"). These two subsidiaries manufacture, assemble and distribute transmission and network access products and telecommunications field and central office test instruments. On March 26, 1997 we acquired our third 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, defense and aerospace markets. In an effort to focus our attention and working capital on our electronic components for the aerospace and defense markets and on our communication products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc., a manufacturer of printed circuit boards, 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. T-Com was a privately-held telecommunications test instrument manufacturer located in Sunnyvale, California. T-Com produced central office test equipment, which is equipment that is typically used in carrier company telephone switching centers and network operating centers. Prior to the T-Com acquisition, our telecommunications test instrument 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, communications companies and other purchasers of communications 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 and circumstances allow. We also believed that we would be able to take advantage of T-Com cross-marketing opportunities for new central office equipment we were planning to develop and our existing field equipment. However, since the T-Com acquisition, our sales of both field and central office test instruments have declined considerably as the telecommunications industry has experienced a severe general downturn. 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 retained 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 operating subsidiaries, XET Corporation, CXR Telcom and CXR France, and through the divisions and subsidiaries of those subsidiaries, we design, develop, manufacture, assemble, and market products and services in the following two business segments: 3 o Electronic Components -- digital switches -- electronic power supplies o Communications Equipment -- a range of transmission and network access products for accessing public and private networks for the transmission of data, voice and video -- communications test instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) Our sales are primarily in North America, Europe and Asia. Financial information regarding our sales by geographic area is contained in Note 14 of our audited consolidated financial statements that are included in Item 8 of Part II of this report. Sales to customers in the electronic components segment, primarily to aerospace customers, defense contractors and industrial customers, were 59.1% of our total net sales during the year ended December 31, 2002. The remainder of our sales were to telecommunications carrier customers and communications products end users. Our objective in our electronic components business is to become the supplier of choice for harsh environment switches and custom power supplies. Our objective in our transmission and network access products and communications test instruments business is to become a leader in quality, cost effective solutions to meet the requirements of communications equipment customers. We believe that we can achieve these objectives through customer-oriented product development, superior product solutions, and excellence in local market service and support. INDUSTRY OVERVIEW 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, defense, 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, defense and industrial segments. To support the myriad customers 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 defense 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. 4 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 second tier subsidiary XCEL Corporation Ltd., has been manufacturing electronic power supplies since 1989. COMMUNICATIONS EQUIPMENT Over the past decade, telecommunications and data communications infrastructures have undergone major growth and have become a critical part of the global business and economic infrastructure that has been driven by: o a surge in demand for broadband access used to conduct e-commerce activities and transmit growing volumes of data, voice and video information; o the adoption of Internet protocol, or IP, which is a protocol developed to enable the transmission of information as packets of data from a source to a recipient using dynamically changing routes, with the data being reassembled at the recipient's location into the original information format; and o an apparent worldwide trend toward deregulation of the communications industry, which has enabled a large number of new communications service providers to enter the market. This rapid growth has been succeeded by a period of consolidation. Consumer demand for broadband access continues to grow at a moderate pace, but existing carrier infrastructures generally have the backbone capacity to accommodate this moderate growth, which has resulted in substantially reduced capital spending by telecommunications carriers. Private and corporate communications providers have been less severely affected, and a small amount of growth is still evident in this sector. Data traffic volumes continue to exceed voice traffic volumes, with both types of traffic moving toward more efficient IP transmission methods. Private and corporate communications providers and other businesses that rely heavily on information technology continue to devote significant resources to the purchase of transmission equipment, such as high-speed DSL and fiber optic modems, through which data and voice information may be transmitted. DSL, or digital subscriber line, technology transmits data up to 50 times faster than a conventional dial-up modem using existing copper telephone wires. The demand for test equipment with which to test, deploy, manage and optimize communications networks, equipment and services remains depressed, with reduced demand across the private and public carrier markets. To support the rapidly changing needs of telecommunications companies and information technology dependent businesses, we believe that transmission and network access products and communications test instruments 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 broadband high-speed data links 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, 5 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. OUR SOLUTION We have developed a range of electronic components, such as digital switches and custom electronic power supplies, used primarily by aerospace, defense and industrial customers. We have developed and we manufacture and market various transmission and network access devices used by businesses and other users to efficiently transmit data, voice and video information to destinations within and outside of their respective networks. We have also developed and we manufacture and market a broad range of test instruments used by operators of public and private telecommunications networks for the installation, maintenance and optimization of advanced communications networks. 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: DEVELOPMENT OF NEW SWITCH TECHNOLOGY. We have complemented our long-established range of products with a new range of patent-pending space-saving rotary switches we refer to as VLP(TM), or very low profile switches. These products have been specifically designed to target harsh environment and aerospace applications where space is at a premium, providing a substantial advantage over larger switches offered by our competitors. PROVISION OF MORE EFFICIENT AND COST-EFFECTIVE POWER SYSTEMS. We have developed and we provide high and low voltage power systems that are highly integrated with the application hardware, which minimizes cost, space and complexity and maximizes overall system reliability and efficiency. We believe that our ability to partner with major international defense contractors and to provide power systems solutions based on both standard modules and custom designs provides us with an important competitive advantage. BROAD RANGE OF TRANSMISSION AND NETWORK ACCESS PRODUCTS FOR A WIDE RANGE OF APPLICATIONS. We have developed a broad range of professional 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 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. 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 enables 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. 6 COMPREHENSIVE CONNECTIVITY. Our transmission and network access products and communications test instruments 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 the supplier of choice for harsh environment switch and custom power supplies in the aerospace, defense and telecommunications markets, in addition to becoming a leading provider of transmission and network access products and communications test instruments for a broad range of applications within the global communications industry. The following are the key elements of our strategy to achieve these objectives: CONTINUE TO FOCUS ON OUR ELECTRONIC COMPONENTS BUSINESS. We plan to continue to grow our electronic components business by marketing our electronic components products in their established market niches and identifying opportunities to broaden our customer base for our power supply products. CONTINUE TO FOCUS ON TRANSMISSION AND NETWORK ACCESS PRODUCTS. We plan to continue our efforts in the communications equipment market and develop new products and enhancements to meet or exceed evolving requirements. 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. 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. 7 SEEK COMPETITIVE WORLD-CLASS MANUFACTURING IN ASIA FOR SELECTED PRODUCTS. Toward the end of 2002, we cut costs by using Asian manufacturing sources for selected communications equipment products and subassemblies. We intend to build on this strategy to increase our competitiveness in the marketplace. 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 communications equipment 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. SEEK ALTERNATIVE MARKET OPPORTUNITIES. We plan to expand our focus and efforts to identify and capture more carrier customers, such as private network utilities and transit customers, for our test equipment. PURSUE STRATEGIC ACQUISITIONS. The transmission and network access market is 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 also intend to expand our electronic power supplies division's domestic presence through acquisition of businesses that offer complementary products or technology. 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 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, as we did with 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 communications 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 Electronic Components -- digital switches -- electronic power supplies o Communications Equipment -- a range of transmission and network access products for accessing public and private networks for the transmission of data, voice and video -- communications test instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) During the years ended December 31, 2002, 2001 and 2000, our total sales were $22,664,000 $27,423,000 and $28,050,000, 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 2002 2001 2000 ------------------------ ---- ---- ---- Electronic Components Digital Switches 20.5% 23.1% 28.6% Electronic Power Supplies 31.3% 20.0% 14.8% Other Products and Services 7.3% 3.0% 0.7% ---------------------------------------------------- 59.1% 46.1% 44.1% ---------------------------------------------------- Communications Equipment Transmission and Network Access Products 23.8% 24.7% 26.2% Test Instruments 12.7% 26.7% 28.2% Other Products and Services 4.4% 2.5% 1.5% ---------------------------------------------------- 40.9% 53.9% 55.9% ---------------------------------------------------- Totals 100.0% 100.0% 100.0% ====================================================
9 OUR ELECTRONIC COMPONENTS BUSINESS Our electronic components segment includes digital switches and electronic power supplies. During the years ended December 31, 2002, 2001 and 2000, this segment accounted for 59.1%, 46.1% and 44.1%, 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, defense and industrial applications. Digital switches are manually operated electromechanical devices used for routing electronic signals. Thumbwheel, push button, lever-actuated and rotary modules, together with assemblies comprised of multiple modules, are manufactured in many 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; o night vision compatibility; o rotary; and o very low profile, or VLP(TM), rotary. 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 AC. 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. BACKLOG Our business is not generally seasonal, with the exception that transmission and network access products and communications test instruments 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, 2002 and 2001, our 10 backlog of firm, unshipped orders was approximately $12.7 million and $14.4 million, respectively. Our December 31, 2002 backlog was related approximately 94% 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 6% to our communications equipment business, the majority of which portion relates to our transmission and network access products. Of these backlog orders, we anticipate fulfilling approximately 70% of our electronic components orders and 100% of our communications 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 communications equipment products carry a two-year limited parts and labor warranty. Typically our communications equipment 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. OUR COMMUNICATIONS EQUIPMENT BUSINESS Our communications equipment business comprises transmission and network access products and communications test equipment. During the years ended December 31, 2002, 2001 and 2000, the sale of communications equipment products, equipment and related services accounted for 40.9%, 53.9% and 55.9% of our total revenues, respectively. These products, many of which are described below, are configured in a variety of models designed to perform analog and digital measurements or to transmit data at speeds varying from low-speed voice grade transmission to high-speed broadband access. Some of the acronyms and terms used most frequently in the product discussions on the following pages include: o Time division multiplexing, or TDM, which is a technique for consolidating multiple data sources into a single data stream by allocating time slots to each data source o Traditional telephone services, such as modems and plain old telephone service, or POTS o Competitive local exchange carriers, or CLECs o Bit 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 Synchronous - in digital telephone transmission, synchronous means that the bits from one call are carried within one transmission frame 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 11 -- Digital subscriber line technology, or DSL, technology 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, which is 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 -- SDH is an acronym for synchronous digital hierarchy -- STM1 (SDH) is a standard technology for synchronous data transmission on optical media and is the international equivalent of synchronous optical network; SDH uses the following synchronous transport modules, or STMs, and rates: STM1- 155 Mbps, STM-4 - 622 Mbps, STM-16 - 2.5 gigabits per second (Gpbs), and STM-64 - 10 Gbps -- G703/G704 is a standard for transmitting voice over digital carriers such as T-1 and E-1; G703 provides the specifications for pulse code modulation at data rates from 64 Kbps to 2.048 Mbps and is typically used for interconnecting data communications equipment such as bridges, routers and multiplexers -- V11/V35/X21 are types of serial interfaces; serial interfaces work best for short (perhaps less than 20 meters), low-speed applications -- X.25 is a protocol that allows computers on different public networks or a TCP/IP network to communicate through an intermediary computer at the network layer level II. International 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 TRANSMISSION AND NETWORK ACCESS PRODUCTS CXR France develops, markets and sells a broad range of managed transmission and network access products that are manufactured in France by CXR France and sold under the name "CXR Anderson Jacobson." These products include high-quality network access devices such as fiber optic, DSL and voice frequency, or VF, modems, ISDN terminal adapters, ISDN concentrators, multiplexers, terminal servers, interface converters and remote access servers, which combine to provide users with a complete solution for voice and data transmission. 12 Modems ------ Our modem product range includes traditional VF modems covering the performance spectrum, a range of fiber optic modems and a range of DSL modems. Our modems are sold as standalone devices for remote sites or as rack-mountable versions for central sites. 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. 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. 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. Terminal Servers ---------------- Terminal servers include a range of products that enable the connection of asynchronous applications to the Ethernet Network. These products were designed to meet the requirements of our customers to interface equipment to the corporate local area network, commonly called the LAN, and therefore to the outside world, via our range of network access products. Drop and Insert Multiplexers ---------------------------- Our broad range of drop and insert multiplexers covers E-1, T-1, FE-1, E-3, T-3 and STM1 (SDH) over both copper wires and fiber optic networks. The units enable users to manage the consolidation of their information from a variety of voice or data sources (G703, G704, X21, V11 and V35) through an easy-to-use menu-driven and Microsoft Windows-based user interface. Modular Routers --------------- Our commercial/industrial router product range is modular, which provides users the flexibility to configure or have configured a unit that meets their specific requirements. Our routers provide access to the Internet or remote sites via ISDN, leased line, X.25, frame relay and DSL connections. The router creates or maintains a table of available routs and their conditions and uses this information, along with distance and cost algorithms, to determine the best route for a given packet of data. Interface Converters -------------------- Our range of interface converters provides users the ability to interface data from LAN, V11 or V35 to E-1, T-1, E-3, T-3 and STM1. A channel service unit/data service unit, or CSU/DSU, converts a digital data frame from a LAN into a frame appropriate to a wide area network, or WAN. 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. 13 The following are descriptions of a few of our more prominent transmission and network access products: 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 2XXXX RANGE 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 CB 2XXXX RANGE 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 14 PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS 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 TERMINAL SERVERS This range of products is used to provide the connection of asynchronous applications to the TCP/IP Ethernet network. These can include point-of-sale terminals, industrial machines, point-to-point RS232 connections and the visual display units/keyboards. DROP AND INSERT These products provide users the ability to manage MULTIPLEXERS the consolidation of data and/or voice information over a variety of TDM networks such as E-1, T-1, E-3, T-3 and STM (SDH). -- easily configured via management software -- remotely manageable over IP or dedicated time slot 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 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 Simple Network Management Protocol/Internet Protocol, OR SNMP/IP, 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. COMMUNICATIONS 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 communications services. These test instruments are modular, rugged, lightweight, hand-held products used predominantly by telephone and Internet companies to pre-qualify facilities for services, verify proper operation of newly installed services and diagnose problems. Original equipment manufacturers, or OEMs, also use service verification equipment to test simulated networks during equipment development and to verify the successful production of equipment. 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: 15 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; 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 BASE UNITS ---------- 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 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 TYPICAL OPTIONAL CONFIGURATIONS ------------------------------- HALCYON 704A-NTS1 -- 704A universal data test set with 1.5 MHz TIMS, full signaling, caller ID and full 4-wire loop DDS test functions, as well as DDS/DS0 test functions and T-1, DS1, DS0 and FT-1 test package -- T-1 test package includes reference receiver for T-1 level, frequency and slip measurements HALCYON 704A-NTS2 -- 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 704A-PKG2 -- 704A universal data test set with 1.5 MHz TIMS, full signaling, full 4-wire loop DDS test functions, as well as DDS/DS0 test functions for DS0-DP and OCU-DP DS0 and sub-rate testing 16 PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS CENTRAL OFFICE TEST EQUIPMENT ----------------------------- 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 MICROCEL 2001A ATM These portable units, used in conduction with laptop computers, are multi-layer asynchronous transfer mode, or ATM, testers, analyzers and simulators. -- basic unit has a 4-port capability that can be independently configured and provides full support of testing, generation and monitoring of ATM traffic -- these units address the requirement for a small, portable unit that can provide monitoring and statistical and user analyses at all three ATM layers, as well as simulate or generate traffic patterns defined by the user CUSTOMERS ELECTRONIC COMPONENTS We sell our components primarily to OEMs in the electronics industry, including manufacturers of aerospace and defense systems, industrial instruments and test equipment. During 2002, our top five electronic components customers in terms of revenues were the BAE Systems companies, Lockheed Martin Systems, MBDA (U.K.) Ltd., Thales Optronics Ltd. and TMD Technologies, Ltd. Sales to the BAE Systems companies represented approximately 14% percent of our total revenues during 2002. No other customer represented 10% or more of our total revenues during 2002. 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. COMMUNICATIONS EQUIPMENT We market our transmission and network access products and communications test instruments primarily to public, private and corporate telecommunications service providers and end users. 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 as elements of the communications infrastructure and 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 2002, our top five communications test instruments and transmission and network access products customers in terms of revenues were Verizon, Siemens, ALO, France Telecom and SPIE. None of our communications equipment customers represented 10% or more of our revenues during 2002. 17 Because we currently derive a significant portion of our revenues from sales to RBOCs and other telecommunications service providers, we have experienced and will continue to experience for the foreseeable future an 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 continuing general downturn in business activity in the telecommunications capital equipment market during 2002, several RBOCs reduced their capital expenditures, which negatively impacted our 2002 sales of test instruments. We anticipate that capital expenditure levels of RBOCs and other telecommunications carriers will remain at reduced levels in 2003, which will cause a continued and perhaps more severe negative impact on our sales of test instruments. 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 continuing general downturn in business activity in the telecommunications market during 2002 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. SALES, MARKETING AND CUSTOMER SUPPORT 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, the Digitran Division's history spans over 40 years in the electronic components industry and major OEMs have designed many of our switches into their product specifications. These factors have frequently resulted in customers seeking us out to manufacture for them unique as well as our standard digital switches. 18 COMMUNICATIONS EQUIPMENT 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 forces from those of our competitors. Our local sales forces are highly knowledgeable about their respective markets, customer operations and strategies and regulatory environments. In addition, our representatives' familiarity with local languages and customs enables them to build close relationships with our customers. We provide repair and training services to enable our customers to improve performance of their networks. We also offer on-line support services to supplement our on-site application engineering support. Customers can also access information regarding our products remotely through our domestic, European and Japanese technical assistance centers. We sell many of our communications 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. COMPETITION 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. We have made substantial investments in machinery and equipment tooling. In addition, the Digitran Division's history spans 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. 19 COMMUNICATIONS EQUIPMENT The markets for our transmission and network access products and communications test instruments and services are fragmented and intensely competitive, both inside and outside the United States, and are subject to rapid technological change, evolving industry standards and regulatory developments. We believe that the principal competitive factors affecting our transmission and network access products and communications test instruments 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 transmission and network access products and communications test instruments include Patton Electronics Corporation, 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 Digitran Division's history spans over 40 years in the electronic components industry. We believe this factor 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 communications equipment 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. MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE Our transmission and network access products and communications test instruments generally are assembled from outsourced components, with final assembly, configuration and quality testing performed in house. 20 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 often are 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 9001- or 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 France. We manufacture all of our test equipment products at the Fremont, California facility of CXR Telcom. 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 communications equipment 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. 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. For the years ended December 31, 2002, 2001 and 2000, our engineering and product development costs were approximately $1.02 million, $1.08 million and $1.17 million, respectively. We closed our St. Charles, Illinois engineering office in August 2001 and terminated the four engineers who worked at that facility. We hired an engineering director at the Fremont, California facility in December 2001 and developed engineering capability at that facility primarily through the use of services provided by outside contractors. Our product development costs during the past three years were related to development of new communications test equipment and voice, data and video transmission equipment and development of a new line of rotary switches at our Digitran facility. We expect to continue incurring engineering costs applicable to the development of rotary switches during 2003. Current research expenditures in the communications equipment segment are directed principally toward enhancements to the current test instrument product line and the expansion of our range of transmission and network access products. These expenditures are intended to improve market share and gross profit margins, although we cannot assure you that we will achieve these improvements. 21 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 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 and 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 that, if adopted, would have a material impact on our business or financial condition. EMPLOYEES As of February 28, 2003, we employed a total of 189 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. ITEM 2. PROPERTIES. As of March 14, 2003, we leased or owned approximately 96,000 square feet of administrative, production, storage and shipping space. All of this space was leased other than the Abondant, France facility. 22
FUNCTION / BUSINESS UNIT LOCATION LEASE EXPIRATION DATE ------------- -------- --------------------- MicroTel International, Inc. Rancho Cucamonga, California Administrative; (corporate headquarters) Expires October 2005 XET Corporation/Digitran Rancho Cucamonga, California Manufacturing; (electronic components) Expires November 2004 Monrovia, California Expires February 2004 XCEL Power Systems, Ltd. Ashford, Kent, United Kingdom Administrative/ and XCEL Corporation Ltd. Manufacturing; (electronic components) Expires March 2013 Belix Wound Components Ltd. Newtown, Wales, United Kingdom Manufacturing; (electronic components) Expires December 2008 XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales; (electronic components) Expires December 2003 CXR France Paris, France Administration/Sales; (transmission and network access products) Expires April 2007 CXR France Abondant, France Manufacturing/Engineering; (transmission and network access products) Facility is owned CXR Telcom (transmission and network access products, Fremont, California Administrative/Engineering/ communications test instruments) Manufacturing; Expires July 2003
On November 1, 2002, CXR Telcom relocated from its Fremont facility to another facility in Fremont that is smaller and less expensive than the former facility. This new lease expires on July 31, 2003. The lease for the Ashford, Kent, United Kingdom facility is a fifteen-year lease that expires in March 2013, 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. 23 ITEM 3. LEGAL PROCEEDINGS. We are not a party to any material pending legal proceedings. 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 OTC 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 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 ----------- 2002: LOW HIGH --- ---- First Quarter (January 1 - March 31).................... $0.28 $0.37 Second Quarter (April 1 - June 30)...................... 0.15 0.32 Third Quarter (July 1 - September 30)................... 0.11 0.22 Fourth Quarter (October 1 - December 31)................ 0.16 0.25 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 14, 2003, we had 21,576,788 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 $0.16. 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 November 2002, we issued 5,000 shares of common stock with an aggregate value of $1,000 to a former employee for services rendered. 24 In December 2002, we issued an aggregate of 16,759 shares of common stock to two holders of Series B Preferred Stock upon conversion of 1,675.9 shares of Series B Preferred Stock. 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. In each case, appropriate investment representations were obtained, stock certificates were issued with restricted stock legends, and stop transfer orders were placed with our transfer agent. 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 report. The consolidated statements of operations and comprehensive income data with respect to the years ended December 31, 2002, 2001 and 2000 and the consolidated balance sheet data at December 31, 2002 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: 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Net sales .................................. $ 22,664 $ 27,423 $ 28,050 $ 25,913 $ 30,100 Cost of sales .............................. 14,147 15,456 15,529 17,066 17,353 --------- --------- --------- --------- --------- Gross profit ............................... 8,517 11,967 12,521 8,847 12,747 Selling, general and administrative expenses 7,731 10,129 9,827 10,584 10,202 Engineering and product development expenses 1,015 1,076 1,167 1,841 2,202 --------- --------- --------- --------- --------- Income (loss) from operations .............. (229) 762 1,527 (3,578) 343 Total other income (expense) ............... (361) (414) 207 (492) (804) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes ..................... (590) 348 1,734 (4,070) (461) Income tax (benefit) expense ............... (20) 77 31 128 101 --------- --------- --------- --------- --------- Income (loss) from continuing operations ... (570) 271 1,703 (4,198) (562) Discontinued operations: Loss from operations of discontinued segment .................. -- 56 (212) (847) (1,203) Gain (loss) on disposal of discontinued segment including provision for phase out period of $122 in 2000 ............. -- -- (487) 449 580 --------- --------- --------- --------- --------- Net income (loss) .......................... (570) 327 1,004 (4,596) (1,185) Foreign currency translation adjustment .... 446 (312) (505) (325) 206 --------- --------- --------- --------- --------- Total comprehensive income (loss) .......... $ (124) $ 15 $ 499 $ (4,921) $ (979) ========= ========= ========= ========= ========= Basic earnings (loss) per share from continuing operations ................... $ (0.03) $ 0.01 $ 0.09 $ (0.26) $ (0.05) ========= ========= ========= ========= ========= Diluted earnings (loss) per share from continuing operations ................... $ (0.03) $ 0.01 $ 0.07 $ (0.26) $ (0.05) ========= ========= ========= ========= ========= Basic earnings (loss) per share from discontinued operations ................. $ 0.00 $ 0.00 $ (0.04) $ (0.02) $ (0.05) ========= ========= ========= ========= ========= Diluted earnings (loss) per share from discontinued operations ................. $ 0.00 $ 0.00 $ (0.03) $ (0.02) $ (0.05) ========= ========= ========= ========= ========= Basic earnings (loss) per share ............ $ (0.03) $ 0.02 $ 0.05 $ (0.28) $ (0.10) ========= ========= ========= ========= ========= Diluted earnings (loss) per share .......... $ (0.03) $ 0.01 $ 0.04 $ (0.28) $ (0.10) ========= ========= ========= ========= ========= Weighted average shares outstanding, basic . 21,208 20,594 19,504 16,638 11,952 Weighted average shares outstanding, diluted 21,208 23,782 23,027 16,638 11,952
25
YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents .... $ 254 $ 604 $ 756 $ 480 $ 450 Working capital .............. 3,961 3,686 2,780 1,080 4,999 Total assets ................. 16,786 17,688 19,484 16,489 20,352 Long-term debt, net of current portion ................... 927 763 282 143 1,175 Stockholders' equity ......... 5,732 5,862 5,807 3,801 5,482 Convertible redeemable preferred stock ........... 282 270 259 588 1,516
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 audited consolidated financial statements and notes to financial statements included elsewhere in this document. This report and our audited consolidated financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: o the projected growth or contraction in the electronic components and communications equipment markets in which we operate; o our business strategy for expanding, maintaining or contracting our presence in these markets; o anticipated trends in our financial condition and results of operations; and o our ability to distinguish ourselves from our current and future competitors. We do not undertake to update, revise or correct any forward-looking statements. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. In particular, you should review the "Risk Factors" section of this report. Any of the factors described above or in the "Risk Factors" section of this report 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 Through our three wholly-owned operating subsidiaries, XET Corporation, CXR Telcom and CXR France, and through the divisions and subsidiaries of those subsidiaries, we design, develop, manufacture, assemble, and market products and services in the following two material business segments: o Electronic Components -- digital switches -- electronic power supplies o Communications Equipment -- transmission and network access products -- communications test instruments Our sales are primarily in North America, Europe and Asia. Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. Sales to customers in the electronic components segment, primarily to aerospace customers, defense contractors and industrial customers, were 59.1%, 46.1% and 44.1% of our total net sales during 2002, 2001 and 2000, respectively. Sales of communications equipment and related services, primarily to telecommunications equipment customers, were 40.9%, 53.9% and 55.8% of our total net sales during 2002, 2001 and 2000, respectively. We experienced a 37.2% decline in our communications equipment segment sales during 2002. We believe this decline primarily was due to a general business downturn experienced by many of our telecommunications customers, the disruption caused by the French elections in 2002 and our decision to discontinue the resale in Europe of test equipment not manufactured by us. As a result of the general business downturn, we experienced significant reductions in sales and gross profit as well as changes in our product mix. Consequently, we have shifted our overall focus toward growing our electronic components business. However, we also plan to continue working to improve the growth and performance of our communications equipment business. We do not anticipate a further decline in our communications equipment segment sales in 2003 as compared to 2002. We believe that our communications equipment segment may actually realize a modest improvement in sales in 2003 as compared to 2002. We have reduced costs in our communications equipment segment and lowered the breakeven point both in our U. S. and French operations through various cost-cutting methods, such as using Asian contract manufacturers, reducing facility rent expense and phasing out our administrative office in Paris, France. We anticipate these cost-cutting efforts will improve our bottom line performance in this segment if we are able to achieve at least the same sales levels we achieved in 2002. However, 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 adversely affect our financial position by reducing cash availability under our lines of credit. We have taken various actions, including staffing reductions as recently as February 2003, to reduce cash outlays of our communications equipment segment. However, if the downturn is long-lasting and more severe, we may need to continue to downsize or to restructure, sell or discontinue all or part of our communications equipment operations, which would negatively impact our business, prospects, financial condition, results of operations and cash flows. 27 CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this report. We believe our most critical accounting policies include inventory valuation, goodwill impairment and foreign currency translation. INVENTORY VALUATION We value our inventory at the lower of the actual cost to purchase or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. Demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the 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 of goodwill, we consider these factors as well as forecasted financial performance of the acquired businesses. If forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of those respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets that were not previously recorded. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142, and were required to analyze our goodwill for impairment issues by June 30, 2002, and then at least annually after that date. During the year ended December 31, 2002, 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 62.1% of our net revenues, 72.3% of our assets and 74.7% of our total liabilities as of and for the year ended December 31, 2002. In preparing our consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the currencies in which they keep their accounting records into United States dollars. This process results in exchange gains and losses which, under relevant accounting guidance, are either included within our statement of operations or as a separate part of our net equity under the caption "cumulative translation adjustment." 28 Under relevant accounting guidance, the treatment of these translation gains or losses depends upon our management's determination of the functional currency of each subsidiary. This determination involves consideration of relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency. However, management must also consider any dependency of the subsidiary upon the parent and the nature of the subsidiary's operations. If management deems any subsidiary's functional currency to be its local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in a cumulative translation adjustment. However, if management deems the functional currency to be United States dollars, then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to United States dollars, then any translation gains or losses arising after the date of the change would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider the functional currency of each of our international subsidiaries to be each subsidiary's local currency. Accordingly we had cumulative translation losses of $597,000 that were included as part of accumulated other comprehensive loss within our balance sheet at December 31, 2002. During the year ended December 31, 2002, we included translation adjustments of a gain of approximately $446,000 under accumulated other comprehensive income and loss. If we had determined that the functional currency of our subsidiaries was United States dollars, these gains or losses would have decreased or increased our loss for the year ended December 31, 2002. The magnitude of these gains or losses depends upon movements in the exchange rates of the foreign currencies in which we transact business as compared to the value of the United States dollar. These currencies include the euro, the British pound and the Japanese yen. Any future translation gains or losses could be significantly higher than those we recorded for the year ended December 31, 2002. 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, ------------------------ 2002 2001 2000 ---- ---- ---- Net sales................................................. 100.0% 100.0% 100.0% Cost of sales............................................. 62.4 56.4 55.4 ------ ------ ------ Gross profit.............................................. 37.6 43.6 44.6 Selling, general and administrative expenses.............. 34.1 36.9 35.0 Engineering and product development expenses.............. 4.5 3.9 4.2 ------ ------ ------ Operating income (loss)................................... (1.0) 2.8 5.4 Interest expense.......................................... (1.9) (1.4) (1.5) Other income (expense).................................... 0.3 (0.1) 2.3 ------ ------ ------ Income (loss) from continuing operations before income taxes..................................... (2.6) 1.3 6.2 Income tax expense (benefit).............................. (0.1) 0.3 0.1 ------ ------ ------ Income (loss) from continuing operations.................. (2.5) 1.0 6.1 Income (loss) from discontinued operations................ -- 0.2 (0.8) Gain (loss) on disposal of discontinued segment........... -- -- (1.7) ------ ------ ------ Net income (loss)......................................... (2.5)% 1.2% 3.6% ====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 CONTINUING OPERATIONS NET SALES. Net sales for 2002 decreased by $4,759,000 (17.4%) to $22,664,000 as compared to $27,423,000 for 2001. Net sales of our electronic components increased by $744,000 (5.9%) to $13,390,000 for 2002 as compared to $12,646,000 for 2001. Sales of power supplies by XCEL Corporation, Ltd. increased by $1,616,000 (29.5%) to $7,098,000 for 2002 as compared to $5,482,000 for 2001 due to an increase in the number of products shipped under long-term programs. We anticipate that during 2003 we will experience similar increases in sales of power supplies. Sales of digital switches manufactured by our Digitran Division declined by $1,593,000 (25.1%) to $4,744,000 for 2002 as compared to $6,337,000 for 2001. The decline in sales of digital switches was a result of lower than expected orders, which we believe was primarily due to a temporary deferral of government orders that we believe will result in an increase in sales of digital switches during 2003. XET Corporation increased its sales of subassemblies by $892,000 (383%) to $1,125,000 for 2002 as compared to $233,000 for 2001 due to new contracts for electronic subsystems from a major aerospace company. These contracts were executed beginning in January 2002, and the final shipments under these contracts were in November 2002. We believe that our Digitran Division will have an opportunity to acquire new electronic subsystems contracts in 2003. Net sales of our communications equipment products and services for 2002 declined by $5,503,000 (37.2%) to $9,274,000 as compared to $14,777,000 for 2001. Test equipment net sales for 2002 declined by $4,439,000 (60.6%) to $2,881,000 as compared to $7,320,000 for 2001. The sales decline resulted from a $2,546,000 reduction in sales of test equipment by CXR Telcom and a $1,893,000 30 reduction in resales by CXR France of test equipment not manufactured by us following our decision to discontinue those resales due to the lower gross margin trends on resale products. Management believes the sales decline for CXR Telcom resulted primarily from reductions in capital spending in 2002 as compared to capital spending in 2001 by many of our telecommunications customers due to generally weak telecommunications markets. The sales decline for CXR France occurred primarily because the exclusive distribution agreement that CXR France had with Sunrise Telecom, Inc. terminated as of November 1, 2001, and CXR France decided not to remain in the test instruments resale business except to support a limited number of existing customers. Net sales of our CXR HALCYON 704 series field test equipment decreased by $1,892,000 (49.2%) to $1,957,000 for 2002 as compared to $3,849,000 for 2001. Net sales of our T-Com central office test equipment product line declined by $642,000 (54.1%) to $527,000 for 2002 as compared to $1,187,000 for 2001, primarily due to continued weakening in the market for central office test equipment. We believe that many of the United States telecom customers that CXR Telcom serves built networks to handle an anticipated demand for voice and data traffic that has not yet occurred. Consequently, many of these customers reduced their purchasing budgets for 2002. This has had a negative impact on CXR Telcom's sales. We anticipate that CXR Telcom's sales during 2003 will remain relatively unchanged from its sales for 2002. CXR France produces all of our transmission products and networking equipment. Net sales of transmission products and networking equipment produced by CXR France decreased by $1,379,000 (20.3%) to $5,399,000 for 2002 as compared to $6,778,000 for 2001. We believe this decrease occurred primarily because of the weak telecom market and the disruption caused by the French elections in mid-2002. Total net sales by CXR France, including both test equipment and transmission and networking equipment, decreased by $1,992,000 (25.4%) to $5,855,000 for 2002 as compared to $7,847,000 for 2001. We believe that the decreases in CXR France's and CXR Telcom's sales relate to the overall slowdown in the telecom markets and the termination of the Sunrise Telecom contract discussed above, and that the French national and local elections in April and May 2002 may have caused a delay in purchases by major governmental customers of CXR France. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 37.6% for 2002 as compared to 43.6% for 2001. In dollar terms, total gross profit decreased by $3,450,000 (28.8%) for 2002 to $8,517,000 as compared to $11,967,000 for 2001. Gross profit for our electronic components segment decreased in dollar terms by $271,000 (5.0%) to $5,203,000 for 2002 as compared to $5,505,000 for 2001, and decreased as a percentage of related net sales from 43.3% for 2001 to 38.9% for 2002. This decrease primarily was the result of a larger proportion of power supply sales in comparison to sales of digital switches and electronic subassemblies, both of which carry higher gross margins than power supplies. Gross profit for our communications equipment segment decreased in dollar terms by $3,149,000 (48.7%) to $3,313,000 for 2002 as compared to $6,462,000 for 2001, and decreased as a percentage of net sales from 43.7% for 2001 to 35.7% for 2002. The decrease in gross profit as a percentage of net sales primarily was due to the substantial reduction in sales volume that increased overhead costs on a per unit basis. We anticipate a modest improvement in our sales of communications equipment products in 2003 which, when combined with our cost cutting efforts, should improve the margins on our communications equipment products in 2003 as compared to 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $2,398,000 (23.7%) to $7,731,000 for 2002 as compared to $10,129,000 for 2001. Selling, general and administrative expenses also declined as a percentage of total net sales, from 36.9% of net sales during 2001 to 34.1% of net sales during 2002. The decrease in selling, general and administrative expenses was due to several factors. For example, we incurred $608,000 in legal and accounting fees during 2001 in connection with amendments to a securities registration statement and periodic reports but did 31 not incur any of those expenses during 2002. Selling expenses were reduced by $624,000 in our communications equipment segment and $117,000 in our electronic components segment primarily due to lower commissions on reduced sales and cost reductions during 2002. Administrative costs were reduced by $546,000 in our communications equipment segment primarily due to staff reductions at CXR Telcom and CXR France. Also, because of the new accounting rules of SFAS No. 142, effective January 1, 2002 we no longer amortize goodwill. Goodwill accounted for $370,000 of our amortization expense in 2001. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our communications equipment segment. These expenses remained relatively unchanged at $1,015,000 for 2002 as compared to $1,076,000 for 2001. We achieved 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. The cost savings were partially offset with increases in engineering expenses for the development of a new rotary switch at our Digitran Division operation in Rancho Cucamonga, California. OTHER INCOME AND EXPENSE. Interest expense increased by $45,000 (11.4%) to $441,000 for 2002 from $396,000 for 2001 due to higher debt loads at our foreign subsidiaries. Other income was $80,000 in 2002 as compared to $18,000 of other expense reported in 2001. This positive change primarily resulted from miscellaneous tax refunds and miscellaneous expense reductions that occurred during 2002. INCOME TAX BENEFIT AND EXPENSE. Income tax benefit for 2002 was $20,000 as compared to $77,000 of income tax expense for 2001. The income tax benefit in 2002 consisted of U.K. income tax refundable amounts due to the availability of net operating loss deductions. This benefit was net of $19,000 of state income taxes and $14,000 of French income tax. NET LOSS. Net loss for 2002 was $570,000 as compared to net income of $327,000 for 2001. The major cause of this change was the reduction in sales of our communications equipment segment below the level needed to cover fixed costs. We took in 2002 and 2001 and are continuing to take in 2003 various actions to reduce costs through staffing reductions in our communications equipment operations in the United States and France and through various other cost-cutting methods, such as using contract manufacturers, reducing facility rent expense and phasing out our administrative office in Paris, France. These actions have substantially reduced the sales volume required to turn a profit at both CXR Telcom and CXR France. However, if these actions are not sufficient to reduce cash outlays below revenue levels, then we may be required to restructure or divest all or part of our communications equipment operations. DISCONTINUED OPERATIONS As a result of our decision to discontinue our last remaining material circuits subsidiary in October 2000, our circuits segment has been accounted for as discontinued operations. We reported income of $56,000 in 2001 as a result of reversal of excess accruals. 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 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 32 $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. Net sales of our communications equipment 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 France 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. 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. Net sales of transmission products and networking equipment produced by CXR France declined 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 CXR France, 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 CXR France'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. 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 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. Gross profit for our communications equipment 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 33 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. 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. Selling, general and administrative expenses also increased as a percentage of total net sales, from 35.0% of net sales during 2000 to 36.9% of net sales during 2001. 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 periodic reports. Selling expenses declined by $332,000, primarily due to the cost savings that resulted from the closure of the networking division of CXR France 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. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our communications equipment 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. LIQUIDITY AND CAPITAL RESOURCES During 2002, 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, 2002, we had working capital of $3,961,000, an accumulated deficit of $19,042,000, an accumulated other comprehensive loss of $597,000, $254,000 in cash and cash equivalents and $5,356,000 of accounts receivable. 34 Cash used in our operating activities totaled $657,000 during 2002 as compared to $100,000 of cash used in our operating activities for the prior year. This increase during 2002 primarily resulted from the net loss for the year due to lower sales, from increases in inventory balances and from payments of accrued expenses. Cash used in our investing activities totaled $176,000 during 2002 as compared to $38,000 for the prior year. Our investing activities consisted of the acquisition of plant and equipment. Cash used in our financing activities totaled $206,000 during 2002 as compared to cash provided of $358,000 for the prior year, primarily due to payments that reduced bank debt. On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, obtained a credit facility extension and modification from Wells Fargo Business Credit, Inc. In April 2002, the maturity date of the facility was extended by two years to August 16, 2005. Since April 17, 2002, the facility has provided for a revolving loan of up to $3,000,000 secured by inventory and accounts receivable and a term loan in the amount of $687,000 secured by machinery and equipment. On December 31, 2002, the interest rate was the prime rate (then 4.25%) plus 1%, subject to a minimum interest charge of $13,500 per month. The balance outstanding at December 31, 2002 was $1,070,000 on the revolving loan and $95,000 on the term loan, and we had available to us $13,000 of additional borrowings under the revolving loan. The credit facility contains restrictive financial covenants that are set by mutual agreement each year. At December 31, 2002, we were not in compliance with the net income covenant. However, we subsequently obtained a waiver from the lender. As of December 31, 2002, our foreign subsidiaries had credit facilities, including lines of credit and term loans, with Venture Finance PLC, an affiliate of ABN AMRO Holdings N.V., in England, Banc National de Paris, Societe Generale and Banque Hervet in France and Johan Tokyo Credit Bank and Johnan Shinkin Bank in Japan. At December 31, 2002, the balances outstanding under our U.K., France and Japan credit facilities were $2,380,000, $849,000 and $82,000, respectively. At December 31, 2001, the balances outstanding under our U.K., France and Japan credit facilities were $1,665,000, $533,000 and $5,000, respectively. XCEL Japan Ltd. , or XJL, obtained a term loan on November 29, 2002 from the Johnan Shinkin Bank. The loan is amortized over five years and carries an annual interest rate 3.25%. The balance of the loan on December 31, 2002 was $82,000 using the exchange rate in effect at December 31, 2002 for conversion of Japanese yen into United States dollars. Our U.K. subsidiary, XCEL Power Systems, Ltd., or XPS, obtained a credit facility with Venture Finance PLC, which new facility replaced a Lloyds Bank facility as of November 12, 2002 and expires on November 15, 2005. Using the exchange rate in effect at December 31, 2002 for the conversion of British pounds into United States dollars, the new facility is for a maximum of $2,415,000 and includes a $564,000 unsecured cash flow loan, a $129,000 term loan secured by fixed assets and the remainder is a loan secured by accounts receivable and inventory. The interest rate is the base rate of Venture Finance PLC (4% at December 31, 2002) plus 2%, and is subject to a minimum rate of 4% per annum. There are no financial performance covenants applicable to this credit facility. As of December 31, 2002, CXR France had credit facilities with several lenders totaling up to approximately $849,000 in the aggregate. Each credit facility has a specified repayment term. However, each lender has the right to demand payment in full at any time prior to the scheduled maturity date of a particular credit facility. Because CXR France has experienced a substantial reduction in revenue, some of its lenders are contemplating, and others have made, reductions in the total available credit. Banque Hervet reduced availability to $78,000 from $159,000 effective December 31, 2002. On February 10, 2003, Societe Generale notified CXR France that CXR France must pay back its credit line balance by April 30, 2003. As of December 31, 2002, that credit line balance was $298,000. As a result, we are in the process of seeking alternative financing sources in France to replace all of the current lenders to our French operations. 35 We cannot assure you that the various lenders to our U.K. and/or French subsidiaries other than Societe Generale will not seek immediate payment of all amounts owed by them under their respective credit facilities or seek to terminate any of the existing credit facilities. Similarly, we cannot assure you that if either of these events were to occur we would be successful in obtaining the required replacement financing for our operations in the U.K. and/or France or, if we were able to obtain such financing, that the financing would occur on a timely basis, would be on acceptable terms and would be sufficient to allow us to maintain our business operations in the U.K. and/or France. Accordingly, any of these actions on the part of the lenders to our U.K. and/or French subsidiaries could adversely impact our results of operations and cash flows. We are currently working to obtain a credit facility from a subsidiary of ABN AMRO Holdings, N.V. to replace our French credit facilities. One of our current creditors in France has also expressed an interest in replacing our other French credit lines. We anticipate closing on a new French credit facility in April 2003. However, we cannot guarantee that we will be successful in obtaining new financing in a timely manner, in sufficient amounts or at all. Our backlog was $12,702,000 as of December 31, 2002, as compared to $14,385,000 as of December 31, 2001. Our backlog as of December 31, 2002 was 93.6% related to our electronic components business, which business tends to provide us with long lead-times for our manufacturing processes due to the custom nature of the products, and 6.4% related to our communications equipment business, which business tends to deliver standard products from stock as orders are received. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. During 2002, 40.9% of our sales were generated by our communications equipment segment. We experienced a 37.2% decline in our communications equipment segment sales in 2002 as compared to 2001. We believe this decline primarily was due to a general business decline experienced by many of our telecommunications customers. 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. We took various actions to reduce costs in 2002. These actions were intended to reduce the cash outlays of our telecommunications equipment segment to match its revenue rate. Also, in February 2003, we reduced the staffing level by 50% at CXR Telcom, which we anticipate will reduce costs at an annualized rate of approximately $360,000. This savings is in addition to the approximate $325,000 annualized savings we have begun to realize from moving CXR Telcom into a lower cost facility in November 2002. 36 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. The symbol "P" represents the prime rate, and the symbol "B" represents the lender's base rate.
PAYMENTS DUE BY PERIOD ---------------------- CONTRACTUAL OBLIGATIONS AT (IN THOUSANDS) DECEMBER 31, 2002 2003 2004 2005 2006 2007 THERE-AFTER TOTAL ----------------- ---- ---- ---- ---- ---- ----------- ----- Line of Credit (Domestic) $1,070 $ -- $ -- $ -- $ -- $ -- $1,070 Average Interest Rate P+1% Line of Credit (U.K.) ... $1,683 $ -- $ -- $ -- $ -- $ -- $1,683 Average Interest Rate B+2% Overdraft (France) ...... $ 722 $ -- $ -- $ -- $ -- $ -- $ 722 Average Interest Rate 5.5% -7.2% Term Loan (Domestic) .... $ 82 $ 8 $ 5 $ -- $ -- $ -- $ 95 Average Interest Rate P+1% Term Loan (U.K.) ........ $ 45 $ 45 $ 602 $ -- $ -- $ -- $ 692 Average Interest Rate B+2% Term Loan (France) ...... $ 61 $ 56 $ 10 $ -- $ -- $ -- $ 127 Average Interest Rate 5.2% -5.6% Term Loan (Japan) ....... $ 17 $ 17 $ 17 $ 16 $ 15 $ -- $ 82 Average Interest Rate 3.25% Capitalized Lease Obligations ........... $ 113 $ 98 $ 35 $ 3 $ -- $ -- $ 249 Operating Leases ........ $ 633 $ 562 $ 382 $ 286 $ -- $ -- $1,863 ------ ------ ------ ------ ----- ------ ------ $4,426 $ 786 $1,051 $ 305 $ 15 $ -- $6,583
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 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 our company or our operating subsidiaries. IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board, or the FASB, issued FASB Statement No. 143, "Accounting for Asset Retirement Obligations," or SFAS No. 143. This statement addresses financial and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the 37 acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Our management has not yet determined the impact of the adoption of SFAS No. 143 on our financial position or 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 No. 144. SFAS No. 144 requires that 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 our consolidated financial statements beginning January 1, 2002. The implementation of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. In April 2002, the FASB issued FASB Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections," or SFAS No. 145. This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and amends SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. With the elimination of SFAS No. 4, gains and losses from extinguishment of debt are to be classified as extraordinary items only if they meet the criteria for extraordinary items in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Applying the provisions of APB Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the classification of an extraordinary item. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The adoption of the provisions of SFAS No. 145 during 2002 did not have any impact on our financial position or results of operations. In June 2002, the FASB issued FASB Statement No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," or SFAS No. 146. SFAS No. 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We do not expect the adoption of this statement to have a material effect on our financial statements. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," or FIN 45. FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also include more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002 and requires the additional disclosures for interim or annual periods ended after December 15, 2002. We do not expect that the initial recognition and measurement provisions of FIN 45 will have a material impact on our results of operations or financial position. 38 In December 2002, the FASB issued FASB Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123," or SFAS No. 148. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. We have adopted the annual disclosure provisions of SFAS No. 148 for our financial reports for the year ended December 31, 2002 and will adopt the interim disclosure provisions for our financial reports beginning with the quarter ending March 31, 2003. Because the adoption of this standard involves disclosures only, we do expect a material impact on our results of operations, financial position or liquidity. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51," or FIN 46. FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. We do not expect that the provisions of FIN 46 will have a material impact on our results of operations or financial position. EURO CONVERSION Our operating subsidiaries located in France and the U.K. had combined net sales from operations approximating 58.7% of our total net sales for 2002. Net sales from the French subsidiary participating in the euro conversion were 25.8% of our net sales for 2002. 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. 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. 39 OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR BUSINESS IF DEMAND IS REDUCED. During the year ended December 31, 2002, the sale of electronic components accounted for 59.1% of our total sales, and the sale of communications equipment and related services accounted for 40.9% of our total sales. In many cases we have long-term contracts with our electronic components and communications equipment 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 communications 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 electronic components and communications equipment 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. THE ECONOMIC DOWNTURN IN THE TELECOMMUNICATIONS EQUIPMENT MARKET CONTINUES TO NEGATIVELY AFFECT OUR COMMUNICATIONS EQUIPMENT SEGMENT SALES, WHICH SALES ACCOUNTED FOR SUBSTANTIAL PORTIONS OF OUR REVENUES IN THE YEARS ENDED DECEMBER 31, 2002 AND 2001. During the years ended December 31, 2002 and 2001, 40.9% and 53.9% of our sales, respectively, were of communications equipment products and related services. We experienced a 37.2% decline in our communications equipment segment sales in the year ended December 31, 2002. We believe this decline primarily was due to a general business decline experienced by many of our telecommunications customers. We anticipate a further decline in our communications equipment segment sales in 2003 as compared to 2002. 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 staffing reductions as recently as February 2003, to reduce cash outlays of our communications equipment segment. However, if the downturn is long-lasting and more severe, we may need to continue to downsize or to restructure, sell or discontinue all or part of our communications equipment operations, which would negatively impact our business, prospects, financial condition, results of operations and cash flows. IF WE ARE UNABLE TO OBTAIN ACCEPTABLE REPLACEMENT FINANCING FOR OUR FRENCH SUBSIDIARY ON A TIMELY BASIS, OUR RESULTS OF OPERATIONS AND CASH FLOWS COULD SUFFER. CXR France has credit facilities with several lenders that totaled up to approximately $849,000 in the aggregate as of December 31, 2002. Because CXR France has experienced a substantial reduction in revenue, some of its lenders are contemplating, and others have made, reductions in the total available credit. Banque Hervet reduced its credit line to CXR France to $78,000 from $159,000 on December 31, 2002. On February 10, 2003, Societe Generale requested CXR France to pay back its December 31, 2002 outstanding balance of $298,000 by April 30, 2003. We are actively seeking replacement financing. However, we cannot assure you that the various lenders to CXR France will not seek immediate payment of all amounts owed by them under their respective credit facilities or seek to terminate any of the other existing credit facilities. Similarly, we cannot assure you that if either of these events were to occur we would be successful in obtaining the required replacement financing for our operations in France or, if we were able to obtain such financing, that the financing would occur on a timely basis, would be on acceptable terms and would be sufficient to allow us to maintain our business operations in France. Accordingly, any of these actions on the part of any of the lenders to our French subsidiary could adversely affect our results of operations and cash flows. We are currently working to obtain a credit facility from a subsidiary of ABN AMRO Holdings, N.V. to replace our French credit facilities. One of our current creditors in France has also expressed an interest in replacing our other French credit lines. We anticipate closing on a new French credit facility in April 2003. However, we cannot guarantee that we will be successful in obtaining new financing in a timely manner, in sufficient amounts or at all. 40 WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE, AND ADEQUATE FINANCING MAY NOT BE AVAILABLE TO US ON ACCEPTABLE TERMS, OR AT ALL. 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 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. 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 equipment products have been in short supply and are frequently on 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 enhanced security measures in response to terrorism threats or 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 adversely affect 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 adversely affect 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. 41 WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD 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 in October 1999, 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 adversely affect 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 COMMUNICATIONS EQUIPMENT 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 electronic components and communications equipment markets in which we compete, encompass evolving customer requirements, provide a broad range of products and 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 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 WILL SUFFER. As of December 31, 2002, we had $12,702,000 in backlog orders for our products. These 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. 42 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 affect 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 62.1% of our net sales for 2002. We currently anticipate that foreign sales will account for a similar proportion of our net sales for 2003. 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 original equipment manufacturer 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. OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND IN LITIGATION AGAINST US. The market prices of securities of technology-based companies currently are highly volatile. The market price of our common stock has fluctuated significantly in the past. In fact, during 2002, the high and low closing sale prices of a share of our common stock were $0.40 and $0.12, respectively. The market price of our common stock may continue to fluctuate 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 communications 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; 43 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, cause 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 an 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. Quarter to quarter fluctuations may also result from the uneven pace of technological innovation, the development of products responding to these technological innovations by us and our competitors, our customers' acceptance of these products and innovations, the varied degree of price, product and technological competition and our customers' and competitors' responses to these changes. 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 communications equipment 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 44 communications equipment 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 communications equipment 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. 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 were 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. 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 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, 45 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. 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. Our common stock trades under the symbol "MCTL" on the OTC Bulletin Board. Because our stock trades on the OTC Bulletin Board rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock. 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, 25 of which were outstanding as of December 31, 2002. In addition, 150,000 shares have been designated as Series B Preferred Stock, 64,057.8 of which were outstanding as of December 31, 2002. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Exchange Rate Sensitivity ------------------------- 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. Interest Rate Sensitivity ------------------------- 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. 46 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 the lender's base rate. Balances are as of December 31, 2002.
FAIR THERE- VALUE LIABILITIES 2003 2004 2005 2006 2007 AFTER TOTAL 12/31/02 ----------- ---- ---- ---- ---- ---- ------ ----- -------- Line of Credit (Domestic) $1,070 $ -- $ -- $ -- $ -- $ -- $1,070 $1,070 Average Interest Rate P+ 1% Line of Credit (U.K.) $1,683 $ -- $ -- $ -- $ -- $ -- $1,683 $1,683 Average Interest Rate B+ 2% Overdraft (France) $ 722 $ -- $ -- $ -- $ -- $ -- $ 722 $ 722 Average Interest Rate 5.5% -7.2% Term Loan (Domestic) $ 82 $ 8 $ 5 $ -- $ -- $ -- $ 95 $ 95 Average Interest Rate P+ 1% Term Loan (U.K.) $ 45 $ 45 $ 602 $ -- $ -- $ -- $ 692 $ 692 Average Interest Rate B+ 2% Term Loan (France) $ 61 $ 56 $ 10 $ -- $ -- $ -- $ 127 $ 127 Average Interest Rate 5.2%-5.6% Term Loan (Japan) $ 17 $ 17 $ 17 $ 16 $ 15 $ -- $ 82 $ 82 Average Interest Rate 3.25%
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 On September 24, 2002, we notified BDO Seidman, LLP, the independent accounting firm that was engaged as our principal accountant to audit our financial statements, that we intended to engage new certifying accountants, in effect terminating our relationship with BDO Seidman. On October 1, 2002, we engaged Grant Thornton LLP as our new certifying accountants. The audit reports of BDO Seidman on our consolidated financial statements and consolidated financial statement schedules as of and for the years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. Our decision to change accountants was approved by our audit committee and board of directors. In connection with the audits of the years ended December 31, 2001 and 2000, and during the subsequent interim period through September 24, 2002, there were no disagreements with BDO Seidman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which disagreements, if not resolved to BDO Seidman's satisfaction, would have caused BDO Seidman to make reference to the subject matter of the disagreement in connection with its opinion. In addition, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of 1933, as amended. 47 We had not consulted with Grant Thornton in the past regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on our financial statements or as to any disagreement or reportable event as described in Item 304(a)(1)(iv) and Item 304(a)(1)(v). 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 15, 2003 are as follows: NAME AGE TITLES ---- --- ------ Carmine T. Oliva 60 Chairman of the Board, President, Chief Executive Officer and Director Graham Jefferies 45 Executive Vice President and Chief Operating Officer of our Telecommunications Group and Managing Director of various subsidiaries Randolph D. Foote 54 Senior Vice President, Chief Financial Officer and Assistant Secretary Robert B. Runyon (1)(2) 77 Secretary and Director Laurence P. Finnegan, Jr. (1)(3) 65 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 has been Chairman of the Board of XCEL Corporation, Ltd. since 1985, and Chairman and Chief Executive Officer of CXR Telcom since March 1997. In 2002, Mr. Oliva obtained a French government working permit and assumed responsibility as President of our CXR France subsidiary. 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 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 CXR France as a director since March 1997 and as General Manager since July 2002, has served as Managing Director of Belix Power Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since 48 our acquisition of those companies 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. 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 France, 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 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. 49 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 2005. Officers are appointed by, and serve at the discretion of, our board of directors. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE 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, 2002 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 2002, 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, 2002, 2001 and 2000 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 2002 (collectively, the "named executive officers"): 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.................. 2002 $250,010 -- -- $4,821 (1) President and Chief Executive 2001 $250,010 $40,000 100,000 $4,821 (1) Officer 2000 $207,395 $80,000 -- $4,821 (1) Graham Jefferies.................. 2002 $152,093 -- -- $9,000 (3) Executive Vice President and 2001 $142,639 $20,000 -- $7,697 (3) Chief 2000 $128,775 $35,000 -- $6,869 (3) Operating Officer of Telecommuni- cations Group (2) Randolph D. Foote................. 2002 $144,168 -- -- $1,604 (4) Senior Vice President, Chief 2001 $130,005 $15,000 -- -- Financial Officer and Assistant 2000 $103,754 $20,000 -- -- Secretary (4)
- --------------- (1) Represents the dollar value of insurance premiums we paid with respect to a $1,000,000 term life insurance policy for the benefit of Mr. Oliva's spouse. (2) 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 company contributions to Mr. Jefferies' retirement account. (4) Represents company contributions to Mr. Foote's 401(k) retirement account. 50 RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS We match up to the lesser of $2,000 and 20% of Mr. Foote's contributions to his 401(k) account. During 2002, our matching contribution amounted to $1,604. This matching arrangement was generally made available to all employees of MicroTel International, Inc. and provides for the same method of allocation of benefits between management and non-management participants. Also, XCEL Power Systems, Ltd. makes matching contributions of up to 6% of Mr. Jefferies' salary to an executives' defined contribution plan. Other employees of XCEL Power Systems, Ltd. may receive matching contributions to a defined contribution plan of up to 4% of their salary. Amounts contributed to the defined contribution plans are intended to used to purchase annuities upon retirement. During 2002, 2001 and 2000, Mr. Jefferies received matching contributions of $9,000, $7,697 and $6,869, respectively. OPTION GRANTS IN LAST FISCAL YEAR We did not grant any options or stock appreciation rights to the named executive officers during 2002. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides information regarding the value of unexercised options held by the named executive officers as of December 31, 2002. None of the named executives officers acquired shares through the exercise of options during 2002.
NUMBER OF SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 2002 DECEMBER 31, 2002 (1) ----------------- --------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Carmine T. Oliva..... 230,633 -- -- -- Graham Jefferies..... 126,287 -- -- -- Randolph D. Foote.... 50,000 -- -- --
- -------------- (1) Based on the last reported sale price of our common stock of $0.18 on December 31, 2002 (the last trading day during 2002) as reported on the OTC Bulletin Board, less the exercise price of the options. 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. 51 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 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 52 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. 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. 53 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; 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's 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 54 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 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. 55 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. The nominating committee selects nominees for the board of directors. Beginning in and since 2000, the nominating committee has consisted of Robert B. Runyon. COMPENSATION OF DIRECTORS During 2002, each non-employee director was entitled to receive $1,000 per month as compensation for their services. Beginning January 1, 2003, this compensation increased to $1,500 per month. In addition, since November 1, 2002, each board member chairing a standing committee has been entitled to receive $500 per month 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 formerly acted as a consultant to MicroTel in the areas of strategy development, business and organization planning, human resources recruiting and development and administrative systems. For 2002, Mr. Runyon became entitled to receive $8,551 in consulting fees. During 2002, we also paid premiums of $2,411 for Mr. Runyon's health insurance. During the latter half of 2002, Mr. Runyon ceased acting as a consultant to MicroTel, and we discontinued payment of his health insurance premiums. 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. During 2002, Mr. Oliva made salary recommendations to our executive compensation and management development committee regarding salary increases for key executives. 56 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. BENEFICIAL OWNERSHIP TABLE As of March 14, 2003, a total of 21,576,788 shares of our common stock were outstanding. The following table sets forth information as of that date 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 stockholder possesses sole voting and investment power with respect to all of the shares of common stock owned by that stockholder, subject to community property laws where applicable. In computing the number of shares beneficially owned by a stockholder and the percentage ownership of that stockholder, shares of common stock subject to options or warrants or underlying preferred stock held by that person that are currently exercisable or convertible or are exercisable or convertible 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.
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) 13.98% Carmine T. Oliva............................ Common 1,384,938 (3) 6.34% Robert B. Runyon............................ Common 338,206 (4) 1.56% Laurence P. Finnegan, Jr.................... Common 202,231 (5) * Graham Jefferies............................ Common 129,563 (6) * Randolph D. Foote........................... Common 55,000 (7) * All executive officers and directors as a group (5 persons)................... Common 2,109,938 (8) 9.44%
- --------------- * 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 and 50,530 shares of common stock underlying Series A Preferred Stock. 57 (4) Includes 158,060 shares of common stock underlying options. (5) Includes 158,060 shares of common stock underlying options. (6) Includes 126,287 shares of common stock underlying options. (7) Includes 50,000 shares of common stock underlying options. (8) Includes 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. EQUITY COMPENSATION PLAN INFORMATION The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2002.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER BE ISSUED UPON EXERCISE EXERCISE PRICE EQUITY COMPENSATION OF OUTSTANDING OF OUTSTANDING OPTIONS, PLANS (EXCLUDING OPTIONS, WARRANTS WARRANTS SECURITIES REFLECTED PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN (a)) - ------------- ---------- ---------- -------------- (a) (b) (c) Equity compensation plans approved by security holders 1,432,323(1) $1.11 1,825,000(2) Equity compensation plans not approved by security holders 404,381(3) $0.67 -- ---------- --------------- Total 1,836,704 1,825,000
- ----------- (1) Represents shares of common stock underlying options that are outstanding under our 1993 Stock Option Plan, our Employee Stock and Stock Option Plan, our 1997 Stock Incentive Plan and our Amended and Restated 2000 Stock Option Plan. (2) Represents shares of common stock available for issuance under options that may be issued under our Amended and Restated 2000 Stock Option Plan. (3) Represents shares of common stock underlying warrants that are described in Note 10 to our consolidated financial statements for the years ended December 31, 2002, 2001 and 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. We are or have been a party to employment and consulting arrangements with related parties, as more particularly described above under the headings "Compensation of Executive Officers," "Employment Contracts and Termination of Employment and Change-in-Control Arrangements" and "Compensation of Directors." 58 ITEM 14. CONTROLS AND PROCEDURES. Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of February 28, 2003 ("Evaluation Date"), that the design and operation of our "disclosure controls and procedures" (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding whether or not disclosure is required. There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the Evaluation Date, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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 ------------------- On October 8, 2002, we filed a Form 8-K for September 24, 2002 that contained Item 4 - Changes in Registrant's Certifying Accountant, and Item 7 - Financial Statements and Exhibits. 59 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page ---- Financial Statements - -------------------- Report of Grant Thornton LLP, Independent Certified Public Accountants.......F-2 Report of BDO Seidman, LLP, Independent Certified Public Accountants.........F-3 Consolidated Balance Sheets as of December 31, 2002 and 2001.................F-4 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000.........................................F-5 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2002, 2001 and 2000............................................................F-6 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000.........................................F-7 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.........................................F-8 Notes to Consolidated Financial Statements for years ended December 31, 2002, 2001 and 2000........................................F-10 Financial Statement Schedule - ---------------------------- Consolidated Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000............................F-41 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We have audited the accompanying consolidated balance sheet of MicroTel International, Inc. as of December 31, 2002 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the year then ended. 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 based on our audit. We conducted our audit 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 audit provides 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, 2002 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002. We have also audited Schedule II of MicroTel International, Inc. for the year ended December 31, 2002. In our opinion, the schedule presents fairly, in all material respects, the information required to be set forth therein. /S/ GRANT THORNTON LLP Los Angeles, California March 28, 2003 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We have audited the accompanying consolidated balance sheet of MicroTel International, Inc. as of December 31, 2001, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 2001. We have also audited the information for each of the years in the two-year period ended December 31, 2001 in the consolidated financial statement schedules listed in the accompanying index. These consolidated financial statements and the consolidated financial statement schedules 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 schedules 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 schedules 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 schedules. 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 schedules. 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 the results of their operations and their cash flows for each of the years in the two-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 schedules referred to above presents fairly, in all material respects, the information set forth therein. /S/ BDO Seidman, LLP BDO Seidman, LLP Costa Mesa, California February 25, 2002 F-3 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS (NOTES 7 AND 8) 2002 2001 ---- ---- Current assets: Cash and cash equivalents $ 254 $ 604 Accounts receivable, net of allowance for doubtful accounts of $130 and $226, respectively 5,356 5,627 Notes receivable (Note 3) 31 48 Inventories (Note 4) 7,505 7,433 Prepaid and other current assets 312 396 --------- --------- Total current assets 13,458 14,108 Property, plant and equipment, net (Note 5) 588 758 Goodwill, net of accumulated amortization of $1,050 and $1,060, respectively (Notes 2 and 3) 2,346 2,389 Other assets 394 433 --------- --------- $ 16,786 $ 17,688 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable due on demand $ 2,405 $ 2,198 Notes payable (Note 7) 1,070 1,420 Current portion of long-term debt (Note 8) 318 550 Accounts payable 3,897 3,783 Accrued expenses 1,807 2,471 --------- --------- Total current liabilities 9,497 10,422 Long-term debt, less current portion (Note 8) 927 763 Other liabilities 348 371 --------- --------- Total liabilities 10,772 11,556 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) 282 270 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 64,000 shares and 150,000 shares in 2002 and 2001, respectively (aggregate liquidation preference of $410 and $960 in 2002 and 2001, respectively) 400 938 Common stock, $0.0033 par value. Authorized 50,000,000 shares; issued and outstanding 21,535,000 and 20,671,000 shares in 2002 and 2001, respectively 71 68 Additional paid-in capital 24,900 24,358 Accumulated deficit (19,042) (18,459) Accumulated other comprehensive loss (597) (1,043) --------- --------- Total stockholders' equity 5,732 5,862 --------- --------- $ 16,786 $ 17,688 ========= ========= See accompanying notes to consolidated financial statements.
F-4 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2002 2001 2000 ---- ---- ---- Net sales (Note 14) $ 22,664 $ 27,423 $ 28,050 Cost of sales 14,147 15,456 15,529 --------- --------- --------- Gross profit 8,517 11,967 12,521 Operating expenses: Selling, general and administrative 7,731 10,129 9,827 Engineering and product development 1,015 1,076 1,167 --------- --------- --------- Income (loss) from operations (229) 762 1,527 Other income (expense): Interest expense (441) (396) (424) Gain (loss) on sale of subsidiary/investment, net (Note 3) -- -- 197 Other, net (Note 3) 80 (18) 434 --------- --------- --------- Income (loss) from continuing operations before income taxes (590) 348 1,734 Income taxes (benefit) (Note 11) (20) 77 31 --------- --------- --------- Income (loss) from continuing operations (570) 271 1,703 --------- --------- --------- Discontinued operations (Note 15): Income (loss) from discontinued operations -- 56 (212) Loss on disposal of discontinued operations, including provision for phase out period of $122 in 2000 -- -- (487) --------- --------- --------- Income (loss) from discontinued operations -- 56 (699) --------- --------- --------- Net income (loss) $ (570) $ 327 $ 1,004 ========= ========= ========= Basic earnings (loss) per share from continuing operations $ (0.03) $ 0.01 $ 0.09 ========= ========= ========= Diluted earnings (loss) per share from continuing operations $ (0.03) $ 0.01 $ 0.07 ========= ========= ========= Basic earnings (loss) per share from discontinued operations $ -- $ 0.00 $ (0.04) ========= ========= ========= Diluted earnings (loss) per share from discontinued operations $ -- $ 0.00 $ (0.03) ========= ========= ========= Basic earnings (loss) per share (Note 12) $ (0.03) $ 0.02 $ 0.05 ========= ========= ========= Diluted earnings (loss) per share (Note 12) $ (0.03) $ 0.01 $ 0.04 ========= ========= ========= See accompanying notes to consolidated financial statements.
F-5 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000 ---- ---- ---- Net income (loss) $ (570) $ 327 $ 1,004 Other comprehensive income (loss) net of tax: Foreign currency translation adjustment 446 (312) (505) -------- -------- -------- Comprehensive Income (loss) $ (124) $ 15 $ 499 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
Series B Accumulated Convertible Common Stock Additional Other Preferred Stock ----------------- Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total - ------------------------------------------------------------------------------------------------------------------------------------ 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 Preferred Series B conversions (86) (538) 864 3 535 -- -- -- Accretion of redeemable preferred stock -- -- -- -- -- (13) (13) Warrants issued for services -- -- -- -- 6 -- -- 6 Common stock issued for services -- -- -- -- 1 -- -- 1 Foreign currency translation adjustment -- -- -- -- -- -- 446 446 Net loss -- -- -- -- -- (570) -- (570) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2002 64 $400 21,535 $71 $24,900 $(19,042) $ (597) $5,732 ==================================================================================================================================== See accompanying notes to consolidated financial statements.
F-7 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (570) $ 327 $ 1,004 Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 349 345 431 Amortization of intangible assets -- 370 352 Provision for doubtful accounts 118 216 47 Provision for inventory obsolescence 438 659 893 Gain on sale of fixed assets (9) -- (43) Gain on sale of stock -- -- (197) Reversal of previously estimated accruals -- -- (399) Stock and warrants issued for services 7 51 25 Repricing of warrants -- -- 65 Gain (loss) on disposal of discontinued operations -- -- 487 Net change in operating assets of discontinued operations -- (15) 401 Changes in operating assets and liabilities net of businesses acquired: Accounts receivable 22 1,609 (428) Inventories (657) (1,755) (1,468) Prepaids and other assets 219 458 274 Note receivable -- -- (130) Accounts payable 114 (1,439) (1,120) Accrued expenses and other liabilities (688) (926) (395) ------------------------------------ Cash used in operating activities (657) (100) (201) ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (193) (120) (158) 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 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 17 82 -- ------------------------------------ Cash provided by (used in) investing activities (176) (38) 909 ------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) of notes payable (206) (34) 1,131 Net proceeds (repayments) of long-term debt -- 392 -- Repayment of notes payable -- -- (1,146) Proceeds from sale of common stock -- -- 88 ------------------------------------ Cash provided by (used in) financing activities (206) 358 73 ------------------------------------ Effect of exchange rate changes on cash 689 (372) (505) Net (decrease) increase in cash and cash equivalents (350) (152) 276 Cash and cash equivalents at beginning of year 604 756 480 ------------------------------------ Cash and cash equivalents at end of year $ 254 $ 604 $ 756 ==================================== See accompanying notes to consolidated financial statements.
F-8 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2002 2001 2000 ---- ---- ---- Cash paid during the year for: Interest $361 $400 $372 ======================== Income taxes $ 95 $ 45 $ 13 ======================== SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital lease $143 $150 $ -- ======================== Common stock issued upon conversion of redeemable preferred stock $ -- $ -- $349 ======================== Accretion of redeemable preferred stock $ 13 $ 11 $ 20 ======================== 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-9 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the "Company") operates through three wholly-owned subsidiaries: CXR Telcom Corporation ("CXR Telcom"), CXR, S.A.S.U. ("CXR France") and XET Corporation (formerly, XIT Corporation) ("XET"). XET and its subsidiaries design, develop, manufacture and market digital switches and power supplies. CXR Telcom and CXR France design, develop, manufacture and market transmission and network access products and communications test equipment. The Company conducts its operations out of various facilities in the U.S., France, England and Japan and organizes itself in two product line segments: electronic components and communications equipment. 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) was 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-10 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 The Company reviews the carrying amount of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. 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. PRODUCT WARRANTY LIABILITIES 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 communications equipment products carry a two-year limited parts and labor warranty. The Company's communications equipment 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 that was sold in March 1999, for less than the amount originally accrued. Accordingly, the Company reversed warranty accruals totaling $137,000 in 2000 that were no longer deemed to be necessary. The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranties when product revenue is recognized. Factors affecting the Company's warranty liability include the number of units sold, historical and anticipated rates of claim, and costs per claim. The Company periodically assess the adequacy of its warranty liability accrual based on changes in these factors. F-11 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 The changes in the Company's product warranty liability during 2002 and 2001 were as follows:
YEAR ENDED DECEMBER 31, 2002 2001 -------------------------------------- Liability, beginning of year $ 32,000 $117,000 Expense for new warranties issued 32,000 32,000 Expense related to accrual revision for prior year warranties -- (85,000) Warranty claims (32,000) (32,000) -------------------------------------- Liability, end of year $ 32,000 $ 32,000 ======================================
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 Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock-based compensation plans. Accordingly, no compensation cost is recognized for its employee stock option plans unless the exercise price of options granted is less than fair market value on the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." 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: F-12 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 2002 2001 2000 ---- ---- ---- NET INCOME (LOSS) As reported $ (570) $ 327 $ 1,004 Pro forma $ (590) $ 211 $ 909 NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS (LESS ACCRETION OF PREFERRED STOCK) As reported $ (583) $ 316 $ 984 Pro forma $ (603) $ 200 $ 889 BASIC EARNINGS (LOSS) PER SHARE As reported $ (0.03) $ 0.02 $ 0.05 Pro forma $ (0.03) $ 0.01 $ 0.05 DILUTED EARNINGS (LOSS) PER SHARE As Reported $ (0.03) $ 0.01 $ 0.04 Pro forma $ (0.03) $ 0.01 $ 0.04 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. 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, 2002 and 2001, the fair value of all financial instruments approximated carrying value. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes the carrying amounts of its notes payable and long-term debt approximate fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates. F-13 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 of 2000. 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 result 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. Accounts receivable are generally due within 30 days in our U.S. operations and are stated net of allowance for doubtful accounts. Accounts outstanding for longer than the contractual payment terms are considered past due. Provisions for uncollectible accounts are made based on the Company's specific assessment of the collectibility of all past due accounts. 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 14% and 10% of the Company's total net revenues during 2002 and 2001. At December 31, 2000, one customer accounted for 10% of net accounts receivable. Provisions for uncollectible accounts are made based on the Company's specific assessment of the collectibility of all past due accounts. FOREIGN CURRENCY TRANSLATION The accounts of foreign subsidiaries have been translated using the local currency as the functional currency. Accordingly, foreign currency denominated assets and liabilities have been translated to U.S. dollars at the current rate of exchange on the balance sheet date. The effects of translation are recorded as a separate component of stockholders' equity in accumulated other comprehensive income (loss). Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average exchange rates and included in operations. Such amounts are not material to the accompanying consolidated financial statements. F-14 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 RECLASSIFICATIONS Certain reclassifications have been made to the prior years financial statements to be consistent with the 2002 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 $5,011,000 value of the Company's common stock outstanding at the date of the merger and the $730,000 direct costs of the acquisition, 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 was to be 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 was being amortized on a straight-line basis over ten years until December 31, 2001, after which no amortization was incurred in accordance with SFAS 142 (see Note 6). (3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES 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 was included in the net amount of other income in the Company's 1999 consolidated statement of operations. F-15 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 On January 7, 2000, the Company sold all of its interest in the DTS common stock 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 was included in other income (expense) in the 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 represented less than 1% of the total outstanding shares of Wi-LAN common stock as of the date of acquisition. 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 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 ============ F-16 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 Initial purchase price $ 790,000 Reduction due to shortfall in net assets (181,000) Earn-out accrual 312,000 ------------ Adjusted purchase price $ 921,000 ============ The acquisition of Belix has been accounted for as a purchase by the Company and resulted in approximately $1.2 million of goodwill. Belix is located in England, U. K. and is in the business of manufacturing power supplies for various applications. Belix has been integrated into the Company's existing power supply producer, XCEL Power Systems, Ltd. Belix's assets consist mostly of accounts receivable, inventories and fixed assets. All dollar amounts indicated in this paragraph are derived from the conversion of British pounds into U. S. dollars at the conversion rate in effect at the time of the acquisition 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 =========== F-17 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 T-Com was a manufacturer of high performance digital transmission test instruments used for the installation and maintenance of high-speed telephone line services for telephone central offices, competitive local exchange carriers and private communications networks. The Company intends to use the acquired assets for substantially the same purposes as such assets were used by T-Com. 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 became 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 is convertible into ten common shares, and conversion rights are 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 were exercisable for a period of twenty-four months following the acquisition closing date of September 22, 2000 and contained a cashless exercise feature. The warrants expired on September 22, 2002. 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 were 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 was being amortized on a straight-line basis over ten years until December 31, 2001, after which no amortization was incurred in accordance with SFAS 142 (see Note 6). Unaudited pro forma results of operations for the year ended December 31, 2000, 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, 2002, 2001 AND 2000 PRO FORMA YEAR ENDED DECEMBER 31, (thousands except per share data) 2000 - ------------------------------------------------------------------------------ Net sales $29,680 Income (loss) from continuing operations 1,255 Net income (loss) 556 Net income per common share Basic 0.03 Diluted 0.02 - ------------------------------------------------------------------------------ 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 $31,000 and $34,000 at December 31, 2002 and 2001, 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 2003. 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: 2002 2001 ---- ---- Raw materials....................................... $2,904,000 $2,806,000 Work-in-process..................................... 2,988,000 2,879,000 Finished goods...................................... 1,613,000 1,748,000 ---------- ---------- $7,505,000 $7,433,000 ========== ========== Included in the amounts above are allowances for inventory obsolescence of $1,591,000 and $1,152,000 at December 31, 2002 and 2001, 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. F-19 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: 2002 2001 ---- ---- Land and buildings ..................... $ 309,000 $ 266,000 Machinery, equipment and fixtures ...... 3,717,000 3,508,000 Leasehold improvements ................. 450,000 449,000 ------------ ------------ 4,476,000 4,223,000 Accumulated depreciation ............... (3,888,000) (3,465,000) ------------ ------------ $ 588,000 $ 758,000 ============ ============ (6) GOODWILL AMORTIZATION AND IMPAIRMENT TESTING The Company initially applied Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002. SFAS 142 provides for impairment testing of goodwill carrying values and disallows the amortization of goodwill. In applying SFAS 142, the Company performed the transitional reassessment and impairment tests required as of January 1, 2002 and determined that goodwill had indefinite useful lives and that there was no impairment of these assets. At the time of adoption, the Company had $1,060,000 of accumulated amortization of goodwill. The Company performed its annual required test of impairment as of December 31, 2002. The following table includes a reversal of the Company's goodwill amortization expenses for 2001 and 2000 so that 2001 and 2000 can be compared with 2002, during which year the Company had no goodwill amortization expense in accordance with SFAS 142.
YEAR ENDED DECEMBER 31, 2002 2001 2000 ------------------------------------------------- Reported net income (loss) from continuing operations $ (570,000) $ 271,000 $ 1,703,000 Add back: goodwill amortization -- 370,000 352,000 ------------ ------------ -------------- Adjusted net income (loss) excluding amortization of goodwill $ (570,000) $ 641,000 $ 2,055,000 ============ ============ ============== Income (loss) from discontinued operations -- 56,000 (699,000) Pro forma net income (loss) $ (570,000) $ 697,000 $ 1,356,000 ============ ============ ============== Earnings (loss) per share: Basic Reported net income (loss) from continuing operations $ (0.02) $ 0.01 $ 0.09 Add back: goodwill amortization -- 0.02 0.02 Adjusted net income (loss) excluding amortization of goodwill $ (0.03) $ 0.03 $ 0.11 ============ ============ ============== F-20 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 Income (loss) from discontinued operations -- -- (0.04) Net income (loss) $ (0.03) $ 0.03 $ 0.07 ============ ============ ============== Diluted Reported net income (loss) from continuing operations $ (0.03) $ 0.01 $ 0.07 Add back: goodwill amortization -- 0.02 0.02 Adjusted net income (loss) excluding amortization of goodwill $ (0.03) $ 0.03 $ 0.09 ============ ============ ============== Income (loss) from discontinued operations -- -- (0.03) Pro forma net income (loss) $ (0.02) $ 0.03 $ 0.06 ============ ============ ==============
(7) NOTES PAYABLE A summary of notes payable is as follows: 2002 2001 ---- ---- Line of credit with a U.S. commercial lender $1,070,000 $1,420,000 Lines of credit with foreign banks 2,405,000 2,198,000 ----------- ----------- $3,475,000 $3,618,000 =========== =========== On July 8, 1998, the Company entered into a $10.5 million credit facility (the "Domestic Facility") with a commercial lender for a term of two years which provided: (i) a term loan of approximately $1.5 million; (ii) a revolving line of credit of up to $8 million based upon assets available from either existing or future-acquired operations; and (iii) a capital equipment expenditure credit line of up to $1 million. This credit facility replaced the existing credit facilities of the Company's domestic operating companies that were paid in full at the closing. 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, together with the Company acting as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc. that includes a revolving loan secured by the Company's inventory and accounts receivable and a term loan 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 Company's 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. F-21 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 In April 2002, the maturity date of the facility with Wells Fargo Business Credit, Inc. was extended by two years to August 16, 2005. Since April 17, 2002, the facility has provided for a revolving loan of up to $3,000,000 secured by inventory and accounts receivable and a term loan in the amount of $687,000 secured by machinery and equipment. On December 31, 2002, the interest rate was the prime rate (then 4.25%) 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 for this credit facility during 2002 was 15.4%. The balance outstanding at December 31, 2002 was $1,070,000 on the revolving loan and $95,000 on the term loan, and $13,000 of additional borrowings were available under the revolving loan. The credit facility contains restrictive financial covenants that are set by mutual agreement each year. At December 31, 2002, the Company was not in compliance with the net income covenant. The Company subsequently obtained a waiver from the lender on March 28, 2003. The Company's U.K. subsidiary, XCEL Power Systems, Ltd. ("XPS") obtained a credit facility with Venture Finance PLC, which new facility replaced a Lloyds Bank facility as of November 12, 2002 and expires on November 12, 2005. Using the exchange rate in effect at December 31, 2002 for the conversion of British pounds into United States dollars, the new facility is for a maximum of $2,415,000 and includes a $564,000 unsecured cash flow loan, a $129,000 term loan secured by fixed assets and the remainder of the loan is secured by accounts receivable and inventory. The interest rate is the base rate of Venture Finance PLC (4% at December 31, 2002) plus 2%, and is subject to a minimum rate of 4% per annum. There are no financial performance covenants applicable to this credit facility. CXR France has credit facilities with several lenders that totaled up to approximately $849,000 in the aggregate as of December 31, 2002. The interest rates on these facilities ranged from 5.2% to 7.2% at December 31, 2002. Each credit facility has a specified repayment term. However, each lender has the right to demand payment in full at any time prior to the scheduled maturity date of a particular credit facility. Because CXR France has experienced a substantial reduction in revenue, some of its lenders are contemplating, and others have made, reductions in the total available credit. Banque Hervet reduced availability to $78,000 from $159,000 effective December 31, 2002. On February 10, 2003, Societe Generale notified CXR France that CXR France must pay back its credit line balance by April 30, 2003. As of December 31, 2002, that credit line balance was $298,000. As a result, the Company is in the process of seeking alternative financing sources in France to replace all of the current lenders to the Company's French operations. XCEL Japan Ltd. ("XJL") obtained a term loan on November 29, 2002 from the Johnan Shinkin Bank. The loan is amortized over five years and carries an annual interest rate 3.25%. The balance of the loan on December 31, 2002 was $82,000 using the exchange rate in effect at December 31, 2002 for conversion of Japanese yen into United States dollars. The Company cannot offer assurance that the various lenders to the Company's U.K. and/or French subsidiaries other than Societe Generale will not seek immediate payment of all amounts owed by them under their respective credit facilities or seek to terminate any of the existing credit facilities. Similarly, the Company cannot offer assurance that if either of these events were to occur, the Company would be successful in obtaining the required replacement financing for its operations in the U.K. and/or France or, if the Company were able to obtain such financing, that the financing would occur on a timely basis, would be on acceptable terms and would be sufficient to allow the Company to maintain its business operations in the U.K. and/or France. Accordingly, any of these actions on the part of the lenders to the Company's U.K. and/or French subsidiaries could adversely impact the Company's results of operations and cash flows. F-22 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (8) LONG-TERM DEBT A summary of long-term debt follows: 2002 2001 ---- ---- Term notes payable to commercial lender (a) $ 95,000 $ 232,000 Term notes payable to foreign banks (b) 901,000 760,000 Capitalized lease obligations (c) 249,000 172,000 Other promissory notes -- 149,000 ------------ ------------ 1,245,000 1,313,000 Current portion (318,000) (550,000) ------------ ------------ $ 927,000 $ 763,000 ============ ============ - --------------- (a) Two term notes payable to Wells Fargo Business Credit, Inc. bearing interest at the lender's prime rate (4.25% at December 31, 2002) 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, 2005. (b) The Company has agreements with several foreign banks that include term borrowings that mature at various dates through 2007. Interest rates on the borrowings bear interest at rates ranging from 2.9% to 6.0% and are payable in monthly installments. (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 at dates through 2004. Principal maturities related to long-term debt as of December 31, 2002 are as follows: Year Ending December 31, Amount ------------------------ ------ 2003 $ 318,000 2004 $ 224,000 2005 $ 668,000 2006 $ 20,000 2007 $ 15,000 (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 that expired May 22, 2001. The estimated fair value of 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) totaled $163,000 and reduced the convertible redeemable preferred stock balance as of the date of issuance. F-23 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 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. F-24 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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. 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. F-25 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 The following table reflects the convertible redeemable preferred stock activity: Number of Shares Amount --------- ------ 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 Conversion to common stock -- -- Accretion of preferred stock -- 12,000 - ---------------------------- ------ --------- Balance at December 31, 2002 25.0 282,000 ====== ========= (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. 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, F-26 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 options granted may be either incentive or nonqualified options. Incentive 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, 2002, 2001 and 2000:
Weighted Weighted Weighted Average Average Average 2002 Exercise 2001 Exercise 2000 Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year 1,718,000 $ 1.34 1,454,000 $ 1.34 1,602,000 $ 1.46 Granted 50,000 0.32 345,000 0.41 235,000 0.50 Exercised -- -- -- -- (90,000) 0.20 Forfeited (336,000) $ 1.37 (81,000) $ 0.64 (293,000) $ 1.10 ----------- -------- ---------- -------- ---------- -------- - ---------------------- Outstanding at end of year 1,432,000 $ 1.11 1,718,000 $ 1.18 1,454,000 $ 1.34 =========== ======== ========== ======== ========== ========
The following table summarizes information with respect to stock options at December 31, 2002:
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 2002 (Years) Price 2002 Price ----------- ---------------- ----------------------- ----------- ---------------- ----------- $0.20 to $1.00 720,000 7.25 $0.36 645,000 $0.36 $1.01 to $2.00 690,000 2.42 1.83 690,000 1.83 $3.01 to $4.00 22,000 2.63 3.21 22,000 3.21 ----------- ---- ----- --------- ----- $0.20 to $4.00 1,432,000 4.85 $1.11 1,335,000 $1.15 ========= ==== ===== ========= =====
The fair value of options granted during 2002 was $13,000, at a weighted average value of $0.26 per share. The fair values of options granted during 2001 and 2000 were $115,000 and $113,000, respectively, at weighted average values of $0.41 and $0.48 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 2002, 2001 and 2000 has been estimated based on a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 92% in 2002, 89% to 95% in 2001 and 101% in 2000; risk-free interest rate of 3.0% to 6.0%; and average expected lives of approximately seven to ten years. F-27 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 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/forfeited (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/forfeited (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 Warrants issued 120,000 $0.50 60,000 Warrants expired/forfeited 1,688,000 $0.25 to 1.73 $1,161,000 - -------------------------------------------------- ------------------------------------------------- Balance outstanding at December 31, 2002 404,000 $0.25 to 2.50 $ 273,000 =================================================
During 2002, the Company issued warrants to purchase up to 120,000 shares of common stock at an exercise price of $0.50 per share. The Company issued the warrants to a former executive of the Company as compensation for services rendered. The estimated value of the warrants was $7,000 and was calculated using the Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 92%; a risk-free interest rate of 3.75%; and a contractual life of 3 years. Also, during 2002 the Company issued 5,000 shares of common stock in consideration for services rendered. The stock was valued at $1,000 on the date of issuance and, accordingly, the Company recorded a $1,000 expense. 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 the 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). 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 and 2000, aggregates of 900 and 1,000 shares, respectively, were issued pursuant to the plan. The Company terminated this plan effective as of July 1, 2001. F-28 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 for 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 Company's 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. Compensation expense of $65,000 was recorded during 2000 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 Opinion No. 25 and Financial Accounting Standards Board ("FASB") Interpretation No. 44. For warrants issued to non-employees, compensation expense was determined in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." ("SFAS 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-SFAS 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, 2002, the Company was authorized to issue 50,000,000 shares of common stock. As of that date, the Company had 21,535,125 shares of common stock outstanding and 3,740,532 shares of common stock that could become issuable pursuant to the exercise of outstanding stock options and warrants and the 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 the Company's 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. (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. F-29 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 Income (loss) from continuing operations before income taxes was taxed under the following jurisdictions:
2002 2001 2000 ---- ---- ---- Domestic $ 497,000 $ 718,000 $2,658,000 Foreign (1,087,000) (370,000) (924,000) --------------------------------------------------------- Total $ (590,000) $ 348,000 $1,734,000 ========================================================= Income tax expense (benefit) consists of the following: 2002 2001 2000 ---- ---- ---- Current Federal $ -- $ 5,000 $20,000 State 18,000 5,000 3,000 Foreign (38,000) 67,000 8,000 --------------------------------------------------------- $ (20,000) $ 77,000 $31,000 ========================================================= Income tax expense (benefit) differs from the amount obtained by applying the statutory federal income tax rate of 34% to income (loss) from continuing operations before income taxes as follows: 2002 2001 2000 ---- ---- ---- Tax (tax benefit) at U.S. federal statutory rate $ (200,000) $ 118,000 $ 590,000 State taxes, net of federal income tax benefit (34,000) 5,000 3,000 Foreign income taxes (38,000) 67,000 8,000 Change in valuation allowances 258,000 -- -- Permanent differences 11,000 54,000 88,000 Utilization of net operating losses -- (167,000) (658,000) Other (17,000) -- -- --------------------------------------------------------- $ (20,000) $ 77,000 $ 31,000 =========================================================
F-30 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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:
2002 2001 ---- ---- Deferred tax assets: Fixed assets depreciation $ 250,000 $ -- Allowance for doubtful accounts 3,000 60,000 Inventory reserves and uniform capitalization 279,000 213,000 Other accrued liabilities 216,000 453,000 Deferred compensation 144,000 182,000 Research credit carryforwards 224,000 224,000 Alternative Minimum Tax credit carryforwards 135,000 135,000 Net operating loss carryforwards 11,006,000 10,732,000 ---------------------------------------- Total deferred tax assets 12,257,000 11,999,000 Valuation allowance for deferred tax assets (12,257,000) (11,999,000) ---------------------------------------- Net deferred tax assets $ -- $ -- ========================================
As of December 31, 2002, the Company had federal net operating loss carryforwards of approximately $31,000,000, which expire at various dates through 2022, and state net operating loss carryforwards of approximately $3,000,000, which expire at various dates through 2010. 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. Internal Revenue Code section 382 and the corresponding California provisions place a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, utilization of the net operating loss carryforwards may be limited. F-31 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (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):
2002 2001 2000 ---- ---- ---- NUMERATOR: Net income (loss) $ (570,000) $ 327,000 $ 1,004,000 Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 13,000 11,000 20,000 -------------------------------------------------- Income (loss) attributable to common stockholders $ (583,000) $ 316,000 $ 984,000 ================================================== DENOMINATOR: Weighted average number of common shares outstanding during the period - basic 21,208,000 20,594,000 19,504,000 Incremental shares from assumed conversions of warrants, options and preferred stock -- 3,188,000 3,523,000 -------------------------------------------------- Adjusted weighted average shares - diluted 21,208,000 23,782,000 23,027,000 ================================================== Basic earnings (loss) per share $ (0.03) $ 0.02 $ 0.05 ================================================== Diluted earnings (loss) per share $ (0.03) $ 0.01 $ 0.04 ==================================================
The following table shows the common stock equivalents that were outstanding as of December 31, 2002 and 2001 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: Number of Exercise Price Shares Per Share ------ --------- Anti-dilutive common stock options: As of December 31, 2002 1,432,323 $0.2000 to $3.4400 As of December 31, 2001 1,243,324 $0.4600 to $3.4375 Anti-dilutive common stock warrants: As of December 31, 2002 404,381 $0.2500 to $2.5000 As of December 31, 2001 1,149,881 $0.6250 to $2.5000 The computation of diluted loss per share for 2002 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 2013. 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 2002, 2001 and 2000 was approximately $1,097,000, $1,091,000 and $956,000, respectively. F-32 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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 ------------------------ ------ 2003 $ 633,000 2004 562,000 2005 382,000 2006 286,000 2007 and thereafter 272,000 ------------- $ 2,135,000 ============= LITIGATION The Company is not currently a party to any material legal proceedings. However, 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 that was determined to no longer be necessary. 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 $22,000, $16,000 and $21,000 to the 401(k) Plan for the years ended December 31, 2002, 2001 and 2000, 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 or at least two years' salary during a renewal 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. F-33 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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: electronic components and communications equipment. The electronic components segment operates in the U.S., European and Asian markets and designs, manufactures and markets digital switches and power supplies. The communications equipment segment operates principally in the U.S. and European markets and designs, manufactures and distributes voice and data transmission and networking equipment and communications test instruments. 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 $160,000, $127,000 and $173,000 for the years ended December 31, 2002, 2001 and 2000, 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. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. F-34 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 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. 2002 2001 2000 ---- ---- ---- SALES TO EXTERNAL CUSTOMERS: Electronic Components $ 13,390,000 $ 12,646,000 $ 12,392,000 Communications Equipment 9,274,000 14,777,000 15,658,000 ------------------------------------------------ $ 22,664,000 $ 27,423,000 $ 28,050,000 ================================================ INTERSEGMENT SALES: Electronic Components $ -- $ -- $ -- Communications Equipment -- -- -- ------------------------------------------------ $ -- $ -- $ -- ================================================ INTEREST EXPENSE: Electronic Components $ 259,000 $ 228,000 $ 216,000 Communications Equipment 168,000 158,000 131,000 ------------------------------------------------ $ 427,000 $ 386,000 $ 347,000 ================================================ DEPRECIATION AND AMORTIZATION: Electronic Components $ 93,000 $ 279,000 $ 173,000 Communications Equipment 177,000 322,000 528,000 ------------------------------------------------ $ 270,000 $ 601,000 $ 701,000 ================================================ SEGMENT PROFITS (LOSSES): Electronic Components $ 2,452,000 $ 2,882,000 $ 3,365,000 Communications Equipment (1,257,000) 450,000 344,000 ------------------------------------------------ $ 1,195,000 $ 3,332,000 $ 3,709,000 ================================================ SEGMENT ASSETS: Electronic Components $ 9,445,000 $ 9,060,000 $ 8,876,000 Communications Equipment 6,773,000 8,317,000 9,901,000 ------------------------------------------------ $ 16,218,000 $ 17,377,000 $ 18,777,000 ================================================ F-35 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 The following is a reconciliation of the reportable segment revenues, profit or loss and assets to the Company's consolidated totals.
2002 2001 2000 ---- ---- ---- Net Sales - --------- Total sales for reportable segments $ 22,664,000 $ 27,423,000 $ 28,050,000 Elimination of intersegment sales -- -- -- --------------------------------------------------- Total consolidated revenues $ 22,664,000 $ 27,423,000 $ 28,050,000 =================================================== Profit (loss) from continuing operations - ---------------------------------------- before income taxes ------------------- Total profit (loss) for reportable segments $ 1,195,000 $ 3,332,000 $ 3,709,000 Unallocated amounts: General corporate expenses $ (1,785,000) $ (2,984,000) $ (1,975,000) --------------------------------------------------- Consolidated income (loss) from continuing operations before income taxes $ (590,000) $ 348,000 $ 1,734,000 =================================================== Assets - ------ Total assets for reportable segments $ 16,218,000 $ 17,377,000 $ 18,777,000 Other assets 568,000 311,000 707,000 --------------------------------------------------- Total consolidated assets $ 16,786,000 $ 17,688,000 $ 19,484,000 =================================================== Interest Expense - ---------------- Interest expense for reportable segments $ 427,000 $ 386,000 $ 347,000 Other interest expense 14,000 10,000 77,000 --------------------------------------------------- Total interest expense $ 441,000 $ 396,000 $ 424,000 =================================================== Depreciation and Amortization - ----------------------------- Depreciation and amortization expense for reportable segments $ 270,000 $ 601,000 $ 701,000 Other depreciation and amortization expense 79,000 114,000 82,000 --------------------------------------------------- Total depreciation and amortization $ 349,000 $ 715,000 $ 783,000 ===================================================
F-36 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 A summary of the Company's net sales and identifiable assets by geographical area follows: 2002 2001 2000 ---- ---- ---- Net sales: United States $ 8,598,000 $12,461,000 $13,246,000 Japan 768,000 1,085,000 941,000 France 5,854,000 7,848,000 9,118,000 United Kingdom 7,444,000 6,029,000 4,745,000 ----------------------------------------------- $22,664,000 $27,423,000 $28,050,000 =============================================== Long-lived assets: United States $ 399,000 $ 422,000 $ 418,000 Japan 15,000 14,000 14,000 France 177,000 186,000 251,000 United Kingdom 97,000 136,000 237,000 ----------------------------------------------- $ 688,000 $ 758,000 $ 920,000 =============================================== 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 10% or more 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. XCD is essentially a captive supplier of printed circuit boards to the electronic components segment with total sales to external customers of $160,000, $127,000 and $173,000 for the years ended December 31, 2002, 2001 and 2000, 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 2002, 2001 and 2000 are as follows:
2002 2001 2000 ---- ---- ---- Net sales $ -- $ -- $ 2,257,000 ============= ============ ============= Operating income (loss) $ -- $ 56,000 $ (212,000) ============= ============ ============= Gain (loss) on sale of discontinued operations $ -- $ -- $ (487,000) ============= ============ =============
F-37 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 There were no assets and liabilities as of December 31, 2002 and 2001 relating to the circuits segment. (16) NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This statement addresses financial and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to all entities and legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of long-lived assets, except for certain obligations of lessees. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company's management has not yet determined the impact of the adoption of SFAS 143 on the Company's financial position or results of operations. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 requires that 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 144 is effective for the Company's consolidated financial statements beginning January 1, 2002. The implementation of SFAS 144 did not have a material impact on the Company's consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" ("SFAS 4") and amends SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." Under SFAS 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. With the elimination of SFAS 4, gains and losses from extinguishment of debt are to be classified as extraordinary items only if they meet the criteria for extraordinary items in APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30"). Applying the provisions of APB 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the classification of an extraordinary item. SFAS 145 also rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The adoption of the provisions of SFAS 145 during 2002 did not have any impact on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect the adoption of this statement to have a material effect on the Company's financial statements. F-38 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also include more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002 and requires the additional disclosures for interim or annual periods ended after December 15, 2002. The Company does not expect that the initial recognition and measurement provisions of FIN 45 will have a material impact on the Company's results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123" ("SFAS 148"). This statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the annual disclosure provisions of SFAS 148 in its financial reports for the year ended December 31, 2002 and will adopt the interim disclosure provisions for its financial reports beginning with the quarter ending March 31, 2003. Because the adoption of this standard involves disclosures only, the Company does not expect a material impact on its results of operations, financial position or liquidity. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An interpretation of ARB No. 51" ("FIN 46"). FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The Company does not expect that the provisions of FIN 46 will have a material impact on the Company's results of operations or financial position. F-39 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly operations for the years ended December 31, 2002 and 2001 (in thousands, except for per share data).
2002 Mar. 31 June 30 Sept. 30 Dec. 31 ---- ------- ------- -------- ------- Net Sales 4,820 6,118 5,764 5,962 Gross Profit 1,529 2,510 2,084 2,394 Income (loss) from continuing operations (699) 255 (330) 204 Income (loss) from discontinued operations -- -- -- -- Net income (loss) (699) 255 (330) 204 Income (loss) available to common shareholder (702) 252 (333) 201 Earnings (loss) per share: Continuing operations Basic (0.03) 0.01 (0.02) 0.01 Diluted (0.03) 0.01 (0.02) 0.01 Discontinued operations Basic -- -- -- -- Diluted -- -- -- -- Net income (loss) Basic (0.03) 0.01 (0.02) 0.01 Diluted (0.03) 0.01 (0.02) 0.01 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
F-40 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Additions Balance at Charged to Deductions Beginning of Costs and Write-offs of Balance at Description Year Expenses Accounts End of Year ----------- ---- -------- -------- ----------- Allowance for doubtful accounts: Year ended December 31, 2002 226,000 118,000 (214,000) 130,000 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 ============== ============= ============== ============== Allowance for inventory obsolescence: Year ended December 31, 2002 1,152,000 438,000 (93,000) 1,497,000 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 ============== ============= ============== ==============
F-41 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) 60 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) 61 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) 62 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) 10.30 Fourth Amendment to Credit and Security Agreement dated as of April 17, 2002 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. (20) 10.31 Sublease Agreement dated as of October 29, 2002, by and between Novellis Systems, Inc. and CXR Telcom Corporation 63 10.32 Deed of Guarantee and Indemnity dated November 12, 2002 made by MicroTel International, Inc., XCEL Corporation Limited, Belix Power Conversion Limited and Belix Wound Components Limited in favor of Venture Finance PLC 10.33 Advantage Facility dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.34 Cashflow Loan Agreement dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.35 Term Loan Agreement dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.36 Deed of Subordination dated November 12, 2002 between Venture Finance PLC, MicroTel International, Inc. and XCEL Corporation Limited 10.37 Agreement for the Purchase of Debts dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.38 Letter Agreement dated October 23, 2002 between XCEL Power Systems Limited and Venture Finance PLC regarding Amendments to Agreement for the Purchase of Debts 10.39 Waiver of Default Agreement dated March 28, 2003 between XET Corporation, CXR Telcom Corporation and Wells Fargo Business Credit, Inc. 10.40 Description of Retirement Account Matching Contributions (#) 16.1 Letter dated October 4, 2002 from BDO Seidman, LLP regarding change in certifying accountant (21) 21.1 Subsidiaries of the Registrant (15) 23.1 Consent of Grant Thornton LLP, Independent Certified Public Accountants 23.2 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 - --------------- (#) 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) 64 (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) (20) Incorporated by reference to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-10346) (21) Incorporated by reference to the Registrant's current report on Form 8-K for September 24, 2002 65 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 31st day of March, 2003. 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, March 31, 2003 - ------------------------------------ Chief Executive Officer (Principal Carmine T. Oliva Executive Officer) and Director /S/ Randolph D. Foote Chief Financial Officer March 31, 2003 - ------------------------------------ (Principal Accounting and Randolph D. Foote Financial Officer), Senior Vice President and Assistant Secretary /S/ Robert B. Runyon Secretary and Director March 31, 2003 - ------------------------------------ Robert B. Runyon /S/ Laurence P. Finnegan, Jr. Director March 31, 2003 - ------------------------------------ Laurence P. Finnegan, Jr.
66 CERTIFICATIONS I, Carmine T. Oliva, certify that: 1. I have reviewed this annual report on Form 10-K of MicroTel International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ CARMINE T. OLIVA Carmine T. Oliva, Chief Executive Officer (principal executive officer) 67 I, Randolph D. Foote, certify that: 1. I have reviewed this annual report on Form 10-K of MicroTel International, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ RANDOLPH D. FOOTE Randolph D. Foote, Chief Financial Officer (principal financial officer) 68 EXHIBITS FILED WITH THIS REPORT EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.31 Sublease Agreement dated as of October 29, 2002, by and between Novellis Systems, Inc. and CXR Telcom Corporation 10.32 Deed of Guarantee and Indemnity dated November 12, 2002 made by MicroTel International, Inc., XCEL Corporation Limited, Belix Power Conversion Limited and Belix Wound Components Limited in favor of Venture Finance PLC 10.33 Advantage Facility dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.34 Cashflow Loan Agreement dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.35 Term Loan Agreement dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.36 Deed of Subordination dated November 12, 2002 between Venture Finance PLC, MicroTel International, Inc. and XCEL Corporation Limited 10.37 Agreement for the Purchase of Debts dated November 12, 2002 between XCEL Power Systems Limited and Venture Finance PLC 10.38 Letter Agreement dated October 23, 2002 between XCEL Power Systems Limited and Venture Finance PLC regarding Amendments to Agreement for the Purchase of Debts 10.39 Waiver of Default Agreement dated March 28, 2003 between XET Corporation, CXR Telcom Corporation and Wells Fargo Business Credit, Inc. 10.40 Description of Retirement Account Matching Contributions (#) 23.1 Consent of Grant Thornton LLP, Independent Certified Public Accountants 23.2 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 69 EX-10.31 3 microtel_10kex10-31.txt EXHIBIT 10.31 SUBLEASE AGREEMENT I. BASIC SUBLEASE INFORMATION -------------------------- Effective Date: The date this Sublease Agreement is executed by both Sublessee and Sublessor, subject to delivery of written consent to this Sublease by the Master Lessor (the "Effective Date"). Commencement Date: The date Possession is delivered to Sublessee pursuant to Section 8 hereof (the "Commencement Date"). Term: From the Commencement Date through July 31, 2003, unless terminated earlier in accordance with the terms of this Sublease. Expiration Date: July 31, 2003 (the "Expiration Date"). Landlord: ProLogis Limited Partnership-I, a Delaware limited partnership ("Master Lessor"). Premises: Approximately eight thousand five hundred fifty (8,550) rentable square feet ("RSF"), located at 47971 Fremont Boulevard, Fremont, California (the "Building"), as more particularly described and illustrated in EXHIBIT A attached hereto and made a part hereof (the "Premises"). Use: General Office, research and development, light assembly, manufacturing and storage of Sublessee's products only and for no other purpose. Rent Commencement Date: Fourteen (14) days after the date Possession is delivered to Sublessee. Monthly Rent: Five Thousand Five Hundred Fifty-Seven and 50/100 Dollars ($5,557.50) Prepaid Rent: Upon execution of this Sublease, Sublessee shall tender to Sublessor the Monthly Rent for the first month in the amount of $5,557.50. Security Deposit: Upon execution of this Sublease, Sublessee shall tender Five Thousand Five Hundred Fifty-Seven and 50/100 Dollars ($5,557.50) to Sublessor as the "Security Deposit." Sublessee's Proportionate Share of Sublessor's Proportionate Share: Sublessee shall pay forty-nine percent (49%) of Sublessor's Proportionate Share of Operating Expenses, including real property taxes, common area maintenance, property insurance and assessments incurred by Sublessor for the Premises, which is estimated at One Thousand Eight Hundred Eighty and No/100 Dollars ($1,880.00) per month to be paid in advance, with reconciliation at the end of the Term. Sublessee shall tender to Sublessor Sublessee's Proportionate Share for the first month upon execution of this Sublease. Sublessee's Proportionate Share shall be considered additional rent. Parking: Sublessee shall have the right park in common with other tenants of the Project in those areas designated for non-reserved parking. Sublessee: CXR Telcom Corporation, a Delaware corporation. Sublessee's Address After Effective Date: CXR Telcom Corporation 47971 Fremont Boulevard Fremont, California 94538 Contact Name: Mr. Kevin Haug With a copy to: Microtel International, Inc. 9485 Haven Avenue, Suite #100 Rancho Cucamonga, California 91730 Contact Name: Mr. Randy Foote Sublessor: Novellis Systems, Inc., a California corporation. Sublessor's Address: 4000 North First Street, M/S 60B San Jose, California 95134 Contact Name: Randy McFarland Sublessor's Broker: Commercial Property Services Sublessee's Broker: Colliers International, Inc. Tenant Improvements: Tenant Improvements to be performed by Sublessor prior to the Commencement Date as described on EXHIBIT B attached hereto and made a part hereof. II. RECITALS -------- THIS SUBLEASE AGREEMENT ("Sublease") is entered as of the Effective Date by and between Sublessor and Sublessee. -2- THE PARTIES ENTER this Sublease on the basis of the following facts, understandings and intentions: A. Gamma Precision Technology, Inc., a California corporation ("GPT"), entered into that certain Lease dated June 22, 2000 (the "Master Lease") with ProLogis Limited Partnership - I, a Delaware limited partnership, for the lease of approximately 17,350 RSF of the Building. A copy of the Master Lease (including all exhibits thereto) is attached as EXHIBIT C hereto and made a part hereof. B. Pursuant to an agreement of merger and plan of reorganization dated as of August 30, 2000, Gasonics International Corporation, a Delaware corporation ("Gasonics"), acquired all of the outstanding common shares of GPT and the Master Lease was assigned to Gasonics with the landlord's consent dated September 18, 2002. C. Pursuant to a merger and acquisition between Gasonics and Sublessor, Sublessor acquired all of the shares of Gasonics and became the successor-in-interest to Tenant's interest in the Master Lease under an assignment and assumption of lease between Gasonics and Sublessor dated January 10, 2001. D. Sublessor desires to sublease the Premises to Sublessee, and Sublessee desires to sublease the Premises from Sublessor, on all of the terms, covenants and conditions hereinafter set forth. NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises of the parties, the parties hereto agree as follows: 1. SUBLEASE. Sublessor shall sublease to Sublessee, and Sublessee shall sublease from Sublessor, the Premises for the Term upon all of the terms, covenants and conditions herein contained, and Sublessee shall have the right to use all common areas within the Project (as that term is defined in the Master Lease) to the extent that Sublessor has such rights under the Master Lease. Sublessor warrants and represents to Sublessee that (i) Sublessor has not executed any amendments or modifications to the Master Lease and that the documents attached hereto as Exhibit C, as assigned, constitute a full and complete copy of the Master Lease, (ii) the Master Lease commenced on June 22, 2000 and, unless sooner terminated in accordance with the terms of the Master Lease, the term expires on July 31, 2003, (iii) as of the date of execution hereof by Sublessor, Sublessor has received no written notice from Landlord of any current default or breach of any of the terms of the Master Lease, nor to its knowledge is there any fact or circumstance that with the delivery of notice or the passage of time would constitute an event of default under the Master Lease, and (iv) Sublessor is in possession of the Premises. 2. CONDITION OF THE PREMISES. a. PHYSICAL CONDITION. Sublessee acknowledges that Sublessee has conducted Sublessee's own investigation of the Premises and the physical condition thereof, including accessibility and location of utilities, improvements, existence of hazardous materials, including but not limited to asbestos, asbestos containing materials, polychlorinated biphenyls (PCB), and earthquake preparedness, which in Sublessee's judgment affect or influence Sublessee's use of the Premises and Sublessee's willingness to enter into this Sublease. Sublessee shall, except for the representations expressly set forth in this subparagraph, rely solely on Sublessee's own inspection and examination of -3- such items and not on any representations of Sublessor, express or implied. Sublessee agrees that the Premises shall be subleased on an "as is" built-out condition with the exception of the improvements shown on Exhibit B, which improvements are estimated to be completed by Sublessor on or before October 23, 2002, and that Sublessor has made no representations or warranties of any kind in connection with improvements or physical conditions on, or bearing on, the use of the Premises, except as expressly set forth in this subsection and Section 9. b. REPRESENTATION AND WARRANTY. Sublessee represents and warrants to Sublessor that Sublessee has been given the opportunity to examine and inspect all matters with respect to taxes, expenses, insurance costs, bonds, permissible uses, the Master Lease, zoning, covenants, conditions and restrictions and all other matters which, in Sublessee's judgment, bear upon the value and suitability of the Premises for Sublessee's purposes, and that Sublessee has either so examined or investigated such matters or knowingly declined to so examine or investigate any or all of such matters. Except as otherwise expressly provided herein, Sublessee has and will rely solely on Sublessee's own inspection and examination of such items and not on any representations of Sublessor. Based thereon, Sublessee agrees to accept delivery of the Premises in their condition as of the date this Sublease is fully executed, subject only to Sublessor's obligation to complete the Tenant Improvements described in EXHIBIT B. 3. SUBLEASE SUBJECT TO MASTER LEASE. a. INCLUSIONS. All of the terms., conditions and covenants of this Sublease shall be those stated herein and those stated in the Master Lease, the terms of which are incorporated herein by reference, except as excluded in Section 3.b herein, modified as appropriate in the circumstances so as to make such terms, covenants and conditions applicable only to the subleasing hereunder. Sublessee shall be subject to, bound by, to the extent applicable to Sublessee's use of the Premises, assume, and comply with all of said terms, covenants and conditions of the Master Lease with respect to the Premises and shall satisfy all applicable terms and conditions of the Master Lease for the benefit of both Master Lessor and Sublessor, it being understood and agreed that wherever in the Master Lease the word "Tenant" appears, for the purposes of this Sublease, the word "Sublessee" shall be substituted; where the word "Landlord" appears, for the purposes of this Sublease, the word "Sublessor" shall be substituted; where the word "Term" appears, for the purposes of this Sublease, such word shall have the definition set forth in Part I hereof; and wherever the word "Premises" for purposes of this Sublease, such word shall refer only to the extent of the Premises sublet under this Sublease; and that upon the breach beyond any applicable cure period of any of said terms, conditions or covenants of the Master Lease by Sublessee or upon the failure of Sublessee to pay Monthly Rent or any other amount comprising Rent or to comply with any of the provisions of this Sublease, Sublessor may exercise any and all applicable rights and remedies granted to Master Lessor by the Master Lease. In the event of any conflict between this Sublease and the Master Lease, the terms of this Sublease shall control. Sublessor shall use its good faith best efforts to maintain the Master Lease in full force and effect during the term of this Sublease; provided, however, that Sublessor shall not be liable to Sublessee for any default or failure by Master Lessor, or any earlier termination of the Master Lease that is not due to the fault of the Sublessor. Whenever the provisions of -4- the Master Lease incorporated as provisions of this Sublease require the written consent of Master Lessor, said provisions shall be construed to require the written consent of both Master Lessor and Sublessor; provided, that Sublessor shall have ten (10) business days from the date of Sublessor's receipt of Sublessee's request to respond in writing to such request and if Sublessor fails to do so within said ten (10) business day period, Sublessor shall be deemed to have approved of Sublessee's request. Sublessee hereby acknowledges that it has read and is familiar with all the terms of the Master Lease, and agrees that this Sublease is subordinate and subject to the Master Lease and that any termination thereof may likewise terminate this Sublease and any obligation whatsoever of Master Lessor to provide the Premises to Sublessee. Upon the expiration of the term of the Master Lease, the Term of the Sublease shall also expire and Sublessee shall no longer have the right to possession of the Premises. Sublessor agrees to maintain the Master Lease in force during the entire term of this Sublease not to enter into any amendment to the Master Lease that will diminish Sublessee's rights or increase its obligations under this Sublease, and to pay rent to Master Lessor in accordance with the terms of the Master Lease, subject however, to any early termination of the Master Lease as expressly provided therein without the default of Sublessor. Sublessee shall comply with the Master Lease, all applicable laws, and any other covenants, conditions and restrictions affecting the Building. b. EXCLUSIONS. The terms and provisions of the following Paragraphs and portions of the Master Lease are not incorporated into this Sublease: Section 4 as it pertains to the amount of Base Rent; Section 5 as it pertains to the amount of the Security Deposit and Section 6 as it pertains to the amount of Operating Expenses. c. TIME FOR NOTICE. The time limits provided for in the provisions of the Master Lease for the giving of notice, making of demands, performance of any act, condition or covenant, or the exercise of any right, remedy or option, are amended for the purposes of this Sublease by lengthening or shortening the same in each instance by three (3) business days, as appropriate, so that notices may be given, demands made, or any act, condition or covenant performed, or any right, remedy or option hereunder exercised, by Sublessor or Sublessee, as the case may be within the time limit relating thereto contained in the Master Lease. If the Master Lease allows only five (5) days or less for Sublessor to perform any act, or to undertake to perform such act, or to correct any failure relating to the Premises or this Sublease, then Sublessee shall nevertheless be allowed five (5) days to perform such act, undertake such act and/or correct such failure. Provided, however, that if Sublessee has commenced to cure a nonmonetary default within any cure or notice periods that the Master Lease allows and is diligently pursuing such cure, Sublessee shall be provided with such additional time as is reasonably necessary to complete such cure if, due to the nature of the breach, the cure cannot be completed within the express time period granted herein and Master Lessor agrees to such additional time. 4. MASTER LESSOR'S OBLIGATIONS. It shall be the obligation of Master Lessor to (i) provide all services to be provided by Master Lessor to Sublessor under the terms of the Master Lease and (ii) to satisfy all obligations and covenants of Master Lessor made to Sublessor in the Master Lease. Sublessee acknowledges that Sublessor shall be under no obligation to provide such services or satisfy any such obligations or covenants (including, without limitation, to make any repairs or replacements to the Premises); provided, however, Sublessor, upon written notice by Sublessee, shall diligently attempt to enforce all obligations of Master Lessor under the Master Lease for the benefit of Sublessee. -5- 5. RENT. a. MONTHLY RENT. Sublessee shall pay to Sublessor as Monthly Rent as set forth in the Basic Sublease Information, hereinabove, and other monetary obligations of Sublessee to Sublessor under the terms of this Sublease, in advance on the first day of each month of the Term, commencing on the Rent Commencement Date. In the event the Rent Commencement Date is not the first day of a calendar month or the last day of a rent period or the last day of the Term is not the last day of the calendar month, the Monthly Rent shall be appropriately prorated based on the actual number of days in the partial month. All installments of Monthly Rent shall be paid in lawful money of the United States and without deduction or offset for any cause whatsoever, but subject to any abatement of rent granted under the Master Lease to Sublessor to the extent applicable to the Premises. On the Effective Date, Sublessee shall pay to Sublessor one installment of Monthly Rent to be applied by Sublessor to the payment of Monthly Rent for the first month's rent due hereunder. b. ADDITIONAL RENT. Sublessee's Proportionate Share of Sublessor's Proportionate Share as set forth in the Basic Sublease Information, hereinabove, and the rent for the Storage Space described in Section 15 below shall be considered "Additional Rent." Additional Rent shall also include expenses or charges applicable to the Premises, which may be imposed, at any time, on Sublessor pursuant to the Master Lease (expressly excluding any late charges, interest or damages or other charges or penalties imposed on Sublessor due to its negligence, willful misconduct, default or delay beyond any applicable grace period pursuant to the terms of the Master Lease) as described in the Master Lease or incurred by Sublessor in compliance with the Master Lease. As herein used, "Rent" shall include Monthly Rent and Additional Rent to be paid by Sublessee pursuant to this Section 5.b. The payments of Additional Rent required of Sublessee pursuant to this Section shall be made within the same time periods after notice from Sublessor of the amount owed as are established by the Master Lease for the comparable obligation of Sublessor to make such payments to Master Lessor, or if not so provided therein, within ten (10) days of written notice from Sublessor. Notwithstanding the foregoing, Sublessee's Additional Rent will be payable in the same time and manner as required by the Master Lease. Overpayments and underpayments of Additional Rent shall be handled in the same manner as provided in the Master Lease; provided, however that overpayments and underpayments shall be reconciled by Sublessor within ten (10) days after the Expiration Date. Any overpayment by Sublessee shall be refunded to Sublessee within five (5) business days after the reconciliation, as long as Sublessee is not otherwise in default of its obligations hereunder. Any underpayment shall be deducted from Sublessee's Security Deposit and any shortage shall be paid by Sublessee within five (5) business days after Sublessee's receipt of the reconciliation. Sublessor shall promptly provide Sublessee with copies of all relevant estimates and statements prepared by Master Lessor with respect to Additional Rent. c. SECURITY DEPOSIT. Upon execution hereof, Sublessee shall pay to Sublessor the sum set forth in the Basic Sublease Information, hereinabove, as a security deposit, to be handled pursuant to Section 5 of the Master Lease. 6. REPAIRS AND MAINTENANCE. Except as provided in Section 9 below, Sublessee acknowledges that Sublessor is under no duty to make repairs, replacements or improvements or provide utilities or other like services to the Premises, including, without limitation, any repairs necessitated by damage or destruction to the Premises or other services addressed in the Master Lease; and -6- Sublessee hereby waives any right it may have at law or in equity to enforce the same against Sublessor. Notwithstanding the foregoing, to the extent Master Lessor is obligated under the Master Lease to make any repairs or replacements in or to the Premises, Sublessor, upon written notice from Sublessee, shall diligently attempt to enforce such obligations of Master Lessor. 7. ALTERATIONS. Sublessee shall not make or suffer to be made any Alterations to the Premises except with the prior written consent of Sublessor, which consent shall not be unreasonably withheld or delayed, and of Master Lessor. Master Lessor and/or Sublessor may require any Alteration installed by Sublessor to be removed at the end of the term of this Sublease and the Premises must be restored to its condition existing prior to the installation of such Alteration by Sublessee (except to the extent of the Tenant Improvements described in Exhibit B). 8. COMMENCEMENT DATE/RENT COMMENCEMENT DATE/POSSESSION. This Sublease shall commence on the date Possession of the Premises is delivered to Sublessee. Possession shall be delivered to Sublessee upon completion of the Tenant Improvements, which is estimated to occur on or before October 23, 2002. Sublessee and Sublessor shall execute a letter confirming the Commencement Date within ten days after Possession is delivered. Sublessee's obligation to pay rent, however, shall commence fourteen (14) days after Sublessor delivers Possession and Sublessee deposits with Sublessor the first month's Base Rent, Sublessee's Proportionate Share of Operating Expenses, Sublessee's first month's rent for the Storage Space described in Section 15 below and the Security Deposit, and delivers the certificates of insurance required under Section 13 below. Delivery of early Possession is intended for provide Sublessor two (2) weeks of free rent for the purposes of space planning, identifying its needs for use and occupancy of the Premises, and to install items that are pertinent to Sublessee's business, including, but not limited to, cabling, telephone systems, furniture partitions, security systems and the like ("Sublessee's Pre-Commencement Alterations"). 9. TENANT IMPROVEMENTS. Sublessor shall be responsible for causing the completion of the Tenant Improvements at no cost or charge to Sublessee. Sublessor shall be responsible for complying with the American with Disabilities Act and similar state laws, to the extent applicable, in connection making such Tenant Improvements and otherwise during the term of Sublease, unless compliance with such laws is required as a result any alteration to the Premises caused by Sublessee. Sublessor shall be responsible for restoration of the Premises to their pre-Sublease condition to the extent of the Tenant Improvements. Sublessor warrants that as of the Commencement Date and continuing through December 31, 2002, the mechanical, HVAC, electrical and plumbing systems shall be in good operating condition and repair. Thereafter, Sublessee shall be responsible for maintaining such systems in good operating condition and repair for the remainder of the Term in accordance with Section 11 of the Master Lease. Sublessee shall be responsible for all other repair obligations under Section 11 of the Master Lease from the date Sublessee gains access to the Premises and commences Sublessee's Pre-Commencement Alterations. -7- 10. ASSIGNMENT AND SUBLETTING. Sublessee may assign, encumber or otherwise transfer this Sublease or sublease the Premises so long as Sublessee complies with the terms and conditions contained in the Master Lease and obtains the prior written consent of Sublessor, which consent shall not be unreasonably withheld. 11. DAMAGE AND DESTRUCTION. a. TERMINATION OF MASTER LEASE. If the Premises are damaged or destroyed and Master Lessor exercises any option it may have to terminate the Master Lease, if any, all as more particularly described in the Master Lease, this Sublease shall terminate as of the date of the termination of the Master Lease. b. CONTINUATION OF SUBLEASE. If the Master Lease is not terminated following any damage or destruction as provided above, this Sublease shall remain in full force and effect, subject to an abatement of Rent as provided by the terms of the Master Lease incorporated herein to the extent applicable to the Premises. 12. EMINENT DOMAIN. If any portion of the Premises sublet under this Sublease or of the Premises let under the Master Lease is condemned by eminent domain, inversely condemned or sold in lieu of condemnation, for any public or a quasi-public use or purpose ("Condemned" or "Condemnation"), and Master Lessor exercises any option to terminate the Master Lease, this Sublease shall automatically terminate as of the date of the termination of the Master Lease. If the Sublessor has the option to terminate the Master Lease and Sublessor wishes to terminate the Master Lease, Sublessor may exercise such option, without liability to Sublessee. If this Sublease is not terminated or the parties agree to an assignment of the Master Lease to Sublessee following any such Condemnation, this Sublease shall remain in full force and effect, subject to the provisions of the Master Lease. 13. INSURANCE. All liability insurance policies Sublessee is required to carry shall contain a provision whereby Sublessor and Master Lessor are each named as additional insureds under such policies. The liability policies shall include coverage for contractual liability, shall provide for severability of interests and shall provide that an act or omission of one of the named insureds shall not void coverage to the other named insureds. The policies shall afford coverage on an occurrence basis and shall otherwise meet all of the requirements under Section 9 of the Master Lease. Prior to commencing Sublessee's Pre-Commencement Alterations, Sublessee shall provide a certificate or certificates of insurance evidencing the coverage herein required. Sublessor shall not be obligated to carry any insurance required of the Master Lessor under the Master Lease. Sublessor and Sublessee hereby mutually waive all claims they or anyone claiming through them might have which arise in connection with any damages suffered as a result of a casualty to the Premises to the extent that such claim or claims are covered by all-risk casualty insurance carried pursuant hereto. The waiver of subrogation provided in the Master Lease shall be deemed a three-party agreement binding among and inuring to the benefit of Sublessor, Sublessee and Master Lessor (by reason of its consent hereto). 14. SIGNAGE. Sublessee, at its sole cost and expense, shall observe and abide by the Master Lease pertaining to the installation, maintenance and removal of signage during the term of its occupancy. Sublessor shall remove all of its personal signage at Sublessor's sole cost and expense. Sublessee shall install and remove its signage at Sublessee's sole cost and expense. -8- 15. STORAGE SPACE. Sublessor shall provide to Sublessee approximately two thousand square feet of storage space (the "Storage Space") at a cost of Eight Hundred and No/100 Dollars ($800.00) per month, which shall be considered Additional Rent hereunder with NO additional common area charges to be paid by Sublessee. All provisions of this Sublease shall apply to Sublessee's rental of the Storage Space, as applicable; provided, however, that Sublessee and Sublessor shall each have the right to terminate Sublessee's right to the Storage Space upon thirty (30) days prior written notice to the other party. 16. MISCELLANEOUS. a. ENTIRE AGREEMENT. This Sublease contains all of the covenants, conditions and agreements between the parties concerning the Premises, and shall supersede all prior correspondence, agreements and understandings concerning the Premises, both oral and written. No addition or modification of any term or provision of this Sublease shall be effective unless set forth in writing and signed by both Sublessor and Sublessee. b. MASTER LESSOR'S CONSENT. This Sublease is conditioned upon Master Lessor's written approval of this Sublease, and upon execution hereof, Sublessor shall use commercially reasonable efforts to obtain such consent as promptly as possible, and Sublessee shall cooperate with Sublessor. If Master Lessor refuses to consent to this Sublease or Sublessor cannot obtain such consent by October 31, 2002, this Sublease may be terminated by either party upon written notice and neither party shall have any continuing obligation to the other with respect to the Premises. Upon such termination, Sublessor shall promptly refund all monies previously paid by Sublessee to Sublessor pursuant hereto and Sublessee shall remove all personal property and restore the Premises to the extent of Sublessee's Pre-Commencement Alterations. Sublessee shall also repair any damage caused by the removal of its personal property and the removal of Sublessee's Pre-Commencement Alterations. c. AUTHORITY. Each person executing this Sublease on behalf of a party hereto represents and warrants that he or she is authorized and empowered to do so and to thereby bind the party on whose behalf he or she is signing. d. ATTORNEY'S FEES. In the event either party shall bring any action or proceeding for damages or for an alleged breach of any provision of this Sublease to recover rents, or to enforce, protect or establish any right or remedy hereunder, the prevailing party shall be entitled to recover reasonable attorney's fees and court costs as part of such action or proceeding. e. WAIVER OF JURY TRIAL. Sublessee and Sublessor each waive trial by jury in any action or other proceeding (including counterclaims), whether at law or equity, brought by Sublessee or Sublessor against the other on matters arising out of or in any way related to or connected with this Sublease or any transaction contemplated by, or the relationship between Sublessee and Sublessor, or any action or inaction by any party under, this Sublease. -9- f. DEFINITIONS. All capitalized words used herein shall have the meaning given each herein or, if not so defined, the meaning set forth in the Master Lease. g. BROKER. Sublessor shall pay a commission equivalent to six percent (6%) of the total Base Rent (Premises) per month and of the first month's rent for the Storage Space to Sublessee's broker identified in Part I of this Sublease; provided, however, that this Sublease becomes effective and the Master Lessor's consent is obtained. The parties hereto agree that no other brokers or finders have been involved in the transaction described in this Sublease and the parties hereby agree that in the event any other broker, salesperson or other person makes any claim for any commission or finder's fee based upon the sublease to Sublessee of the Premises or any other items or interests contemplated by this Sublease, the parties through whom said broker, salesperson or other person makes its claim shall indemnify and hold harmless the other party from said claim and all liabilities, costs and expenses relating thereto, including reasonable attorneys' fees, which may be incurred by such other party in connection with such claim. h. CONDITION UPON SURRENDER. At the expiration or earlier termination of this Sublease, Sublessee shall be required to have the carpets vacuumed and return the Premises in a broom-clean condition, vacant of occupants. Sublessee shall remove all of Sublessee's personal property. Subject to the terms of the Master Lease. Sublessee shall remove all Sublessee's Alterations (including Sublessee's Pre-Commencement Alterations) and any other alterations and/or improvements from the Premises and restore the Premises to the condition existing as of the Effective Date of this Sublease, ordinary wear and tear excepted and except to the extent of the Tenant Improvements constructed by Sublessor. Sublessee shall repair any and all damage resulting from the removal of said personal property and the removal of Sublessee's Alterations and other alterations and/or improvements caused by Sublessee. i. QUIET ENJOYMENT. Sublessor covenants that, as long as Sublessee shall fulfill its obligations pursuant to this Sublease, Sublessee shall and may peaceably an quietly have, hold and enjoy the Premises and all parts thereof subject to the terms of this Sublease. j. LIMITATION OF LIABILITY. In no event shall either party to this Sublease be liable to the other under any theory of tort, contract, strict liability or other legal or equitable theory for any lost profits (excluding rent or damages for rent payable hereunder), exemplary, punitive, special, incidental, indirect or consequential damages, each of which is hereby excluded by agreement or the parties regardless of whether or not any party has been advised of the possibility of such damages. k. HAZARDOUS MATERIALS INDEMNITY. Without limiting in any way Sublessee's obligations under any other provision of this Sublease and the Master Lease, Sublessee and its successors and assigns shall indemnify, protect, defend (with counsel approved by Sublessor) and hold Sublessor, its partners, officers, directors, shareholders, employees, agents, lenders, contractors and each of their respective successors and assigns (the "Sublessor Indemnified Parties") harmless from any and all claims, damages, liabilities, losses, costs and expenses of any nature whatsoever, known or unknown, contingent or otherwise (including, without limitation, attorneys' fees, litigation, arbitration and administrative proceedings costs, expert and consultant fees and laboratory costs, as well as damages arising out of the diminution in the value of the Premises or any portion thereof, damages for the loss of the Premises, damages -10- arising from any adverse impact on the marketing of space in the Premises, and sums paid in settlement of claims) (collectively "Claims"), which arise during or after the Term in whole or in part as a result of the presence of any hazardous or toxic materials, in, on, under, from or about the Premises caused by Sublessee, its agents, employees or contractors, unless such Claims arise out of or are caused by any of the Sublessor Indemnified Parties. Without limiting in any way Sublessor's obligations under any other provision of this Sublease and Master Lease, as amended, Sublessor and its successors and assigns shall indemnify, protect, defend (with counsel approved by Sublessee) and hold Sublessee, and its partners, officers, directors, shareholders, employees, agents, lenders, contractors and each of their respective successors and assigns ("Sublessee Indemnified Parties") harmless against all Claims if arising out of or caused by the Sublessor, its agents, employees or contractors, unless such Claims arise out of or are caused by any of the Sublessee Indemnified Parties. The indemnities contained herein shall survive the expiration or earlier termination of this Sublease. l. NOTICES. Any notice which is required or permitted to be given by either party under this Sublease shall be in writing and must be given only by certified mail, return receipt requested, by hand delivery or by nationally recognized overnight courier service at the addresses set forth above. Each party shall further use reasonable efforts to provide the other party with a courtesy copy of any notice by fax and by electronic mail. Any such notice shall be deemed given on the earlier of two (2) business days after the date sent in accordance with one of the permitted methods described above or the date of actual receipt thereof, provided that receipt of notice solely by fax or electronic mail shall not be deemed to be delivery of notice hereunder. The time period for responding to any such notice shall begin on the date the notice is actually received, but refusal to accept delivery or inability to accomplish delivery because the party can no longer be found at the then current notice address, shall be deemed receipt. Either party may change its notice address by providing written notice to the other party in accordance with the terns herein. -11- IN WITNESS WHEREOF, the parties hereto have executed one (1) or more copies of this Sublease, effective as of the Consent Date. "Sublessor" NOVELLUS SYSTEMS, INC., a California corporation By: /S/ KEVIN ROYAL ------------------------ Name: Kevin Royal Its: CFO "Sublessee" CXR Telcom Corporation a Delaware corporation By: /S/ RANDOLPH FOOTE ------------------------ Name: Randolph Foote Its: VP & CFO By: ------------------------ Name: Its: -12- EXHIBIT A Floor Plan of Premises ________________________ EXHIBIT B Tenant Improvements List ________________________ EXHIBIT C Master Lease EX-10.32 4 microtel_10kex10-32.txt EXHIBIT 10.32 DEED OF GUARANTEE AND INDEMNITY To Venture Finance PLC Sussex House Perrymount Road Haywards Heath West Sussex RH16 1DN 1 In this deed except where the context otherwise requires: (1) words implying the singular shall include the plural and words implying any of the three genders shall include either of the other two; and (2) the following expressions shall have the meanings assigned to them below: "Agreement" any agreement between the Principal and you for the sale and purchase or factoring or discounting of debts; "Co-surety" any person (other than a person named in section 2 of the Schedule) who has given a guarantee or indemnity in respect of any obligations of the Principal to you: "Indulgence" the grant of any time or indulgence or the conclusion of any agreement not to sue or of any compromise or composition or the release of any charge lien or other security or any part thereof; "Losses" losses costs damages claims interest and expenses; "Principal" the person whose name and address appears in section 1 of the Schedule; "Schedule" the schedule annexed to and forming part of this deed. 2 We the Guarantors and Indemnifiers whose names appear in section 2 of the Schedule hereby guarantee: (i) the due performance of all the obligations to you of the Principal under the Agreement and any other agreement and (ii) upon your demand in writing the due payment of all amounts payable or which may at any time hereafter become payable to you by the Principal whether arising under the Agreement or otherwise. 3 Without prejudice to the provisions of paragraph 2 hereof we hereby agree to indemnify you and hold you harmless against all losses you may suffer or incur by reason of any failure of the Principal to comply with any term of the Agreement or of any other agreement between the Principal and you. 4 The guarantee given herein shall be a continuing guarantee and shall apply to the ultimate amount payable by the Principal and shall not be discharged by any intermediate payment or satisfaction by the Principal. -1- 5 Our liability under this guarantee and indemnity shall not be affected by: (i) any Indulgence granted or made by you to or with the Principal or any Co-surety; (ii) any variation in the Agreement or in any other agreement between the Principal and you (whether or not our liability to you may be increased thereby) or by any defect therein or in its execution; (iii) any failure by you to take perfect or hold unencumbered any security from the Principal or any other person; (iv) any change in the constitution of the Principal; or (v) any other matter or circumstance that might, but for the operation of this paragraph, operate to release or reduce our liability hereunder, and we shall be liable hereunder in every respect as principal debtors. 6 If two or more persons are named as Guarantors and Indemnifiers in section 2 of the Schedule our liability hereunder shall be joint and several and the liability of each one of us shall not be affected by any Indulgence granted or made by you to or with any other of us nor by: (i) any defect in the execution of this deed by any other of us: (ii) any defect in any other guarantee or indemnity or other security held by you in respect of the Principal's obligations to you or in the execution thereof: (iii) any notice of termination hereof by any other of us; you may at your discretion (but shall not be obliged to) treat any notice by any one of us as notice by all of us. 7 We shall be liable to pay you interest calculated from day to day and compounded monthly at four per cent over the base rate of HSBC Bank plc on all sums demanded by you hereunder from the date of your demand to the date when payment is received by you both before and after any judgement. 8 As security for the due performance of our obligations hereunder: (i) Each one of us that is a corporate body hereby assigns to you any right of proof (in consequence of the winding up of the principal) in respect of any indebtedness of the Principal to each one of us; and (ii) Each one of us that is not a corporate body hereby assigns to you any amount which is now or may hereafter become owing to that one of us by the Principal together with any security taken or to be taken to secure that indebtedness. -2- (iii) Each one of us irrevocably appoints you and your directors and company secretary for the time being jointly and each one of you and them severally to be his attorney to execute in his name such document and to do such other things as you may consider requisite to effect collection of any dividend or to vote at any meeting in respect of such right of proof or to perfect your ownership of and to collect any such indebtedness and to realise any such security as the case may be. 9 Any monies received by you by virtue of or in connection with this guarantee and indemnity may be placed by you to the credit of a suspense account with a view to your preserving your right to prove for the whole of your claim against the Principal in the event of its winding up. 10 We agree to pay you all costs and expenses (on a full indemnity basis) arising out of or in connection with the recovery by you of the monies due to you herein. 11 Any discharge given by you to us in respect of our obligations under this guarantee and indemnity shall be deemed to have been void and of no effect if any security taken from or payment made by the Principal or any other person which had been taken into account by you in giving the discharge is subsequently avoided or reduced by or in pursuance of any provision of law. The paper on which this deed is written shall remain your property notwithstanding any such discharge. 12 This guarantee and indemnity shall be additional to and not in substitution for any other security taken or to be taken by you in respect of the Principal's obligations to you. In arriving at the amount payable to you by the Principal you shall be entitled to take into account all liabilities (whether actual or contingent) and to make a reasonable estimate of any contingent liability. This guarantee and indemnity shall remain in full force and effect until the expiry of not less than three months notice of its termination given by us by delivery of it to your registered office not earlier than the termination of the Agreement (and if the Agreement comprises more than one agreement until the last such termination); but such termination of this guarantee and indemnity shall not affect our liability as regards any liability of the Principal arising out of any transaction having its inception before the expiry of the period of such notice. 13 Any notice or demand on any of us shall be validly given or made if delivered to or sent by post to its address stated in section 2 of the Schedule or its address last known to you (or in the case of a corporate body to its registered office or if handed to one of its officials) and if sent by post shall be deemed to be received within seventy-two hours of posting. 14 This guarantee and indemnity shall be construed and take effect according to English law and we accept the non-exclusive jurisdiction of the English Courts. If any provision hereof shall be held invalid or unenforceable no other provisions hereof shall be affected and all such other provisions shall remain in full force and effect. -3- THE SCHEDULE 1 PRINCIPAL: Xcel Power Systems Limited Brunswick Road Cobbs Wood Ashford Kent TN231EB Country of registration: England Registered number: 00575679 2 GUARANTOR AND INDEMNIFIER: Microtel International Inc. 9485 Haven Avenue Suite 100 Rancho Cucamonga CA 91730 Country of registration: United States of America Registered number: IN WITNESS whereof such of the parties have executed this Deed in the manner described below Signed as a Deed by MICROTEL INTERNATIONAL INC. ) ) on the 12 day of November 2002 ) Acting by: /S/ CARMINE T. OLIVA Director ) /S/ CARMINE T. OLIVA - --------------------------- ------------------- Carmine T. Oliva ) /S/ ROBERT B. RUNYON Director/Secretary ) /S/ ROBERT B. RUNYON - --------------------------- -------------------- Robert B. Runyon -4- IN WITNESS whereof such of the parties have executed this Deed in the manner described below Signed as a Deed by XCEL CORPORATION LIMITED ) ) on the 23 day of October 2002 ) Acting by: /S/ C.T. OLIVA Director ) /S/ CARMINE T. OLIVA - --------------------------- --------------------- ) /S/ GRAHAM JEFFERIES Director/Secretary ) /S/ GRAHAM JEFFERIES - --------------------------- ---------------------- Signed as a Deed by BELIX POWER CONVERSION LIMITED ) ) on the 23 day of October 2002 ) Acting by: /S/ C.T. OLIVA Director ) /S/ CARMINE T. OLIVA - --------------------------- --------------------- ) /S/ GRAHAM JEFFERIES Director/Secretary ) /S/ GRAHAM JEFFERIES - --------------------------- ---------------------- Signed as a Deed by BELIX WOUND COMPONENTS LIMITED ) ) on the 23 day of October 2002 ) Acting by: /S/ C.T. OLIVA Director ) /S/ CARMINE T. OLIVA - --------------------------- --------------------- ) /S/ GRAHAM JEFFERIES Director/Secretary ) /S/ GRAHAM JEFFERIES - --------------------------- ---------------------- -5- EX-10.33 5 microtel_10kex10-33.txt EXHIBIT 10.33 ADVANTAGE FACILITY DATED: 12 November 2002 - ----- BETWEEN:- (I) Venture Finance PLC (a company registered in - ------- England and Wales with the number 2281768) ("Venture") and (II) Xcel Power Systems Limited (a company registered in England and Wales with the number) 00575679 ("the Client"). WHEREAS:- (A) Venture and the Client are parties to an - ------- agreement for the Purchase of Debts which on the ("the Agreement"), and (B) The Client has requested and Venture has agreed to provide additional financing facilities to the Client subject and supplemental to the Agreement and upon the terms hereof. NOW IT IS HEREBY AGREED AS FOLLOWS:- - ------------------------------------ (1) Venture may upon request from the Client make an Additional Payment to the Client subject to the terms hereof. (2) The Client shall, in consideration of Venture's agreement to the terms hereof, and/or the making of any Additional Payment to the Client, grant in favour of Venture a Debenture in respect of and over all the assets property and undertaking of the Client now or hereafter ("the Debenture") the Debenture to have priority over all other debentures charges or other security granted in favour of any person by the Client in existence now or hereafter or subject to such priority over such of the assets property and undertaking of the Client as Venture may in its absolute discretion agree. (3) In addition to and notwithstanding the other terms hereof Venture shall not be obliged to make any payment, Prepayment or Additional Payment to the Client (other than in its absolute discretion) if following Venture's own assessment of the Client's Eligible Collateral in accordance with the Eligible Collateral Formula, and after a notional or actual combination of all accounts of the Client with Venture ("the Account Balance") the making of such a payment, prepayment or Additional Payment to the Client would cause the Account Balance to exceed the Facility Limit. -1- (4) Venture shall (in its absolute discretion and without affecting the intent effect or extent of this Deed) maintain such accounts or such additional accounts as it deems necessary to record the transactions between Venture and the Client pursuant to or under the terms of this Deed and Venture shall be entitled from time to time and at any time to combine all and any such accounts maintained in the name of the Client in the books of Venture such combination being deemed to have taken place on the happening of any event giving rise to the right of Venture to terminate this Deed and/or the Agreement. (5) All the terms of the Agreement which relate to payments to the Client (including Prepayments) shall apply to any Additional Payment. (6) The amount of any Additional Payment shall be such as may be agreed by Venture with the Client. (7) The Client shall throughout the duration of this Deed comply at all times with all provisions contained within the Agreement and the Debenture, and shall provide to Venture all such information and physical access to premises owned or under the control of the Client as Venture may reasonably require and the Client hereby grants an irrevocable licence to Venture for Venture (and any of its employees servants or agents) to enter upon any premises owned or under the control or authority of the Client at any time during normal business hours for the purposes of this Deed, for confirming and ensuring the compliance by the Client with the terms hereof, and for the purposes of Venture's assessment and monitoring from time to time as it may require of the location state nature and value of any Eligible Collateral at that time. (8) Notwithstanding and in addition to the terms of this Deed the Client shall remain bound by all the warranties undertakings covenants and obligations contained within the Agreement and the Debenture. In addition the Client shall comply with all the Collateral Reporting and Monitoring Requirements of Venture as detailed in paragraph 5 of the Schedule or as Venture may require and may notify to the Client from time to time. (9) Subject to the terms of this Deed Venture shall not make payment of Additional Payments aggregating from time to time to more than the sum stated in paragraph 1 of the Schedule hereto although this amount may be increased or reduced from time to time by Venture in its absolute discretion. (10) It is agreed that the contents of any report (whether written or oral) prepared by Venture for the purposes of Venture considering whether or not to make payment of any Additional Payment to the Client shall remain confidential and shall not be available to the Client for any reason (save for any requirement of law) in whole or in part and whether in original or copy form. (11) In addition to all fees charges costs and expenses payable by the Client to Venture pursuant to the Agreement the Client shall pay to Venture on the date of this Deed and on each anniversary thereof the Annual Fee referred to in the Schedule. All and any amounts payable by the Client to Venture herein may be debited by Venture to the Current Account of the Client in the books of Venture from time to time. -2- (12) Further the Client shall pay to Venture an Administration Charge in the amount specified in paragraph 3 of the Schedule during the currency of this Deed. (13) Any Additional Payment made pursuant to the terms of this Deed shall be subject to a Discount Charge at the rate specified in paragraph 4 of the Schedule which Discount Charge shall accrue daily on the balance of all Additional Payments then having been made to the Client and which shall be debited to the Current Account of the Client with Venture monthly. (14) The agreement recorded in this Deed may be terminated by Venture upon or following any breach hereof by the Client and/or upon or following Venture having the right to terminate the Agreement, and shall in any event terminate without further formality upon the termination of the Agreement for whatsoever reason. (15) As a consequence of the entering into of this Deed and to give effect to the intent hereof Venture shall be entitled from time to time to increase or reduce the Prepayment Percentage to such percentage (not exceeding 100%) and for such time as Venture may in its absolute discretion determine. For the avoidance of doubt no payment or Prepayment or Additional Payment shall be made to the Client at any time (other than in Venture's absolute discretion) if the making of any such payment or Prepayment or Additional Payment would cause the Account Balance to exceed the Facility Limit. (16) In this Deed where the context so permits, the singular shall include the plural and vice versa and reference to any one gender shall be deemed to include reference to the other two, and where any expression used herein is defined in the Agreement such expression shall have the same meaning herein as therein where the context so permits. (17) This Deed shall be read and construed and shall be subject to English Law. (18) In this Deed:- "Additional Payment" shall mean a payment by Venture to the Client on account of the Purchase Price of Debts the subject of the Agreement in excess of any payment or Prepayment which would normally be made by Venture to the Client but for the entering into of this Deed, the making of such payment being in the absolute discretion of Venture at all times, and "Base Rate" shall mean the Base Rate set by Venture's Bankers subject to a minimum rate of 4%, and "Collateral Reporting and Monitoring Requirements" shall mean the reporting and monitoring requirements of Venture in relation to the Eligible Collateral from time to time including monitoring by way of physical access to premises and such Eligible Collateral by Venture or any of its employees servants or agents and shall for the time being be those detailed in the Schedule, and -3- "Eligible Collateral" shall mean such of the Client's undertaking property and assets as Venture may from time to time notify to the Client as forming part of the Client's Eligible Collateral and shall until further notice be assessed in accordance with the Eligible Collateral Formula appears in the Schedule, and "Eligible Collateral Formula" shall mean the formula referred to in paragraph 6 of the Schedule until such shall be varied (in Venture's absolute discretion) by notice in writing to the Client. "Facility Limit" shall mean a sum equivalent to the credit balance from time to time on the Debts Purchased Account of the Client in the books of Venture, or such sum as Venture may notify to the Client from time to time in Venture's absolute discretion, and "the Schedule" shall mean the schedule hereto, and "Venture's Bankers" HSBC Bank Plc or such other bank as Venture may from time to time, at its sole discretion, appoint as its bankers. -4- SCHEDULE 1. Additional Payment Limit:- (pound)225,000 (Pounds Sterling Two Hundred and Twenty Five Thousand) (clause 9) 2. Annual Fee: N/A (clause 11) 3. Administration Charge: (pound)1,000 (Pounds Sterling One Thousand) jointly with the Term Loan facility (per month or part thereof) (clause 12) 4. Discount Charge: 2.0% above the Base Rate of Venture's Bankers for the time being in force (clause 13) 5. Collateral Reporting and Monitoring Requirements:- (clause 8) (i) Inventory and Preferential Creditors (as defined in Schedule 6 to the Insolvency Act 1986) - Monthly within 5 working days of each month end. (ii) Fixed Assets - Annual valuation (on date of anniversary of this Deed) by valuer to be agreed by Venture. (iii) Eligible Collateral Audits - per quarter annum following commencement of this Deed. -5- 6. Eligible Collateral Formula:- (clause 3) The Eligible Collateral Formula for the AdVantage Facility in respect of stock will be Raw Materials x 25% plus Work in Progress x 25% less preferential creditors subject to an AdVantage Limit of (pound)225,000 (Pounds Sterling Two Hundred and Twenty Five Thousand). Venture will require a detailed stock listing on a monthly basis. This report will be required within five working days of each period end and is to include details of all categories of stock and preferential creditor balances. -6- IN WITNESS WHEREOF the parties hereto have executed this deed in the manner hereafter appearing and have delivered it on the date first above written. EXECUTED AND DELIVERED AS A DEED by PAUL BEVERIDGE /S/ PAUL BEVERIDGE - -------------- ------------------ as Attorney for VENTURE FINANCE PLC in the presence of:- PAUL ARPS /S/ PAUL ARPS - --------- ------------- Address of Witness SUSSEX HOUSE, PERRYMOUNT ROAD, HAYWARDS HEATH ----------------------------------------------------- Executed and delivered as a deed by Acting by: C.T. OLIVA Director /S/ CARMINE T. OLIVA ------------------------ -------------------- GRAHAM JEFFERIES Director/Secretary /S/ GRAHAM JEFFERIES ------------------------ -------------------- -7- EX-10.34 6 microtel_10kex10-34.txt EXHIBIT 10.34 DATE OF LOAN AGREEMENT 2002 PARTIES (1) XCEL POWER SYSTEMS LIMITED (Company Number 00575679) whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent, TN23 1EB (the "BORROWER") (2) VENTURE FINANCE PLC AS LENDER (Company Number 2281768) whose registered office is at Sussex House, Perrymount Road, Haywards Heath, West Sussex, RH16 1DN ("VF") INTRODUCTION A VF and the Borrower are parties to an agreement for the purchase of debts ("THE AGREEMENT FOR THE PURCHASE OF DEBTS"), a stock facility ("THE ADVANTAGE AGREEMENT"), a term loan ("THE LOAN Agreement") and a cashflow loan ("THE CASHFLOW LOAN AGREEMENT") each dated as of the date hereof; B VF has agreed to make available to the Borrower a loan facility upon the terms and subject to the conditions set out in this Agreement. IT IS AGREED as follows:- 1 CONSTRUCTION 1.1 DEFINITIONS In this Agreement, unless the context otherwise requires, the following words and expressions will have the meaning set out opposite them:- "AGREEMENT" means this agreement and the Schedule. "AGGREGATE LIMIT" means the amount specified in (or, if appropriate, calculated in accordance with) paragraph 2 of Part 1 of the Schedule, or such other greater or lesser amount as VF may notify to the Borrower from time to time, in each case in VF's absolute discretion. "AVAILABILITY PERIOD" means the period detailed in paragraph 7 of Part 1 of the Schedule. "BASE RATE" means the Base Rate set by VF's Bankers subject to a minimum rate of 4.5%. "DEFAULT RATE" means the rate which is 4 per cent per annum above the Interest Rate. "DRAWDOWN PERIOD" means the period of 30 days following the date upon which the Borrower satisfies the requirements of clause 4. "EVENT OF DEFAULT" means any of the events specified in Clause 13. "FACILITY" means the loan facility to be made available by VF to the Borrower pursuant to this Agreement and as more particularly specified in clause 2. -1- "INTEREST COVER COVENANT" means the covenant specified in paragraph 4 of Part 1 of the Schedule. "INTEREST RATE" means the rate specified in paragraph 3 of Part 1 of the Schedule charged on the Loan Account Balance outstanding from day to day, which interest shall be debited to the Loan Account upon the last Working Day of each calendar month. "LOAN" means the principal sum drawn under the Facility pursuant to Clause 3 from time to time or, as the context requires, the principal amount of such a sum from time to time outstanding under this Agreement. "LOAN ACCOUNT" means a loan account or accounts in the name of the Borrower with VF opened in connection with the Facility. "LOAN ACCOUNT BALANCE" means the debit balance of the Loan Account from time to time. "MAXIMUM LOAN AMOUNT" means the maximum principal amount which may be drawn as a Loan hereunder as detailed in paragraph 1 of Part 1 of the Schedule. "SECURITY DOCUMENT" means the document listed in Part 2 of the Schedule and any other documents for the time being securing (directly or indirectly) all or any of the Borrower's obligations under this Agreement and/or all or any other obligations (present or future, actual or contingent) of the Borrower to VF and references to any such documents shall include the same as varied or amended in writing by the parties thereto from time to time. "SCHEDULE" means the schedule to this Agreement consisting of Parts 1 and 2. "UNENCUMBERED" means not subject to any mortgage, charge, assignment for the purpose of security, pledge, lien, right of set-off, arrangements for retention of title (other than in favour of the Borrower), or trust arrangement for the purpose of, or which has the effect of granting security or any other interest in the nature of security of any kind whatsoever or any agreement, whether expressed to be conditional or otherwise, to create any of the same. "VF'S BANKERS" HSBC Bank Plc or such other bank as VF may from time to time, at its sole discretion, appoint as its bankers. "WORKING DAY" means a day upon which VF and clearing Banks in London generally are open for business of the nature required for the purposes of this Agreement. 1.2 INTERPRETATION (a) Any reference in this Agreement to:- (i) clause, sub-clause or Schedule shall (except where the context otherwise requires) be construed as a reference to the relevant clause or sub-clause in or Schedule to (and forming a part of) this Agreement; (ii) a person shall include a body corporate, individual, firm or an unincorporated body of persons (as the case may be); -2- (iii) the singular shall include the plural and vice-versa; (iv) any statutory provision shall be deemed to mean and to include a reference to any modification, consolidation or re-enactment thereof for the time being in force; (v) "Borrower" and "VF" shall, where the context admits, include their respective personal representatives, successors in title or assignees (whether immediate or derivative). (vi) Any reference herein to any document, including to this Agreement includes such document as amended, novated, supplemented, substituted, extended, assigned or replaced from time to time and includes any document which is supplemental hereto or thereto. (vii) The meaning of general words introduced by the word "other" and the word "otherwise" shall not be limited by reference to any preceding words or enumeration including a particular class of acts, matters or things. (b) The headings in this Agreement are inserted for convenience only and shall not affect its construction or interpretation. (c) Any right or power which may be exercised or any determination which may be made hereunder by VF may be exercised or made in the absolute and unfettered discretion of VF who shall not be under any obligation to give reasons therefor. (d) Unless the context otherwise requires, expressions defined in the Agreement for the Purchase of Debts shall bear the same meaning herein. 2 THE FACILITY 2.1 The Facility shall consist of a loan drawn pursuant to the terms of this Agreement of a maximum principal amount not exceeding the Maximum Loan Amount. 2.2 Unless VF otherwise agrees in writing with the Borrower, the Facility will be used by the Borrower to fund its working capital requirements. VF shall not be bound to enquire as to, nor shall it be responsible for, the use or application by the Borrower of all or any part of the Facility. 3 TERM AND DRAWDOWN 3.1 Subject to Clause 4 and to the first drawing hereunder taking place prior to the expiry of the Drawdown Period, the Facility shall be available for drawing by the Borrower at any time within the Availability Period. VF shall not, other than in its absolute discretion, permit drawings to be made under this Agreement more frequently than the Drawing Frequency detailed in paragraph 5 of Part 1 of the Schedule. -3- 3.2 VF shall not be obliged to permit any drawing hereunder (other than in its absolute discretion) if the Borrower is in breach of or has at any time breached the Interest Cover Covenant. 3.3 VF shall not be obliged to permit any drawing hereunder or make any payment to the Borrower pursuant to the Agreement for the Purchase of Debts (other than in its absolute discretion) if following a notional or actual combination of all accounts of the Borrower with VF (including all actual and/or contingent liabilities of the Borrower to VF at the relevant time) ("the Account Balance") the drawing or payment of such amount would cause the Account Balance to exceed the Aggregate Limit. If as a consequence of such assessment and/or combination it is found that the Account Balance is at that time in excess of the Aggregate Limit the Borrower shall forthwith upon VF's demand repay to VF such amount as shall be required to extinguish such excess. 3.4 VF shall be entitled from time to time and at any time to combine all and any accounts maintained in the name of the Borrower in the books of VF, such combination being deemed to have taken place on the happening of any Event of Default. The Borrower will upon demand in writing from VF pay such amount as may be required to bring the account of the Borrower within the monetary limits stated in this Agreement. 4 CONDITIONS PRECEDENT The Facility will only be available for drawing under Clause 3 if:- (a) the Agreement for the Purchase of Debts has commenced and all conditions precedent to the making of prepayments thereunder by VF have been satisfied; and (b) the Security Document duly executed by the Borrower has been received by VF together with copy Board Minutes authorising the entry into and execution of the same; and (c) there is no Event of Default and no event has occurred which, with the lapse of time or giving of notice or both, might constitute an Event of Default; and (d) the representations and warranties set out in Clause 10 are true and accurate in all material respects; and (e) the Borrower has notified VF in writing of the amount requested to be drawn by the Borrower and full details of the account of the Borrower to which the funds are to be remitted. The Borrower acknowledges that any notice given in accordance with this clause 4(e) shall be irrevocable and, unless VF otherwise agrees, shall oblige the Borrower to borrow the amount specified. 5 INTEREST AND FEES 5.1 Interest will be charged on the Loan Account Balance at the Interest Rate and shall accrue from day to day and shall be computed on the basis of a 365 day year and the number of days elapsed. -4- 5.2 The interest accrued on the Loan Account Balance from and including the date upon which the facility is drawn shall be debited to the Loan Account monthly. The Borrower and VF hereby agree that for administrative convenience all interest payable in respect of the Loan Account balance and all other sums payable by the Borrower pursuant to this Agreement may be debited by VF to the Current Account of the Borrower maintained by VF pursuant to the Agreement for the Purchase of Debts. VF reserves the right to require actual payment of all interest by cheque drawn by the Client or such other form of remittance as VF may from time to time specify. 6 REPAYMENT The principal amount of the Facility drawn by the Borrower shall (if not repayable at an earlier date pursuant to the terms of this Agreement) be repaid in accordance with the Repayment Terms set out in paragraph 6 of Part 1 of the Schedule. Notwithstanding any other term of this Agreement the Borrower may at any time repay the whole or any part of the Loan Account Balance from time to time. 7 DEFAULT INTEREST 7.1 If the Borrower shall fail to pay any amount due under this Agreement on its due date, the Borrower shall be liable (if VF so requires) for interest on such amount from the date of such default until the date of actual payment (after as well as before judgement or demand) at the Default Rate. The Borrower's liability under this Clause shall be in substitution for the liability for interest on such defaulted amount at the Interest Rate. Such interest shall be payable on demand and, to the extent not actually paid, shall be compounded monthly in arrears (and debited to the Loan Account or the Current Account as referred to in clause 5.2 above) and shall be payable before as well as after any judgement. 7.2 VF and the Borrower agree that the Default Rate represents a genuine pre-estimate of VF's additional administrative and funding costs in the event of the Borrower's failure to pay any sum due to VF and is not a penalty. 8 PAYMENTS 8.1 The Borrower will make all payments due under this Agreement without set-off, counterclaim or deduction whatsoever and howsoever arising. 8.2 If the Borrower is compelled by law to make any such deduction or withholding, the Borrower shall forthwith pay to VF such additional amount as shall be required to ensure that VF shall receive in aggregate the amount it would have received but for such deduction or withholding. 9 CHANGES IN CIRCUMSTANCES AND INCREASED COSTS 9.1 If at any time it becomes unlawful or impossible for VF to maintain or fund the whole or any part of the Loan Account Balance VF may at any time by written notice to the Borrower require the Borrower to repay the Loan Account Balance immediately, together with any outstanding interest and all other sums due to VF under this Agreement, the Agreement for the Purchase of Debts, the warrant loan Agreement and the Security Document. -5- 9.2 The Borrower shall pay to VF on demand such amount as VF may from time to time certify as being necessary to compensate it for any increase in the cost of funding the Loan Account Balance or for any reduction in the rate of return under this Agreement, incurred by VF as a result of compliance with any official directives, requirements or requests of any regulatory authority (whether or not having the force of law) or any law or regulation (including, without limitation, those relating to reserve assets, special deposits, taxes, capital adequacy and/or asset ratios). 10 REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants that:- 10.1 it has the power to enter into and perform its obligations under this Agreement and the Security Document and to borrow hereunder and has taken all necessary action (corporate or otherwise) to authorise the unconditional entry into and performance of its obligations under this Agreement and the Security Document and the utilisation of the Facility upon the terms and conditions contained herein and unconditionally to authorise the execution, delivery and performance of this Agreement and the Security Document in accordance with their respective terms; 10.2 all authorisations, approvals, consents, licences, exemptions, filings, registrations and other procedures required in connection with the entry into, performance and validity of this Agreement, the utilisation of the Facility and the execution of the Security Document have been obtained and are in full force and effect; 10.3 this Agreement and the Security Document constitute legal, valid, binding and enforceable obligations of the Borrower; 10.4 the entry into and performance of this Agreement and the Security Document and the transactions contemplated hereby and thereby do not and will not conflict with (i) any law or regulation or any official or judicial order, or (ii) the Memorandum or Articles of Association of the Borrower; or (iii) any agreement or document to which the Borrower is a party or which is binding upon the Borrower or its assets; 10.5 the financial and other business information and documentation furnished by the Borrower to VF pursuant to this Agreement; (a) is and was (or shall be) when delivered true and accurate and does not contain any misstatement or omit any material fact and (b) there has been no material adverse change in the Borrower's business, assets, conditions and operation since the delivery of such information to VF; 10.6 save as notified in writing to VF prior to the date of this Agreement all of the Borrower's assets are Unencumbered save for the security granted or to be granted pursuant to the Security Document; 10.7 save as disclosed to VF in writing prior to the date of this Agreement, no litigation, arbitration or administrative proceeding or claim exists which might reasonably be expected to have by itself or together with any other such proceedings or claims either: -6- (a) a material adverse effect on the business, assets or condition of the Borrower; or (b) a material adverse effect on the ability of the Borrower to observe or perform its obligations under this Agreement or the Security Document is current or pending or, to the best of the knowledge of the Borrower, threatened against it. The representations and warranties set out in this Clause 10 shall be deemed to be repeated on each day that any amount is or may be outstanding hereunder with reference to the facts and circumstances then subsisting as if made at each such time. 11 FINANCIAL INFORMATION VF reserves the right during the term of the Facility to require the Borrower to provide VF with such financial information about the Borrower as VF may from time to time reasonably require. 12 GENERAL COVENANTS During the time of the Facility the Borrower shall:- 12.1 not without VF's prior written consent:- (a) create or permit to subsist any mortgage, charge or other encumbrance over any of its assets (except pursuant to the Security Document); or (b) make any loans or otherwise make credit (other than normal trade credit) available to any person; or (c) by one or a series of transactions, whether related or not, sell or otherwise dispose of all or any material part of its property or assets (except in the normal course of its business). 12.2 throughout the duration of this Agreement comply at all times with all provisions contained within the Agreement for the Purchase of Debts and the Security Document, and shall provide to VF all such information and physical access to premises owned or under the control of the Borrower as VF may reasonably require and the Borrower hereby grants an irrevocable licence to VF for VF (and any of its employees servants or agents) to enter upon any premises owned or under the control or authority of the Borrower at any time during normal business hours for the purposes of this Agreement, for confirming and ensuring the compliance by the Borrower with the terms hereof; 12.3 ensure that VF does not breach the Interest Cover Covenant; 12.4 pay all sums due to VF hereunder or otherwise on the due date for payment thereof; 12.5 promptly notify VF if any Event of Default arises under Clause 13 and of anything which might with the passage of time give rise to an Event of Default. -7- 13 EVENTS OF DEFAULT 13.1 In the event that:- (a) the Borrower fails to pay on the due date any amount due under this Agreement or any other agreement between the Borrower and VF; or (b) the Borrower fails to perform any other of its respective obligations under this Agreement or any other agreement between VF and the Borrower; or (c) any representation, warranty or statement made under or in connection with this Agreement and/or the Agreement for the Purchase of Debts and/or the Warrant loan Agreement and/or the Security Document is or proves to be untrue in any material respect on the date as of which it was made or deemed to be made or repeated; or (d) the Agreement for the Purchase of Debts is terminated (or is subject to notice of termination served by the Borrower on VF) or any event occurs entitling VF to terminate the Agreement for the Purchase of Debts (whether or not such right is exercised); or (e) it becomes impossible or unlawful:- (i) for the Borrower to perform any of its respective obligations contained in this Agreement or the Security Document or any of them; or (ii) for VF to exercise any of its rights under this Agreement and/or the Agreement for the Purchase of Debts and/or the Security Document; or (f) this Agreement and/or the Security Document do not come into or cease to be in full force and effect or is/are not for any reason valid and binding upon and enforceable in all respects against the Borrower or VF is of the reasonable opinion that any security conferred thereby is or may be in jeopardy; or (g) VF is of the opinion that there has been a material adverse change in the Borrower's trading or financial position or condition; or (h) anything is done or permitted or omitted to be done by the Borrower which VF believes may materially impair the security created by the Security Document and/or prejudice or detract from the Borrower's ability to perform the obligations contained in this Agreement and the Security Document or any of them; or (i) VF is not furnished with all information required to be delivered to it at the time required; or (j) the Borrower is or has been in breach of the Interest Cover Covenant, then, in any such event VF may by notice in writing terminate the Facility and declare the Loan Account Balance and any other amounts due hereunder immediately due and payable, whereupon the Borrower will immediately comply with such demand by repaying the Loan Account Balance together with all outstanding interest and any other amounts due under this Agreement. -8- 14 ASSIGNMENT AND TRANSFER 14.1 The Borrower may not transfer or assign any of its rights under this Agreement and/or the Security Document. 14.2 VF may, without notice and at any time, transfer or assign all or any part of this Agreement and/or the Facility and/or the Security Document and the Borrower hereby irrevocably consents to any such transfer or assignment (and the disclosure by VF to a transferee or assignee of any information about the Borrower and the Facility as VF may consider appropriate). 15 NOTICES Any notice from one party to another hereunder shall be sent to the addressee and be deemed delivered in accordance with the terms of the Agreement for the Purchase of Debts. 16 WAIVERS No failure or delay by VF in exercising any right, power or privilege under this Agreement and/or the Security Document or any of them shall operate as a waiver thereof nor will any single or partial exercise of any right, power or privilege preclude any further exercise thereof or prejudice any other or further exercise by VF of any of its rights or remedies under this Agreement and/or the Security Document. Such rights and remedies are cumulative and not exclusive of any right or remedy provided by law. 17 INDEMNITY FOR EXPENSES 17.1 The Borrower shall pay to VF on demand on a full indemnity basis whether or not there is a drawing under the Facility:- (a) all funding breakage costs and/or costs in relation to arrangements incurred by VF in connection with the funding of the Loan Account Balance; (b) any stamp documentary registration and other similar duties or taxes in connection with this Agreement and/or the Security Document; (c) all costs and expenses incurred in connection with the negotiation or enforcement of this Agreement and/or the Security Document (including legal fees, charges, disbursements, survey and valuation fees, and value added tax), and (d) the Facility Fee due upon delivery of this Agreement to VF, and if the Borrower shall fail to pay when due any of the above amounts VF is entitled to debit such amounts either to the Loan Account or any other account(s) of the Borrower with VF. -9- 17.2 The Borrower shall also indemnify VF against any loss or expense incurred by it (including all additional out of pocket expenses (of whatsoever nature and howsoever arising) and the cost of all additional management time and effort expended by VF in protecting or enforcing VF's rights and interests hereunder)as a consequence of any failure by the Borrower to pay any sum due to VF when payable. For the purposes of calculating the cost of such additional management time and effort VF shall apportion the salary costs of its personnel involved on a pro rata basis according to the time spent by such personnel in managing the Borrower's account taking account only of such time as would not have been spent by such personnel had such failure to pay not occurred. 18 ILLEGALITY If any of the provisions of this Agreement and/or the Security Document become invalid, illegal or unenforceable in any respect, under any law, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. 19 SET-OFF In addition to any right of set-off or other similar right to which VF may be entitled in law, VF may at any time and without notice to the Borrower combine and consolidate all or any of the accounts between the Borrower and VF and/or set-off any moneys and in any currency whatsoever, which VF may at any time hold for the account of the Borrower, against any liabilities whatsoever which may be due or accruing due to VF from the Borrower. 20 DEMANDS AND NOTIFICATION BINDING Any demand notification or certificate given by VF in writing and signed by a duly authorised officer of VF specifying any rate of interest or any amounts due and payable under or in connection with any provision of this Agreement and/or the Security Document or any of them shall (in the absence of manifest error or error in law) be conclusive and binding upon the Borrower and in any proceedings against the Borrower shall be conclusive evidence of such rate of interest or amounts so due and payable. 21 GENERAL 21.1 The contents of any report (whether written or oral) prepared by or on behalf of VF for the purposes of VF considering whether or not to permit any drawing under or to continue the Facility shall remain confidential and shall not be available to the Borrower for any reason or purpose (save for any requirement of law) in whole or in part and whether in original or copy form. 21.2 VF may in its absolute discretion set-off or reserve against any monies due to the Borrower by VF the amount of any and/or all actual and/or contingent liability of the Borrower to VF at any time and from time to time howsoever arising (and whether pursuant to this Agreement or otherwise) upon or following the occurrence of an Event of Default or in the event of the Aggregate Limit being exceeded for whatsoever reason. -10- 21.3 VF may rely and act upon any instruction or communication received or purportedly received from or on behalf of the Borrower by facsimile or telex transmission notwithstanding that no hard original copy of such instruction or communication has been or is received by VF before so relying or acting, provided that any such instruction or communication is purportedly from or transmitted under the direction of an authorised signatory of the Borrower, and the Borrower hereby agrees to indemnify VF and keep VF indemnified in respect of all losses, costs, damages, expenses, interest or other liability incurred or suffered by VF by reason of so relying and/or acting. 22 GOVERNING LAW This Agreement shall be governed by and construed in accordance with English Law and the Borrower hereby submits to the exclusive jurisdiction of the English Courts. IN WITNESS of which the parties have signed this agreement on the date set out above. -11- PART 1 1. Maximum Loan Amount:-(pound)350,000 (Pounds Sterling Three Hundred and Fifty Thousand) (clauses 1.1 and 2.1) 2. Aggregate Limit:- 1,500,000 (Pounds Sterling One Million Five Hundred Thousand) including the Confidential Invoice Discounting Facility, the Stock Facility and the Cashflow Advance (clauses 1.1, 3.3 and 21.2) 3. Interest Rate: 2.0% above the Base Rate from time to time of Venture's Bankers for the time being in force (clauses 1.1,5.1 and 7.1) 4. Venture requires that the Fixed Charge cover, measured as the ratio of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), less non-financed capital expenditure to Total Interest Costs (net of any interest receivable) and scheduled term loan repayments, does not fall below 2 times when measured on a rolling 3 month basis. There will be a Cashflow Loan of (pound)350,000 (Pounds Sterling Three Hundred and Fifty Thousand). An annually renewable Arrangement Fee of (pound)3,500 (Pounds Sterling Three Thousand Five Hundred) plus VAT at the rate applicable will apply. 5 Drawing Frequency (clause 3.1) Daily 6 Repayment Terms (clause 6) All amounts owed hereunder must be repaid on or before the end of the Availability Period. Amounts repaid by the Borrower under this Agreement may, subject always to the other provisions of this Agreement, be reborrowed. 7 Availability Period (clause 3.1) The period commencing on the date of this Agreement and ending on the third anniversary of the date hereof or the termination of the Agreement for the Purchase of Debts, whichever is the earlier. -12- PART 2 - SECURITY DOCUMENT An all assets Debenture in such form as VF may require constituting certain fixed charges and a floating charge over whole of the Borrower's undertaking and assets. -13- SIGNED and delivered as a deed by XCEL POWER SYSTEMS LIMITED acting by two directors or by one director and the secretary: DIRECTOR Signature :/S/ CARMINE T. OLIVA Name :C.T. OLIVA DIRECTOR/SECRETARY Signature :/S/ GRAHAM JEFFERIES Name :GRAHAM JEFFERIES SIGNED and delivered as a deed by VENTURE FINANCE PLC acting by two directors or by one director and the secretary: DIRECTOR Signature :/S/ PAUL BEVERIDGE Name :PAUL BEVERIDGE DIRECTOR/SECRETARY Signature :/S/ PETER EWEN Name :PETER EWEN -14- EX-10.35 7 microtel_10kex10-35.txt EXHIBIT 10.35 DATE OF LOAN AGREEMENT 12 NOVEMBER 2002 PARTIES (1) XCEL POWER SYSTEMS LIMITED (Company Number 00575679) whose registered office is at Brunswick Road, Cobbs Wood, Ashford, Kent, TN23 1EB (the "Borrower") (2) VENTURE FINANCE PLC AS LENDER (Company Number 2281768) whose registered office is at Sussex House, Perrymount Road, Haywards Heath, West Sussex, RH16 1DN ("VF") WHEREAS (A) VF and the Borrower are parties to an agreement for the purchase of debts which commenced on the 12 November 2002 ("the Agreement for the Purchase of Debts"), and (B) VF has agreed to make available to the Borrower a loan facility upon the terms and subject to the conditions set out in this Agreement. IT IS AGREED as follows:- 1 CONSTRUCTION 1.1 DEFINITIONS In this Agreement, unless the context otherwise requires, the following words and expressions will have the meaning set out opposite them:- "ADMINISTRATION CHARGE" means the charge referred to in clause 5.4; "AGREEMENT" means this agreement and the Schedule; "AGGREGATE LIMIT" means the amount specified in (or, if appropriate, calculated in accordance with) paragraph 2 of Part 1 of the Schedule, or such other greater or lesser amount as VF may notify to the Borrower from time to time, in each case in VF's absolute discretion; "AVAILABILITY PERIOD" means the period detailed in paragraph 10 of Part 1 of the Schedule; "BASE RATE" means the Base Rate set by Venture's Bankers subject to a minimum rate of 4%. "COLLATERAL REPORTING AND MONITORING REQUIREMENTS" means the reporting and monitoring requirements of VF in relation to the Eligible Collateral from time to time including monitoring by way of physical access to premises and access to such Eligible Collateral by VF or any of its employees servants or agents and shall for the time being be those detailed in the Schedule; "DEFAULT RATE" means the rate which is 4 per cent per annum above the Interest Rate; "DRAWDOWN PERIOD" means the period of three calendar months following the date upon which the Borrower satisfies the requirements of clause 4; "ELIGIBLE COLLATERAL" means such of the Borrowers undertaking property and assets as VF may from time to time notify to the Borrower as forming part of the Borrower's Eligible Collateral which shall until further notice be such of the undertaking, property and assets of the Borrower as shall be assessed in accordance with the Eligible Collateral Formula; -1- "ELIGIBLE COLLATERAL FORMULA" means the formula referred to in paragraph 7 of Part 1 of the Schedule as the same may be varied from time to time (in VF's absolute discretion) by notice in writing to the Borrower; "EVENT OF DEFAULT" means any of the events specified in Clause 13; "FACILITY" means the loan facility to be made available by VF to the Borrower pursuant to this Agreement and as more particularly specified in clause 2; "FACILITY FEE" means the fee referred to in clause 5.3; "INTEREST RATE" means the rate specified in paragraph 5 of Part 1 of the Schedule charged on the Loan Account Balance outstanding from day to day, which interest shall be debited to the Loan Account upon the last Working Day of each calendar month "LOAN" means the principal sum drawn under the Facility pursuant to Clause 3 from time to time or, as the context requires, the principal amount of such a sum from time to time outstanding under this Agreement; "LOAN ACCOUNT" means a loan account or accounts in the name of the Borrower with VF opened in connection with the Facility; "LOAN ACCOUNT BALANCE" means the debit balance of the Loan Account from time to time; "MAXIMUM LOAN AMOUNT" means the maximum principal amount which may be drawn as a Loan hereunder as detailed in paragraph 1 of Part 1 of the Schedule; "SECURITY DOCUMENT" means the document listed in Part 2 of the Schedule and any other documents for the time being securing (directly or indirectly) all or any of the Borrower's obligations under this Agreement and/or all or any other obligations (present or future, actual or contingent) of the Borrower to VF and references to any such documents shall include the same as varied or amended in writing by the parties thereto from time to time; "SCHEDULE" means the schedule to this Agreement consisting of Parts 1 and 2; "UNENCUMBERED" means not subject to any mortgage, charge, assignment for the purpose of security, pledge, lien, right of set-off, arrangements for retention of title (other than in favour of the Borrower), or trust arrangement for the purpose of, or which has the effect of granting security or any other interest in the nature of security of any kind whatsoever or any agreement, whether expressed to be conditional or otherwise, to create any of the same; "VENTURE'S BANKERS" HSBC Bank Plc or such other bank as Venture may from time to time, at its sole discretion, appoint as its bankers. "WORKING DAY" means a day upon which VF and clearing Banks in London generally are open for business of the nature required for the purposes of this Agreement. 1.2 INTERPRETATION (a) Any reference in this Agreement to:- (i) clause, sub-clause or Schedule shall (except where the context otherwise requires) be construed as a reference to the relevant clause or sub-clause in or Schedule to (and forming a part of) this Agreement; -2- (ii) a person shall include a body corporate, individual, firm or an unincorporated body of persons (as the case may be); (iii) the singular shall include the plural and vice-versa; (iv) any statutory provision shall be deemed to mean and to include a reference to any modification, consolidation or re-enactment thereof for the time being in force; (v) "Borrower" and "VF" shall, where the context admits, include their respective personal representatives, successors in title or assignees (whether immediate or derivative). (vi) Any reference herein to any document, including to this Agreement includes such document as amended, novated, supplemented, substituted, extended, assigned or replaced from time to time and includes any document which is supplemental hereto or thereto. (vii) The meaning of general words introduced by the word "other" and the word "otherwise" shall not be limited by reference to any preceding words or enumeration including a particular class of acts, matters or things. (b) The headings in this Agreement are inserted for convenience only and shall not affect its construction or interpretation. (c) Any right or power which may be exercised or any determination which may be made hereunder by VF may be exercised or made in the absolute and unfettered discretion of VF who shall not be under any obligation to give reasons therefor. (d) Unless the context otherwise requires, expressions defined in the Agreement for the Purchase of Debts shall bear the same meaning herein. 2 THE FACILITY 2.1 The Facility shall consist of a loan drawn pursuant to the terms of this Agreement of a maximum principal amount not exceeding the Maximum Loan Amount. 2.2 Unless VF otherwise agrees in writing with the Borrower, the Facility will be used by the Borrower to fund its working capital requirements. VF shall not be bound to enquire as to, nor shall it be responsible for, the use or application by the Borrower of all or any part of the Facility. 3 TERM AND DRAWDOWN 3.1 Subject to Clause 4 and to the first drawing hereunder taking place prior to the expiry of the Drawdown Period, the Facility shall be available for drawing by the Borrower at any time within the Availability Period. VF shall not, other than in its absolute discretion, permit drawings to be made under this Agreement more frequently than the Drawing Frequency detailed in paragraph 8 of Part 1 of the Schedule. -3- 3.2 VF shall not be obliged to permit any drawing hereunder (other than in its absolute discretion) if following VF's own assessment of the Borrower's Eligible Collateral in accordance with the Eligible Collateral Formula the drawing would cause the Loan Account Balance to exceed the sum produced by applying such formula to the Borrower's Eligible Collateral. If as a consequence of such assessment the Loan Account Balance is found to be in excess of the sum so produced, the Borrower shall forthwith upon VF's demand repay to VF such amount as shall be required to extinguish such excess. 3.3 VF shall not be obliged to permit any drawing hereunder or make any payment to the Borrower pursuant to the Agreement for the Purchase of Debts (other than in its absolute discretion) if following VF's own assessment of the Borrower's Eligible Collateral in accordance with the Eligible Collateral Formula, and after a notional or actual combination of all accounts of the Borrower with VF (including all actual and/or contingent liabilities of the Borrower to VF at the relevant time) ("the Account Balance") the drawing or payment of such amount would cause the Account Balance to exceed the Aggregate Limit. If as a consequence of such assessment and/or combination it is found that the Account Balance is at that time in excess of the Aggregate Limit the Borrower shall forthwith upon VF's demand repay to VF such amount as shall be required to extinguish such excess. 3.4 VF shall be entitled from time to time and at any time to combine all and any accounts maintained in the name of the Borrower in the books of VF, such combination being deemed to have taken place on the happening of any Event of Default. The Borrower will upon demand in writing from VF pay such amount as may be required to bring the account of the Borrower within the monetary limits stated in this Agreement. 4 CONDITIONS PRECEDENT The Facility will only be available for drawing under Clause 3 if:- (a) the Agreement for the Purchase of Debts has commenced and all conditions precedent to the making of prepayments thereunder by VF have been satisfied; and (b) the Security Document duly executed by the Borrower has been received by VF together with copy Board Minutes authorising the entry into and execution of the same; and (c) there is no Event of Default and no event has occurred which, with the lapse of time or giving of notice or both, might constitute an Event of Default; and (d) the representations and warranties set out in Clause 10 are true and accurate in all material respects; and (e) the Borrower has notified VF in writing of the amount requested to be drawn by the Borrower and full details of the account of the Borrower to which the funds are to be remitted. The Borrower acknowledges that any notice given in accordance with this clause 4(e) shall be irrevocable and, unless VF otherwise agrees, shall oblige the Borrower to borrow the amount specified. -4- 5 INTEREST AND FEES 5.1 Interest will be charged on the Loan Account Balance at the Interest Rate and shall accrue from day to day and shall be computed on the basis of a 365 day year and the number of days elapsed. 5.2 The interest accrued on the Loan Account Balance from and including the date upon which the facility is drawn shall be debited to the Loan Account monthly. The Borrower and VF hereby agree that for administrative convenience all interest payable in respect of the Loan Account balance and all other sums payable by the Borrower pursuant to this Agreement may be debited by VF to the Current Account of the Borrower maintained by VF pursuant to the Agreement for the Purchase of Debts. VF reserves the right to require actual payment of all interest by cheque drawn by the Client or such other form of remittance as VF may from time to time specify. 5.3 The Borrower shall pay to VF the Facility Fee in the amount and at the frequency stated in paragraph 3 of Part 1 of the Schedule. 5.4 The Borrower shall pay to VF the Administration Charge in the amount and at the frequency specified in paragraph 4 of Part 1 of the Schedule. 6 REPAYMENT The principal amount of the Facility drawn by the Borrower shall (if not repayable at an earlier date pursuant to the terms of this Agreement) be repaid in accordance with the Repayment Terms set out in paragraph 9 of Part 1 of the Schedule. Notwithstanding any other term of this Agreement the Borrower may at any time repay the whole or any part of the Loan Account Balance from time to time. 7 DEFAULT INTEREST 7.1 If the Borrower shall fail to pay any amount due under this Agreement on its due date, the Borrower shall be liable (if VF so requires) for interest on such amount from the date of such default until the date of actual payment (as well as after as before judgement or demand) at the Default Rate. The Borrower's liability under this Clause shall be in substitution for the liability for interest on such defaulted amount at the Interest Rate. Such interest shall be payable on demand and, to the extent not actually paid, shall be compounded monthly in arrears (and debited to the Loan Account or the Current Account as referred to in clause 5.2 above) and shall be payable before as well as after any judgement. 7.2 VF and the Borrower agree that the Default Rate represents a genuine pre-estimate of VF's additional administrative and funding costs in the event of the Borrower's failure to pay any sum due to VF and is not a penalty. 8 PAYMENTS 8.1 The Borrower will make all payments due under this Agreement without set-off, counterclaim or deduction whatsoever and howsoever arising. -5- 8.2 If the Borrower is compelled by law to make any such deduction or withholding, the Borrower shall forthwith pay to VF such additional amount as shall be required to ensure that VF shall receive in aggregate the amount it would have received but for such deduction or withholding. 9 CHANGES IN CIRCUMSTANCES AND INCREASED COSTS 9.1 If at any time it becomes unlawful or impossible for VF to maintain or fund the whole or any part of the Loan Account Balance VF may at any time by written notice to the Borrower require the Borrower to repay the Loan Account Balance immediately, together with any outstanding interest and all other sums due to VF under this Agreement, the Agreement for the Purchase of Debts and the Security Document. 9.2 The Borrower shall pay to VF on demand such amount as VF may from time to time certify as being necessary to compensate it for any increase in the cost of funding the Loan Account Balance or for any reduction in the rate of return under this Agreement, incurred by VF as a result of compliance with any official directives, requirements or requests of any regulatory authority (whether or not having the force of law) or any law or regulation (including, without limitation, those relating to reserve assets, special deposits, taxes, capital adequacy and/or asset ratios). 10 REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants that:- 10.1 it has the power to enter into and perform its obligations under this Agreement and the Security Document and to borrow hereunder and has taken all necessary action (corporate or otherwise) to authorise the unconditional entry into and performance of its obligations under this Agreement and the Security Document and the utilisation of the Facility upon the terms and conditions contained herein and unconditionally to authorise the execution, delivery and performance of this Agreement and the Security Document in accordance with their respective terms; 10.2 all authorisations, approvals, consents, licences, exemptions, filings, registrations and other procedures required in connection with the entry into, performance and validity of this Agreement, the utilisation of the Facility and the execution of the Security Document have been obtained and are in full force and effect; 10.3 this Agreement and the Security Document constitute legal, valid, binding and enforceable obligations of the Borrower; 10.4 the entry into and performance of this Agreement and the Security Document and the transactions contemplated hereby and thereby do not and will not conflict with (i) any law or regulation or any official or judicial order, or (ii) the Memorandum or Articles of Association of the Borrower; or (iii) any agreement or document to which the Borrower is a party or which is binding upon the Borrower or its assets; 10.5 the financial and other business information and documentation furnished by the Borrower to VF pursuant to this Agreement; (a) is and was (or shall be) when delivered true and accurate and does not contain any misstatement or omit any material fact and -6- (b) there has been no material adverse change in the Borrower's business, assets, conditions and operation since the delivery of such information to VF; 10.6 save as notified in writing to VF prior to the date of this Agreement all of the Borrower's assets are Unencumbered save for the security granted or to be granted pursuant to the Security Document; 10.7 save as disclosed to VF in writing prior to the date of this Agreement, no litigation, arbitration or administrative proceeding or claim exists which might reasonably be expected to have by itself or together with any other such proceedings or claims either: (a) a material adverse effect on the business, assets or condition of the Borrower; or (b) a material adverse effect on the ability of the Borrower to observe or perform its obligations under this Agreement or the Security Document is current or pending or, to the best of the knowledge of the Borrower, threatened against it. The representations and warranties set out in this Clause 10 shall be deemed to be repeated on each day that any amount is or may be outstanding hereunder with reference to the facts and circumstances then subsisting as if made at each such time. 11 FINANCIAL INFORMATION VF reserves the right during the term of the Facility to require the Borrower to provide VF with such financial information about the Borrower as VF may from time to time reasonably require. 12 GENERAL COVENANTS During the time of the Facility the Borrower shall:- 12.1 not without VF's prior written consent:- (a) create or permit to subsist any mortgage, charge or other Encumbrance over any of its assets (except pursuant to the Security Document); or (b) make any loans or otherwise make credit (other than normal trade credit) available to any person; or (c) by one or a series of transactions, whether related or not, sell or otherwise dispose of all or any material part of its property or assets (except in the normal course of its business). 12.2 throughout the duration of this Agreement comply at all times with all provisions contained within the Agreement for the Purchase of Debts and the Security Document, and shall provide to VF all such information and physical access to premises owned or under the control of the Borrower as VF may reasonably require and the Borrower hereby grants an irrevocable licence to VF for VF (and any of its employees servants or agents) to enter upon any premises owned or under the control or authority of the Borrower at any time during normal business hours for the purposes of this Agreement, for confirming and ensuring the compliance by the Borrower with the terms hereof, and for the purposes of VF's assessment and monitoring from time to time as it may require of the location state nature and value of any Eligible Collateral at that time; -7- 12.3 comply with all the Collateral Reporting and Monitoring Requirements of VF as detailed in paragraph 6 of Part 1 of the Schedule or as VF may require and may notify to the Borrower from time to time; 12.4 pay all sums due to VF hereunder or otherwise on the due date for payment thereof; 12.5 promptly notify VF if any Event of Default arises under Clause 13 and of anything which might with the passage of time give rise to an Event of Default. 13 EVENTS OF DEFAULT 13.1 In the event that:- (a) the Borrower fails to pay on the due date any amount due under this Agreement or any other agreement between the Borrower and VF; or (b) the Borrower fails to perform any other of its respective obligations under this Agreement or any other agreement between VF and the Borrower; or (c) any representation, warranty or statement made under or in connection with this Agreement and/or the Agreement for the Purchase of Debts and/or the Security Document is or proves to be untrue in any material respect on the date as of which it was made or deemed to be made or repeated; or (d) the Agreement for the Purchase of Debts is terminated (or is subject to notice of termination served by the Borrower on VF) or any event occurs entitling VF to terminate the Agreement for the Purchase of Debts (whether or not such right is exercised); or (e) it becomes impossible or unlawful:- (i) for the Borrower to perform any of its respective obligations contained in this Agreement or the Security Document or any of them; or (ii) for VF to exercise any of its rights under this Agreement and/or the Agreement for the Purchase of Debts and/or the Security Document; or (f) this Agreement and/or the Security Document do not come into or cease to be in full force and effect or is/are not for any reason valid and binding upon and enforceable in all respects against the Borrower or VF is of the reasonable opinion that any security conferred thereby is or may be in jeopardy; or (g) VF is of the opinion that there has been a material adverse change in the Borrower's trading or financial position or condition; or -8- (h) anything is done or permitted or omitted to be done by the Borrower which VF believes may materially impair the security created by the Security Document and/or prejudice or detract from the Borrower's ability to perform the obligations contained in this Agreement and the Security Document or any of them; or (i) VF is not furnished with all information required to be delivered to it at the time required, then, in any such event VF may by notice in writing terminate the Facility and declare the Loan Account Balance and any other amounts due hereunder immediately due and payable, whereupon the Borrower will immediately comply with such demand by repaying the Loan Account Balance together with all outstanding interest and any other amounts due under this Agreement. 14 ASSIGNMENT AND TRANSFER 14.1 The Borrower may not transfer or assign any of its rights under this Agreement and/or the Security Document. 14.2 VF may, without notice and at any time, transfer or assign all or any part of this Agreement and/or the Facility and/or the Security Document and the Borrower hereby irrevocably consents to any such transfer or assignment (and the disclosure by VF to a transferee or assignee of any information about the Borrower and the Facility as VF may consider appropriate). 15 NOTICES Any notice from one party to another hereunder shall be sent to the addressee and be deemed delivered in accordance with the terms of the Agreement for the Purchase of Debts. 16 WAIVERS No failure or delay by VF in exercising any right, power or privilege under this Agreement and/or the Security Document or any of them shall operate as a waiver thereof nor will any single or partial exercise of any right, power or privilege preclude any further exercise thereof or prejudice any other or further exercise by VF of any of its rights or remedies under this Agreement and/or the Security Document. Such rights and remedies are cumulative and not exclusive of any right or remedy provided by law. 17 INDEMNITY FOR EXPENSES 17.1 The Borrower shall pay to VF on demand on a full indemnity basis whether or not there is a drawing under the Facility:- (a) all funding breakage costs and/or costs in relation to arrangements incurred by VF in connection with the funding of the Loan Account Balance; (b) any stamp documentary registration and other similar duties or taxes in connection with this Agreement and/or the Security Document; -9- (c) all costs and expenses incurred in connection with the negotiation or enforcement of this Agreement and/or the Security Document (including legal fees, charges, disbursements, survey and valuation fees, and value added tax), and (d) the Facility Fee due upon delivery of this Agreement to VF, and if the Borrower shall fail to pay when due any of the above amounts VF is entitled to debit such amounts either to the Loan Account or any other account(s) of the Borrower with VF. 17.2 The Borrower shall also indemnify VF against any loss or expense incurred by it (including all additional out of pocket expenses (of whatsoever nature and howsoever arising) and the cost of all additional management time and effort expended by VF in protecting or enforcing VF's rights and interests hereunder)as a consequence of any failure by the Borrower to pay any sum due to VF when payable. For the purposes of calculating the cost of such additional management time and effort VF shall apportion the salary costs of its personnel involved on a pro rata basis according to the time spent by such personnel in managing the Borrower's account taking account only of such time as would not have been spent by such personnel had such failure to pay not occurred. 18 ILLEGALITY If any of the provisions of this Agreement and/or the Security Document become invalid, illegal or unenforceable in any respect, under any law, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. 19 SET-OFF In addition to any right of set-off or other similar right to which VF may be entitled in law, VF may at any time and without notice to the Borrower combine and consolidate all or any of the accounts between the Borrower and VF and/or set-off any moneys and in any currency whatsoever, which VF may at any time hold for the account of the Borrower, against any liabilities whatsoever which may be due or accruing due to VF from the Borrower. 20 DEMANDS AND NOTIFICATION BINDING Any demand notification or certificate given by VF in writing and signed by a duly authorised officer of VF specifying any rate of interest or any amounts due and payable under or in connection with any provision of this Agreement and/or the Security Document or any of them shall (in the absence of manifest error or error in law) be conclusive and binding upon the Borrower and in any proceedings against the Borrower shall be conclusive evidence of such rate of interest or amounts so due and payable. 21 GENERAL 21.1 The contents of any report (whether written or oral) prepared by or on behalf of VF for the purposes of VF considering whether or not to permit any drawing under or to continue the Facility shall remain confidential and shall not be available to the Borrower for any reason or purpose (save for any requirement of law) in whole or in part and whether in original or copy form. -10- 21.2 VF may in its absolute discretion set-off or reserve against any monies due to the Borrower by VF the amount of any and/or all actual and/or contingent liability of the Borrower to VF at any time and from time to time howsoever arising (and whether pursuant to this Agreement or otherwise) upon or following the occurrence of an Event of Default or in the event of the Aggregate Limit being exceeded for whatsoever reason. 21.3 VF may rely and act upon any instruction or communication received or purportedly received from or on behalf of the Borrower by facsimile or telex transmission notwithstanding that no hard original copy of such instruction or communication has been or is received by VF before so relying or acting, provided that any such instruction or communication is purportedly from or transmitted under the direction of an authorised signatory of the Borrower, and the Borrower hereby agrees to indemnify VF and keep VF indemnified in respect of all losses, costs, damages, expenses, interest or other liability incurred or suffered by VF by reason of so relying and/or acting. 22 GOVERNING LAW This Agreement shall be governed by and construed in accordance with English Law and the Borrower hereby submits to the exclusive jurisdiction of the English Courts. -11- SCHEDULE 1 PART 1 1 Maximum Loan Amount:-(pound)80,000 (Pounds Sterling Eighty Thousand) (clauses 1.1 and 2.1) 2 Aggregate Limit:-(pound)1,500,000 (Pounds Sterling One Million Five Hundred Thousand) including the Confidential Invoice Discounting Facility, Stock Facility and Cashflow Advance (clauses 1.1, 3.3 and 21.2)] 3 Facility Fee: N/A upon the delivery of this Agreement to VF duly executed by the Borrower and upon each annual anniversary of the date hereof (clauses 1.1, 5.3 and 17.1(d) ) 4 Administration Charge:(pound)1,000 (Pounds Sterling One Thousand) jointly with the Stock facility (per month or part thereof) (clause 5.4) 5 Interest Rate: 2.0% above the Base Rate from time to time of Venture's Bankers for the time being in force (clauses 1.1,5.1 and 7.1) 6 Collateral Reporting and Monitoring Requirements:- (clauses 1.1 and 12(c) ) 6.1 Inventory and Preferential Creditors (as defined in Schedule 6 to the Insolvency Act 1986) - within 5 Working Days of each month end 6.2 Fixed Assets - Annual valuation (on date of anniversary of this Deed) by valuer to be agreed by VF. 6.3 Eligible Collateral Audits - per quarter annum following commencement of this Deed. 1 Eligible Collateral Formula: (clauses 1.1, 3.2 and 3.3) The Eligible Collateral Formula for the AdVantage Loan Facility in respect of Plant & Machinery will be plant & machinery x 100%, subject to an AdVantage Limit of (pound)80,000 (Pounds Sterling Eighty Thousand). Venture will require an annual valuation of any Fixed Assets detailed within the Eligible Collateral Formula to be conducted by a Valuer acceptable to Venture. Either Venture will require a waiver from the Landlord in respect of any premises where stock and/or Plant & Machinery is located, which is made available to us as collateral. Or Venture will hold a reserve in respect of 3 months rent in respect of any premises where stock and/or Plant & Machinery is located, which is made available to us as collateral 8 Drawing Frequency (clause 3.1) Once, on commencement 9 Repayment Terms (clause 6.1) Repayable in quarterly instalments of (pound)7,000 (Pounds Sterling Seven Thousand) with a final bullet repayment. 10. Availability Period (clause 3.1 The period commencing on the date of this Agreement and terminating on the 3rd anniversary of the date hereof. SCHEDULE 2 PART 2 - SECURITY DOCUMENT An all assets Debenture in such form as VF may require constituting certain fixed charges and a floating charge over whole of the Borrower's undertaking and assets. IN WITNESS of which the parties have signed this agreement on the date set out above. SIGNED AND DELIVERED AS A DEED By XCEL POWER SYSTEMS LIMITED /s/ Carmine T. Oliva - ---------------------------------- a Director /s/ Graham Jefferies - ---------------------------------- *director/company secretary EXECUTED AS A DEED By PAUL BEVERIDGE /S/ PAUL BEVERIDGE ------------------------------------ ------------------------------- as Attorney for VENTURE FINANCE PLC in the presence of: PAUL ARPS /S/ PAUL ARPS - ---------------------------------------- ------------------------------- EX-10.36 8 microtel_10kex10-36.txt EXHIBIT 10.36 DATE OF DEED OF SUBORDINATION 12 NOVEMBER 2002 PARTIES (1) VENTURE FINANCE PLC (Company Number 02281766) whose registered office is at Sussex House, Perrymount Road, Haywards Heath, West Sussex RH16 1DN ("Venture") (2) MICROTEL INTERNATIONAL INC. (a Company incorporated under the laws of [ ]) and whose address for service is at 9845 Haven Avenue, Suite 100, Rancho Cucamonga, California, United States of America (the "Parent") (3) XCEL CORPORATION LIMITED (Company Number 01969006) whose registered office is at Brunswick Road, Cobbswood, Ashford Kent TN23 1EH (the "Guarantor") INTRODUCTION A Venture has entered or shall enter into an Agreement for the Purchase of Debts (the "Agreement") with Xcel Power Systems Limited (the "Company") pursuant to which, the Company has assigned or shall assign certain of its book debts to Venture. B The Guarantor has given or shall give a Guarantee and Indemnity (the "Guarantee") in favour of Venture in respect of all of the obligations of the Company to Venture, including any obligations of the Company to Venture arising under the Agreement. C There exists certain intra-group indebtedness which is due owing or incurred by the Guarantor to the Parent and which is evidenced on certain intra group accounting arrangements. D The parties hereto have entered into this Deed to regulate the basic upon which all or any part of the Intra Group Indebtedness (as hereinafter defined) may be discharged. IT IS AGREED THAT: 1 INTERPRETATION 1.1 In this Deed, except where the context otherwise requires, each of the expressions set out below shall have the meaning ascribed to it: "Intra Group Indebtedness" means all and any monies and/or liabilities which are now or shall become due, owing or incurred by the Guarantor to the Parent in any manner actually or contingently, solely or jointly and whether as principal or surety. 2 SUBORDINATION 2.1 Subject to Clause 4 below, the Guarantor hereby irrevocably warrants and undertakes in favour of Venture that it shall not without the prior written consent of Venture take steps to discharge or discharge all or any part of the Intra Group Indebtedness until: (a) the Agreement has been validly terminated in accordance with the terms; and (b) Venture has unconditionally released the Guarantor from all and any of its obligations to Venture pursuant to the Guarantee; and (c) all and any monies and/or liabilities which are now or shall become due, owing or incurred by the Guarantor and/or the Company to Venture on any account whatsoever (including without limitation under the Agreement and/or the Guarantee) have been satisfied in full unconditionally and cannot be subsequently avoided or reduced (whether or not by or in pursuance of any provision of law or legal process). 3 UNDERTAKING OF THE PARENT 3.1 Subject to Clause 4 below, the Parent irrevocably warrants and undertakes in favour of Venture that it shall not without the prior written consent of Venture accept repayment of all or any part of the Intra Group Indebtedness from the Guarantor until the conditions described in Clauses 2.1(a) - 2.1(c) inclusive above have been duly satisfied. 4 PERMITTED REPAYMENTS 4.1 In the event that the aggregate amount of the Intra Group Indebtedness from time to time is in excess of two hundred thousand pounds sterling ((pound)200,000) (the "Threshold"), nothing in Clauses 2.1 and/or 3.1 shall prevent the Guarantor making, nor the Parent accepting repayment of all and any sums in excess of the Threshold. 5 RIGHTS OF THIRD PARTIES 5.1 A person, company or other legal entity that is not a party to this Deed does not have any rights pursuant to it and the provisions of the Contracts (Rights of Third Parties) Act 1999 are excluded from this Deed. 6 COUNTERPARTS 6.1 This Deed may be executed in any number of counterparts or documents, each in the like form, all of which, when taken together shall constitute one and the same document. 7 VARIATION AND TERMINATION 7.1 Save as otherwise specifically provided herein, any variation of this Deed shall be binding only if it is recorded in a document signed by or on behalf of each of the parties hereto. 7.2 This Deed may be terminated only if it is recorded in a document signed by or on behalf of each of the parties hereto. 8 LAW AND JURISDICTION 8.1 This Deed shall be governed by and construed in accordance with English Law and the parties hereto irrevocably submit to the jurisdiction of the English Courts. 2 IN WITNESS whereof the parties hereto have executed and delivered this Deed as a deed the day and year first above written. Signed and Delivered as a deed by PAUL BEVERIDGE /S/ PAUL BEVERIDGE - ----------------------------- ------------------ as Attorney for VENTURE FINANCE PLC in the presence of: PAUL ARPS /S/ PAUL ARPS - ----------------------------- ------------------ Address of Witness SUSSEX HOUSE, PERRYMOUNT ROAD - ----------------------------- HAYWARDS HEATH - ----------------------------- SIGNED and delivered as a deed by MICROTEL INTERNATIONAL INC acting by two directors or by one director and the secretary Director Signature : /s/ Carmine T. Oliva Name : Director/Secretary Signature : /s/ Robert B. Runyon Name : SIGNED and delivered as a deed by XCEL CORPORATION LIMITED acting by two directors or by one director and the secretary Director Signature : /s/ Carmine T. Oliva Name : Director/Secretary Signature : /s/ Graham Jefferies Name : 3 EX-10.37 9 microtet_10kex10-37.txt EXHIBIT 10.37 AGREEMENT FOR THE PURCHASE OF DEBTS 1 PARTIES ------- (1) VENTURE FINANCE PLC ("Venture") of Sussex House Perrymount Road Haywards Heath West Sussex RH16 1DN incorporated in England with registered number 2281768. (2) THE CLIENT ("Client") named in paragraph 1(a) of the Schedule ("the Schedule") annexed to and forming part of this Agreement ("this Agreement"). 2 DATE ---- This Agreement shall be treated as being made on the date which the last of either Venture or the Client shall execute it. 3 DEFINITIONS AND INTERPRETATION ------------------------------ (1) The expressions specified in Appendix A forming part of this Agreement shall have the meanings assigned to them therein. This Agreement shall be construed in accordance with Appendix B. (2) Where in connection with any legal jurisdiction outside England and Wales a word or phrase in this Agreement has no precise counterpart, then this Agreement shall be interpreted as if that word or phrase referred to the closest equivalent in the jurisdiction concerned. 4 TRANSFER OF OWNERSHIP OF DEBTS ------------------------------ (1) This Agreement is for the Sale by the Client and the Purchase by Venture of all Debts, which are in existence at the Commencement Date or which afterwards arise during the currency of this Agreement. On the Commencement Date the Client shall deliver an Offer in respect of each such Debt unpaid at that date. Venture shall only accept such Offer by crediting the value of the Debt, as shown in the Offer, to the Debts Purchased Account, where upon Venture's ownership of such Debt shall be complete. (2) The ownership of every Debt coming into existence after the Commencement Date and until the ending of this Agreement shall vest in Venture automatically upon such Debt coming into existence without any further act on the part of either Venture or the Client. (3) Upon the vesting in Venture of each Debt pursuant to clauses 4(1) and 4(2) there shall also vest in Venture the ownership of all Related Rights to such Debt. 5 PERFECTION OF FACTOR'S TITLE ---------------------------- The Client shall at any time, at the request of Venture and at the expense of the Client, execute and deliver to Venture a formal written assignment (with the applicable stamp duty endorsed thereon) of any Debt or Related Rights owned by Venture. The Client shall hold in trust for Venture (and separately from the Client's own property) any Debt or Related Rights purchased by Venture of which the ownership shall fail to vest in Venture for any reason. 6 PURCHASE PRICE AND NOTIFICATION OF DEBTS ---------------------------------------- (1) Subject to the other provisions of this Agreement the Purchase Price of each Debt, together with its Related Rights, shall be equivalent to the amount payable by the Debtor in respect of such Debt, including any tax or duty, according to the relevant Sale Contract, after there has been deducted therefrom: -1- (i) any discount, allowance or other deduction allowed or allowable by the Client to the Debtor; and (ii) the Discount Charge in respect of such Debt, calculated in accordance with clause 9(3). (2) The Client shall promptly notify Venture of each Debt created after the Commencement Date and vesting in Venture in such manner and with such particulars and documents evidencing the Debt as Venture may from time to time require. Notification shall be as soon as the relevant Goods have been Delivered, or at any other time if so required by Venture. A Notification shall not include any Debt previously notified or subject to an offer. (3) If in relation to any Debt the Client is unable to give to Venture every one of the warranties and undertakings contained in this Agreement, then the Client shall notify such Debt to Venture separately from other Debts and clearly mark the relevant Notification to that effect. All such Debts shall be Disapproved Debts. 7 CREDIT OF THE PURCHASE PRICE AND PAYMENT BY VENTURE --------------------------------------------------- (1) Following receipt of a Notification, Venture shall on the next Working Day credit the Purchase Price to the Debts Purchased Account. For administrative convenience Venture may make such credit before the deduction of any of the items which, in accordance with clause 6(1), are to be deducted in computing the Purchase Price. Venture may consequently, if it so wishes, aggregate and debit all such items at any time thereafter to either the Debts Purchased Account or the Current Account. (2) Venture shall make appropriate accounting entries on the Transfer Date to effect the transfer of the Purchase Price of a Debt from the Debts Purchased Account to the credit of the Current Account. The Transfer Date shall be: (i) where it is specified in paragraph 8 of the Schedule that Venture is to collect the Debts:- (a) and where the relevant remittance is by Sterling cheque or Bill of Exchange drawn on or accepted for payment at a bank in the United Kingdom: whichever is the later of the day Venture lodges the instrument of payment with its banker for collection or the day the instrument of payment shall be payable or the day Venture shall identify such payment as being in respect of a specific Notified Debt; (b) but where the relevant remittance is by cheque or Bill of Exchange otherwise than in Sterling and/or by cheque or by Bill of Exchange drawn on or accepted for payment at a bank not in the United Kingdom: whichever is the later of either the day Venture receives notice it has received value for such remittance or the day Venture shall identify such payment as being in respect of a Notified Debt; (c) but where the payment is made by an electronic funds transfer direct to Venture's bank account: whichever is the later of either one Working Day after it is credited to such account or the day Venture shall identify it to be in respect of a specific Notified Debt; (d) but where it is specified in paragraph 5 of the Schedule that the general nature of this Agreement is "With Bad Debt Protection" and the Purchase Price of a Credit Approved Debt shall not have been transferred to the Current Account: whichever is the earlier of five Working Days after the end of the -2- fourth calendar month following the end of the month in which the Debt shall have fallen due for payment or five Working Days after Venture receives confirmation of the Insolvency of the Debtor, (except in respect of Export Debts when it shall be the date referred to in the rider to the Schedule - as varied at Venture's discretion from time to time - by reference to the country to which the relevant invoice is addressed); or (ii) where it is specified in paragraph 8 of the Schedule that the Client is to act as Agent of Venture:- (a) one Working Day after the credit of the relevant remittance to the bank account, established by Venture for the purpose of receiving such remittances; or (b) where it is specified in paragraph 5 of the Schedule that the general nature of this Agreement is "With Bad Debt Protection" and the Purchase Price of a Credit Approved Debt shall not have been transferred to the Current Account and the Client has provided evidence of the validity of the Debt and of compliance with the matters referred to in clause 12(4)(i)(c):- five Working Days after Venture shall receive confirmation of the Insolvency of the Debtor, (except in respect of Export Debts when it shall be the date referred to in the rider to the Schedule - as varied at Venture's discretion from time to time - by reference to the country to which the relevant invoice is addressed). (3) Where the Purchase Price of a Debt is to be transferred in accordance with clause 7(2)(i)(d) or 7(2)(ii)(b) Venture may prior to such transfer deduct the amount of any Client Bad Debt Risk but so that the total amount so deducted in relation to a single debtor shall not exceed the amount specified in paragraph 14 of the Schedule. (4) If, following receipt of an instrument of payment from a Debtor, but prior to receipt of notification of its clearance for fate, Venture shall have transferred the Purchase Price of a Debt to the Current Account, then Venture shall be entitled to reverse such accounting entries on notification that the instrument has failed to be so cleared for fate. (5) In maintaining the Debts Purchased Account, Venture shall be entitled to debit thereto any discount, allowance or other deduction nature claimed by a Debtor at the time of making payment of any Debt to Venture and shall give notice thereof to the Client. However, upon written notice of objection by the Client within 14 days of such notice the deduction shall be credited back to the Debts Purchased Account and shall be treated as a Disapproved Debt. (6) The Client may at any time request Venture to pay to the Client, but in each case subject to Venture's right of set-off: (i) any amount standing to the credit of the Client on the Current Account; or (ii) amounts up to the equivalent of the Availability. Any payment made by Venture shall be sent in a sterling cheque by post either to the Client or to any bank account of the Client or, if the Client and Venture so agree verbally or in writing, shall be made by Bankers Automated Clearing System (sometimes known as BACS). If the Client and Venture agree verbally or in writing that instead of payment by cheque or BACS that Venture may make payments by the Clearing House -3- Automated Payment System (sometimes known as "CHAPS") then the Purchase Price shall be adjusted by a Supplementary Discount Charge and Venture shall be entitled to a transaction charge, (the amount of which shall be advised by Venture from time to time) in respect of each payment. Any payment shall be debited to the Current Account on the day Venture shall send a cheque or on the day Venture gives instructions to its bank for a payment by BACS or CHAPS. (7) Venture shall send or make available to the Client a statement of its accounts with the Client not less than once in each month or at such other intervals as may be agreed. Such statement shall be treated as correct and binding on the Client, except for manifest errors or errors in law or any error notified by the Client to Venture within fourteen days of its despatch. (8) Venture shall at any time be entitled to debit to the Current Account all liabilities of the Client to Venture, whether or not arising under this Agreement, present, future, contingent or prospective (including liability to Venture as the customer of another Client of Venture or for Value Added Tax). Where the amount can not be immediately ascertained Venture shall be entitled to make a reasonable estimate thereof. Until such liabilities shall be so debited Venture may set off the amount thereof against amounts payable to the Client. 8 FOREIGN CURRENCY DEBTS ---------------------- (1) For the purpose of computing the Purchase Price of a Foreign Currency Debt and crediting it to the Debts Purchased Account in accordance with clause 7(1) Venture shall be entitled to use the Conversion Rate on the day it is so credited. (2) For the purpose of transferring the Purchase Price of a Foreign Currency Debt to the Current Account in accordance with clause 7(2) Venture shall be entitled to use the Conversion Rate on the Transfer Date. If the converted amount of the Debt transferred is more than the converted amount of the Purchase Price of that Debt, the difference shall be treated as an increase in the Purchase Price and if it is lower the difference shall be treated as a reduction in the Purchase Price. (3) On Recourse or Reassignment of any Foreign Currency Debt, the Repurchase Price shall be computed by reference to the Conversion Rate applied in crediting the Purchase Price to the Debts Purchased Account. 9 FACTORING FEES, DISCOUNT CHARGES, BANK AND OTHER CHARGES -------------------------------------------------------- (1) Venture shall, upon delivery of a Notification, be entitled forthwith to charge a Factoring Fee equivalent to the percentage specified in paragraph 15 of the Schedule (or such other percentage or amounts as may be agreed by the parties in writing) of the notified value of such Debt and credit notes before the deduction of any discount or other allowance allowed or allowable at any time to the Debtor. Venture shall immediately debit the Factoring Fee to the Current Account. (2) If the total Factoring Fees during the period of three months immediately following the occurrence of a Right of Immediate Termination shall be less than the total Factoring Fees during the period of three months ended immediately before such right shall arise, then the Client shall pay to Venture a sum equal to the difference or Venture may debit the same to the Current Account. This shall be payable even if this Agreement shall end before the expiry of the three months and shall not affect any other rights of Venture arising out of such events. Should a Collection Transfer Fee become payable pursuant to clause 12(4)(ii) the relevant percentage for calculating the Factoring Fee in respect of all Debts Notified thereafter shall be the percentage stated in paragraph 17(ii) of the Schedule as being the Revised Factoring Fee, in substitution for that appearing in paragraph 15 of the Schedule. -4- (3) The Discount Charge to be deducted in computing the Purchase Price of each Debt, in relation to which a Prepayment shall be made, shall be equivalent to the rate per annum specified in paragraph 16 of the Schedule (or such other rate as may be agreed by the parties in writing) calculated daily, with monthly rests, on the amount of such Prepayment from the date on which it is debited to the Current Account until four Working Days after the Transfer Date. For administrative convenience Venture may calculate the Discount Charge by reference to the Funds in Use at the end of each day. The total of the Discount Charges so calculated shall then be debited monthly. (4) Venture shall be entitled to debit the Current Account and / or the Debts Purchased Account with: (i) all bank charges incurred by Venture in respect of an instrument of payment not cleared for fate as described in Clause 7(4) for a Debt which is not a Credit Approved Debt; (ii) if so provided in paragraph 15 of the Schedule, all banking charges and other costs and expenses it may incur in relation to any account to which it directs that any payments by Debtors shall be credited; (iii) such other charges or fees as are referred to in the Schedule or any rider to the Schedule and all bank charges incurred in collecting Export Debts and converting the proceeds of a Foreign Currency Debt into Sterling; (iv) any amount due to Venture in relation to the matters referred to in clauses 14 and 18(2)(v); (v) any other amounts due to Venture. (5) Any amount debited to the Current Account shall be treated as a Prepayment for the purpose of calculating the Discount Charge. (6) All charges and fees to which Venture shall be entitled under the terms of this Agreement shall be calculated or charged exclusive of value added tax. Value added tax shall be payable upon issue by Venture of a value added tax invoice. 10 DISPUTES AND CREDIT NOTES ------------------------- (1) If a Debtor disputes its liability to pay the full Notified amount of any Debt (less any discount or allowance approved by Venture) the Client shall forthwith notify Venture of such dispute (if the same has not already been advised to the Client by Venture) and undertakes: (i) to use its best endeavours promptly to settle every such dispute, subject to the right of Venture itself to settle or compromise any such dispute or to require that the Client should settle or compromise it on such terms as Venture may in its absolute discretion think fit; (ii) to perform promptly all further and continuing obligations of the Client to the Debtor under any Sale Contract and to give evidence to Venture of such performance and to agree that in the event of the failure of such performance Venture may itself perform such obligations at the expense of the Client; (iii) to issue promptly all credit notes due in respect of Debts and to Notify same within three Working Days of issue subject to the right of Venture to require that no credit note shall be authorised or issued without Venture's consent and that the originals of such credit notes shall be sent to Venture; and the Client shall be bound by anything done by or at the direction of Venture in accordance with this sub-clause (1), including any corresponding reduction in the Purchase Price. -5- (2) (i) The amount of every credit note Notified pursuant to clause 10(1)(iii) shall be treated as a reduction of the Purchase Price of the Debt to which the credit note relates and shall be debited to the Debts Purchased Account. (ii) The Client shall, if requested by Venture, give Venture a cheque, in favour of Venture, drawn on a London clearing bank for the amount of the credit note. On collection of the cheque its amount shall be credited to the Current Account. 11 DISAPPROVED DEBTS ----------------- (1) A Debt shall become a Disapproved Debt: (i) if (when aggregated with all other Outstanding Debts owing by the same Debtor) it is not for the time being within the Funding Limit or within the Debtor Concentration; or (ii) where paragraph 5 of the Schedule specifies that the general nature of this Agreement is "Without Bad Debt Protection" - at any time after the expiry of the recourse period specified in paragraph 13 of the Schedule; or (iii) where the cost and expense in effecting its collection shall, in Venture's view, exceed its Purchase Price (except Credit Approved Debts) - at any time after Venture takes that view; or (iv) where the Debtor claims to be unable to pay because of any laws, rules or regulations having the force of law (other than arising solely from the Debtor's insolvency) - at any time after such claim is made; or (v) where it is the subject of a dispute described in clause 10 (1) - when such dispute arises; or (vi) where there is a breach of warranty or undertaking given by the client - at the time of such breach; or (vii) where it is (or is required to be) notified separately in accordance with clause 6 (3) - at the time when such notification is (or should be) made; or (viii) where it does not fall within paragraph 6 of the Schedule - at the time that such Debt comes into existence; or (ix) Upon Venture exercising its rights under clause 19(2). (2) Venture shall have Recourse in respect of: (i) a Debt which is a Disapproved Debt because of clause 11(1)(v) - at any time after the sixtieth day after the arising of the dispute; (ii) any other Disapproved Debt - at any time after the day on which it is due for payment or the day of its Disapproval; (iii) any Debt which is not a Credit Approved Debt where paragraph 5 of the Schedule specifies that the general nature of this Agreement is "With Bad Debt Protection" - at any time after the day on which it is due for payment; (iv) the amount of any Client Bad Debt Risk - at the time it is deducted from the Purchase Price of a Debt in accordance with clause 7(3). -6- 12 NOTICES TO AND COLLECTIONS FROM DEBTORS --------------------------------------- (1) Whilst the ownership of any Debt remains vested in Venture or any Debt is held in trust for Venture pursuant to Clause 5, Venture shall have the sole right to enforce payment of and determine whether such Debt shall be collected by Venture or by the Client (as the agent of Venture) and to institute, carry on, defend or compromise proceedings in its own name or the name of the Client in such manner and upon such terms as it may in its absolute discretion think fit. The Client shall co-operate in such enforcement, collection or proceedings and in the recovery of any Transferred Goods. (2) Where paragraph 7 of the Schedule specifies that notice of assignment shall be given such notice shall state, inter alia, that the Debt to which it relates has been purchased by and assigned to Venture and the Client undertakes:- (i) in respect of every Debt vesting in Venture, to give such notice in the manner and form prescribed by Venture; and (ii) to use its best endeavours to ensure that each Debtor makes payment in accordance with such notice and, without affecting such obligation, at its own expense to despatch a letter in terms stipulated by Venture to any Debtor ignoring such notice or any part thereof and to send to Venture a copy of each such letter. (3) Even though paragraph 7 of the Schedule specifies that no notice of assignment shall be given Venture may, at any time by notice to the Client, require that the Client shall forthwith give the notices prescribed in Clause 12(2) in such form and manner as Venture may direct. (4) Where there is reference to "Agent" in paragraph 8 of the Schedule: (i) Venture hereby appoints the Client as the agent of Venture, until notice to the contrary and without prejudice to Venture's rights pursuant to Clause 12(1), for the purpose of administering the accounts of Debtors and procuring the collection of Debts for the benefit of Venture. The Client hereby accepts such appointment and undertakes: (a) to act promptly and efficiently in carrying out such tasks; and (b) not to hold itself out as the agent of Venture, except while the provisions of this clause 12(4) apply, and while such provisions apply not to hold itself out as the agent of Venture for any other purpose; and (c) to obtain the prior written approval of Venture to the debt collection procedures to be adopted and shall at all times adhere to these and obtain approval to any variations; and (d) to furnish Venture, by such date in each month as Venture may direct, with copies of such records, statements and accounts of Debtors and such reconciliation's to the Debts Purchased Account as Venture may require. (ii) Venture may, at any time by notice to the Client, withdraw such appointment. Upon or at any time after such withdrawal Venture shall be entitled to debit the Current Account with the Collection Transfer Fee calculated in the manner specified in paragraph 17(i) of the Schedule. (5) The Client shall at its own cost forthwith deliver to Venture or, if so required by Venture, directly to a bank account designated by Venture the actual cash, cheque, instrument or payment received by the Client in or on account of the discharge of each Debt. Until so delivered, the Client shall meanwhile hold such cash, cheque, instrument or payment in trust for Venture. The Client shall not deal with, negotiate -7- or pay the same into any bank account unless so directed by Venture. If it be necessary for any instrument to be endorsed to enable Venture to receive payment then the Client shall endorse the same prior to its delivery to Venture. If so required, the Client shall give an indemnity to Venture's bankers in respect of "account payee" cheques made payable to the Client and so endorsed. (6) Any Transferred Goods shall be notified by the Client to Venture and shall be set aside and marked with Venture's name as owner. Venture shall have the right without notice to the Client to take possession of and sell any Transferred Goods upon such terms and at such prices as Venture may in its absolute discretion decide. 13 CREDIT LIMITS AND ALLOCATION OF PAYMENTS ---------------------------------------- (1) Credit Limits will be established by Venture only where Paragraph 5 of the Schedule specifies that the general nature of this Agreement is to be `With Bad Debt Protection'. (2) Any Credit Limit may, in Venture's absolute discretion, be increased, reduced or cancelled by Venture at any time. Any increase must be by written or electronic notice to the Client or by making the same available by electronic interrogation of Venture's computer. Any such change shall take immediate effect, except that no reduction or cancellation shall affect any Debt which: (i) shall have arisen from Goods Delivered before the service of notice on the Client of such reduction or cancellation; and (ii) at the time of such service shall be (when totalled with all other Debts owing by the Debtor) within the Credit Limit. (3) Where two or more Debts are owing by the same Debtor they shall be treated as falling within the Credit Limit in the order in which they are Notified. (4) When a Credit Approved Debt shall be discharged by a Debtor then the next Debt in the order referred to in clause 13(3) shall become a Credit Approved Debt to the extent that it falls within a Credit Limit. (5) When Credit Approved Debts and other Debts are owing by the same Debtor Venture shall have the right to allocate any payment by the Debtor or any credit or allowance granted by the Client to the Debtor or any sum by way of dividend or benefit in satisfaction of any Credit Approved Debt in priority to any other Debt, despite any contrary allocation by the Debtor or the Client. (6) The Client shall not disclose to the Debtor or any third party the amount of or absence of any Credit Limit or the reasons for such Credit Limit. 14 CREDIT BALANCES --------------- The Client hereby irrevocably authorises Venture to make payment to any Debtor on account of or in settlement of any credit balance appearing on its account in the records of Venture, whether such credit balance arises from the issue of a credit note by the Client or otherwise. Until such payment shall be made by Venture any such credit balance shall be a prospective liability of the Client to Venture. 15 RECOVERY OF VALUE ADDED TAX --------------------------- (1) For the purpose of enabling the client to recover from H.M. Customs and Excise any value added tax included in any Credit Approved Debt unpaid for such period as would have enabled the Client to make a claim for value added tax bad debt relief but for its assignment to Venture, the following provisions shall apply. -8- (2) Venture may reassign the Debt to the Client for a consideration equal to the amount of value added tax included in the Debt and any dividend or benefit recovered. The Client also irrevocably authorises Venture in the name of the Client to submit a proof of debt in the estate of the relevant Debtor. (3) The Client shall immediately upon receipt pay to Venture (or in Venture's absolute discretion Venture may debit the Current Account with) and meanwhile hold in trust for Venture the amount of any dividend or other benefit received or receivable in reduction of such Debt. (4) On the Transfer Date Venture may set off against the Purchase Price of an Outstanding Credit Approved Debt the amount of any value added tax included in the Debt. (5) Any payment by Venture to the Client in respect of a Credit Approved Debt shall not discharge the consideration due from the Debtor to the Client for the taxable supply. 16 CLIENT'S ACCOUNTS AND RECORDS ----------------------------- (1) Whether or not the Client is a body corporate, it shall provide for Venture: (i) a signed copy of its and in addition such Associates' audited balance sheet and accounts as Venture may require for each year or accounting reference period (as defined in the Companies Act 1985) ending during the currency of this Agreement, within six months of the end of such period (and shall promptly advise Venture of any change to its accounting reference period); and (ii) such other accounts or statements of its financial position or affairs as Venture may at any time require. (2) The Client, if so required by Venture, shall procure at its own expense that the Client's auditors report directly to Venture on any matters relating to the financial affairs of the Client. (3) The Client shall promptly provide Venture (at the Client's expense) with such of the Financial Records included in the Related Rights or copies of them and of any other records or documents of the Client as Venture may at any time require or any other evidence of the performance of Contracts of Sale. (4) Any official or duly authorised representative or agent of Venture may at any time (at the Client's expense) enter upon any premises at which the Client carries on business and inspect and/or take copies of the Financial Records or other records or documents of the Client. (5) The Client shall permit or procure the verification of Debts in such manner as shall be determined by Venture in its absolute discretion. -9- 17 POWER OF ATTORNEY ----------------- (1) The Client hereby irrevocably appoints Venture and the Directors and the Company Secretary and every other officer for the time being of Venture jointly and each of them severally to be the Client's attorney in the name of the Client to execute such deeds or documents and to complete and endorse such instruments and to institute or defend such proceedings and to perform such other acts as Venture may consider requisite in order to perfect Venture's title to any Debt or Related Rights and to secure performance of any of the Client's obligations under this Agreement or under any Sale Contract or to obtain payment of Debts. (2) Venture or its Directors and the Company Secretary and every other officer of Venture for the time being are empowered to appoint and remove at will any substitute attorney or agent for the Client in respect of any of the matters referred to in clause 17(1). (3) The Client agrees to ratify and confirm whatever Venture or its Directors or Company Secretary or Officers substitutes and agents shall lawfully do pursuant to the above power of attorney. 18 WARRANTIES AND UNDERTAKINGS OF THE CLIENT ----------------------------------------- (1) In addition to and without affecting any other undertaking given elsewhere in this Agreement the Client warrants and the same shall be deemed repeated on the delivery of each Notification, namely: (i) that save as disclosed by the Client to Venture in writing no disposition, charge, trust or encumbrance (whether created by the Client or otherwise) affects or may affect any of the Debts or Related Rights vesting in Venture and that no supplier to the Client has or may have any claim to any such Debt or Related Rights, whether or not by equitable tracing right; (ii) that before entry into this Agreement the Client has disclosed to Venture every fact or matter known to the Client which the Client knew or should reasonably have known might influence Venture in any decision: (a) whether or not to enter into this Agreement; or (b) to accept any person as a guarantor or indemnifier for the Client's obligations to Venture; or (c) as to the terms of this Agreement; or (d) as to the making of any Prepayment; or (e) the designation of any Debt as a Credit Approved Debt. (2) The Client undertakes to Venture: (i) to disclose promptly to Venture any such fact or matter of which the Client becomes aware during the currency of this Agreement, including (without affecting the generality of clause 18(1)(ii)) any change or prospective change in the constitution or control of the Client or of any guarantor or indemnifier of the Client's obligations to Venture or any prospective security right to be created by the Client affecting any of its assets; (ii) immediately after notifying Venture of any Debt, to make an appropriate entry in the Client's Financial Records regarding the sale of such Debt and in all cases in which the Client acts as agent of Venture pursuant to clause 12(4) to ensure that all accounts and records relating to Debtors are clearly marked that the Debts so recorded thereon have been sold to Venture; -10- (iii) to indemnify Venture against all costs and expenses (including administrative costs, legal fees, disbursements, opponent's and third party's costs) incurred by Venture in enforcing or attempting to enforce payment and collection of all Debts (other than Credit Approved Debts) and in settling or compromising any dispute or claim (whether justified or not) by a Debtor; (iv) to pay to Venture all costs and expenses incurred by Venture in entering into this Agreement and in enforcing its terms or in obtaining a release or waiver in respect of the matters referred to in clause 18(1)(i); (v) to indemnify Venture against all claims actions and demands made by any Debtor against Venture and all costs interest and expenses arising therefrom except where the same arises solely from the misconduct of Venture; (vi) to ensure that all statements contained in and all signatures appearing on every order, invoice and other documents (including in particular all Notifications) supplied to Venture as evidence of or relating to the Debt are true and genuine. (3) The inclusion of any Debt in a Notification (other than a Notification pursuant to clause 6(3)) or in any report made to Venture pursuant to clause 12(4)(i)(d) shall be treated as a warranty by the Client that: (i) the Sale Contract does not include any prohibition against the assignment of the Debt; (ii) the Goods have been Delivered and the Debt is a legally binding obligation of the Debtor for the Notified amount and has arisen from a Sale Contract made in the ordinary course of the Client's business specified in paragraph 1(e) of the Schedule which: (a) provides for the invoice to be expressed and payment to be made in a currency specified in paragraph 1(f)(i) of the Schedule and on terms of payment (which shall be stated on each and every invoice) not more liberal than those specified in paragraph 1(f)(ii) of the Schedule; (b) is subject to the law of a country specified in paragraph 1(f)(iii) of the Schedule; (c) is not regulated by the Consumer Credit Act 1974; and (d) is otherwise as approved by Venture and the Client will not vary or attempt to vary any of the terms of any such Sale Contract without the prior written consent of Venture; (iii) the Client has no obligations to the Debtor, other than under any Sale Contract and there exists no agreement between the Client and the Debtor for set-off or for abatement or whereby the amount of the Debt specified in the Notification may otherwise be reduced, except in accordance with the terms of the Sale Contract approved by Venture; (iv) the Client is not in breach of any of its obligations under the relevant Sale Contract and the Debtor will accept the Goods and the invoice therefor without any dispute or claim, including claims for release of liability (or of inability to pay) because of force majeure or because of the requirements of any law wherever applying or of rules orders or regulations having the force of law in any jurisdiction; and -11- (v) the Debtor has an established place of business and is not an Associate, subsidiary, co-subsidiary, parent or associated company of the Client or under the same director or shareholder control as the Client. 19 COMMENCEMENT AND TERMINATION ---------------------------- (1) This Agreement shall commence on the Commencement Date and, unless terminated pursuant to clause 19(2), shall continue for the minimum period set out in paragraph 3 of the Schedule and thereafter for successive periods equal to such minimum period unless terminated in accordance with this clause. Either party may give notice in writing to the other terminating this Agreement. Such a notice from Venture may be served at any time. Such a notice from the Client must be served in the calendar month immediately preceding the calendar month in which the anniversary of the commencement of this Agreement falls. In each case such notice shall be of not less than the period specified in paragraph 4 of the Schedule. (2) If any of the following events happen, Venture shall have the right by notice to the Client to terminate this Agreement forthwith or at any time thereafter: (i) the Client's Insolvency or its calling any meeting of its creditors; or any petitions or applications being issued before a Court with a view to the Client's Insolvency; (ii) a petition for an administration order pursuant to the Insolvency Act 1986 in relation to the Client (being a body corporate) or a resolution of its members for its winding up; (iii) the dissolution of any partnership comprising the Client or any change in the constitution, composition or legal personality of the Client, whether by death, retirement, amalgamation, reconstruction, addition or otherwise; (iv) the Client's income or assets or any part thereof being seized under any execution legal process or distress for rent or the making or threat of a garnishee order on any person indebted to the Client or the attachment or attempt of attachment to Outstanding Debts or any amount owed by Venture to the Client; (v) if any of the Client's obligations to third parties for the repayment of borrowed money shall be declared due prior to their stated maturity dates by reason of default or shall not be paid when due; (vi) if at any time the Client (whether or not a body corporate) is unable to pay its debts as defined in paragraph 123(1) of the Insolvency Act 1986, or if a statutory demand under the Insolvency Act 1986 be served on the Client, or if at any time the value of its assets disclosed in any balance sheet or financial statement shall be less than the amount of its liabilities (including any contingent or prospective liabilities), or if an encumbrancer shall take possession of any part of its income or assets, or the making of any garnishee order on Venture following a judgement against the Client; (vii) the occurrence of any of the events similar to those referred to in paragraphs (i) to (vi) inclusive of this clause, in relation to any person who has given a guarantee or indemnity in respect of the Client's obligations under this Agreement or the death of any such person or the termination or attempted termination of any such guarantee or indemnity; (viii) any breach of any covenant or undertaking given by any person in reliance upon which Venture entered into or continued this Agreement or the withdrawal or attempted withdrawal of any waiver release or priority given to Venture in relation to any security right affecting any asset of the Client; (ix) the cessation or threatened cessation of the Client's business; -12- (x) any change in the business of the Client specified in paragraph 1(e) of the Schedule or change in ownership of 25% or more of the issued shares of the Client as at the date hereof or any change in the constitution or control of any other person referred to in clause 18(1)(ii)(b); (xi) any breach of any of the Client's obligations, warranties or undertakings to Venture whether arising under this Agreement or any other agreement between Venture and the Client or under any guarantee or charge given by the Client to Venture or otherwise howsoever arising; (xii) the failure by the Client to deliver any Notification for a period in excess of six weeks or the failure to deliver sufficient Notifications in any period of six consecutive weeks to provide Factoring Fees to Venture of at least (pound)100 (Pounds Sterling One Hundred) exclusive of Value Added Tax. (3) Upon or at any time following an event referred to in clause 19(2), Venture shall have: (i) immediate Recourse in respect of all Outstanding Debts but so that the ownership of none of such Debts shall vest in the Client until the Repurchase Price of all such Debts has been received by Venture; and (ii) the right to do any or all of the following: (a) reduce the Prepayment Percentage to zero; (b) demand immediate payment of all Funds in Use; (c) treat all Credit Approved Debts as Disapproved Debts; (d) increase the Discount Charge by 2% (which the Client and Venture agree is an acceptable increase to compensate Venture for its increased risk in such circumstances) (e) treat Debts which are afterwards Notified as Disapproved Debts. (4) Venture shall have no obligations to pay any sum to the Client whilst any petition or application shall be pending relating to the Client's Insolvency. (5) (i) Following the occurrence of an event referred to in clause 19(2), Venture shall be entitled to debit the Current Account with the amount of all and any losses, damage, costs and/or expenses whether actual or contingent suffered or incurred by Venture (including all additional out of pocket expenses (of whatsoever nature and howsoever arising) and the cost of all additional management time and effort expended by Venture in protecting or enforcing Venture's rights and interests acquired pursuant to this Agreement) as a consequence of the occurrence of such event. For the purposes of calculating the cost of such additional management time and effort Venture shall apportion the salary costs of its personnel involved on a pro rata basis according to the time spent by such personnel in managing the Client's account taking account only of such time as would not have been spent by such personnel had such event referred to in clause 19(2) not occurred. (ii) In addition to all other sums payable by the Client under this Agreement should an event occur which is referred to in clause 19(2) which event has the consequence of Venture not being able to earn from -13- the Client the fees and charges provided for in this Agreement for any period between the happening of such event and the earliest possible date upon which this Agreement could be validly terminated by notice from the Client, Venture shall be entitled to debit the Current Account with the amount of such fees and charges which Venture would have earned during such period had such event not occurred (or where such fees and charges are incapable of precise calculation, Venture's reasonable estimate of such fees and charges calculated in a reasonable manner consistent with the performance and forecasts of the Client prior to the happening of such event). (6) The Client agrees to be bound by a certificate (except as to manifest errors or errors in law) signed by the Company Secretary or a Director of Venture as to: (i) the amount of the losses, damage, costs and/or expenses (actual or contingent) referred to in clause 19(5)(i) and the fees and charges referred to in clause 19 (5)(ii) and/or (ii) the amount at any time owed by the Client to Venture or vice versa and however arising. (7) Unless specifically provided to the contrary termination of this Agreement shall neither affect the rights and obligations of either party in relation to Debts which are in existence on the date of termination nor the continued calculation of the Discount Charge. Such rights and obligations shall remain in full force and effect until duly extinguished. 20 EXCLUSION OF OTHER TERMS AND PRESERVATION OF VENTURE'S RIGHTS ------------------------------------------------------------- (1) This Agreement (including the appendices hereto and the Schedule and any special conditions set out therein and any procedural steps stipulated pursuant to clause 20(4)) and any other document executed as a deed by both parties contains all the terms agreed between Venture and the Client, to the exclusion of any agreement, statement or representation however made by or on behalf of Venture prior to the making of this Agreement. In the event of any conflict between the terms of this Agreement and the procedural steps then this Agreement shall prevail. Except to the extent provided for in this Agreement, no variation of this Agreement shall be valid unless it is in writing and signed on behalf of the Client and signed on behalf of Venture by a Director or the Company Secretary or by any person from time to time authorised to sign on behalf of Venture. (2) Venture's rights under this Agreement shall not be affected in any way by the granting of time or indulgence by Venture to the Client or to any other person nor by any failure or delay in the exercise of any right or option under this Agreement or otherwise. (3) Venture shall be entitled to rely upon any act done or document signed or any telex or facsimile or oral communication sent by any person purporting to act, sign, send or make on behalf of the Client despite any defect in or absence of authority vested in such person. (4) The Client shall carry out the procedural steps stipulated by Venture for the efficient working of this Agreement. (5) The Client's obligations to Venture shall continue without any right of set-off or counterclaim by the Client against Venture until all moneys due to Venture hereunder have been paid. (6) Venture may supply a copy of this Agreement or any variation of it to any party having security over the Client's assets. 21 COUNTER INDEMNITY ----------------- (1) Venture will from time to time grant an indemnity (the "Indemnity") to its bankers in respect of facilities granted or to be granted to its Clients (including the Client). (i) In consideration of Venture entering into the Agreement the Client undertakes:- -14- (a) to pay Venture upon demand any sum which may actually or contingently be payable by Venture to its bankers under the Indemnity; and (b) to indemnify Venture and keep Venture indemnified and hold Venture harmless against all losses which may be incurred, suffered, claimed and/or made against Venture under the Indemnity. (2) The Client irrevocably authorises Venture to debit to any account in the Client's name in Venture's records the whole or any part of:- (i) any sum demanded by Venture pursuant to clause 1 (i) (a) above; (ii) any losses and any sums that may prospectively or contingently become due under this Indemnity (3) Venture may also set off all and any Losses or sums demanded or due from the Client against any amount that Venture may at any time owe to the Client. Where the amount of any Losses or other amount due from the Client cannot be immediately ascertained then Venture may make a reasonable estimate of them for the purpose of making such debit or set off. (4) The Client agrees that any request or demand, made upon Venture appearing or purporting to be made by or on behalf of its bankers, for payment of any sum under the Indemnity shall be sufficient authority for Venture to make any such payment. Venture need not enquire whether any such amount shall in fact be due or whether the demand or request has been properly made. (5) Venture may at all times set off and retain against monies due to the Client under the Agreement such sums as may actually or contingently be due by Venture to its bankers. 22 PROVISION OF ELECTRONIC DATA INTERCHANGE SERVICES ------------------------------------------------- (1) Venture will provide access via their web site to their Electronic Data Interchange Facility and on line help screens. (2) The Client undertakes to Venture: (i) to ensure that all Messages it sends are correct and complete; (ii) to comply at all times with the requirements and directions appearing in Venture'sweb site; (iii) to use the Services only for the Client's own needs ; (iv) ensure that all persons within the Client's organisation keep the security access codes confidential and to change access codes when a person with such knowledge leaves their organisation; (v) to pay to Venture all charges which Venture may from time to time notify to the Client as being payable in respect of the provision by Venture at the Client's request of any on-site technical assistance in respect of the Services. (3) Commencement -15- Venture will advise the Client that the Service is available by issuing to the Client the initial security access code. (4) Mutual Obligations Each party undertakes: (i) to maintain adequate computer systems (hardware and software) for the use of the Services and computer record security; (ii) to use its best endeavours to maintain its computer systems virus free; (iii) to take reasonable precautions to prevent unauthorised access to the Services; (iv) to keep secret and confidential the method of operation of the Services, user identification codes, passwords, test keys, access codes and security procedures; (v) to notify the other promptly if it learns or suspects that there has occurred any failure or delay in receiving or transmitting any Message, any error or fraud in affecting the sending or receiving of any Message or any programming error or defect or corruption of any Message, and to co-operate with the other party in trying to remedy the same; (vi) to take all such appropriate steps and establish and maintain all appropriate procedures so as to ensure that as far as reasonably practicable Messages are properly stored, are not accessible to unauthorised persons, are not altered, lost or destroyed, and are capable of being retrieved only by properly authorised persons; (vii) to ensure that any Message containing confidential information as designated by the sender of the Message is maintained by the recipient in confidence and is not disclosed to any unauthorised person or used by the recipient other than for the purposes of the business transaction to which it relates. Messages shall not be regarded as containing confidential information to the extent that such information is in the public domain, or the recipient is already in receipt of it prior to transmission by the sender or receives the information from a third party entitled to disclose it. Any authorised disclosure to another person shall be on the same terms as to confidentiality as required by the sender or as contained in this clause; (viii) upon becoming aware of any breach of security in relation to any Message or the Electronic Data Interchange Facility, or in relation to the procedures implemented under this clause, to immediately inform the other party to this Agreement of such breach and shall use all reasonable endeavours to rectify the cause of such a breach as soon as possible; (ix) to notify the other party immediately if it knows of or suspects any misuse or likely misuse of, or breach or likely breach of secrecy in respect of the Services, any Message (or any part thereof) or any passwords, access codes or other similar information. (5) Where permitted by law, the parties may apply special protection to Messages by encryption thereof or by any other agreed means. (6) Logging & Copyright (i) Venture's Master Log of Messages and data received or transmitted by Venture shall in the absence of manifest error, be conclusive proof and evidence of -16- the Messages sent or received by Venture in connection with or referable to the Services and of the constituents of such Messages and the times at which they were sent or received. (ii) The copyright and all other rights in Venture's web site and in any software used or provided by Venture or Venture's licensors in connection with Venture's web site or the Services shall at all times remain vested in Venture, or if the terms of any contract that Venture has with any licensor, otherwise specified, in such licensor. The Client will not copy any of the same without Venture's prior written consent. (7) Liability (i) Every message sent by the Client must identify the sender. Venture may accept and act upon any message ostensibly sent by the Client even though it may not originate from the Client or the person purporting to send the message shall lack authority and Venture shall be under no obligation to enquire as to any such matter; (ii) The Client accepts that data available through the Services will be subject to change during the hours of business each day, particularly the details of items posted to the accounts of the Client with Venture and Venture shall not in any circumstances whatsoever have any liability to the Client for a change in such data occurring after the Client shall have acted in reliance thereon. In particular the Client should under no circumstances initiate payment to any third party based upon a message purporting to show that monies may be drawn by the Client from Venture. Venture shall confirm in accordance with its normal procedures the transmission of payments to the Client which payments shall only be made in accordance with the terms of the Agreement; (iii) Venture shall not be liable for or in respect of any loss or damage or any failure to comply, or any delay in complying with its obligations hereunder or any other obligation in respect of the Services which is caused directly or indirectly by; (a) any downtime, unavailability, failure or malfunction of any computer hardware equipment or software, or of any telephone line or other communication system, service, link or equipment, whether the property of Venture or the Client or any Internet service provider or any other party; (b) suspension, alteration or withdrawal of the Services; (c) any error, discrepancy, corruption, incorrect formatting of or ambiguity in any Message received by Venture; (d) industrial dispute, abnormal operating conditions, act or omission of the Client or any third party; (e) force majeure; (iv) Venture shall not be liable to the Client for any consequential, special secondary or indirect loss or damage or any loss of or damage to goodwill, profits or anticipated savings suffered by the Client by reason of any of the matters referred to in clause 22.4 (1) to (ix) inclusive (however caused); (v) The Client hereby agrees to indemnify Venture and keep Venture indemnified against all liabilities, damages and expenses arising out of the transmission or the receipt by Venture of incorrect, corrupted, ambiguous or inaccurate Messages (however caused); -17- (vi) All terms and conditions implied into this Agreement by law are expressly excluded to the fullest extent permissible by law; (vii) Nothing in this clause 22.6 shall operate to excuse Venture from liability for loss or damage caused to or suffered by the Client which loss or damage is directly attributable to the negligence or fraud of any of Venture's officers. (8) Messages (i) Each party agrees to accord the messages the same status as would be accorded to a document or to information sent other than by electronic means, unless such Messages can be shown to have been corrupted during or upon transmission to Venture; (ii) Where there is evidence that a Message has been corrupted or if any Message is identified or capable of being identified as incorrect it shall be re-transmitted by the sender as soon as practicable with a clear indication that it is a corrected Message. Any liability of the sender which would otherwise accrue from the sender's failure to comply with the provisions of this clause 22.8(ii) shall not accrue if clause 22.8(iii) applies; (iii) Notwithstanding clauses 22.8(i) and 22.8(ii) Venture will not be liable for the consequences of an incomplete or incorrect Message if the error is or should in all the circumstances be reasonably obvious to the Client. In such event the Client must immediately notify Venture thereof; (iv) If the recipient has reason to believe that a Message is not intended for him he should notify the sender and should delete from his system the information contained in such Message but not the record of its receipt. (9) Suspension and Withdrawal (i) Venture shall have the right without liability to the Client and without notice, at any time and from time to time, to suspend the operation of the Services whereupon no further Messages shall be sent or enquiries made by either party until Venture has agreed to re-activate the Services; (ii) This service can be suspended or withdrawn for any reason, clauses 22.(1), 22.(2) and 22.(9) shall survive withdrawal of this Service; (iii) Withdrawal of this service shall not affect any action required to complete or implement Messages, which are received by either of the parties prior to such withdrawal. (10) General Venture shall provide to the Client a telephone number and e-mail address for access to Venture's "help desk" support for the Services. Venture is not bound to maintain the availability of the "help desk" and when available the "help desk" will be staffed by Venture only during Venture's normal business hours. The "help desk" will only provide assistance with regard to the Services and not in respect of any other software applications. -18- 23 CONSTITUTION AND PLURALITY OF CLIENT ------------------------------------ (1) If the Client comprises a partnership: (i) references to the Client in clauses 12(5), 19(2) and 19(4) shall be treated as references to any one or more of the partners; (ii) all undertakings and warranties given to Venture shall be treated as having been given by every one of the partners; (iii) the liability of the partners to Venture shall be joint and several and Venture may release or compromise with any one or more of the partners, without affecting its rights against the others; (iv) Venture may in its absolute discretion treat any notice to or demand on any one or more of the partners as notice to or demand on them all and any notice to Venture by any one or more of the partners as notice by them all; (v) all the persons who have executed this Agreement warrant that all the present partners of such partnership are named herein and without prejudice to Venture's rights will advise Venture of any changes. (2) If the Client is an individual or a partnership (and not a body corporate): (i) except as provided in clause 19(2) this Agreement and all the terms hereof shall remain in full force and effect notwithstanding any change in the constitution of the Client whether by death retirement addition or otherwise; (ii) the Client shall fully co-operate with Venture, when requested, to enable this Agreement to be registered at the Bills of Sale Registry; (iii) the Client consents to Venture storing and processing information about the Client on Venture's and/or the ABN AMRO Holdings NV's computers and in any other way. The Client is aware that this will be used by Venture and other companies in the ABN AMRO Holdings NV to decide whether to continue with this Agreement or to vary its terms, for training purposes, credit or financial assessments, market and product analysis, making payments, recovering monies and preparing statistics. Information about the Client may also be used so that Venture can develop, improve and market its services to the Client and other clients and to protect Venture's interests (including establishing credit limits for the benefit of other clients or obtaining settlement of any liability of the Client to Venture). Venture may also use such information to prevent fraud and money laundering. (iv) Venture will tell the Client if Venture makes a significant decision about the Client solely using an automatic decision making process. The Client can them request a review by Venture. (v) Venture may from time to time make searches of the Client's record at one or more trade, credit reference or fraud prevention agencies. The Client's record with such agencies includes searches made and information given by other businesses. The details of Venture's search(es) will be kept by such agencies. (vi) Venture may give information about the Client, its finances, this Agreement and any Debts sold to Venture to:- (a) Venture's or the Client's insurers - so they can quote for and issue any policy or deal with any claims -19- (b) the Department of Trade and Industry in connection with an application under the Small Firms Loan Guarantee Scheme (c) any guarantor or indemnifier of this Agreement - so they can assess their obligations to Venture or so Venture can enforce such obligations (d) any business acting on Venture's behalf or the Client's behalf including accountants, bankers or solicitors - so they can carry out their services to Venture or the Client (e) any business providing a similar service to Venture to whom the Client may wish to transfer - to facilitate such a transfer (f) any business to whom Venture may wish to transfer the Debts - to facilitate such transfer (g) anyone else to whom Venture transfers its rights or duties under this Agreement - so they can comply with or enforce this Agreement (h) any introducer - so Venture can advise of income earned and commission due Venture may also give out information about the Client if Venture has a duty to do so or if the law allows Venture to do so. (vii) Unless the Client objects or has objected Venture (and other members of the ABN AMRO Holdings NV) may also contact the Client (by letter, telephone, fax or e-mail): (a) about services and products which they consider may be of interest to the Client; or (b) to carry out market research about their services and products (or those of third parties) (viii) Unless the Client objects or has objected the Client consents to Venture giving the Client's name, address, business details and a short description of the facility contained in this Agreement to: (a) carefully selected/reputable/associated businesses/Group Companies; (b) joint venture partners (c) brokers and introducers of business to Venture Finance Plc (d) the Department of Trade and Industry (e) insurers (ix) the Client consents to Venture disclosing or transferring information held about the Client to countries outside the European Economic Area. The Client acknowledges its awareness that such countries may not have a level of data protection equivalent to that of the United Kingdom. These disclosures and transfers will be made for the purposes of:- (a) debt collecting (b) processing (c) head office reporting (d) statistical analysis (x) For training and/or security purposes the Client's phone calls to Venture may be monitored and/or recorded (xi) In respect of information about its sole trader and partnership Debtors any such information disclosed to Venture will be accurate and fully comply with the Data Protection Act 1998. -20- 24 ASSIGNMENT OR DELEGATION BY CLIENT ---------------------------------- The Client shall not be entitled to assign or charge or declare a trust over any of its rights or delegate any of its obligations under this Agreement without the prior written consent of Venture. 25 NOTICES ------- (1) Any notice or demand to be served or made by Venture under the terms of this Agreement shall be validly served or made: (i) if handed to the Client or to any officer of or partner in the Client as appropriate; or (ii) if delivered, or sent by facsimile transmission or post, to the address stated in the Schedule or the address of the Client last known to Venture or to any address at which the Client carries on business; or (iii) if sent by electronic mail to the Client's e-mail address advised to Venture. Notice or demands served personally by Venture shall take effect upon such service and those made by facsimile shall be treated as being received upon transmission. Notices sent and demands made by Venture by post or electronic mail shall be conclusively deemed to have been received no later than 10.00 a.m. on the next Working Day following the posting or despatch. (2) Any notice to be served on Venture must be in writing and delivered by Recorded Delivery post to the registered office of Venture or such other office, as Venture shall notify to the Client for the purpose of this sub-clause. They shall take effect at the time of delivery so recorded. 26 APPLICABLE LAW -------------- The proper law of this Agreement both as to form and substance shall be the law of England and the Client hereby submits to the jurisdiction of the English Courts but without prejudice to the right of Venture to bring proceedings in the Courts of any territory in which the Client carries on business or may have assets. -21- THE SCHEDULE (forming part of an agreement for the purchase of Debts between Venture Finance PLC and the Client named in section 1(a) hereof) All references in this Schedule to definitions shall be those in Appendix A to this Agreement 1 (a) Name of Client (clause 1(2)): Xcel Power Systems Limited (b) Trading address of Client: Brunswick Road Cobbs Wood Ashford Kent TN23 1EB (c) Country of Incorporation: England (d) Registered Number: 00575679 (e) Nature of Client's business Design and Manufacture of (clauses 18(3)(ii) and 19(2)(x)) Power Supplies (f) Key provisions of Client's Sale Contract: (i) Currency Sterling (clause 18(3)(ii)(a)): (ii) Terms of payment Up to 90 days with maximum (clause 18(3)(ii)(a)): settlement discount of 5% (iii) Governing Law England (clause 18(3)(ii)(b)): 2 Commencement Date 12th November 2002 (clause 19(1) and definition of Commencement Date): 3 Minimum Period of Agreement Thirty Six Calendar Months (clause 19(1): 4 Period of Notice of Termination Six Calendar Months (clause 19(1)): 5 General Nature of Agreement Without Bad Debt (clauses 7(2)(i)(d) and (ii)(b), 11(1)(ii), Protection 11(2)(iii) and 13(1): 6 Class or description of Debts for approval All Debtors (clause 11(1)(viii)): -22- 7 Provision for Notice of Assignment No notice of assignment (clauses 12(2) and 12(3)): 8 Collection Arrangements The Client shall collect (clauses 7(2)(i) and (ii), 12(1) and 12(4)): the Debts as Agent of Venture in accordance with Clause 12(4) 9 Prepayment Percentage 85% (definition of Availability and definition of Prepayment Percentage): 10 Review Limit (pound)1,500,000 (Pounds (definition of Availability and definition Sterling One Million of Review Limit): Five Hundred Thousand) including an Advantage Facility of up to(pound) 225,000 (Pounds Sterling Two Hundred and Twenty Five Thousand), a Term Loan of up to (pound) 80,000 (Pounds Sterling Eighty Thousand) and a Cashflow Advance of up to (pound)350,000 (Pounds Sterling Three Hundred and Fifty Thousand) 11 Debtor Concentration Up to 50% on BAE and up to (clause 11(1)(i) and definition of Debtor 20% on all others unless Concentration): otherwise approved. 12 Funding Limit N/A (clause 11(1)(i) and definition of Funding Limit): 13 Recourse period 90 days from end of month (clause 11(1)(ii): of invoice date 14 Client Bad Debt Risk N/A (clauses 7(3) and 11(2)(iv)): 15 Factoring Fee, bank and other charges 0.25% plus VAT at the rate (clauses 9(1), 9(2) and 9(4) and definition applicable, plus Bank of Factoring Fee and Export Charges): charges 16 Discount Charge 2.0% over the Base Rate of (clause 9(3) and definition of Discount Venture's Bankers for the Charge): time being in force for Prepayments in Pounds Sterling. 2.0% over Venture cost of funds for the time being in force for Prepayments in agreed currencies other than Pounds Sterling. 17 (i) Collection Transfer Fee 6% of the notified amount (Clause 12(4)(ii)) of all Outstanding Debts 18 (ii) Revised Factoring Fee 2% (in substitution for (Clause 9(2)) the percentage stated in paragraph 15 above) -23- 18 Special Conditions: 1. Prior to Venture making any Prepayment or payment due to the Client under this Agreement a release of the Debts will be required from any Debenture which exists or which may come into existence in the future and Venture will take a Fixed and Floating Charge over the assets of Xcel Power Systems Limited. Venture will require priority from any other chargeholder in respect of all assets and will additionally require any other floating chargeholder to either: a) Not appoint a receiver without the prior written consent of Venture or b) Provide not less than 28 days prior written notice to Venture of any intention to appoint a receiver. Where the terms of any release require that all Prepayments or payments by Venture to the Client shall be sent to a bank account designated in the release then Venture will make payment accordingly. 2. The Agreement is to be supported by the Corporate Guarantee and Indemnity of Microtel International Inc. 3. The Agreement is to be supported by the Cross Corporate Guarantees and Indemnities of all associated companies, currently, Xcel Corporation Limited, Belix Power Conversion Limited and Belix Wound Components Limited. In support of Cross Corporate Guarantees and indemnities, Venture will take Fixed and Floating Charges over the assets of Xcel Corporation Limited, Belix Power Conversion Limited and Belix Wound Components Limited. 4. Prior to Venture making any Prepayment, Venture will require to be named as First Loss Payee and Joint Insured under the terms of the stock and Buildings Contents insurance policy held by the Client. 5. Prior to Venture making any Prepayment subordination of all loans to the Group from Microtel International Inc. will be required by Venture. 6. Venture will charge an Arrangement Fee of (pound)1,000 (Pounds Sterling One Thousand) plus VAT at the rate applicable. 7. Prior to Venture making any Prepayment confirmation and subordination of inter-company loans to the value of (pound)200,000 (Pounds Sterling Two Hundred Thousand) will be required by Venture. 8. All legal fees incurred by Venture in satisfaction of the conditions are for the account of the Client. 9. Venture will require signed audited accounts to be provided within six months of each year-end. Monthly management accounts (including both profit and loss account and balance sheet) will be required within 21 days of each month end. Should these not be received within the agreed timescale, Venture reserves the right to reduce the Prepayment Percentage. 10. Venture will require an annotated open item aged debt analysis and sales ledger control account reconciliation, agreed back to the Debts Purchased Account, within 5 working days of each month end. 11. Venture will require that a Letter be sent to all Debtors, which pay by BACS, advising them of the change in bank account details. -24- 12. Venture will require that a copy of the Client's Purchase Ledger be forwarded within 5 working days of each month end, and Venture reserves the right to hold contingency reserves in respect of contra accounts as it deems appropriate, such reserves shall be deemed as Disapproved Debts for the purposes of calculating Availability. 13. Venture requires that the Client obtain signed proofs of delivery or collection in respect of each Debt and that these be retained for inspection by Venture from time to time. 14. In the event that the balance of Debts more than 90 days from the end of month of invoice date exceeds 10% of the value of Debts Notified to Venture then Venture reserves the right to reduce the Prepayment Percentage. 15. Venture will carry out periodic audits during the Agreement at a cost to the Client of (pound)500 (Pounds Sterling Five Hundred) per audit day, plus VAT at the rate applicable. 16. Venture requires that the Fixed Charge cover, measured as the ratio of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), less non-financed capital expenditure to Total Interest Costs (net of any interest receivable) and scheduled term loan repayments, does not fall below 2 times when measured on a rolling 3 month basis. 17. The Eligible Collateral Formula for the AdVantage Facility in respect of stock will be Raw Materials x 25% plus Work in Progress x 25% less preferential creditors subject to an AdVantage Limit of (pound)225,000 (Pounds Sterling Two Hundred and Twenty Five Thousand). 18. Venture will require a detailed stock listing on a monthly basis. This report will be required within five working days of each period end and is to include details of all categories of stock and preferential creditor balances. 19. The Eligible Collateral Formula for the AdVantage Loan Facility in respect of Plant & Machinery will be plant & machinery x 100% subject to an AdVantage Limit of (pound)80,000 (Pounds Sterling Eighty Thousand). 20. Venture will require an annual valuation of any Fixed Assets detailed within the Eligible Collateral Formula to be conducted by a Valuer acceptable to Venture. 21. Either Venture will require a waiver from the Landlord in respect of any premises where stock and/or Plant & Machinery is located, which is made available to us as collateral: Or Venture will hold a reserve in respect of 3 months rent in respect of any premises where stock and/or Plant & Machinery is located, which is made available to us as collateral. 22. There will be a Cashflow Loan of (pound)350,000 (Pounds Sterling Three Hundred and Fifty Thousand). An annually renewable Arrangement Fee of (pound)3,500 (Pounds Sterling Three Thousand Five Hundred) plus VAT at the rate applicable will apply. -25- IN WITNESS whereof such of the parties have executed this Deed in the manner described below. EXECUTED AND DELIVERED AS A DEED by PAUL BEVERIDGE /S/ PAUL BEVERIDGE - -------------- ------------------ as Attorney for VENTURE FINANCE PLC in the presence of: PAUL ARPS /S/ PAUL ARPS - -------------- ------------------ Address of Witness SUSSEX HOUSE, PERRYMOUNT ROAD, HAYWARDS HEATH --------------------------------------------- on the 12 day of November 2002 Signed as a Deed by Xcel Power Systems Limited on the ) ) 23 day of October 2002 ) Acting by: C.T. OLIVA Director ) /S/ CARMINE T. OLIVA - ----------------------- ------------------------------- ) GRAHAM JEFFERIES Director/Secretary ) /S/ GRAHAM JEFFERIES - ----------------------- ------------------------------- -26- Signed and Delivered as a Deed by as attorney for and on behalf of ) LLOYDS TSB BANK Plc in the ) presence of ) Witness signature: (ILLEGIBLE) ------------------------------------------- Witness name: /S/ (ILLEGIBLE) ------------------------------------------------ Witness Address: LLOYDS TSB BANK plc HORLEY SECURITIES CENTRE P.O. BOX 104 13 HIGH STREET HORLEY SURREY RH6 7YA EXECUTED AND DELIVERED AS A DEED by PAUL BEVERIDGE /S/ PAUL BEVERIDGE - -------------- ------------------ as Attorney for VENTURE FINANCE PLC in the presence of: PAUL ARPS /S/ PAUL ARPS - -------------- ------------------ Address of Witness SUSSEX HOUSE, PERRYMOUNT ROAD, HAYWARDS HEATH, WEST SUSSEX ---------------------------------------------------------- Signed as a Deed by XCEL POWER SYSTEMS LIMITED acting by Graham Jefferies ) /S/ GRAHAM JEFFERIES ------------------------------- a director and ) Carmine T. Oliva ) /S/ CARMINE T. OLIVA ------------------------------- another director/the secretary ) -27- APPENDIX A - DEFINITIONS "ABN AMRO HOLDINGS NV" Any company in which ABN AMRO Holdings NV of the Netherlands has a beneficial shareholding either directly or indirectly or through any intermediary. "ASSOCIATE" An associate as defined in paragraph 184 of the Consumer Credit Act 1974 of the Client or a director or shareholder or employee of the Client. "AVAILABILITY" The lesser of: (i) an amount calculated by applying the Prepayment Percentage to the credit balance on the Debts Purchased Account after deducting therefrom the total value of Disapproved Debts, or (ii) the Review Limit, if any, shown in paragraph 10 of the Schedule and then, as applicable, either: (iii) adding thereto the credit balance on the Current Account, or (iv) deducting therefrom the Funds in Use. "BASE RATE" The Base Rate set by Venture Bankers subject to a minimum rate of 4% "CLIENT BAD DEBT RISK" For a Debtor the amount, if any, specified in paragraph 14 of the Schedule which will be subject to Venture's rights of Recourse and Reassignment regardless of the amount of any Credit Limit established in respect of the Debtor and the designation of Debts as Credited Approved Debts". "COLLECTION TRANSFER FEE" The fee referred to in clause 12(4)(ii). "COMMENCEMENT DATE" The date of the commencement of this Agreement which is specified in paragraph 2 of the Schedule. "CONVERSION RATE" The spot buying rate notified by Venture's Bankers for the Currency of the Debts. "CREDIT APPROVED DEBT" If the Schedule states that the general nature of this facility is to be "With Bad Debt Protection" then any Notified Debt which is (when aggregated with all other Outstanding Debts owing by the same Debtor): (i) for the time being within a Credit Limit; (ii) not one in respect of which the Client is in breach of any obligation under this Agreement; (iii) not in existence on the Commencement Date; (iv) not one in respect of which Venture has Recourse. shall be a Credit Approved Debt. "CREDIT LIMIT" A limit established by Venture in its absolute discretion in relation to a Debtor. "CURRENT ACCOUNT" Any account maintained by Venture in the name of the Client for the recording of transactions between Venture and the Client. "DATA LOG" The complete record of transmissions exchanged between Venture and the Client representing Messages. -28- "DEBT" Any book or other debt or monetary claim of any nature due or owing to the Client (including any financial obligation of a Debtor under a Sale Contract) together with any applicable tax or duty payable by the Debtor to the Client) and where the context so admits a part of a Debt. "DEBTOR" Any person, including any body of persons corporate or unincorporate, incurring any obligation to the Client (whether under a present, future or prospective Sale Contract or otherwise) and where the context so permits the person having the duty to administer the Debtor's estate upon death or Insolvency. "DEBTOR CONCENTRATION" The maximum amount of the Outstanding Debts of a single Debtor equivalent to the percentage specified in paragraph 11 of the Schedule of all Outstanding Debts. "DEBTS PURCHASED ACCOUNT" Any account maintained in the records of Venture in the name of the Client for the purpose of recording the Purchase Price of Debts (together with any Related Rights pertaining thereto). "DELIVERED" In the case of Goods, means they have been despatched to or to the order of the Debtor and, in the case of services, means they have been completed. "DISAPPROVED DEBT" A Debt which is disapproved in accordance with clause 11(1). "DISCOUNT CHARGE" The charge for Prepayments (if any) made by Venture. "ELECTRONIC DATA INTERCHANGE FACILITY" An Internet web site and/or any other form of electronic communication and/or software maintained and made available for the purpose of enabling data to be transmitted between Venture and the Client. "EXPORT CHARGES" A charge in addition to the Factoring Fee for each invoice. Additionally where the general nature of this facility is "With Bad Debt Protection", a charge for each credit application. A list of charges is available on request. "EXPORT DEBT" A Debt evidenced by an invoice addressed to a Debtor outside the United Kingdom. "FACTORING FEE" The fee referred to in clause 9(1). "FINANCIAL RECORDS" The ledgers, computer data, records, documents, disks, machine readable material on or by which the financial or other information pertaining to a Debt is recorded or evidenced and any equipment necessary for reading or amending the same. "FOREIGN CURRENCY DEBT" Any Debt which is represented by an invoice expressed otherwise than in Sterling or is payable otherwise than in Sterling in the United Kingdom in accordance with the Sale Contract giving rise to it. -29- "FORCE MAJEURE" In relation to any party, any circumstances beyond the reasonable control of that party (including without limitation, any strike, lock-out or other form of industrial action). "FUNDING LIMIT" In relation to a Debtor:- the amount specified in paragraph 12 of the Schedule or such other amount as Venture may from time to time in its absolute discretion determine. "FUNDS IN USE" The debit balance, if any, on the Current Account arrived at by aggregating all Prepayments made by Venture to the Client which have been debited to a Current Account (together with all sums treated as Prepayments by virtue of clause 9(5)) and deducting therefrom the aggregate of Debts transferred to the Current Account in accordance with clause 7(2). "GOODS" Any goods, services or work done with materials supplied or hiring which are the subject of a Sale Contract. "INSOLVENCY" (i) in the case of an individual:- bankruptcy or sequestration; (ii) in the case of a partnership:- winding up by the court or bankruptcy or sequestration; (iii) in the case of a body corporate:- winding up by the court or voluntary winding up by reason of its inability to pay its debts or the appointment of an administrator pursuant to the Insolvency Act 1986 or of a receiver of any part or all of its income or assets; and (iv) in any case:- any informal or voluntary arrangement (whether or not in accordance with the Insolvency Act 1986) with or for the benefit of the general body of creditors of the individual the partnership or the body corporate. "MESSAGE" Data and any e-mail or Internet message transmitted electronically between the parties via the Electronic Data Interchange Facility. "NOTIFICATION" An offer pursuant to Clause 4(1) or a notification of a Debt by the Client to Venture pursuant to clause 6(2) and a credit note pursuant to clause 10(1)(iii) and "Notified" and "Notify" shall be construed accordingly. "OFFER" An unconditional offer by the Client to sell a Debt and its Related Rights to Venture with full title guarantee to be made in such form and with such evidence of the performance of the Sale Contract as Venture may specify and where more than one Debt is at the same time subject to an Offer it shall be treated as an independent offer to sell to Venture each Debt so offered, which may be accepted or rejected by Venture entirely at Venture's absolute discretion. "ONSET OF INSOLVENCY" (i) in the case of sequestration or bankruptcy or winding up by the Court:- the date of the sequestration award or the bankruptcy or winding up order respectively; (ii) in the case of voluntary winding up:- the date of the effective resolution for winding up by members of the body corporate; (iii) in the case of the appointment of a receiver or administrator or judicial factor:- the date of his appointment; (iv) in the case of any arrangement:- the date when it is made; (v) in the case of a trust deed for creditors:- the date of its execution. -30- "OUTSTANDING DEBT" Any Debt which has been included in a Notification and which remains vested in Venture and unpaid; and "Outstanding" shall be construed accordingly. "PREPAYMENT" A payment made by Venture to the Client on account of any Purchase Price (before the Transfer Date thereof). "PREPAYMENT PERCENTAGE" The percentage of the Purchase Price of each Debt which is specified in paragraph 9 of the Schedule or such other higher or lower percentage of the Purchase Price that Venture may from time to time in its absolute discretion determine. "PURCHASE PRICE" The amount payable by Venture to the Client for each Debt (and any Related Rights) vested in Venture and calculated in accordance with clause 6(1). "REASSIGNMENT" The transfer of ownership of a Debt from Venture to the Client. "RECOURSE" The right of Venture to require the Client to repurchase a Debt (together with its Related Rights) at its Repurchase Price or such lesser amount as Venture may require. "RECOURSE DEBT" A Debt in respect of which Venture shall have Recourse as provided in clause 11(2). "RELATED RIGHTS" (i) all the Client's rights as an unpaid Client, under the Sale Contract giving rise to a Debt, other than rights relating to ownership of Goods but without any obligation on Venture to complete the Sale Contract; (ii) the benefit of all guarantees, indemnities, insurance's, instruments and securities given to or held by the Client in relation to such Debt; (iii) all cheques, bills of exchange and other instruments held by or available to the Client in relation to such Debt; (iv) the Financial Records; (v) the Transferred Goods; (vi) the right to call for the transfer to Venture of any Goods (except Transferred Goods) subject to a Sale Contract, except where ownership thereof has already vested in the Debtor. "REPURCHASE PRICE" In respect of a Recourse Debt the Notified amount of the Debt or the unrecovered proportion of it. "REVIEW LIMIT" The maximum Funds in Use as specified in paragraph 10 of the Schedule or as otherwise agreed by Venture. "REVISED FACTORING FEE" The fee referred to in the final sentence of clause 9(2). "RIGHT OF IMMEDIATE TERMINATION" The right of Venture to terminate this Agreement forthwith by notice in the circumstances described in clause 19(2), whether or not Venture shall have exercised that right. "SALE CONTRACT" A contract for the supply of Goods by the Client. -31- "SERVICES" The provision to the Client of an electronic messaging capability and of certain information via the Electronic Data Interchange Facility for the purposes of operating the Agreement. "STERLING" The lawful currency of Great Britain and Northern Ireland. "SUPPLEMENTARY DISCOUNT CHARGE" A sum calculated by applying to the amount of any payment made by Venture to the Client by CHAPS, as provided by clause 7(6), the rate per annum specified in paragraph 16 of the Schedule for a period of four calendar days. "TRANSFER DATE" The day on which the Purchase Price of a Debt is to be transferred from the Debts Purchased Account to the Current Account as specified in clause 7(2). "TRANSFERRED GOODS" (i) Any Goods included in the Sale Contract which shall not have been Delivered before the Debt relating to such Goods shall have been notified to Venture in breach of the terms hereof; or (ii) Goods which any Debtor shall reject or shall return to Venture or to the Client or indicate a wish so to do; or (iii) Goods which the Client or Venture recovers from the Debtor. "UNITED KINGDOM" Great Britain and Northern Ireland, but excluding the Channel Islands and the Isle of Man. "VENTURES BANKERS" HSBC Bank Plc or such other bank as Venture may from time to time, at its sole discretion, appoint as its bankers. "WORKING DAY" A day when both Venture and the bankers of Venture are both open for the usual conduct of business. -32- APPENDIX B - INTERPRETATION (1) In this Agreement except where the context otherwise requires: (i) the singular shall include the plural and vice versa; (ii) any of the three genders shall include the other two; (iii) references to Venture shall include Venture's successors and assigns; (iv) references to a "clause" (except where otherwise specified) are to clauses of this Agreement; (v) references to any statute shall be treated as including its statutory modification or re-enactment or any relevant subordinate legislation. (2) Headings to clauses are for reference only and shall not affect or limit the meaning or extent of any clause. (3) References in the Schedule to clauses are to clauses of this Agreement and references to the Appendix are to the Appendix to this Agreement. (4) References to "Agreement" shall be treated as including the Schedule and the Appendices. (5) Invalidity and Severability In the event of a conflict between any provision of clause 22 of the Agreement and any law regulation or decree affecting clause 22 of the Agreement then provision of clause 22 of the Agreement so affected shall be regarded as null and void or shall, where practicable, be curtailed and limited to the extent necessary to bring it within the requirements of such law regulation or decree but otherwise it shall not render null and void any other provision of clause 22 of the Agreement -33- EX-10.38 10 microtel_10kex10-38.txt EXHIBIT 10.38 (Venture Finance PLC letterhead) Date PRIVATE & CONFIDENTIAL The Directors Xcel Power Systems Limited Brunswick Road Cobbs Wood Ashford Kent TN23 1EB Dear Sirs: We refer to the Agreement for the Purchase of Debts between Xcel Power Systems Limited and Venture Finance PLC, which commenced on 12 November 2002 and advise you of the following amendments to the Schedule to the Agreement for the Purchase of Debts. Condition for Deletion: 18 Special Conditions: 5. Prior to Venture making any Prepayment subordination of all loans to the Group from Microtel International Inc. will be required by Venture Conditions to be amended as shown: (i) Currency Pounds Sterling, US Dollars and Euros (clause 18(3)(ii)(a): 18 Special Conditions: 7. Prior to making any Prepayment, Venture will require a Deed of Postponement in respect of the indebtedness of (pound)200,000 (Pounds Sterling Two Hundred Thousand) due from Xcel Corporation Limited to Microtel International Inc. Please sign and return the attached copy of this letter as acceptance of the amendments to the Schedule to the Agreement for the Purchase of Debts between Xcel Power Systems Limited and Venture Finance PLC.
Yours faithfully For and on behalf of VENTURE FINANCE PLC Amendments to Terms and Conditions agreed For and on behalf of Xcel Power Systems Limited /S/ PAUL BEVERIDGE As Attorney for Venture Finance PLC Signed /S/ CARMINE T. OLIVA Date 23-10-02 ----------------------------- -------- In the presence of PAUL ARPS /S/ PAUL ARPS Signed /S/ GRAHAM JEFFERIES Date 23-10-02 - --------------------------- ------------------ ----------------------------- --------
EX-10.39 11 microtel_10kex10-39.txt EXHIBIT 10.39 WAIVER OF DEFAULT AGREEMENT This Waiver of Default Agreement dated as of March 28, 2003 is made by and between XET CORPORATION, a New Jersey corporation ("XET"), CXR TELCOM CORPORATION, a Delaware corporation ("CXR") (CXR and XET shall collectively be referred to herein as the "BORROWER"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation ("LENDER"). RECITALS -------- Borrower and Lender have entered into that certain Credit and Security Agreement dated as of August 16, 2000 and amended by that certain First Amendment to Credit and Security Agreement dated September 29, 2000 and that certain Second Amendment to Credit and Security Agreement dated as of November 29, 2000 and that certain Third Amendment to Credit and Security Agreement dated September 20, 2001 and that certain Fourth Amendment to Credit and Security Agreement dated April 17, 2002 (the "CREDIT AGREEMENT"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. Borrower is currently in violation of the Minimum Net Income Covenant as set forth in Sections 6.14 of the Credit Agreement, which states that Borrower will maintain a YTD Net Income after corporate allocations of not less than Five Hundred Thousand Dollars ($500,000) for the fiscal year ending December 31, 2002. However, Borrower's actual YTD Net Income based on Borrower's internally prepared financial statement as of December 31, 2002 was noted as Four Hundred Six Thousand Seven Hundred Fifty-Eight Dollars ($406,758). Moreover, Borrower is also in violation of the Minimum Book Net Worth covenant as set forth in Sections 6.13 of the Credit Agreement, which states that Borrower will cause Microtel and its subsidiaries ("MICROTEL") to maintain a Book Net Worth, on a consolidated basis, of not less than Five Million Six Hundred Eighty Thousand Dollars ($5,860,000) for the fiscal year ending December 31, 2002. However, Microtel's actual consolidated Book Net Worth based on the Microtel's internally prepared financial statement as of December 31, 2002 was noted as Five Million Seven Hundred Thirty-Three Thousand Dollars ($5,733,000). Borrower has requested a waiver of Default for violating Section 6.13 and Section 6.14 of the Credit Agreement. 1. WAIVER OF DEFAULTS. Lender hereby waives enforcement of its rights against Borrower arising from Defaults or Events of Default resulting from Borrower's failure to maintain Book Net Worth and Minimum Net Income as set forth in Section 6.13 and 6.14 of the Credit Agreement prior to the date hereof. This waiver shall be effective only for the specific Default or Events of Default specified above, and in no event shall this waiver be deemed to be a waiver of enforcement of Lender's rights with respect to any other Default(s) or Event(s) of Default now existing or hereafter arising. Nothing contained in this agreement nor any communications between Borrower and Lender shall be a waiver of any rights or remedies Lender has or may have against Borrower, except as specifically provided herein. Lender hereby reserves and preserves all of its rights and remedies against Borrower under the Credit Agreement and the other Loan Documents. 1 2. NO OTHER CHANGES. Except as explicitly amended by this agreement, all of the terms and conditions of the Credit Agreement shall remain in full force and effect. 3. WAIVER FEE. Borrower shall pay Lender on the date hereof a fully earned, non-refundable fee in the amount of Two Thousand Five Hundred Dollars ($2,500) in consideration of Lender's execution of this agreement. 4. CONDITIONS PRECEDENT. This agreement, and the waiver set forth in Paragraph 1, hereof, shall be effective when Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to Lender in its sole discretion: (a) Payment of the fee described in Paragraph 3, (b) Such other matters as Lender may require. 5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Lender as follows: (a) Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by Borrower and constitute the legal, valid and binding obligation of Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by Borrower of this Amendment has been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate and provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to Borrower, or the articles of incorporation or by-laws of Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent of such representations and warranties relate solely to an earlier date. 6. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 2 7. NO OTHER WAIVER. Except as set forth in Paragraph 1 hereof, the execution of this Agreement shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by Lender, whether or not known to Lender and whether or not existing on the date of this Amendment. 8. COSTS AND EXPENSES. Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse Lender on demand for all costs and expenses incurred by Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, Borrower specifically agrees to pay all fees and disbursements of counsel to Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. Borrower hereby agrees that Lender may, at any time or from time to time in its sole discretion and without further authorization by Borrower, make a loan to Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fees required under Paragraph 5 hereof. 9. MISCELLANEOUS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. CXR TELCOM CORPORATION By: /S/ VINCENT L. MADDEN By: /S/ RANDOLPH D. FOOTE ---------------------------------- ---------------------------- Name: VINCENT L. MADDEN Name: RANDOLPH D. FOOTE -------------------------------- -------------------------- Title: ASST. VICE PRESIDENT Title: VP & CFO -------------------------------- ------------------------- XET CORPORATION By: /S/ RANDOLPH D. FOOTE ---------------------------- Name: RANDOLPH D. FOOTE -------------------------- Title: VP & CFO ------------------------- 3 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTOR The undersigned, a guarantor of the indebtedness of XET Corporation ("XET") and CXR Telcom Corporation (XET and CXR collectively the "BORROWER") to Wells Fargo Business Credit, Inc. ("LENDER") pursuant to that certain Guarantee dated as of August 16, 2000 (the "GUARANTEE"), hereby (i) acknowledge receipt of the foregoing Agreement; (ii) consent to the terms and execution thereof; (iii) reaffirm their obligations to Lender pursuant to the terms of the Guarantee; and (iv) acknowledge that Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of Borrower, or enter into any agreement or extent additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under the Guarantee for all of Borrower's present and future indebtedness to Lender. MICROTEL INTERNATIONAL, INC. By: /S/ RANDOLPH D. FOOTE ----------------------- Name: RANDOLPH D. FOOTE ------------------------------ Title: VP & CFO ----------------------------- 4 EX-10.40 12 microtel_10kex10-40.txt EXHIBIT 10.40 DESCRIPTION OF RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS Microtel International, Inc. matches up to the lesser of $2,000 and 20% of Randolph Foote's contributions to his 401(k) account. During 2002, those matching contribution amounted to $1,604. This matching arrangement was generally made available to all employees of MicroTel International, Inc. and provides for the same method of allocation of benefits between management and non-management participants. Also, XCEL Power Systems, Ltd. makes matching contributions of up to 6% of Graham Jefferies' salary to an executives' defined contribution plan. Other employees of XCEL Power Systems, Ltd. may receive matching contributions to a defined contribution plan of up to 4% of their salary. Amounts contributed to the defined contribution plans are intended to used to purchase annuities upon retirement. During 2002, 2001 and 2000, Mr. Jefferies received matching contributions of $9,000, $7,697 and $6,869, respectively. EX-23.1 13 microtel_10kex23-1.txt EXHIBIT 23.1 CONSENT OF GRANT THORNTON LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We hereby consent to the incorporation by reference in the Registration Statements (Nos. 333-74281, 333-71035, 333-69571, 333-12567 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, 2002. /S/ GRANT THORNTON LLP Los Angeles, California March 31, 2003 EX-23.2 14 microtel_10kex23-2.txt EXHIBIT 23.2 CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We hereby consent to the incorporation by reference in the Registration Statements (Nos. 333-74281, 333-71035, 333-69571, 333-12567 and 333-65528) on Form S-8 of our report dated February 25, 2002, relating to the consolidated financial statements and financial statement schedules of MicroTel International, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. /S/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Costa Mesa, California March 31, 2003 EX-99.1 15 microtel_10kex99-1.txt EXHIBIT 99.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report on Form 10-K of MicroTel International, Inc. (the "Company") for the year ended December 31, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Executive Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 31, 2003 By: /s/ CARMINE T. OLIVA ------------------------------- Carmine T. Oliva Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. ----------------- In connection with the annual report on Form 10-K of MicroTel International, Inc. (the "Company") for the year ended December 31, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Financial Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 31, 2003 By: /s/ RANDOLPH D. FOOTE ---------------------------- Randolph D. Foote Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----