-----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, OMjkTAuYhDi5WywHZR7bdRHaq+j6aPlkANd62zTcX8aVJJFM1EhEK0jptuWWyj21 lacp10MdywL4/EDFBg3UNw== 0001019687-04-001795.txt : 20040816 0001019687-04-001795.hdr.sgml : 20040816 20040816141800 ACCESSION NUMBER: 0001019687-04-001795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 04977820 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-Q 1 microtel_10q-063004.txt ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2004 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 Incorporation or Organization) Identification No.) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CALIFORNIA 91730 (Address of Principal Executive Offices) (Zip Code) (909) 987-9220 (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address And Former Fiscal Year, if Changed Since Last Report) Indicate by check 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 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 2, 2004, there were 24,695,458 shares of the issuer's common stock, $0.0033 par value, outstanding. ================================================================================
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003........................................................................ F-1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)..................................................... F-2 Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2004 and 2003 (unaudited)................................ F-3 Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2004 (unaudited)................................................... F-4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)........................................................... F-5 Notes to Condensed Consolidated Financial Statements (unaudited)................................... F-6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................... 2 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................................................... 12 ITEM 4. CONTROLS AND PROCEDURES....................................................................... 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS............................................................................. 14 ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.............. 14 ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 14 ITEM 5. OTHER INFORMATION............................................................................. 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 15 SIGNATURES .............................................................................................. 15 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) June 30, December 31, ASSETS 2004 2003 ------------ ------------ Current assets: (unaudited) Cash and cash equivalents $ 1,436 $ 1,174 Accounts receivable, net of allowance for doubtful accounts of $152 and $161, respectively 4,871 5,393 Inventories 6,109 6,683 Prepaid and other current assets 545 555 ------------ ------------ Total current assets 12,961 13,805 Property, plant and equipment, net 410 322 Goodwill, net of accumulated amortization of $1,073 and $1,050, respectively 2,464 2,447 Other assets 655 595 ------------ ------------ $ 16,490 $ 17,169 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,458 $ 2,882 Current portion of long-term debt 262 316 Accounts payable 1,582 1,637 Accrued expenses 2,769 3,274 ------------ ------------ Total current liabilities 7,071 8,109 Long-term debt, less current portion 853 819 Other liabilities 274 325 ------------ ------------ Total liabilities 8,198 9,253 ------------ ------------ Stockholders' equity: Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred Stock, $0.01 par value; issued and outstanding 200 shares and 1,000 shares, respectively (aggregate liquidation preferences of $1 and $4, respectively) 1 4 Common stock, $0.0033 par value. Authorized 50,000,000 shares; issued and outstanding 23,482,000 and 23,476,000, respectively 77 77 Additional paid-in capital 25,617 25,613 Accumulated deficit (17,447) (17,886) Accumulated other comprehensive income 44 108 ------------ ------------ Total stockholders' equity 8,292 7,916 ------------ ------------ $ 16,490 $ 17,169 ============ ============ See accompanying notes to condensed consolidated financial statements. F-1
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (in thousands, except per share amounts) Net sales $ 6,432 $ 6,834 $ 12,624 $ 12,502 Cost of sales 3,533 4,005 6,978 7,532 ------------ ------------ ------------ ------------ Gross profit 2,899 2,829 5,646 4,970 Operating expenses: Selling, general and administrative 2,067 1,918 4,284 3,616 Engineering and product development 312 246 595 467 ------------ ------------ ------------ ------------ Income from operations 520 665 767 887 Other expense: Interest expense (94) (117) (190) (213) Other expense (30) (47) (36) (61) ------------ ------------ ------------ ------------ Income before income taxes 396 501 541 613 Income tax expense 27 142 102 210 ------------ ------------ ------------ ------------ Net income $ 369 $ 359 $ 439 $ 403 ============ ============ ============ ============ Earnings per share: Net income: Basic $ 0.02 $ 0.02 $ 0.02 $ 0.02 ============ ============ ============ ============ Diluted $ 0.02 $ 0.02 $ 0.02 $ 0.02 ============ ============ ============ ============ See accompanying notes to condensed consolidated financial statements. F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2004 2003 2004 2003 --------- --------- --------- --------- (in thousands) Net income $ 369 $ 359 $ 439 $ 403 Other comprehensive income (loss): Foreign currency translation adjustment (62) 224 (64) 252 --------- --------- --------- --------- Comprehensive income $ 307 $ 583 $ 375 $ 655 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
Accumulated Series B Other Convertible Compre- Preferred Stock Common Stock Additional hensive ---------------------- ---------------------- Paid-In Accumulated Income Shares Amount Shares Amount Capital Deficit (Loss) Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2003 1 $ 4 23,476 $ 77 $ 25,613 $ (17,886) $ 108 $ 7,916 Preferred Series B conversions -- (3) 4 -- 3 -- -- -- Stock option exercise -- -- 2 -- 1 -- -- 1 Foreign currency translation adjustment -- -- -- -- -- -- (64) (64) Net profit -- -- -- -- -- 439 -- 439 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at June 30, 2004 1 $ 1 23,482 $ 77 $ 25,617 $ (17,447) $ 44 $ 8,292 ========== ========== ========== ========== ========== ========== ========== ========== F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2004 AND 2003 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, 2004 2003 ---------- ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 439 $ 403 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 128 167 Provision for doubtful account -- 40 Provision for obsolete/slow moving inventory 339 317 Warrants issued for services -- 19 Changes in operating assets and liabilities: Accounts receivable 522 17 Inventories 240 174 Other assets (77) (213) Accounts payable and accrued expenses (611) (312) ---------- ---------- Cash provided by operating activities 980 612 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (186) (2) Cash collected on note receivable -- 6 ---------- ---------- Cash provided by (used in) investing activities (186) 4 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in notes payable and long-term debt (443) (616) ---------- ---------- Cash (used in) financing activities (443) (616) ---------- ---------- Effect of exchange rate changes on cash (89) 259 Net increase in cash and cash equivalents 262 259 ---------- ---------- Cash and cash equivalents at beginning of period 1,174 254 ---------- ---------- Cash and cash equivalents at end of period $ 1,436 $ 513 ========== ========== Cash paid for: Income tax $ 170 $ 33 ========== ========== Interest $ 164 $ 210 ========== ========== See accompanying notes to condensed consolidated financial statements. F-5 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2004 AND 2003 (UNAUDITED) (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 Anderson Jacobson, formerly CXR, SA ("CXR-AJ") and XET Corporation ("XET"). XET and its subsidiaries design, develop, manufacture and market digital and rotary switches, power supplies and subsystem assemblies. CXR Telcom and CXR-AJ design, develop, manufacture and market network access and transmission 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. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of June 30, 2004 and December 31, 2003 and the results of operations and cash flows for the related interim periods ended June 30, 2004 and 2003. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements included in its 2003 annual report on Form 10-K. 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 ("SFAS") No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure." The following table sets forth the net income, net income available for common stockholders and earnings per share amounts for the periods presented as if the Company had elected the fair value method of accounting for stock options for all periods presented: F-6 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ----------------------------- 2004 2003 2004 2003 ------------ ------------ ------------- ------------ Net income: As reported $ 369,000 $ 359,000 $ 439,000 $ 403,000 Add: Stock based compensation expense included in reported net income, net of related tax effect -- -- -- -- Deduct: Stock-based compensation expense determined under the fair value-based method (34,000) (10,000) (48,000) (24,000) ------------ ------------ ------------- ------------ Pro forma $ 335,000 $ 349,000 $ 391,000 $ 379,000 ============ ============ ============= ============ Basic earnings per share: As reported $ 0.02 $ 0.02 $ 0.02 $ 0.02 Add: Stock based compensation expense included in reported net income, net of related tax effect -- -- -- -- Deduct: Stock-based compensation expense determined under the fair value-based method (0.01) -- -- -- ------------ ------------ ------------- ------------ Pro forma $ 0.01 $ 0.02 $ 0.02 $ 0.02 ============ ============ ============= ============ Diluted earnings per share: As reported $ 0.02 $ 0.02 $ 0.02 $ 0.02 Add: Stock based compensation expense included in reported net income, net of related tax effect -- -- -- -- Deduct: Stock-based compensation expensed determined under the fair value-based method (0.01) (0.01) -- -- ------------ ------------ ------------- ------------ Pro forma $ 0.01 $ 0.01 $ 0.02 $ 0.02 ============ ============ ============= ============
The above calculations include the effects of all grants in the periods 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 or loss in future periods. The calculations were based on a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 87% to 92%; risk-free interest rate of 3%; expected lives of 7 years. F-7 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED)
(2) EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts): Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ----------------------------- 2004 2003 2004 2003 ------------- ------------- ------------- ------------ (in thousands, except per share amounts) NUMERATOR: Net income $ 369 $ 359 $ 439 $ 403 Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock -- 2 -- 5 ------------- ------------- ------------- ------------ Income attributable to common stockholders $ 369 $ 357 $ 439 $ 398 ============= ============= ============= ============ DENOMINATOR: Weighted average number of common shares outstanding during the period 23,482 21,865 23,481 21,705 Incremental shares from assumed conversions of warrants, options and preferred stock 826 1,643 871 1,753 ------------- ------------- ------------- ------------ Adjusted weighted average number of outstanding shares 24,308 23,508 24,352 23,458 ============= ============= ============= ============ Basic earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.02 ============= ============= ============= ============ Diluted earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.02 ============= ============= ============= ============
F-8
MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED) The following options and warrants were excluded from the computation of diluted earnings per share as a result of the exercise prices exceeding the average market prices of the underlying shares of common stock. Three Months Ended June 30, ------------------------------------- 2004 2003 ------------ ------------ Options and warrants to purchase shares of common stock 911,000 1,300,000 ------------ ------------ Exercise prices $1.00 - $3.44 $0.35 - $3.44 ------------- ------------- Six Months Ended June 30, ------------------------------------- 2004 2003 ------------ ------------ Options and warrants to purchase shares of common stock 1,129,000 2,291,000 ------------ ------------ Exercise prices $1.00 - $3.44 $0.35 - $3.44 ------------- ------------- (3) INVENTORIES Inventories consist of the following: June 30, December 31, 2004 2003 ------------ ------------ Raw materials $ 3,162,000 $ 3,230,000 Work-in-process 1,347,000 1,963,000 Finished goods 1,550,000 1,490,000 ------------ ------------ $ 6,109,000 $ 6,683,000 ============ ============
(4) REPORTABLE SEGMENTS 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 and rotary switches, power supplies and subsystem assemblies. 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. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers and different design and manufacturing and marketing strategies. F-9
MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED) There were no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's audited consolidated financial statements included in its 2003 annual report on Form 10-K. Selected financial data for each of the Company's operating segments is shown below: Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ---------------- ---------------- ---------------- ---------------- Sales to external customers: Electronic Components $ 3,955,000 $ 4,378,000 $ 7,860,000 $ 7,849,000 Communications Equipment 2,477,000 2,456,000 4,764,000 4,653,000 ---------------- ---------------- ---------------- ---------------- $ 6,432,000 $ 6,834,000 $ 12,624,000 $ 12,502,000 ================ ================ ================ ================ Segment pretax profits (losses): Electronic Components $ 813,000 $ 985,000 $ 1,596,000 $ 1,659,000 Communications Equipment 141,000 99,000 130,000 (33,000) ---------------- ---------------- ---------------- ---------------- $ 954,000 $ 1,084,000 $ 1,726,000 $ 1,626,000 ================ ================ ================ ================ June 30, 2004 December 31, 2003 ---------------- ----------------- Segment assets: Electronic Components $ 8,641,000 $ 9,466,000 Communications Equipment 6,674,000 6,969,000 ---------------- ---------------- $ 15,315,000 $ 16,435,000 ================ ================ The following is a reconciliation of the reportable segment income and assets to the Company's consolidated totals: Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003 ------------- ------------- ------------- ------------- Total income for reportable segments $ 954,000 $ 1,084,000 $ 1,726,000 $ 1,626,000 Unallocated amounts: Unallocated general corporate expenses (558,000) (583,000) (1,185,000) (1,013,000) ------------- ------------- ------------- ------------- Consolidated income (loss) before income taxes $ 396,000 $ 501,000 $ 541,000 $ 613,000 ============ ============ ============ ============
F-10 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED) June 30, December 31, 2004 2003 ------------ ------------ Assets Total assets for reportable segments $15,315,000 $16,435,000 Other assets 1,175,000 734,000 ------------ ------------ Total consolidated assets $16,490,000 $17,169,000 ============ ============ (5) NEW ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are discussed under the heading "Impacts of New Accounting Pronouncements" in Item 2 of Part I of this report. (6) INCOME TAXES The effective tax rate for the three- and six-month periods ended June 30, 2004, is different than the 34% U.S. statutory rate primarily because of foreign taxes on foreign source income that cannot be offset by the utilization of U.S. tax loss carryforwards. (7) CREDIT FACILITIES On June 1, 2004, the Company's subsidiaries, XET Corporation and CXR Telcom Corporation, together with the Company acting as guarantor, obtained a credit facility from Wells Fargo Bank, N.A. for the Company's domestic operations. This facility is effective through July 1, 2005 and replaced the previous credit facility the Company had with Wells Fargo Business Credit, Inc. No prepayment penalty was due because the prior loan contract excluded from prepayment penalties loans replaced with new credit facilities from Wells Fargo Bank, N.A. Also, the new credit facility has no minimum interest. The new credit facility provides a $3,000,000 revolving credit line secured by accounts receivable and inventories. The first $2,000,000 of borrowings are not formula-based and do not have to be supported by specific receivables or inventory balances. The interest rate is variable and is adjusted monthly based on the prime rate plus 0.5%. The prime rate at June 30, 2004 was 4.25%. The new credit facility also provides a term loan of $150,000 secured by machinery and equipment, amortizable over 36 months at a variable rate equal to the prime rate plus 1.5%. In addition, Wells Fargo Bank, N.A. has provided the Company with $300,000 of credit available for the purchase of new capital equipment when needed. As of June 30, 2004, the Company had a balance owing under the new credit facility of $1,469,000, and the Company had $681,000 of availability. The credit facility is subject to the following financial covenants: debt service; annual profitability; debt-to-tangible net worth; current ratio; and minimum tangible net worth. As of June 30, 2004, the Company was in compliance with each of these covenants other than the current ratio covenant. The Company obtained a waiver of non-compliance of the current ratio covenant. F-11 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2004 AND 2003 (UNAUDITED) As of June 30, 2004, the Company's foreign subsidiaries had credit facilities, including lines of credit and term loans, with Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution, in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. At June 30, 2004, the balances outstanding under the Company's U.K., France and Japan credit facilities were $1,151,000, $739,000 and $64,000, respectively. (8) SUBSEQUENT EVENT Pursuant to the terms of a Stock Purchase Agreement executed on July 13, 2004, the Company acquired all of the issued and outstanding common stock of Larus Corporation, a California corporation ("Larus"). Larus is based in San Jose, California and engages in the manufacturing and sale of telecommunications products. Larus has one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"), which provides engineering services to Larus. The Company acquired all of the assets and liabilities of Larus in this transaction, including the intellectual property, cash, accounts receivable and inventories owned by each of Larus and Vista. The purchase price for the acquisition consisted of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common stock, $887,500 in the form of two short-term, zero interest promissory notes, $3,000,000 in the form of two subordinated secured promissory notes, and warrants to purchase up to an aggregate of 150,000 shares of the Company's common stock at $1.30 per share. In addition, the Company assumed $245,000 worth of accounts payable and accrued expenses and entered into an above-market real property lease with the sellers, which lease represents an obligation that exceeds the fair market value by approximately $756,000 and is part of the acquisition purchase price. The cash portion of the acquisition purchase price was funded with proceeds from the Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand. In determining the purchase price for Larus, the Company took into account the historical and expected earnings and cash flow of Larus, as well as the value of companies of a size and in an industry similar to Larus, comparable transactions and the market for such companies generally. The Company will consolidate the results of operations of Larus beginning from the date of acquisition, July 13, 2004. F-12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes to financial statements included elsewhere in this document. This report and our condensed 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 ability to efficiently and effectively integrate and operate the businesses of our newly-acquired subsidiaries, Larus Corporation ("Larus") and Vista Labs, Incorporated ("Vista"); 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 document is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. In particular, you should review our annual report on Form 10-K for the year ended December 31, 2003, and the "Risk Factors" we included in that report. Any of the factors described above could cause our financial results, including our net income or loss or growth in net income or loss to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. OVERVIEW Through three of our wholly-owned operating subsidiaries, XET Corporation ("XET"), CXR Telcom Corporation ("CXR Telcom"), and CXR Anderson Jacobson, formerly CXR, SA ("CXR-AJ"), 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: 2 o Electronic Components -- digital and rotary switches -- electronic power supplies -- subsystem assemblies o Communications Equipment -- network access and transmission 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 63.4%, 59.1% and 46.1% of our total net sales during 2003, 2002 and 2001, respectively, and 62.3% of our total net sales during the six months ended June 30, 2004. Sales of communications equipment and related services, primarily to private customer premises and public carrier customers, were 36.6%, 40.9% and 53.9% of our total net sales during 2003, 2002 and 2001, respectively, and 37.7% of our total net sales during the six months ended June 30, 2004. During the six months ended June 30, 2004, we achieved a 2.4% sales volume increase in our communications equipment segment as compared to the six months ended June 30, 2003, and the sales volume for our electronic components segment remained stable as compared to the comparable prior year period. As discussed below, our cost reductions and Asian outsourcing have reduced the breakeven point in our communications equipment segment, which enabled us to produce a small operating profit in this segment despite the historically low sales volume that reflects a three-year downturn in the telecommunications market. In 2003, our communications equipment segment sales increased slightly from the historically low level experienced in 2002. As a result of the telecommunications business downturn in 2001 and 2002, we experienced significant reductions in sales and gross profit as well as changes in our product mix. Consequently, during 2003 we shifted our overall focus toward growing our electronic components business. However, we also continued working to improve the growth and performance of our communications equipment business, particularly customer premises network access and transmission products. These efforts are continuing during 2004 and include our recent acquisition of Larus as discussed below, which acquisition is expected to enhance our performance based upon synergies anticipated to occur through the planned combination of the businesses of Larus and CXR Telcom. In addition to shifting our overall focus toward growing our electronic components business, during the first half of 2003 we reduced costs at CXR Telcom by reducing its work force and increasing our sourcing of test equipment components from Asian manufacturers that produce components for lower prices than we previously paid to our former suppliers. We have also reduced costs elsewhere in our communications equipment segment and lowered the breakeven point both in our United States and France operations through various cost-cutting methods, such as using Asian contract manufacturers, reducing facility rent expense and downsizing our administrative office in Paris, France. These cost-cutting efforts were a major factor in restoring our communications equipment segment to profitability in 2003 and the first half of 2004. However, 3 we cannot predict if the recent improvement in telecom sales we are experiencing indicates the end of the severe telecommunications market downturn or the extent to which the downturn may continue to negatively affect our ability to sell our products and services to customers in the telecommunications industry. In July 2004, we acquired Larus Corporation. Larus is a San Jose, California-based manufacturer and seller of telecommunications products that has one wholly-owned subsidiary, Vista Labs, Incorporated, which provides engineering services to Larus. The basic purchase terms of the acquisition are described below under the heading "Liquidity and Capital Resources." We will consolidate the results of operations of Larus beginning from the date of acquisition, July 13, 2004. Based on current sales projections, we anticipate that the Larus acquisition will be accretive to our earnings per share despite the associated expenses relating both to the payment of the purchase price and the operation and integration of Larus' business. We expect increased sales of our French subsidiary's products in the U.S. market as a result of sales and marketing support for the French products by Larus' U.S.-based sales and marketing staff. We intend to consolidate our CXR Telcom subsidiary's operations into the Larus facility, which we anticipate will result in significant administrative and facilities cost savings. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in the notes to the consolidated financial statements that are included in our annual report on Form 10-K for the year ended December 31, 2003. We believe our most critical accounting policies include inventory valuation, foreign currency translation and goodwill impairment. 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 communications 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. 4 FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries that together accounted for 68.8% of our net revenues, 70.6% of our assets and 70.3% of our total liabilities as of and for the year ended December 31, 2003, and 67.6% of our net revenues, 67.9% of our assets and 68.3% of our total liabilities as of and for the six months ended June 30, 2004. 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." 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 gains of $108,000 and $44,000 that were included as part of accumulated other comprehensive income within our balance sheets at December 31, 2003 and June 30, 2004, respectively. During the year ended December 31, 2003 and the six months ended June 30, 2004, we included foreign currency translation adjustments of a gain of approximately $705,000 and a loss of $64,000, respectively, under other comprehensive income or 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 these periods. 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 or lower than those we recorded for these periods. GOODWILL IMPAIRMENT 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. 5 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. If that were the case, we would have to record an expense in order to reduce the carrying value of our goodwill. 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. At December 31, 2003, the reported goodwill totaled $2,447,000 (net of accumulated amortization of $1,070,000). During 2003 and the six months ended June 30, 2004, we did not record any impairment losses related to goodwill and other intangible assets. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales:
Three months ended June 30, ------------------------------- 2004 2003 ------------ ------------ Net sales......................................... 100.0% 100.0% Cost of sales..................................... 54.9 58.6 ------- ------- Gross profit...................................... 45.1 41.4 Selling, general and administrative expenses........................................ 32.1 28.1 Engineering and product development expenses........................................ 4.9 3.6 ------- ------- Operating income.................................. 8.1 9.7 Interest expense.................................. (1.5) (1.7) Other income...................................... (0.5) (0.7) ------- ------- Income before income tax expense.................. 6.1 7.3 Income tax expense................................ 0.4 2.0 ------- ------- Net income ....................................... 5.7% 5.3% ======= =======
NET SALES. Net sales for the three months ended June 30, 2004 decreased by $402,000 (5.9%) to $6,432,000 as compared to $6,834,000 for the three months ended June 30, 2003. Net sales of our electronic components decreased by $423,000 (9.7%) to $3,955,000 for the three months ended June 30, 2004 as compared to $4,378,000 for the three months ended June 30, 2003. Net sales of U.K.-produced power supplies by XCEL Power Systems Ltd. ("XPS") decreased by $550,000 (27.3%) to $1,467,000 for the three months ended June 30, 2004 as compared to $2,017,000 for the three months ended June 30, 2003 due to deferral of some program delivery schedules and delay in placement of new engineering contracts. Net sales of subsystem assemblies by XPS increased by $24,000 (5.6%) to $450,000 from $426,000 in the 2003 period. We anticipate that during the remainder of 2004 we will experience a level of sales of power supplies similar to the level we experienced in the three months ended June 30, 2004. Net sales of switches 6 manufactured by XET Corporation's Digitran Division increased by $48,000 (3.3%) to $1,511,000 for the three months ended June 30, 2004 as compared to $1,463,000 for the three months ended June 30, 2003. Net sales of our communications equipment products and services increased by $21,000 (0.9%) to $2,477,000 for the three months ended June 30, 2004 as compared to $2,456,000 for the three months ended June 30, 2003, primarily due to an improvement in net sales of test equipment by CXR Telcom. Test equipment net sales increased by $118,000 (19.1%) to $735,000 for the three months ended June 30, 2004 as compared to $617,000 for the three months ended June 30, 2003 primarily due to increased market penetration into the central region of the U.S. CXR-AJ, our French subsidiary, produces all of our network access equipment and transmission products. Net sales of network access equipment and transmission products manufactured by CXR-AJ decreased by $52,000 (3.3%) to $1,535,000 for the three months ended June 30, 2004 as compared to $1,587,000 for the prior year period primarily due to reduced sales to distributors. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 45.1% for the three months ended June 30, 2004 as compared to 41.4% for the comparable period in 2003. In dollar terms, total gross profit increased by $70,000 (2.5%) to $2,899,000 for the three months ended June 30, 2004 as compared to $2,829,000 for the three months ended June 30, 2003. Gross profit for our electronic components segment decreased slightly in dollar terms by $32,000 (1.8%) to $1,694,000 for the three months ended June 30, 2004 as compared to $1,726,000 for the three months ended June 30, 2003, but increased as a percentage of related net sales to 42.8% for the three months ended June 30, 2004 from 39.4% for the three months ended June 30, 2003. This increase primarily resulted from increased profit margins of digital switches due to changes in product mix to a greater proportion of high margin military spare parts. The gross profit for digital switches increased to $912,000 from $731,000 in the prior year period, while the gross profit on power supplies decreased to $642,000 from $839,000 in the prior year period primarily due to lower sales volumes. The gross profit for XPS, producer of power supplies, decreased by $197,000 (23.5%) to $642,000 for the three months ended June 30, 2004 as compared to $839,000 for the three months ended June 30, 2003 due to lower sales. We expect 2004 sales of power supplies to be less than in 2003 due to scheduling of shipments, which we anticipate will result in a lower gross profit for power supplies in 2004 as compared to 2003. Gross profit for our communications equipment segment increased in dollar terms by $103,000 (9.3%) to $1,205,000 for the three months ended June 30, 2004 as compared to $1,102,000 for the three months ended June 30, 2003, and increased as a percentage of net sales to 48.6% for the three months ended June 30, 2004 from 44.8% for the three months ended June 30, 2003. The increase in gross profit was due to an increase in test equipment sales volume at CXR Telcom and the reduction in costs due to outsourcing to Asian sources. These factors were instrumental in improving our gross profit in test instruments and related sales to $526,000 as compared to a gross loss of $335,000 in the prior period. CXR-AJ's decrease in gross profit to $679,000 from $767,000 in the prior year period primarily was due to lower markups on sales of network access products and a larger proportion of resale products in the sales base as compared to the proportion of our in-house manufactured products in the sales base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $149,000 (7.8%) to $2,067,000 for the three months ended June 30, 2004 as compared to $1,918,000 for the three months ended June 30, 2003. Selling, general and administrative expenses also increased as a percentage of total net sales, to 32.1% of net sales during the three months ended June 30, 2004 from 28.1% of net sales during the comparable period in 2003. The increase in selling, general and administrative expenses was due to several factors discussed below. 7 Sales commissions decreased by $61,000 (11.6%) to $69,000 for the three months ended June 30, 2004 as compared to $130,000 for the three months ended June 30, 2003, primarily due to lower negotiated commission rates established by CXR Telcom for its sales representatives. However, other sale expenses increased by $174,000 (36.5%) to $651,000 for the three months ended June 30, 2004 as compared to $477,000 for the three months ended June 30, 2003, primarily due to the addition of a sales and marketing manager at XET for the marketing of new rotary switches and also an increase in marketing and sales activities at CXR Telcom. In addition, CXR-AJ incurred $31,000 of marketing costs attending the Hanover Fair tradeshow during the three months ended June 30, 2004. Administration expenses increased slightly by $35,000 (2.7%) to $1,346,000 for the three months ended June 30, 2004 as compared to $1,311,000 for the three months ended June 30, 2003. Legal and accounting fees increased $34,000 and administrative costs of our electronic component segment increased $48,000 for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003. There was also a net decrease in wages of $90,000 for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003 primarily due to a reversal of an accrual for executive bonuses. We anticipate that selling, general and administrative expenses for the remainder of 2004 will remain at levels higher than those we experienced last year due to increased investments in new products, sales and marketing expenses for our new low profile rotary and digital switches, our increased activity in searching for and analyzing potential acquisitions, our expansion of our investor relations program and our increased corporate governance activities in response to the Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the Securities and Exchange Commission. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities. These expenses increased by $66,000 (26.8%) to $312,000 for the three months ended June 30, 2004 as compared to $246,000 for the three months ended June 30, 2003. The majority of the increase was due to additional research and engineering for new low profile rotary and digital switches, including the hiring of two engineers. We expect this higher level of expense to continue throughout 2004 as we develop our new family of rotary switches. OTHER INCOME AND EXPENSE. Interest expense decreased by $23,000 (19.7%) to $94,000 for the three months ended June 30, 2004 as compared to the three months ended June 30, 2003 due to reduced balances and reduced costs associated with a new credit facility for our U.S. operations. We expect annual costs associated with this new credit facility to be approximately $150,000 less the costs associated with our previous facility. Other expense was $30,000 for the three months ended June 30, 2004 as compared to $47,000 for the three months ended June 30, 2003. INCOME TAX EXPENSE. Income tax expense for the three months ended June 30, 2004 was $27,000 as compared to $142,000 for the comparable prior year period. The reduction was primarily due to reduced U.K. income tax payables related to an increase in available loss carryforwards. NET INCOME. The net income for the three months ended June 30, 2004 increased $10,000 (2.8%) to $369,000 as compared to the net income of $359,000 for the three months ended June 30, 2003. The primary reason for the increase was reduced tax provisions for U.K. taxes. This reduction was almost totally offset with the impact of increased sales and marketing expenses to launch new products and improve the marketing and sales efforts in promoting our existing products. We continue to closely monitor costs throughout our operations and have reduced costs through staffing reductions in our communications equipment operations in the United States. 8 SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales:
Six months ended June 30, ------------------------------- 2004 2003 ------------ ------------ Net sales......................................... 100.0% 100.0% Cost of sales..................................... 55.3 60.2 ------- ------- Gross profit...................................... 44.7 39.8 Selling, general and administrative expenses........................................ 33.9 28.9 Engineering and product development expenses........................................ 4.7 3.8 ------- ------- Operating income.................................. 6.1 7.1 Interest expense.................................. (1.5) (1.7) Other expense..................................... (0.3) (0.5) ------- ------- Income before income tax expense.................. 4.3 4.9 Income tax expense................................ 0.8 1.7 ------- ------- Net income ....................................... 3.5% 3.2% ======= =======
NET SALES. Net sales for the six months ended June 30, 2004 increased by $122,000 (1.0%) to $12,624,000 as compared to $12,502,000 for the six months ended June 30, 2003. Net sales of our electronic components increased slightly by $11,000 (0.1%) to $7,860,000 for the six months ended June 30, 2004 as compared to $7,849,000 for the six months ended June 30, 2003. Net sales of power supplies by XPS decreased by $1,089,000 (26.4%) to $3,037,000 for the six months ended June 30, 2004 as compared to $4,126,000 for the six months ended June 30, 2003 due to the deferral of some program delivery schedules. We anticipate that during the remainder of 2004 we will experience a level of sales of power supplies similar to the level we experienced in the first half of 2004. Despite the decrease in net sales of power supplies, during the six months ended June 30, 2004, XPS realized a $411,000 (96.5%) increase in sales of electronic subsystem assemblies to $837,000 as compared to $426,000 in the prior year period. Net sales of switches manufactured by XET Corporation's Digitran Division increased by $303,000 (11.2%) to $3,000,000 for the six months ended June 30, 2004 as compared to $2,697,000 for the six months ended June 30, 2003. The increase in net sales of digital switches was a result of increased orders from our customers for military equipment spare parts that we believe were partially due to the war in Iraq. Sales of electronic subsystem assemblies manufactured by the Digitran Division were negligible in the current period and the comparable prior year period. Net sales of our communications equipment products and services for the six months ended June 30, 2004 increased by $111,000 (2.4%) to $4,764,000 for the six months ended June 30, 2004 as compared to $4,653,000 for the six months ended June 30, 2003. The increase was primarily due to an improvement in net sales of test equipment by CXR Telcom. Test equipment net sales increased by $309,000 (34.0%) to $1,217,000 for the six months ended June 30, 2004 as compared to $908,000 for the six months ended June 30, 2003 primarily due to increased market penetration into the central region of the U.S. and $115,000 of sales related to a new contract for test equipment for an agency of the Department of Homeland Security. We believe that follow-on orders for this project are probable and likely will be sizable. 9 Net sales of network access equipment and transmission products manufactured and marketed by CXR-AJ decreased by $163,000 (4.9%) to $3,136,000 for the six months ended June 30, 2004 as compared to $3,299,000 for the prior year period. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 44.7% for the six months ended June 30, 2004 as compared to 39.8% for the comparable period in 2003. In dollar terms, total gross profit increased by $676,000 (13.6%) to $5,646,000 for the six months ended June 30, 2004 as compared to $4,970,000 for the six months ended June 30, 2003. Gross profit for our electronic components segment increased in dollar terms by $239,000 (7.7%) to $3,335,000 for the six months ended June 30, 2004 as compared to $3,096,000 for the six months ended June 30, 2003, and increased as a percentage of related net sales to 42.4% for the six months ended June 30, 2004 from 39.4% for the six months ended June 30, 2003. This increase primarily resulted from increased profit margins of digital switches due to changes in product mix to a greater proportion of high margin military spare parts. The gross profit for XPS, producer of power supplies, decreased to $1,251,000 from $1,436,000 in the prior year period primarily due to lower shipments. Gross profit for our communications equipment segment increased in dollar terms by $438,000 (23.4%) to $2,311,000 for the six months ended June 30, 2004 as compared to $1,873,000 for the six months ended June 30, 2003, and increased as a percentage of net sales to 48.5% for the six months ended June 30, 2004 from 40.3% for the six months ended June 30, 2003. The increase in gross profit was due to the increase in sales volume at CXR Telcom, the reduction in costs due to outsourcing to Asian sources and the sale of demo equipment. These factors were instrumental in improving our gross profit in test instruments and related sales to $887,000 for the six months ended June 30, 2004 as compared to a gross profit of $312,000 in the prior year period. The gross margin for test instruments increased significantly to 66.3% for the six months ended June 30, 2004 from 29.6% for the prior year period. CXR-AJ's decrease in gross profit to $1,423,000 for the six months ended June 30, 2004 from $1,562,000 for the prior year period primarily was due to lower sales of network access products, and CXR-AJ's gross margin declined to 41.5% for the six months ended June 30, 2004 from 43.4% for the prior year period due to a larger proportion of resale products in the sales base as compared to the proportion of our in-house manufactured products in the sales base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $668,000 (18.5%) to $4,284,000 for the six months ended June 30, 2004 as compared to $3,616,000 for the six months ended June 30, 2003. Selling, general and administrative expenses also increased as a percentage of total net sales, to 33.9% of net sales during the six months ended June 30, 2004 from 28.9% of net sales during the comparable period in 2003. The increase in selling, general and administrative expenses was due to several factors discussed below. Sales expenses increased by $364,000 (31.1%) to $1,536,000 for the six months ended June 30, 2004 from $1,172,000 for the prior year period due to the addition of a sales manager and increased marketing expenses for new low profile rotary and digital switches, test instruments and network access products. Administrative expenses increased by $303,000 (12.4%) to $2,747,000 for the six months ended June 30, 2004 from $2,444,000 for the six months ended June 30, 2003 due to increases in legal, accounting and investor relations expenses and investment banking fees that primarily related to searching for and analyzing potential acquisitions. We anticipate that selling, general and administrative expenses for the remainder of 2004 will remain at levels higher than those we experienced last year due to our increased activity in searching for and analyzing potential acquisitions, our expansion of our investor relations program and our increased corporate governance activities in response to the Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the Securities and Exchange Commission. 10 ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities. These expenses increased by $128,000 (27.4%) to $595,000 as compared to $467,000 in the prior year period. The majority of the increase was due to additional research, engineering and patent expenses for our new patent-pending low profile rotary and digital switch products, including the hiring of two engineers. We expect this higher level of expense to continue throughout 2004 as we continue to develop our new family of low profile rotary and digital switches. OTHER INCOME AND EXPENSE. Interest expense decreased to $190,000 for the six months ended June 30, 2004 as compared to $213,000 for the six months ended June 30, 2003 due to lower loan balances. Other expense was $36,000 for the six months ended June 30, 2004 as compared to $61,000 for the six months ended June 30, 2003. INCOME TAX EXPENSE. Income tax expense for the six months ended June 30, 2004 was $102,000 as compared to $210,000 for the comparable prior year period. The majority of the tax relates to U.K. income tax. The reduction was primarily due to reduced U.K. income tax payable related to an increase in available loss carryfowards. NET INCOME. The net income for the six months ended June 30, 2004 increased by $36,000 (8.9%) to $439,000 as compared to the net income of $403,000 for the six months ended June 30, 2003. The largest contribution to this positive change was the decrease in the U.K. tax provision. Also contributing was the increase in net sales and gross profit of CXR Telcom in our communications equipment segment, which improved its operating income by $489,000. This was offset by lower operating earnings derived from power supplies and network access equipment. We continue to closely monitor costs throughout our operations and have reduced 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 downsizing our administrative office in Paris, France. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 2003 and the six months ended June 30, 2004, 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 June 30, 2004, we had working capital of $5,890,000, which represented a $194,000 improvement from working capital of $5,696,000 at December 31, 2003. Also at June 30, 2004, we had an accumulated deficit of $17,447,000, accumulated other comprehensive gains of $44,000, cash and cash equivalents of $1,436,000, and $4,871,000 of accounts receivable. At December 31, 2003, we had an accumulated deficit of $17,886,000, accumulated other comprehensive gains of $108,000, cash and cash equivalents of $1,174,000, and $5,393,000 of accounts receivable. Cash provided by our operating activities totaled $980,000 for the six months ended June 30, 2004 as compared to cash provided by our operating activities of $612,000 for the six months ended June 30, 2003. This $368,000 increase in cash provided by operations during the six months ended June 30, 2004 as compared to the comparable prior year period primarily resulted from improved accounts receivable collections. 11 Cash used in our investing activities totaled $186,000 for the six months ended June 30, 2004 as compared to $4,000 for the six months ended June 30, 2003. Included in the results for the six months ended June 30, 2004 are $186,000 of fixed asset purchases for telecommunications, management information systems and support of prototype and production quantities of our new low profile rotary and digital switches. Cash used in our financing activities totaled $443,000 for the six months ended June 30, 2004 as compared to $616,000 of cash used in our financing activities for the first six months of 2003, due to repayment of bank debt in both periods. On June 1, 2004, our subsidiaries, XET Corporation and CXR Telcom Corporation, together with MicroTel acting as guarantor, obtained a credit facility from Wells Fargo Bank, N.A. for our domestic operations. This facility is effective through July 1, 2005 and replaced the previous credit facility we had with Wells Fargo Business Credit, Inc. No prepayment penalty was due because the prior loan contract excluded from prepayment penalties loans replaced with new credit facilities from Wells Fargo Bank, N.A.. Also, the new credit facility has no minimum interest. The new credit facility provides a $3,000,000 revolving credit line secured by accounts receivable and inventories. The first $2,000,000 of borrowings are not formula-based and do not have to be supported by specific receivables or inventory balances. The interest rate is variable and is adjusted monthly based on the prime rate plus 0.5%. The prime rate at June 30, 2004 was 4.25%. The new credit facility also provides a term loan of $150,000 secured by machinery and equipment, amortizable over 36 months at a variable rate equal to the prime rate plus 1.5%. In addition, Wells Fargo Bank, N.A. has provided us with $300,000 of credit available for the purchase of new capital equipment when needed. As of June 30, 2004, we had a balance owing under the new credit facility of $1,469,000, and we had $681,000 of availability. The credit facility is subject to the following financial covenants: debt service; annual profitability; debt to tangible net worth; current ratio; and minimum tangible net worth. As of June 30, 2004, we were in compliance with each of these covenants other than the current ratio covenant. We obtained a waiver of non-compliance of the current ratio covenant. As of June 30, 2004, our foreign subsidiaries had credit facilities, including lines of credit and term loans, with Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution, in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. At June 30, 2004, the balances outstanding under our U.K., France and Japan credit facilities were $1,151,000, $739,000 and $64,000, respectively. XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from Johnan Shinkin Bank. The loan is amortized over five years and carries an annual fixed interest rate of 3.25%. The balance of the loan as of June 30, 2004 was $64,000 using the exchange rate in effect at that date for conversion of Japanese yen into United States dollars. Our U.K. subsidiary, XPS, obtained a credit facility with Venture Finance PLC as of November 12, 2002. This credit facility expires on November 15, 2005. Using the exchange rate in effect at June 30, 2004 for the conversion of British pounds into United States dollars, the facility is for a maximum of $2,730,000 and includes a $637,000 unsecured cash flow loan, a $146,000 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 (4.5% at June 30, 2004) plus 2%, and is subject to a minimum rate of 4% per annum. There are no financial performance covenants applicable to this credit facility. 12 On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a subsidiary of ABN AMRO N.V. The credit line is for a maximum of $1,459,000, based on the exchange rate in effect at June 30, 2004 for the conversion of euros into United States dollars. This represents a substantial increase over the total of the credit lines that CXR-AJ had with its former lenders. In addition, CXR-AJ has outstanding term loans with two other French banks totaling $57,000. The IFN Finance facility is secured by accounts receivable and carries an annual interest rate of 1.6% above the French "T4M" rate. The French T4M rate was 2.03% as of May 31, 2004. Our backlog was $8,403,000 as of June 30, 2004 as compared to $11,476,000 as of June 30, 2003. The reduction in backlog was primarily due to substantial shipments under long-term contracts by XPS in the U.K. Our backlog as of June 30, 2004 was 90.8% 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 9.2% 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. We took various actions to reduce costs in 2003. These actions were intended to reduce the cash outlays of our telecommunications equipment segment to match its revenue rate. We also have contracted with Asian manufacturers for production of test equipment components at lower prices than we previously paid to our former suppliers and have received shipments of quality components from these new Asian suppliers. We included in our annual report on Form 10-K for the year ended December 31, 2003 a contractual obligations table that outlines payments due from us or our subsidiaries under our lines of credit and other significant contractual obligations through 2008, exclusive of interest. During the six months ended June 30, 2004, no material changes in this information occurred outside the ordinary course of business. As described above under the heading "Overview," we acquired Larus and Vista in July 2004. As a result of the acquisition, we acquired all of the assets and liabilities of Larus, including the intellectual property, cash, accounts receivable and inventories owned by each of Larus and Vista. The purchase price consisted of $1,000,000 in cash, the issuance of 1,213,592 shares of our common stock, $887,500 in the form of two short-term, zero interest promissory notes that have since been repaid, $3,000,000 in the form of two subordinated secured promissory notes, and warrants to purchase up to an aggregate of 150,000 shares of our common stock at $1.30 per share. In addition, we assumed $245,000 worth of accounts payable and accrued expenses and entered into an above-market seven-year real property lease with the sellers, which lease represents an obligation that exceeds the fair market value by approximately $756,000. We funded the cash portion of the Larus acquisition purchase price using proceeds from our credit facility with Wells Fargo Bank, N.A. and our cash on-hand. In determining the purchase price for Larus, we took into account the historical and expected earnings and cash flow of Larus, as well as the value of companies of a size and in an industry similar to Larus, comparable transactions and the market for such companies generally. 13 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, including the additional expenses relating to the Larus acquisition. If, however, our capital requirements or cash flow vary materially from our current projections or if unforeseen circumstances occur, we may require additional financing. Depressed global economic conditions may cause prolonged declines in investor confidence 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 during the periods presented. IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," an amendment of SFAS Nos. 87, 88 and 106, and a revision of SFAS No. 132. The statement is effective for fiscal years and interim periods ending after December 15, 2003. The statement revises employers' disclosures about pension plans and other post-retirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS Nos. 87, 88 and 106. The new rules require additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The adoption of this statement has not adversely affected our financial condition or results of operations. In December 2003, the FASB issued FASB Staff Position No. ("FSP") 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." The guidance is effective for initial interim or annual fiscal periods ending after December 7, 2003. FSP 106-1 permits employers that sponsor post-retirement benefit plans (plan sponsors) that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Act"). Without FSP 106-1, plan sponsors would be required under SFAS No. 106 to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date the President signed the Act into law. The adoption of this statement has not adversely affected our financial condition or results of operations. In December 2003 the Securities and Exchange Commission issued Staff Accounting Bulletin No. ("SAB") 104, "Revenue Recognition." SAB 104 codifies, revises and rescinds certain sections of SAB 101, in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and Securities and Exchange Commission rules and regulations. Accordingly, there is no impact to our results of operations, financial position or cash flows as a result of the issuance of SAB No. 104. 14 In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities." FIN 46R requires the application of either FIN 46 or FIN 46R by public entities to all special purpose entities ("SPEs") created prior to February 1, 2003, as of December 31, 2003 for calendar year-end companies. FIN 46R is applicable to all non-SPEs created prior to February 1, 2003 at the end of the first interim or annual period ending after March 15, 2004. For all entities created subsequent to January 31, 2003, public entities were required to apply the provisions of FIN 46. The adoption of FIN 46 did not adversely affect our consolidated financial position, results of operations or cash flows. The adoption of FIN 46R for SPEs did not impact our consolidated financial position, results of operations or cash flows, and we do not believe the adoption of FIN 46R for non-SPEs will adversely affect our consolidated financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. A substantial portion of our notes payable and long-term debt have variable interest rates based on the prime interest rate and/or the lender's base rate, which exposes us to risk of earnings loss due to changes in such interest rates. Our annual report on Form 10-K for the year ended December 31, 2003 contains information about our debt obligations that are sensitive to changes in interest rates under "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." There were no material changes in those market risks during the six months ended June 30, 2004. ITEM 4. 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 June 30, 2004, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) 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. During the quarter ended June 30, 2004, there were no changes in our "internal controls over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 15 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are not a party to any material pending legal proceedings. ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES. We have not paid dividends on our common stock to date. Our credit facility with Wells Fargo Bank, N.A. 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. Pursuant to the terms of a Stock Purchase Agreement executed on July 13, 2004, we acquired all of the issued and outstanding common stock of Larus Corporation, a California corporation ("Larus"). Prior to the acquisition, all of the common stock of Larus was owned by Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988. Larus is based in San Jose, California and engages in the manufacturing and sale of telecommunications products. Larus has one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"), which provides engineering services to Larus. We acquired all of the assets and liabilities of Larus in this transaction, including the intellectual property, cash, accounts receivable and inventories owned by each of Larus and Vista. We intend to use these acquired assets for the same purpose for which they were used by each of Larus and Vista. The purchase price for the acquisition consisted of $1,000,000 in cash, the issuance of 1,213,592 shares of our common stock, $887,500 in the form of short-term, zero interest promissory notes that have been subsequently paid in full, $3,000,000 in the form of two subordinated secured promissory notes, and warrants to purchase up to an aggregate of 150,000 shares of our common stock at $1.30 per share. In addition, we assumed $245,000 worth of accounts payable and accrued expenses and entered into an above-market real property lease with the sellers, which lease represents an obligation that exceeds fair market value by approximately $756,000. The cash portion of the acquisition purchase price was funded with proceeds from our credit facility with Wells Fargo Bank, N.A. and cash on-hand. In determining the purchase price for Larus, we took into account the historical and expected earnings and cash flow of Larus, as well as the value of companies of a size and in an industry similar to Larus, comparable transactions and the market for such companies generally. 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- Number Description ------ ----------- 2.1 Stock Purchase Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott; Warren P. Yost; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (1) 2.2 Subordinated Secured Promissory Note dated July 13, 2004 in the principal amount of $1,681,318.68 made by MicroTel International Inc. in favor of Noel C. McDermott Revocable Living Trust dated December 19, 1995 2.3 Subordinated Secured Promissory Note dated July 13, 2004 in the principal amount of $1,318,681.32 made by MicroTel International Inc. in favor of Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.4 Pledge and Security Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Collateral Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.5 Intercreditor Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.6 Continuing Guarantee dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.7 Continuing Guarantee dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.8 Continuing Guarantee dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.9 Security Agreement dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 17 2.10 Security Agreement dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.11 Security Agreement dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 10.1 Commercial Lease dated July 13, 2004 between MicroTel International Inc., as Tenant, and Noel C. McDermott and Warren P. Yost, as Landlord, for the premises located at 894 Faulstich Court, San Jose, California 10.2 Credit Facility Letter Agreement dated June 1, 2004 between Wells Fargo Bank, N.A., XET Corporation and CXR Telcom Corporation 10.3 Revolving Line of Credit Note dated June 1, 2004 in the principal amount of up to $3,000,000 made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.4 Term Note dated June 1, 2004 in the principal amount of $150,000 made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.5 Continuing Guaranty made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.6 Security Agreement Equipment made by XET Corporation in favor of Wells Fargo Bank, N.A. 10.7 Security Agreement Equipment made by CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.8 Continuing Security Agreement Rights to Payment and Inventory made by XET Corporation in favor of Wells Fargo Bank, N.A. 10.9 Continuing Security Agreement Rights to Payment and Inventory made by CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 18 31 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ------------------ (1) Filed with the Securities and Exchange Commission on July 28, 2004 as an exhibit to our Form 8-K for July 13, 2004 and incorporated herein by reference. (b) Reports on Form 8-K ------------------- None. SIGNATURES Pursuant to the requirements of 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. MICROTEL INTERNATIONAL, INC. Dated: August 16, 2004 By: /S/ CARMINE T. OLIVA -------------------------------------------- Carmine T. Oliva, Chairman of the Board, Chief Executive Officer (principal executive officer) and President By: /S/ RANDOLPH D. FOOTE -------------------------------------------- Randolph D. Foote, Chief Financial Officer (principal financial and accounting officer) 19 EXHIBITS ATTACHED TO THIS REPORT Number Description ------ ----------- 2.2 Subordinated Secured Promissory Note dated July 13, 2004 in the principal amount of $1,681,318.68 made by MicroTel International Inc. in favor of Noel C. McDermott Revocable Living Trust dated December 19, 1995 2.3 Subordinated Secured Promissory Note dated July 13, 2004 in the principal amount of $1,318,681.32 made by MicroTel International Inc. in favor of Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.4 Pledge and Security Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Collateral Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.5 Intercreditor Agreement dated July 13, 2004 between MicroTel International Inc.; Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.6 Continuing Guarantee dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.7 Continuing Guarantee dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.8 Continuing Guarantee dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.9 Security Agreement dated July 13, 2004 made by Larus Corporation in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.10 Security Agreement dated July 13, 2004 made by Vista Labs Incorporated in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 2.11 Security Agreement dated July 13, 2004 made by CXR Telcom in favor of Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 19, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 20 10.1 Commercial Lease dated July 13, 2004 between MicroTel International Inc., as Tenant, and Noel C. McDermott and Warren P. Yost, as Landlord, for the premises located at 894 Faulstich Court, San Jose, California 10.2 Credit Facility Letter Agreement dated June 1, 2004 between Wells Fargo Bank, N.A., XET Corporation and CXR Telcom Corporation 10.3 Revolving Line of Credit Note dated June 1, 2004 in the principal amount of up to $3,000,000 made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.4 Term Note dated June 1, 2004 in the principal amount of $150,000 made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.5 Continuing Guaranty made by XET Corporation and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.6 Security Agreement Equipment made by XET Corporation in favor of Wells Fargo Bank, N.A. 10.7 Security Agreement Equipment made by CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 10.8 Continuing Security Agreement Rights to Payment and Inventory made by XET Corporation in favor of Wells Fargo Bank, N.A. 10.9 Continuing Security Agreement Rights to Payment and Inventory made by CXR Telcom Corporation in favor of Wells Fargo Bank, N.A. 31 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 21 EX-2.1 2 microtel_10qex2-1.txt EXHIBIT 2.1 EXECUTION COPY STOCK PURCHASE AGREEMENT AMONG MICROTEL INTERNATIONAL INC. AND THE SHAREHOLDERS OF LARUS CORPORATION JULY 13, 2004 TABLE OF CONTENTS ----------------- PAGE ---- 1. Definitions...........................................................1 2. Purchase and Sale of Company Shares...................................6 2.1 Basic Transaction............................................6 2.2 Purchase Price...............................................6 2.3 The Closing..................................................6 2.4 Deliveries at the Closing....................................6 3. Representations and Warranties Concerning the Transaction.............7 3.1 Representations and Warranties of the Sellers................7 3.2 Representations and Warranties of the Buyer..................9 4. Representations and Warranties Concerning the Company and the Subsidiary...........................................................10 4.1 Organization, Qualification, and Corporate Power............10 4.2 Capitalization..............................................10 4.3 Noncontravention............................................11 4.4 Brokers' Fees...............................................11 4.5 Title to Assets.............................................11 4.6 Subsidiary..................................................11 4.7 Financial Statements........................................12 4.8 Events Subsequent to Most Recent Fiscal Year End............12 4.9 Undisclosed Liabilities.....................................14 4.10 Legal Compliance............................................14 4.11 Tax Matters.................................................14 4.12 Real Property...............................................16 4.13 Intellectual Property.......................................17 4.14 Tangible Assets.............................................19 4.15 Inventory...................................................19 4.16 Contracts...................................................19 4.17 Notes and Accounts Receivable...............................20 4.18 Powers of Attorney..........................................20 4.19 Insurance...................................................20 4.20 Litigation..................................................21 4.21 Product Warranty............................................21 4.22 Product Liability...........................................22 4.23 Employees...................................................22 4.24 Employee Benefits...........................................22 4.25 Guaranties..................................................24 4.26 Environmental, Health, and Safety Matters...................24 4.27 Certain Business Relationships with the Company and the Subsidiary..................................................25 4.28 Stock Repurchases...........................................25 4.29 Disclosure..................................................26 -i- PAGE ---- 5. Post-Closing Covenants...............................................26 5.1 General.....................................................26 5.2 Litigation Support..........................................26 5.3 Transition..................................................26 5.4 Confidentiality.............................................26 5.5 Non-Competition.............................................27 5.6 Preparation and Delivery of Closing Balance Sheets..........29 5.7 Certain Tax Payments........................................29 6. Conditions to Obligation to Close....................................29 6.1 Conditions to Obligation of the Buyer.......................29 6.2 Conditions to Obligation of the Sellers, McDermott and Yost....................................................31 7. Remedies for Breaches of This Agreement..............................32 7.1 Survival of Representations and Warranties..................32 7.2 Indemnification Provisions for Benefit of the Buyer.........32 7.3 Indemnification Provisions for Benefit of the Sellers.......33 7.4 Matters Involving Third Parties.............................33 7.5 Determination of Adverse Consequences.......................34 7.6 Set Off.....................................................34 7.7 Limitations on Indemnification Matters......................34 8. Tax Matters..........................................................35 8.1 Tax Periods Beginning Before and Ending After the Closing Date................................................35 8.2 Cooperation on Tax Matters..................................35 8.3 Tax Sharing Agreements......................................36 9. Miscellaneous........................................................36 9.1 Press Releases and Public Announcements.....................36 9.2 No Third-Party Beneficiaries................................36 9.3 Entire Agreement............................................36 9.4 Succession and Assignment...................................37 9.5 Counterparts................................................37 9.6 Headings....................................................37 9.7 Notices.....................................................37 9.8 Governing Law...............................................38 9.9 Amendments and Waivers......................................38 9.10 Severability................................................38 9.11 Expenses....................................................38 9.12 Construction................................................38 9.13 Incorporation of Exhibits and Schedules.....................39 9.14 Specific Performance........................................39 9.15 Submission to Jurisdiction..................................39 -ii- Exhibit A - Form of Short Term Note Exhibit B - Form of Long Term Note Exhibit C - List of Buyer's Banks and Lending Institutions Exhibit D - Form of Warrant Agreement Exhibit E - Financial Statements Exhibit F - Form of Registration Rights Agreement Exhibit G - Form of Lock-Up Agreement Exhibit H - Form of Facility Lease Agreement Exhibit I - Form of Consulting Agreement - McDermott Exhibit J - Form of Consulting Agreement - Yost Exhibit K - Form of Opinion of Counsel to the Sellers Exhibit L - Form of Opinion of Counsel to the Buyer -iii- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "AGREEMENT") is entered into on July 13, 2004, by and among MICROTEL INTERNATIONAL INC., a Delaware corporation (the "BUYER"), NOEL C. McDERMOTT, an individual ("MCDERMOTT"), WARREN P. YOST, an individual ("YOST"), and the holders of the common stock of LARUS CORPORATION, a California corporation (the "COMPANY"), identified in the signature block at the end of this Agreement (each individually a "SELLER" and collectively the "SELLERS"). The Buyer, McDermott, Yost, and the Sellers are each referred to herein as a "PARTY" and collectively referred to herein as the "PARTIES." R E C I T A L S --------------- A. The Sellers in the aggregate own all of the outstanding common stock of the Company, which common stock comprises all of the capital stock of the Company. B. This Agreement contemplates a transaction in which the Buyer will purchase from the Sellers, and the Sellers will sell to the Buyer, all of the outstanding common stock of the Company in return for cash and other consideration described in SECTION 2.2. NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the Parties agree as follows. 1. DEFINITIONS. "ACCREDITED INVESTOR" has the meaning set forth in Regulation D promulgated under the Securities Act. "ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses. "AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "AFFILIATED GROUP" means any affiliated group within the meaning of Code Section 1504(a) or any similar group defined under a similar provision of state, local or foreign law. "BASIS" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence. "BUSINESS" means the manufacturing and sale of telecommunications products. "BUYER" has the meaning set forth in the preface above. "BUYER NOTES" means the Short Term Notes and the Long Term Notes. "BUYER SECURITIES" means, collectively, the Buyer Shares, the Buyer Notes, the Warrants and the Warrant Shares. "BUYER SHARES" has the meaning set forth in SECTION 2.2(d). "CLOSING" has the meaning set forth in SECTION 2.3. "CLOSING BALANCE SHEETS" has the meaning set forth in SECTION 5.6. "CLOSING DATE" has the meaning set forth in SECTION 2.3. "COBRA" means the requirements of Part 6 of Subtitle B of Title I of ERISA and Code Section 4980B and of any similar state law. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPANY" has the meaning set forth in the preface above. "COMPANY SHARE" means any share of the common stock, no par value per share, of the Company. "CONFIDENTIAL INFORMATION" means any information concerning the businesses and affairs of the Company or the Subsidiary that is not already generally available to the public. "CONSULTING AGREEMENTS" has the meaning set forth in SECTION 6.1(k). "CONTROLLED GROUP" has the meaning set forth in Code Section 1563. "DEFERRED INTERCOMPANY TRANSACTION" has the meaning set forth in Reg. Section 1.1502-13 under the Code. "DISCLOSURE SCHEDULE" has the meaning set forth in SECTION 4. "EMPLOYEE BENEFIT PLAN" means any "EMPLOYEE BENEFIT PLAN" (as such term is defined in ERISA Section 3(3)) and any other employee benefit plan, program or arrangement of any kind. "EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA Section 3(2). "EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA Section 3(1). -2- "ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" means each entity which is treated as a single employer with the Company for purposes of Code Section 414. "EXCESS LOSS ACCOUNT" has the meaning set forth in Reg. Section 1.1502-19 under the Code. "FACILITY LEASE AGREEMENT" has the meaning set forth in SECTION 6.1(j). "FCC" means the Federal Communications Commission. "FIDUCIARY" has the meaning set forth in ERISA Section 3(21). "FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.7. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "INDEMNIFIED PARTY" has the meaning set forth in SECTION 7.4. "INDEMNIFYING PARTY" has the meaning set forth in SECTION 7.4. "INTELLECTUAL PROPERTY" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data and related documentation), (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). -3- "KNOWLEDGE" means actual knowledge. "LIABILITY" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "LOCK-UP AGREEMENTS" has the meaning set forth in SECTION 6.1(i). "LONG TERM NOTES" has the meaning set forth in SECTION 2.2(c). "MCDERMOTT" shall mean Noel C. McDermott, an individual. "MOST RECENT BALANCE SHEET" means the balance sheet of the Company or the Subsidiary contained within the Most Recent Financial Statements of the Company or the Subsidiary, as the case may be. "MOST RECENT FINANCIAL STATEMENTS" has the meaning set forth in SECTION 4.7. "MOST RECENT FISCAL MONTH END" has the meaning set forth in SECTION 4.7. "MOST RECENT FISCAL YEAR END" has the meaning set forth in SECTION 4.7. "MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37). "ORDINARY COURSE OF BUSINESS" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). "PARTY" has the meaning set forth in the preface above. "PBGC" means the Pension Benefit Guaranty Corporation. "PERSON" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "PRODUCTS" means the products manufactured by the Company. "PROHIBITED TRANSACTION" has the meaning set forth in ERISA Section 406 and Code Section 4975. "PURCHASE PRICE" has the meaning set forth in SECTION 2.2. "REGISTRATION RIGHTS AGREEMENT" has the meaning set forth in SECTION 6.1(h). "REPORTABLE EVENT" has the meaning set forth in ERISA Section 4043. -4- "RESTRICTED PERIOD" has the meaning set forth in SECTION 5.5(a). "RESTRICTED TERRITORY" means all states, territories, districts, provinces and commonwealths of the United States and Canada in which the Company has conducted any aspect of the Business, and all states, territories, districts and commonwealths of the United States in which the Buyer conducts its business (including, without limitation, the Business of the Company) hereafter. "SEC" means the United States Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SECURITIES EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "SELLER" has the meaning set forth in the preface above. "SHORT TERM NOTES" has the meaning set forth in SECTION 2.2(b). "STOCK REPURCHASES" means (i) the repurchase by Vista of an aggregate of 3,000 shares of common stock of Vista held by shareholders of Vista other than Larus, and (ii) the repurchase by Larus of and aggregate of 18,750 of common stock of Larus held by shareholders of Larus other than McDermott or Yost, which repurchases were made effective immediately prior to the Closing. "SUBSIDIARY" means Vista Labs Incorporated, a California corporation, a wholly-owned subsidiary of the Company. "TAX" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code Section 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "TAX RETURN" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "THIRD PARTY CLAIM" has the meaning set forth in SECTION 7.4. -5- "WARRANTS" has the meaning set forth in SECTION 2.2(e). "WARRANT AGREEMENT" has the meaning set forth in SECTION 2.2(e). "WARRANT SHARES" has the meaning set forth in SECTION 2.2(e). "YOST" shall mean Warren P. Yost, an individual. 2. PURCHASE AND SALE OF COMPANY SHARES. 2.1 BASIC TRANSACTION. On and subject to the terms and conditions of this Agreement, the Buyer agrees to purchase from each of the Sellers, and each of the Sellers agrees to sell to the Buyer, all of his or its Company Shares for the consideration specified below in SECTION 2.2. The consideration set forth in Section 2(b) below shall be the aggregate consideration delivered by the Buyer to the Sellers. Such aggregate consideration shall be divided pro-rata among the Sellers based upon their respective percentage ownership of the Company Shares on the Closing Date in relation to all of the Company Shares. 2.2 PURCHASE PRICE. The Buyer agrees to pay to the Sellers at the Closing an aggregate purchase price (the "PURCHASE PRICE") comprised of the following elements: (a) $1,000,000 cash; (b) zero interest promissory notes ("SHORT TERM NOTES"), in form and substance as set forth in EXHIBIT A, issued by the Buyer in the aggregate principal amount equal to $887,500; (c) subordinated secured promissory notes (the "LONG TERM NOTES"), in form and substance as set forth in EXHIBIT B, issued by the Buyer in the aggregate principal amount of $3,000,000; (d) 1,213,592 shares of the Buyer's common stock (the "BUYER SHARES"); and (e) warrants (the "WARRANTS") to purchase up to an aggregate of 150,000 shares of the Buyer's common stock (the "WARRANT SHARES") pursuant to the terms of the Warrant Agreements (the "WARRANT AGREEMENTS") in form and substance as set forth in EXHIBIT D. 2.3 THE CLOSING. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall take place at the offices of Rutan & Tucker, LLP, located at 611 Anton Boulevard, 14th Floor, Costa Mesa, California 92626, commencing at 9:00 a.m. local time on such date as the Buyer and the Sellers may mutually determine (the "CLOSING DATE"); PROVIDED, HOWEVER, that the Closing Date shall be no later than July 9, 2004. 2.4 DELIVERIES AT THE CLOSING. At the Closing, (i) the Sellers will deliver to the Buyer the various certificates, instruments, and documents referred to in SECTION 6.1, (ii) the Buyer will deliver to the Sellers the various certificates, instruments, and documents referred to in SECTION 6.2 below, (iii) each of the Sellers will deliver to the Buyer by facsimile (with -6- hard copy to follow within five business days after the Closing) stock certificates representing all of his or its Company Shares, endorsed in blank or accompanied by duly executed assignment documents, and (iv) the Buyer will deliver to each of the Sellers their respective portion of the aggregate consideration specified in SECTION 2.2 (except for certificates representing Buyers Shares, which certificates shall be delivered to the Sellers within five business days after the Closing). 3. REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION. 3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. Each Seller, severally and not jointly, represents and warrants to the Buyer as follows: (a) AUTHORIZATION OF TRANSACTION. Such Seller has full power and authority to execute and deliver this Agreement and to perform his or its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of such Seller, enforceable in accordance with its terms and conditions. Such Seller need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. (b) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which such Seller is subject, or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which such Seller is a party or by which he is bound or to which any of his assets is subject. (C) BROKERS' FEES. Such Seller has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement other than the fees payable by the Sellers to Trudeau and Trudeau Associates, Inc. and such fees payable by the Sellers to Trudeau and Trudeau Associates, Inc. shall be paid in full by the Sellers. (d) SECURITIES LAW COMPLIANCE. (i) such Seller has a net worth sufficient to bear the economic risk (including the entire loss) of his or its investment made in the Buyer Securities; (ii) such Seller is an "accredited investor," as such term is defined in Rule 501 of Regulation D promulgated under the rules and regulations of the Securities Act; (iii) such Seller has adequate means of providing for his or its current cash needs and personal contingencies and has no need for liquidity in this investment in the Buyer Securities and has no reason to anticipate any change in his or its personal circumstances, financial or otherwise, which may cause or require any sale or distribution by such Seller of all or any part of the Buyer Securities acquired by him or it herein; -7- (iv) by reason of such Seller's business or financial experience or the business or financial experience of such Seller's professional advisor(s) who are unaffiliated with and who are not compensated by the Buyer or any Affiliate of the Buyer, directly or indirectly, such Seller has the capacity to protect his or its own interests in connection with an investment in the Buyer Securities; (v) such Seller understands that the he or it is acquiring the Buyer Securities without being furnished any prospectus or offering circular, other than a copy of this Agreement, a copy of the Buyer's annual report on Form 10-K for the year ended December 31, 2003 and a copy of the Buyer's quarterly report on Form 10-Q for the quarterly period ended March 31, 2004; (vi) no representations or warranties have been made to such Seller by the Buyer or any employee or agent of the Buyer regarding the Buyer and in entering into this Agreement, such Seller is not relying on any information, other than as a result of the independent investigation of the Buyer by such Seller, and no guarantee of any profit or return on his or its investment made in the Buyer Securities has been made to such Seller; (vii) in evaluating the merits and risk of this investment, such Seller has relied on the advice of his or its personal tax advisor, investment advisor and/or legal counsel; (viii) such Seller is aware that the Buyer Securities have not been registered or qualified, nor is registration or qualification contemplated (except where such Seller is a party to the Registration Rights Agreement, to the extent provided for therein), with the SEC under the Securities Act or any state securities law. Accordingly, the Buyer Securities may not be sold or otherwise transferred or hypothecated unless they are subsequently registered or qualified under the Securities Act or applicable laws or if, in the opinion of counsel, an exemption from registration or qualification thereunder is available and the transaction will not jeopardize the availability of the exemptions under applicable federal and state securities laws relied upon by the Buyer in connection with the offering in which such Seller acquired his or its Buyer Securities; (ix) such Seller acknowledges that the Buyer Securities were not offered by means of any general solicitation or advertising; (x) such Seller is acquiring his or its Buyer Securities solely for his or its own account, for investment purposes only, and not with an intent to sell, or for resale in connection with any distribution of all or any portion of the Buyer Securities within the meaning of the Securities Act; (xi) the address of such Seller set forth on the signature pages hereto is the principal residence of such Seller, if such Seller is an individual, or the principal business address of such Seller, if such Seller is a business or other entity, and that all offers to such Seller have been made only in the state specified in such address; and -8- (xii) such Seller acknowledges and agrees that the Buyer Notes, Warrant Agreement, certificates representing the Buyer Shares and, when issued, the certificates representing the Warrant Shares shall each contain such restrictive legends as may be required under applicable state and federal securities laws with respect to the transferability of such securities. (e) COMPANY SHARES. Such Seller holds of record and owns beneficially the number of Company Shares set forth next to his or its name in SECTION 4.2 of the Disclosure Schedule, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act and state securities laws), Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. The Seller is not a party to any option, warrant, purchase right, or other contract or commitment that could require such Seller to sell, transfer, or otherwise dispose of any capital stock of the Company (other than this Agreement). Such Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of the Company. 3.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents and warrants to the Sellers as follows: (a) ORGANIZATION OF THE BUYER. The Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. (b) AUTHORIZATION OF TRANSACTION. The Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Buyer, enforceable in accordance with its terms and conditions. The Buyer need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. (c) NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Buyer is subject or any provision of its charter or bylaws or (ii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Buyer is a party or by which it is bound or to which any of its assets is subject. (d) BROKERS' FEES. The Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement other than the fees payable by the Buyer to OEM Capital Corp. -9- (e) INVESTMENT. The Buyer is not acquiring the Company Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act. (f) SEC FILINGS. As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing): (i) each of the documents filed by the Buyer with the SEC complied in all material respects with the applicable requirements of the Securities Act or the Securities Exchange Act (as the case may be); and (ii) none of such documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Buyer has filed with the SEC all documents required to be filed with the SEC as set forth in the Securities Act or the Securities Exchange Act (as the case may be). 4. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY AND THE SUBSIDIARY. The Sellers, McDermott and Yost, jointly and severally, represent and warrant to the Buyer that the statements contained in this SECTION 4 are correct and complete as of the date of this Agreement, except as set forth in the disclosure schedule delivered by the Sellers, McDermott and Yost to the Buyer on the date hereof and initialed by the Sellers, McDermott and Yost (the "DISCLOSURE SCHEDULE"). 4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. Each of the Company and the Subsidiary is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. Each of the Company and the Subsidiary is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required. Each of the Company and the Subsidiary has full corporate power and authority and all licenses, permits, and authorizations necessary to carry on the businesses in which it is engaged and in which it presently proposes to engage and to own and use the properties owned and used by it. Section 4.1 of the Disclosure Schedule lists the directors and officers of each of the Company and the Subsidiary. The Sellers have delivered to the Buyer correct and complete copies of the charter and bylaws of each of the Company and the Subsidiary (as amended to date). The minute books (containing the records of meetings of the stockholders, the board of directors, and any committees of the board of directors), the stock certificate books, and the stock record books of each of the Company and the Subsidiary are correct and complete. Neither the Company nor the Subsidiary is in default under or in violation of any provision of its charter or bylaws. 4.2 CAPITALIZATION. The entire authorized capital stock of the Company consists of 1,000,000 Company Shares, of which 910,000 Company Shares are issued and outstanding (after taking into account the Stock Repurchases). All of the issued and outstanding Company Shares have been duly authorized, are validly issued, fully paid, and nonassessable, and are held of record by the respective Sellers as set forth in Section 4.2 of the Disclosure Schedule. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or -10- commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of the Company. 4.3 NONCONTRAVENTION. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which either the Company or the Subsidiary is subject or any provision of the charter or bylaws of either the Company or the Subsidiary or (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which either the Company or the Subsidiary is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets). Neither the Company nor the Subsidiary needs to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement. 4.4 BROKERS' FEES. Neither the Company nor the Subsidiary has any Liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement. All fees payable to Trudeau and Trudeau Associates, Inc. shall be paid by the Sellers. 4.5 TITLE TO ASSETS. The Company and the Subsidiary have good and marketable title to, or a valid leasehold interest in, the properties and assets used by them, located on their premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all Security Interests, except for properties and assets disposed of in the Ordinary Course of Business since the date of the Most Recent Balance Sheet. 4.6 SUBSIDIARY. Section 4.6 of the Disclosure Schedule sets forth for the Subsidiary (a) its name and jurisdiction of incorporation, (b) the number of shares of authorized capital stock of each class of its capital stock, and (c) the number of issued and outstanding shares of each class of its capital stock and that all such shares of capital stock are held by the Company. All of the issued and outstanding shares of capital stock of the Subsidiary have been duly authorized and are validly issued, fully paid, and nonassessable. The Company holds of record and owns beneficially all of the outstanding shares of capital stock of the Subsidiary, free and clear of any restrictions on transfer (other than restrictions under the Securities Act and state securities laws), Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require either the Company or the Subsidiary to sell, transfer, or otherwise dispose of any capital stock of the Subsidiary or that could require the Subsidiary to issue, sell, or otherwise cause to become outstanding any of its own capital stock. There are no outstanding stock appreciation, phantom stock, profit participation, or similar rights with respect to the Subsidiary. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of any capital stock of the Subsidiary. Neither the Company nor the Subsidiary controls directly or indirectly or has any direct or indirect equity participation in any corporation, partnership, trust, or other business association. -11- 4.7 FINANCIAL STATEMENTS. Attached hereto as EXHIBIT E are the following financial statements of the Company and the Subsidiary for the periods described below, all of which are subject to audit adjustments by the Buyer (collectively the "FINANCIAL STATEMENTS"): (i) unaudited balance sheets and statements of income as of and for the fiscal years ended November 30, 2003 and October 31, 2003 (in each case, the "MOST RECENT FISCAL YEAR END") for the Company and the Subsidiary, respectively; and (ii) unaudited balance sheets and statements of income (in each case, the "MOST RECENT FINANCIAL STATEMENTS") as of and for the six months and seven months ended May 31, 2004 (in each case, the "MOST RECENT FISCAL MONTH END") for the Company and the Subsidiary, respectively. The Financial Statements, all of which are subject to audit adjustments by the Buyer, present fairly the financial condition of the Company and the Subsidiary as of such dates and the results of operations of the Company and the Subsidiary for such periods, are correct and complete, and are consistent with the books and records of the Company and the Subsidiary (which books and records are correct and complete). 4.8 EVENTS SUBSEQUENT TO MOST RECENT FISCAL YEAR END. Since the Most Recent Fiscal Year End, there has not been any adverse change in the business, financial condition, operations, results of operations, or future prospects of either the Company or the Subsidiary. Without limiting the generality of the foregoing, since those dates: (a) neither the Company nor the Subsidiary has sold, leased, transferred, or assigned any of its assets, tangible or intangible, other than for a fair consideration in the Ordinary Course of Business; (b) neither the Company nor the Subsidiary has entered into any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) either involving more than $25,000 or outside the Ordinary Course of Business; (c) no party (including the Company and the Subsidiary) has accelerated, terminated, modified, or cancelled any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) involving more than $25,000 to which either the Company or the Subsidiary is a party or by which either of them is bound; (d) neither the Company nor the Subsidiary has imposed any Security Interest upon any of its assets, tangible or intangible; (e) neither the Company nor the Subsidiary has made any capital expenditure (or series of related capital expenditures) either involving more than $25,000 or outside the Ordinary Course of Business; (f) neither the Company nor the Subsidiary has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions) either involving more than $25,000 or outside the Ordinary Course of Business; -12- (g) neither the Company nor the Subsidiary has issued any note, bond, or other debt security or created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation either involving more than $25,000 in the aggregate; (h) neither the Company nor the Subsidiary has delayed or postponed the payment of accounts payable and other Liabilities outside the Ordinary Course of Business; (i) neither the Company nor the Subsidiary has cancelled, compromised, waived, or released any right or claim (or series of related rights and claims) either involving more than $5,000 or outside the Ordinary Course of Business; (j) neither the Company nor the Subsidiary has granted any license or sublicense of any rights under or with respect to any Intellectual Property; (k) there has been no change made or authorized in the charter or bylaws of either the Company or the Subsidiary; (l) neither the Company nor the Subsidiary has issued, sold, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock; (m) neither the Company nor the Subsidiary has declared, set aside, or paid any dividend or made any distribution with respect to its capital stock (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any of its capital stock, other than the Stock Repurchases; (n) neither the Company nor the Subsidiary has experienced any material damage, destruction, or loss (whether or not covered by insurance) to its property; (o) neither the Company nor the Subsidiary has made any loan to, or entered into any other transaction with, any of its directors, officers, and employees outside the Ordinary Course of Business; (p) neither the Company nor the Subsidiary has entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement; (q) neither the Company nor the Subsidiary has granted any increase in the base compensation of any of its directors, officers, and employees outside the Ordinary Course of Business; (r) neither the Company nor the Subsidiary has adopted, amended, modified, or terminated any bonus, profit-sharing, incentive, severance, or other plan, contract, or commitment for the benefit of any of its directors, officers, and employees (or taken any such action with respect to any other Employee Benefit Plan); -13- (s) neither the Company nor the Subsidiary has made any other change in employment terms for any of its directors, officers, and employees outside the Ordinary Course of Business; (t) neither the Company nor the Subsidiary has made or pledged to make any charitable or other capital contribution outside the Ordinary Course of Business; (u) there has not been any other occurrence, event, incident, action, failure to act, or transaction outside the Ordinary Course of Business involving either the Company or the Subsidiary; and (v) neither the Company nor the Subsidiary has committed to any of the foregoing. 4.9 UNDISCLOSED LIABILITIES. Neither the Company nor the Subsidiary has any Liability (and there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability), except for (a) Liabilities set forth on the face of the Most Recent Balance Sheet for the Company and the Subsidiary and (b) Liabilities which have arisen after the Most Recent Fiscal Month End for the Company and the Subsidiary in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement, or violation of law). 4.10 LEGAL COMPLIANCE. Each of the Company and the Subsidiary has complied with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof) (including without limitation all applicable rules and regulations of the FCC with respect to the Company's Products including Part 15 of Title 47 of the Code of Federal Regulations), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply. 4.11 TAX MATTERS. (a) Each of the Company and the Subsidiary has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all respects. All Taxes owed by the Company and the Subsidiary (whether or not shown on any Tax Return) have been paid. Neither the Company nor the Subsidiary currently is the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where either the Company or the Subsidiary does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets of either the Company or the Subsidiary that arose in connection with any failure (or alleged failure) to pay any Tax. (b) Each of the Company and the Subsidiary has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. -14- (c) No Seller or director or officer (or employee responsible for Tax matters) of the Company or the Subsidiary expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax Liability of the Company or the Subsidiary either (i) claimed or raised by any authority in writing or (ii) as to which any of the Sellers and the directors and officers (and employees responsible for Tax matters) of the Company and the Subsidiary has Knowledge based upon personal contact with any agent of such authority. Section 4.11 of the Disclosure Schedule lists all federal, state, local, and foreign income Tax Returns filed with respect to the Company and the Subsidiary for taxable periods ended on or after November 30, 2000, and October 31, 2000, respectively, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. The Sellers have delivered to the Buyer correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by the Company or the Subsidiary since November 30, 1999 and October 31, 1999, respectively. (d) Neither the Company nor the Subsidiary has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (e) Neither the Company nor the Subsidiary has filed a consent under Code Section 341(f) concerning collapsible corporations. Neither the Company nor the Subsidiary has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Code Section 280G. Neither the Company nor the Subsidiary has been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). Each of the Company and the Subsidiary has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Code Section 6662. Neither the Company nor the Subsidiary is a party to any Tax allocation or sharing agreement. Neither the Company nor the Subsidiary (i) has been a member of an Affiliated Group filing a consolidated federal income Tax Return (other than a group the common parent of which was the Company) or (ii) has any Liability for the Taxes of any Person (other than the Company or the Subsidiary) under Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (f) Section 4.11 of the Disclosure Schedule sets forth the following information with respect to each of the Company and the Subsidiary (or, in the case of clause (ii) below, with respect to the Subsidiary) as of the most recent practicable date (as well as on an estimated pro forma basis as of the Closing giving effect to the consummation of the transactions contemplated hereby): (i) the basis of the Company or Subsidiary in its assets; (ii) the basis of the stockholder(s) of the Subsidiary in its stock (or the amount of any Excess Loss Account); (iii) the amount of any net operating loss, net capital loss, unused investment or other credit, unused foreign tax, or excess charitable contribution allocable to the Company or the Subsidiary; and (iv) the amount of any deferred gain or loss allocable to the Company or the Subsidiary arising out of any Deferred Intercompany Transaction. -15- 4.12 REAL PROPERTY. (a) Neither the Company nor the Subsidiary owns any real property. (b) Section 4.12(b) of the Disclosure Schedule lists and describes briefly all real property leased or subleased to the Company or the Subsidiary. McDermott and Yost have delivered to the Buyer correct and complete copies of the leases and subleases listed in Section 4.12(b) of the Disclosure Schedule (as amended to date). With respect to each lease and sublease listed in Section 4.12(b) of the Disclosure Schedule, to the Knowledge of the Sellers, McDermott or Yost: (i) the lease or sublease is legal, valid, binding, enforceable, and in full force and effect; (ii) no party to the lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder; (iii) no party to the lease or sublease has repudiated any provision thereof; (iv) there are no disputes, oral agreements, or forbearance programs in effect as to the lease or sublease; (v) with respect to each sublease, the representations and warranties set forth in subsections (i) through (v) above are true and correct with respect to the underlying lease; (vi) neither the Company nor the Subsidiary has assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in the leasehold or subleasehold; (vii) all facilities leased or subleased thereunder have received all approvals of governmental authorities (including licenses and permits) required in connection with the operation thereof and have been operated and maintained in accordance with applicable laws, rules, and regulations; (viii) all facilities leased or subleased thereunder are supplied with utilities and other services necessary for the operation of said facilities; and (ix) the owner of the facility leased or subleased has good and marketable title to the parcel of real property, free and clear of any Security Interest, easement, covenant, or other restriction, except for installments of special easements not yet delinquent and recorded easements, covenants, and other restrictions which do not impair the current use, occupancy, or value, or the marketability of title, of the property subject thereto. -16- 4.13 INTELLECTUAL PROPERTY. (a) To the Knowledge of the Sellers, McDermott or Yost, the Company and the Subsidiary own or have the right to use pursuant to license, sublicense, agreement, or permission all Intellectual Property necessary or desirable for the operation of the businesses of the Company and the Subsidiary as presently conducted and as presently proposed to be conducted. Each item of Intellectual Property owned or used by any of the Company or the Subsidiary immediately prior to the Closing hereunder will be owned or available for use by the Company or the Subsidiary on identical terms and conditions immediately subsequent to the Closing hereunder. To the Knowledge of the Sellers, McDermott or Yost, each of the Company and the Subsidiary has taken all necessary and desirable action to maintain and protect each item of Intellectual Property that it owns or uses. (b) Neither the Company nor the Subsidiary has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties, and none of the Sellers and the directors and officers (and employees with responsibility for Intellectual Property matters) of the Company and the Subsidiary has ever received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that the Company or the Subsidiary must license or refrain from using any Intellectual Property rights of any third party). To the Knowledge of the Sellers, McDermott or Yost, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of the Company or the Subsidiary. (c) Section 4.13(c) of the Disclosure Schedule identifies each patent or registration which has been issued to the Company or the Subsidiary with respect to any of its Intellectual Property, identifies each pending patent application or application for registration which the Company or the Subsidiary has made with respect to any of its Intellectual Property, and identifies each license, agreement, or other permission which the Company or the Subsidiary has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). The Sellers have delivered to the Buyer correct and complete copies of all such patents, registrations, applications, licenses, agreements, and permissions (as amended to date) and have made available to the Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item. Section 4.13(c) of the Disclosure Schedule also identifies each trade name or unregistered trademark used by the Company or the Subsidiary in connection with any of its businesses. With respect to each item of Intellectual Property required to be identified in Section 4.13(c) of the Disclosure Schedule: (i) the Company and the Subsidiary possess all right, title, and interest in and to the item, free and clear of any Security Interest, license, or other restriction; (ii) the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; -17- (iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, enforceability, use, or ownership of the item; and (iv) neither the Company nor the Subsidiary has ever agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item. (d) Section 4.13(d) of the Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that the Company or the Subsidiary uses pursuant to license, sublicense, agreement, or permission. The Sellers have delivered to the Buyer correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date). With respect to each item of Intellectual Property required to be identified in Section 4.13(d) of the Disclosure Schedule: (i) the license, sublicense, agreement, or permission covering the item is legal, valid, binding, enforceable, and in full force and effect; (ii) the license, sublicense, agreement, or permission will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) no party to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder; (iv) no party to the license, sublicense, agreement, or permission has repudiated any provision thereof; (v) with respect to each sublicense, the representations and warranties set forth in subsections (i) through (iv) above are true and correct with respect to the underlying license; (vi) the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (vii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or is threatened which challenges the legality, validity, or enforceability of the underlying item of Intellectual Property; and (viii) neither the Company nor the Subsidiary has granted any sublicense or similar right with respect to the license, sublicense, agreement, or permission. (e) To the Knowledge of the Sellers, McDermott or Yost, neither the Company nor the Subsidiary will interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of third parties as a result of the continued operation of its businesses as presently conducted and as presently proposed to be conducted. -18- (f) Neither the Sellers, McDermott nor Yost has any Knowledge of any new products, inventions, procedures, or methods of manufacturing or processing that any competitors or other third parties have developed which reasonably could be expected to immediately replace any Product or process of the Company or the Subsidiary. 4.14 TANGIBLE ASSETS. The Company and the Subsidiary own or lease all buildings, machinery, equipment, and other tangible assets necessary for the conduct of their businesses as presently conducted and as presently proposed to be conducted. Each such tangible asset is free from defects (patent and latent), has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used and presently is proposed to be used. 4.15 INVENTORY. The inventory of the Company and the Subsidiary consists of raw materials and supplies, manufactured and purchased parts, goods in process, and finished goods. 4.16 CONTRACTS. Section 4.16 of the Disclosure Schedule lists the following contracts and other agreements to which the Company or the Subsidiary is a party: (a) any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for lease payments in excess of $5,000 per annum; (b) any agreement (or group of related agreements) for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year, result in a loss to the Company or the Subsidiary, or involve consideration in excess of $10,000; (c) any agreement concerning a partnership or joint venture; (d) any agreement (or group of related agreements) under which it has created, incurred, assumed, or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, in excess of $10,000 or under which it has imposed a Security Interest on any of its assets, tangible or intangible; (e) any agreement concerning confidentiality or noncompetition; (f) any agreement with any of the Sellers and their Affiliates (other than the Company and the Subsidiary); (g) any profit sharing, stock option, stock purchase, stock appreciation, deferred compensation, severance, or other plan or arrangement for the benefit of its current or former directors, officers, and employees; -19- (h) any collective bargaining agreement; (i) any agreement for the employment of any individual on a full-time, part-time, consulting, or other basis providing annual compensation in excess of $40,000 or providing severance benefits; (j) any agreement under which it has advanced or loaned any amount to any of its directors, officers, and employees outside the Ordinary Course of Business; (k) any agreement under which the consequences of a default or termination could have a material adverse effect on the business, financial condition, operations, results of operations, or future prospects of the Company or the Subsidiary; or (l) any other agreement (or group of related agreements) the performance of which involves consideration in excess of $10,000. The Sellers have delivered to the Buyer a correct and complete copy of each written agreement listed in Section 4.16 of the Disclosure Schedule (as amended to date) and a written summary setting forth the terms and conditions of each oral agreement referred to in Section 4.16 of the Disclosure Schedule. With respect to each such agreement, to the Knowledge of the Sellers, McDermott or Yost: (i) the agreement is legal, valid, binding, enforceable, and in full force and effect; (ii) the agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) no party is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the agreement; and (iv) no party has repudiated any provision of the agreement. 4.17 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts receivable of the Company and the Subsidiary are reflected properly on their books and records, are valid receivables subject to no setoffs or counterclaims, are current and collectible, and will be collected in accordance with their terms at their recorded amounts as set forth on the face of the Most Recent Balance Sheet of the Company and the Subsidiary, respectively. 4.18 POWERS OF ATTORNEY. There are no outstanding powers of attorney executed on behalf of the Company or the Subsidiary. 4.19 INSURANCE. Section 4.19 of the Disclosure Schedule sets forth the following information with respect to each insurance policy (including policies providing property, casualty, liability, and workers' compensation coverage and bond and surety arrangements) to which the Company or the Subsidiary has been a party, a named insured, or otherwise the beneficiary of coverage at any time within the past seven (7) years: (a) the name, address, and telephone number of the agent; (b) the name of the insurer, the name of the policyholder, and the name of each covered insured; -20- (c) the policy number and the period of coverage; (d) the scope (including an indication of whether the coverage was on a claims made, occurrence, or other basis) and amount (including a description of how deductibles and ceilings are calculated and operate) of coverage; (e) any claim for coverage that has been denied (including partially denied) or is being contested; and (f) a description of any retroactive premium adjustments or other loss-sharing arrangements. With respect to each such insurance policy, to the Knowledge of the Sellers, McDermott or Yost: (i) the policy is legal, valid, binding, enforceable, and in full force and effect; (ii) the policy will continue to be legal, valid, binding, enforceable, and in full force and effect on identical terms following the consummation of the transactions contemplated hereby; (iii) neither the Company nor the Subsidiary nor any other party to the policy is in breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification, or acceleration, under the policy; and (iv) no party to the policy has repudiated any provision thereof. Each of the Company and the Subsidiary has been covered during the past seven (7) years by insurance in scope and amount customary and reasonable for the businesses in which it has engaged during the aforementioned period. Section 4.19 of the Disclosure Schedule describes any self-insurance arrangements affecting the Company or the Subsidiary. 4.20 LITIGATION. Section 4.20 of the Disclosure Schedule sets forth each instance in which the Company or the Subsidiary (a) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (b) is a party or, to the Knowledge of the Sellers, McDermott and Yost, is threatened to be made a party to any action, suit, proceeding, hearing, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. None of the actions, suits, proceedings, hearings, and investigations set forth in Section 4.20 of the Disclosure Schedule could result in any material adverse change in the business, financial condition, operations, results of operations, or future prospects of the Company or the Subsidiary. Neither the Sellers, McDermott nor Yost has any reason to believe that any such action, suit, proceeding, hearing, or investigation may be brought or threatened against the Company or the Subsidiary. 4.21 PRODUCT WARRANTY. Each Product manufactured, sold, leased, or delivered by the Company or the Subsidiary has been in conformity with all applicable contractual commitments and all express and implied warranties, and neither the Company nor the Subsidiary has any Liability (and to the Knowledge of the Sellers, McDermott or Yost, there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability) for replacement or repair thereof or other damages in connection therewith in excess of the amounts experienced by the Company or the Subsidiary in the past. No Product manufactured, sold, leased, or delivered by the Company or the -21- Subsidiary is subject to any guaranty, warranty, or other indemnity beyond the applicable standard terms and conditions of sale or lease. Section 4.21 of the Disclosure Schedule includes copies of the standard terms and conditions of sale or lease for each of the Company and the Subsidiary (containing applicable guaranty, warranty, and indemnity provisions). 4.22 PRODUCT LIABILITY. Neither the Company nor the Subsidiary has any Liability (and to the Knowledge of the Sellers, McDermott or Yost) there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against any of them giving rise to any Liability) arising out of any injury to individuals or property as a result of the ownership, possession, or use of any Product manufactured, sold, leased, or delivered by the Company or the Subsidiary. 4.23 EMPLOYEES. To the Knowledge of the Sellers, McDermott or Yost, no executive, key employee, or group of employees has any plans to terminate employment with the Company or the Subsidiary. Neither the Company nor the Subsidiary is a party to or bound by any collective bargaining agreement, nor has any of them experienced any strikes, grievances, claims of unfair labor practices, or other collective bargaining disputes. Neither the Company nor the Subsidiary has committed any unfair labor practice. Neither the Sellers, McDermott nor Yost has any Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of the Company or the Subsidiary. 4.24 EMPLOYEE BENEFITS. (a) Section 4.24 of the Disclosure Schedule lists each Employee Benefit Plan that the Company or the Subsidiary maintains, to which the Company or the Subsidiary contributes or has any obligation to contribute, or with respect to which the Company or the Subsidiary has any Liability or potential Liability. (i) Each such Employee Benefit Plan (and each related trust, insurance contract, or fund) has been maintained, funded and administered in accordance with the terms of such Employee Benefit Plan and complies in form and in operation in all respects with the applicable requirements of ERISA, the Code, and other applicable laws. (ii) All required reports and descriptions (including annual reports (IRS Form 5500), summary annual reports, and summary plan descriptions) have been timely filed and/or distributed in accordance with the applicable requirements of ERISA and the Code with respect to each such Employee Benefit Plan. The requirements of COBRA have been met with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan subject to COBRA. (iii) All contributions (including all employer contributions and employee salary reduction contributions) which are due have been made within the time period prescribed by ERISA to each such Employee Benefit Plan which is an Employee Pension Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been made to each such Employee Pension Benefit Plan or accrued in accordance with the past custom and practice of the Company and the Subsidiary. All premiums or other payments for all periods ending on or before the Closing Date have been paid with respect to each such Employee Benefit Plan which is an Employee Welfare Benefit Plan. -22- (iv) Each such Employee Benefit Plan which is intended to meet the requirements of a "qualified plan" under Code Section 401(a) has received a determination from the Internal Revenue Service that such Employee Benefit Plan is so qualified, and nothing has occurred since the date of such determination that could adversely affect the qualified status of any such Employee Benefit Plan. (v) The market value of assets under each such Employee Benefit Plan which is an Employee Pension Benefit Plan (other than any Multiemployer Plan) equals or exceeds the present value of all vested and nonvested Liabilities thereunder determined in accordance with PBGC methods, factors, and assumptions applicable to an Employee Pension Benefit Plan terminating on the date for determination. (vi) McDermott and Yost have delivered to the Buyer correct and complete copies of the plan documents and summary plan descriptions, the most recent determination letter received from the Internal Revenue Service, the most recent annual report (IRS Form 5500, with all applicable attachments), and all related trust agreements, insurance contracts, and other funding arrangements which implement each such Employee Benefit Plan. (b) With respect to each Employee Benefit Plan that any of the Company, the Subsidiary, and any ERISA Affiliate maintains, to which any of them contributes or has any obligation to contribute, or with respect to which any of them has any Liability or potential Liability: (i) No such Employee Benefit Plan which is an Employee Pension Benefit Plan (other than any Multiemployer Plan) has been completely or partially terminated or been the subject of a Reportable Event. No proceeding by the PBGC to terminate any such Employee Pension Benefit Plan (other than any Multiemployer Plan) has been instituted or, to the Knowledge of the Sellers, McDermott or Yost, threatened. (ii) There have been no Prohibited Transactions with respect to any such Employee Benefit Plan. No Fiduciary has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan. No action, suit, proceeding, hearing, or investigation with respect to the administration or the investment of the assets of any such Employee Benefit Plan (other than routine claims for benefits) is pending or, to the Knowledge of the Sellers, McDermott or Yost, threatened. Neither the Sellers, McDermott nor Yost has any Knowledge of any Basis for any such action, suit, proceeding, hearing, or investigation. -23- (iii) Neither the Company nor the Subsidiary has incurred, and neither the Sellers, McDermott nor Yost has any reason to expect that the Company or the Subsidiary will incur, any Liability to the PBGC (other than with respect to PBGC premium payments not yet due) or otherwise under Title IV of ERISA (including any withdrawal liability as defined in ERISA Section 4201) or under the Code with respect to any such Employee Benefit Plan which is an Employee Pension Benefit Plan, or under COBRA with respect to any such Employee Benefit Plan which is an Employee Welfare Benefit Plan. (c) None of the Company, the Subsidiary, and any ERISA Affiliate has incurred any Liability on account of a "partial withdrawal" or a "complete withdrawal" (within the meaning of ERISA Section Section 4205 and 4203, respectively) from any Multiemployer Plan, no such Liability has been asserted, and there are no events or circumstances which could result in any such partial or complete withdrawal; and none of the Company, the Subsidiary, and any ERISA Affiliate is bound by any contract or agreement or has any obligation or Liability described in ERISA Section 4204. Each Multiemployer Plan complies in form and has been administered in accordance with the requirements of ERISA and, where applicable, the Code, and each Multiemployer Plan is qualified under Code Section 401(a). (d) Neither the Company nor the Subsidiary maintains, contributes to or has an obligation to contribute to, or has any Liability or potential Liability with respect to, any Employee Welfare Benefit Plan providing medical, health, or life insurance or other welfare-type benefits for current or future retired or terminated employees, their spouses, or their dependents (other than in accordance with COBRA). 4.25 GUARANTIES. Neither the Company nor the Subsidiary is a guarantor or otherwise is liable for any Liability or obligation (including indebtedness) of any other Person. 4.26 ENVIRONMENTAL, HEALTH, AND SAFETY MATTERS. (a) Each of the Company and the Subsidiary has complied and is in compliance with all Environmental, Health, and Safety Requirements. (b) Without limiting the generality of the foregoing, each of the Company and the Subsidiary has obtained and complied with, and is in compliance with, all permits, licenses and other authorizations that are required pursuant to Environmental, Health, and Safety Requirements for the occupation of its facilities and the operation of its business; a list of all such permits, licenses and other authorizations is set forth in Section 4.26 of the Disclosure Schedule. (c) Neither the Company nor the Subsidiary has received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements, or any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to any of them or its facilities arising under Environmental, Health, and Safety Requirements. -24- (d) None of the following exists at any property or facility owned or operated by the Company or the Subsidiary: (i) underground storage tanks, (ii) asbestos-containing material in any form or condition, (iii) materials or equipment containing polychlorinated biphenyls, or (iv) landfills, surface impoundments, or disposal areas. (e) Neither the Company nor the Subsidiary has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including without limitation any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to liabilities, including any liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Solid Waste Disposal Act, as amended, or any other Environmental, Health, and Safety Requirements. (f) Neither this Agreement nor the consummation of the transaction that is the subject of this Agreement will result in any obligations for site investigation or cleanup, or notification to or consent of government agencies or third parties, pursuant to any of the so-called "transaction-triggered" or "responsible property transfer" Environmental, Health, and Safety Requirements. (g) Neither the Company nor the Subsidiary has, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other Person relating to Environmental, Health, and Safety Requirements. (h) No facts, events or conditions relating to the past or present facilities, properties or operations of the Company or the Subsidiary will prevent, hinder or limit continued compliance with Environmental, Health, and Safety Requirements, give rise to any investigatory, remedial or corrective obligations pursuant to Environmental, Health, and Safety Requirements, or give rise to any other liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental, Health, and Safety Requirements, including without limitation any relating to onsite or offsite releases or threatened releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage. 4.27 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY AND THE SUBSIDIARY. Except as set forth in Section 4.27 of the Disclosure Schedule, neither of the Sellers nor their Affiliates has been involved in any business arrangement or relationship with the Company or the Subsidiary within the past twelve (12) months, and neither of the Sellers nor their Affiliates owns any asset, tangible or intangible, which is used in the business of the Company or the Subsidiary. 4.28 STOCK REPURCHASES. The Stock Repurchases comply in all respects with all applicable laws including without limitation Section 500 of the California Corporations Code and all state and federal securities laws. The materials distributed by the Company and the Subsidiary to their respective shareholders in connection with the Stock Repurchases did not contain any untrue -25- statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. All of the agreements between the Company and its shareholders and the Subsidiary and its shareholders with respect to the Stock Repurchases constitute the valid and legally binding obligations of the respective parties thereto, enforceable in accordance with their respective terms and conditions. 4.29 DISCLOSURE. The representations and warranties contained in this SECTION 4 do not contain any untrue statement of a fact or omit to state any fact necessary in order to make the statements and information contained in this SECTION 4 not misleading. 5. POST-CLOSING COVENANTS. The Parties agree as follows with respect to the period following the Closing. 5.1 GENERAL. In case at any time after the Closing any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under SECTION 7). The Sellers acknowledge and agree that from and after the Closing the Buyer will be entitled to possession of all documents, books, records (including Tax records), agreements, and financial data of any sort relating to the Company and the Subsidiary. 5.2 LITIGATION SUPPORT. In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (a) any transaction contemplated under this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Company or the Subsidiary, each of the other Parties will cooperate with him or it and his or its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under SECTION 7 below). 5.3 TRANSITION. None of the Sellers, McDermott and Yost will take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of the Company or the Subsidiary from maintaining the same business relationships with the Company or the Subsidiary after the Closing as it maintained with the Company or the Subsidiary prior to the Closing. Each of the Sellers, McDermott and Yost will refer all customer inquiries relating to the businesses of the Company and the Subsidiary to the Buyer from and after the Closing. 5.4 CONFIDENTIALITY. Each of the Sellers, McDermott and Yost will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to the Buyer or destroy, at the request and option of the Buyer, all tangible embodiments (and all copies) of the -26- Confidential Information which are in his or its possession. In the event that any of the Sellers, McDermott or Yost is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, that Seller, McDermott or Yost will notify the Buyer promptly of the request or requirement so that the Buyer may seek an appropriate protective order or waive compliance with the provisions of this SECTION 5.4. If, in the absence of a protective order or the receipt of a waiver hereunder, any of the Sellers, McDermott or Yost is, on the advice of counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, that Seller, McDermott or Yost may disclose the Confidential Information to the tribunal; PROVIDED, HOWEVER, that the disclosing Seller, McDermott or Yost shall use his or its best efforts to obtain, at the reasonable request of the Buyer, an order or other assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed as the Buyer shall designate. The foregoing provisions shall not apply to any Confidential Information which is generally available to the public immediately prior to the time of disclosure. 5.5 NON-COMPETITION. (a) As further consideration for the purchase and sale of the Company Shares and the transactions contemplated by this Agreement, during the period commencing on the Closing Date, and ending on the date which is five (5) years thereafter (the "RESTRICTED PERIOD"), neither the Sellers, McDermott nor Yost shall, in any Restricted Territory, directly or indirectly: (i) subject to the terms and conditions of the Consulting Agreements, engage in any business, activity, or enterprise competitive with or substantially similar to the Business, including, without limitation, in the manufacture, production, design, engineering, importation, purchase, marketing, sale, distribution, research or development of any Products, or engage or invest in, own, manage, operate, finance, control, solicit business related to, or participate in the ownership, management, operation, financing, or control of, be employed by, lend his name or any similar name, or lend his credit to, or render services or advice to, any Person engaged in any business, activity or enterprise competitive with or substantially similar to the Business including, without limitation, in the manufacture, production, design, engineering, importation, purchase, marketing, sale, distribution, research or development of any Products; (ii) individually or on behalf of any other Person, recruit or solicit any person who has been an employee, representative, consultant or agent of the Buyer or former employee of the Company hired by the Buyer, to terminate his or her employment with the Buyer; (iii) use, incorporate or otherwise create any business organization utilizing any name which uses, the words "Larus" or "Vista" or which are confusingly similar to any such words; or -27- (iv) solicit, call upon, or attempt to communicate with any customer, former customer, or prospective customer of the Buyer, the Company or the Subsidiary for the purposes of manufacture, production, design, engineering, importation, purchase, marketing, sale, distribution, research or development of any Products. This restriction shall only apply to any customer, former customer or prospective customer of the Buyer, the Company or the Subsidiary with whom the Company, the Subsidiary, the Sellers, McDermott or Yost had contact with prior to the Closing Date. For purposes of this paragraph, "contact" means interaction between the Sellers, McDermott or Yost, directly or indirectly, and the customer, former customer or prospective customer which takes place to further the business relationship, or performing of services, on behalf of the Company, the Subsidiary, the Sellers, McDermott or Yost. (b) The Sellers, McDermott and Yost shall be deemed to be competing with Buyer in violation of SECTION 5.5(a) if any thereof, or any Affiliate thereof, is engaged or participates in any activity or activities described in SECTION 5.5(a), directly or indirectly, whether for his own account or for that of any other Person, and whether as a shareholder, partner or investor controlling any such entity or as principal, agent, representative, proprietor or partner, or in any other capacity; PROVIDED, HOWEVER, that nothing herein shall prohibit purely passive investments in any business so long as the aggregate interest represented by such investments does not exceed one percent (1%) of any class of the outstanding debt or equity securities of said business. (c) Because a breach, or failure to comply with, this SECTION 5.5 will cause irreparable injury to the Buyer for which there is no adequate remedy at law and the exact amount of which will be difficult to ascertain, if any of the Sellers, McDermott or Yost, or any Affiliate of any thereof, should in any way breach, or fail to comply with, the terms of this SECTION 5.5, the Buyer shall be entitled to an injunction restraining such Person(s) from any such breach or failure. All remedies expressly provided for herein are cumulative of any and all other remedies now existing at law or in equity, to the extent permitted under applicable law. The Buyer shall, in addition to the remedies herein provided, be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for compensation, and for the specific enforcement of the covenants contained herein without the necessity of proving actual damages. Resort to any remedy provided for hereunder or provided for by law shall not preclude or bar the concurrent or subsequent employment of any other appropriate remedy or remedies, or preclude the recovery by the Buyer of monetary damages and compensation. (d) If any provision of this SECTION 5.5 shall finally be judicially determined to be invalid, ineffective or unenforceable, such determination shall apply only in the jurisdiction in which such adjudication is made and every other provision of this SECTION 5.5 shall remain in full force and effect. The invalid, ineffective or unenforceable provision shall, without further action by the parties, be automatically amended, to the extent permitted under applicable law, to effect the original purpose and intent of the invalid, ineffective or unenforceable provision (and if such provision governs the duration of the Restricted Period or geographic scope of the Restricted Territory, such provision shall be amended to reduce such duration or scope, as applicable, as minimally as possible so that such provision is valid, effective and enforceable for the longest period of time and fullest geographic area as is adjudged permissible for such provision to be valid, effective and enforceable); PROVIDED, HOWEVER, that such amendment shall apply only with respect to the operation of such provision in the particular jurisdiction in which such adjudication is made. -28- (e) Each of the Sellers, McDermott and Yost acknowledges that the duration of the Restricted Period, the geographic scope of the Restricted Territory, and the scope of restricted activities described in SECTION 5.5(a) are reasonable and necessary to protect the legitimate business interests of the Buyer in view of the nature of the Business of the Company, the nature of the business in which the Buyer is engaged, and the nature of the transactions contemplated by this Agreement. Each of the Sellers, McDermott and Yost understands that the foregoing restrictions will significantly limit or bar his ability to earn a livelihood in the Business or a business related to the Business, but each of them nevertheless believes that he or it has received and will receive, directly or indirectly, sufficient consideration and other benefits pursuant to this Agreement and the other agreements relating to this Agreement to clearly justify such restrictions. 5.6 PREPARATION AND DELIVERY OF CLOSING BALANCE SHEETS. Within fifteen (15) days after the Closing Date, the Sellers shall deliver to the Buyer all information necessary for the Buyer to prepare the balance sheets of the Company and the Subsidiary dated as of the Closing Date (the "CLOSING BALANCE Sheets") in accordance with GAAP. The Buyer shall deliver to the Sellers the Closing Balance Sheets within twenty-five (25) days after the Closing Date. 5.7 CERTAIN TAX PAYMENTS. The Buyer shall be responsible for the payment of any income tax liability resulting from a disallowance of the tax deduction of the aggregate $400,000 in bonuses to the directors of the Company and the Subsidiary for fiscal 2003 set forth on the Company's and/or the Subsidiary's federal and state or franchise tax returns. 6. CONDITIONS TO OBLIGATION TO CLOSE. 6.1 CONDITIONS TO OBLIGATION OF THE BUYER. The obligation of the Buyer to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions as of the Closing: (a) the representations and warranties set forth in SECTION 3.1 and SECTION 4 shall be true and correct in all material respects at and as of the Closing Date; (b) the Sellers shall have performed and complied with all of their covenants hereunder in all material respects through the Closing; (c) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement, (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (iii) affect adversely the right of the Buyer to own the Company Shares and to control the Company and the Subsidiary, or (iv) affect adversely the right of the Company or the Subsidiary to own its assets and to operate its businesses (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); (d) the Sellers shall have delivered to the Buyer a certificate to the effect that each of the conditions specified in SECTIONS 6.1(a)-(c) are satisfied in all respects; -29- (e) the Parties, the Company and the Subsidiary shall have received all authorizations, consents, and approvals of governments and governmental agencies referred to in SECTION 3.1(a), SECTION 3.2(b), and SECTION 4.3; (f) the relevant parties shall have entered into the Short Term Notes, the Long Term Notes, and the Warrant Agreements and the same shall be in full force and effect; (g) the relevant parties shall have entered into the Registration Rights Agreement (the "REGISTRATION RIGHTS AGREEMENT") in form and substance as set forth on EXHIBIT F attached hereto and the same shall be in full force and effect; (h) the Sellers, McDermott and Yost shall each have entered into a Lock-Up Agreement (collectively, the "LOCK-UP AGREEMENTS") with the Buyer covering the resale of each such holder of the Buyer Shares in form and substance as set forth in EXHIBIT G attached hereto and the same shall be in full force and effect; (i) McDermott and Yost, or an entity controlled by them, shall have entered into a noncancelable triple net lease agreement (the "FACILITY LEASE AGREEMENT") with the Buyer for the lease of the approximately 30,000 square foot facility located at 894 Faulstich Court, San Jose, California 95112, in form and substance as set forth in EXHIBIT H attached hereto and the same shall be in full force and effect; (j) each of McDermott and Yost shall have entered into a Consulting Agreement (collectively, the "CONSULTING AGREEMENTS") in form and substance as set forth on EXHIBIT I and EXHIBIT J, respectively, attached hereto and the same shall be in full force and effect; (k) all trade accounts payable of the Company and the Subsidiary, excluding any payables between the Company and the Subsidiary, shall be within terms (i.e., equal to or less than forty-five (45) days) and within the range of trade accounts payable at the end of each month for the previous twelve (12) months prior to the Closing Date, excluding any accrued payable for NEBS approval; (l) no outstanding funded debt of either the Company or the Subsidiary shall exist, other than inter-company debt; (m) in the Buyer's sole judgment, a credible fiscal 2004 sales forecast of each of the Company and the Subsidiary shall exist in writing and have been delivered to the Buyer showing results of operations at least as good as fiscal 2003; (n) satisfactory reviews of the projected Closing Balance Sheets prepared by management of the Company and the Subsidiary or requested by the Buyer from time to time prior to the Closing shall have been completed; (o) the Buyer's independent auditors shall be able to provide comfort to the Buyer that the financial statements of each of the Company and the Subsidiary as of their respective Most Recent Fiscal Year End are auditable and that the financial statements of each of the Company and the Subsidiary as of their respective Most Recent Fiscal Month End are may be reviewed; -30- (p) fiscal 2003 aggregate annual bonus payments made by the Company and the Subsidiary shall not have been greater than $50,000, and fiscal 2003 profit sharing amounts shall not have been greater than $50,000 and no accrued bonus or profit sharing amounts to non-directors shall exist on the Most Recent Balance Sheet of the Company and/or the Subsidiary. In addition, there shall not have been any fiscal 2003 bonus payments made to the directors of either of the Company or the Subsidiary; (q) the transactions contemplated by this Agreement shall have been approved by all necessary corporate action on the part of the Buyer, and the Company; (r) the Buyer shall have received from counsel to the Sellers an opinion in form and substance as set forth in EXHIBIT K attached hereto, addressed to the Buyer, and dated as of the Closing Date; (s) the Buyer shall have received the resignations, effective as of the Closing, of each director and officer of the Company and the Subsidiary; and (t) all actions to be taken by the Sellers in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Buyer. The Buyer may waive any condition specified in this SECTION 6.1 if it executes a writing so stating at or prior to the Closing. 6.2 CONDITIONS TO OBLIGATION OF THE SELLERS, MCDERMOTT AND YOST. The obligation of the Sellers, McDermott and Yost to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions as of the Closing: (a) the representations and warranties set forth in SECTION 3.2 shall be true and correct in all material respects at and as of the Closing Date; (b) the Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (c) no action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (i) prevent consummation of any of the transactions contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect); -31- (d) the Buyer shall have delivered to the Sellers a certificate to the effect that each of the conditions specified in SECTIONS 6.2(a)-(c) are satisfied in all respects; (e) the Parties, the Company and the Subsidiary shall have received all authorizations, consents, and approvals of governments and governmental agencies referred to in SECTION 3.1(a), SECTION 3.2(b), and SECTION 4.3; (f) the relevant parties shall have entered into the Short Term Notes, the Long Term Notes, the Warrant Agreements, the Registration Rights Agreement, the Lock-Up Agreements, the Facility Lease Agreement, and the Consulting Agreements and the same shall be in full force and effect; (g) the transactions contemplated by this Agreement shall have been approved by all necessary corporate action on the part of the Buyer and the Company; (h) the Sellers shall have received from counsel to the Buyer an opinion in form and substance as set forth in EXHIBIT L attached hereto, addressed to the Sellers, and dated as of the Closing Date; and (i) all actions to be taken by the Buyer in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to the Sellers. The Sellers, McDermott or Yost may waive any condition specified in this SECTION 6.2 if they execute a writing so stating at or prior to the Closing. 7. REMEDIES FOR BREACHES OF THIS AGREEMENT. 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties of the Sellers contained in SECTION 3.1, all of the representations and warranties of the Sellers, McDermott and Yost contained in SECTION 4 (other than SECTIONS 4.11 AND 4.21 and even if the Buyer knew or had reason to know of any misrepresentation or breach of warranty with respect to SECTION 4.10 at the time of Closing) and all of the representation and warranties of the Buyer contained in SECTION 3.2 shall survive the Closing hereunder and continue in full force and effect for a period of one (1) year thereafter. All of the representations and warranties of the Sellers, McDermott and Yost contained in SECTION 4.21 relating to the Products shall survive the Closing hereunder and continue in full force and effect with respect to each Product for a period after the Closing equal to the warranty period relating to each such Product; PROVIDED, HOWEVER, that in no event shall such period exceed two (2) years after the Closing. All of the representations and warranties of the Parties of the Sellers, McDermott and Yost contained in SECTION 4.11 shall survive the Closing and continue in full force and effect forever thereafter (subject to any applicable statutes of limitations). 7.2 INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER. (a) Subject to SECTION 7.7, in the event the Sellers, McDermott or Yost breaches any of their representations and warranties contained in SECTION 4, if there is an applicable survival period pursuant to SECTION 7.1, provided that the Buyer makes a written claim for indemnification against -32- McDermott or Yost pursuant to SECTION 9.7 within such survival period, then each of the Sellers, McDermott and Yost agrees to indemnify the Buyer from and against the entirety of any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, in the nature of, or caused by the breach. (b) Subject to SECTION 7.7, in the event any of the Sellers breaches any of his representations and warranties in SECTION 3.1, and, if there is an applicable survival period pursuant to SECTION 7.1, provided that the Buyer makes a written claim for indemnification against the Seller pursuant to SECTION 9.7 within such survival period, then such Seller agrees to indemnify the Buyer from and against the entirety of any Adverse Consequences the Buyer may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Buyer may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach). 7.3 INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLERS. Subject to SECTION 7.7, in the event the Buyer breaches any of its representations, warranties, and covenants contained herein, and, if there is an applicable survival period pursuant to SECTION 7.1, provided that any of the Sellers makes a written claim for indemnification against the Buyer pursuant to SECTION 9.7 within such survival period, then the Buyer agrees to indemnify each of the Sellers from and against the entirety of any Adverse Consequences the Seller may suffer through and after the date of the claim for indemnification (including any Adverse Consequences the Seller may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, in the nature of, or caused by the breach (or the alleged breach). 7.4 MATTERS INVOLVING THIRD PARTIES. (a) If any third party shall notify any Party (the "INDEMNIFIED PARTY") with respect to any matter (a "THIRD PARTY CLAIM") which may give rise to a claim for indemnification against any other Party (the "INDEMNIFYING PARTY") under this SECTION 7, then the Indemnified Party shall promptly notify each Indemnifying Party thereof in writing; PROVIDED, HOWEVER, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying Party notifies the Indemnified Party in writing within fifteen (15) days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim, (ii) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (iii) the Third Party -33- Claim involves only money damages and does not seek an injunction or other equitable relief, (iv) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interests of the Indemnified Party, and (v) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. (c) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with SECTION 7.4(b), (i) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim, (ii) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (iii) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). (d) In the event any of the conditions in SECTION 7.4(b) is or becomes unsatisfied, however, (i) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (ii) the Indemnifying Parties will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including attorneys' fees and expenses), and (iii) the Indemnifying Parties will remain responsible for any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim to the fullest extent provided in this SECTION 7. (e) The foregoing provisions of SECTIONS 7.4(a)-(d) notwithstanding, it is the intention of the Parties to cooperate fully with each other in the event of a Third Party Claim. To that end, if the event of a Third Party Claim resulting in McDermott, Yost or the Sellers being an Indemnifying Party, the Buyer will consult with McDermott and Yost prior to taking any action in defense of such Third Party Claim, especially if the Third Party Claim involves matters concerning the FCC or the Internal Revenue Service. 7.5 DETERMINATION OF ADVERSE CONSEQUENCES. All indemnification payments under this SECTION 7 shall be deemed adjusted to the Purchase Price. 7.6 SET OFF. In addition to any and all other remedies hereunder or at law or in equity, the Buyer shall be entitled to recover any indemnification payment or other amounts due from the Sellers, by retaining and setting off the amounts (whether or not such amounts are liquidated or reduced to judgment) against any amounts due or to become due from the Buyer to the Sellers under the Buyer Notes. 7.7 LIMITATIONS ON INDEMNIFICATION MATTERS. (a) The maximum aggregate amount of indemnification which can be required of McDermott, Yost and the Sellers under SECTIONS 7.2(a) and (b) for any breach of any representation, warranty or covenant set forth herein shall not exceed $250,000; PROVIDED, HOWEVER, that McDermott and Yost shall provide additional indemnification in the amount of $250,000 with respect to any breach of any representation or warranty set forth in SECTION 4.10, such -34- that the maximum aggregate amount of indemnification required of McDermott, Yost and the Sellers shall not exceed $500,000, and PROVIDED, FURTHER, that the indemnification obligations of McDermott, Yost and Sellers relating to the representations and warranties contained in SECTION 4.10 shall not extend to the payment of any legal fees incurred by the Indemnified Party in connection with the defense of any Adverse Consequence in connection therewith. (b) The Sellers, McDermott and Yost shall not have any obligation to indemnify the Buyer from and against any Adverse Consequences resulting from, arising out of, relating to, in the nature of, or caused by the breach of any representation or warranty until the Buyer has suffered Adverse Consequences by reason of all such breaches in excess of a $120,000 aggregate threshold (at which point the Sellers, McDermott and Yost will be obligated to indemnify the Buyer from and against all such Adverse Consequences in excess of such amount up to the amounts set forth in SECTION 7.2(a)); PROVIDED, HOWEVER, that the $120,000 threshold shall not apply to any indemnification obligation of the Sellers, McDermott or Yost relating to the breach of any representation and warranty set forth in SECTIONS 3.1(c) AND 4.4. (c) Neither the Sellers, McDermott nor Yost shall be required to indemnify, defend or hold Buyer harmless from and against any Adverse Consequences the Buyer may suffer relating to the research and development contract between the Company and the Subsidiary. 8. TAX MATTERS. The following provisions shall govern the allocation of responsibility as between the Buyer and the Sellers for certain tax matters following the Closing Date: 8.1 TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING DATE. The Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company and the Subsidiary for Tax periods which begin before the Closing Date and end on or after the Closing Date and shall be responsible for the payment of any Taxes relating thereto. 8.2 COOPERATION ON TAX MATTERS. (a) The Buyer, the Company, the Subsidiary and the Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this SECTION 8 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and the Subsidiary and the Sellers agree (i) to retain all books and records with respect to Tax matters pertinent to the Company and the Subsidiary relating to any taxable period beginning before the Closing Date until the expiration of the statute of -35- limitations (and, to the extent notified by Buyer or Sellers, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company and the Subsidiary or Sellers, as the case may be, shall allow the other party to take possession of such books and records. (b) The Buyer and the Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (c) The Buyer and the Sellers further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Department Regulations promulgated thereunder. 8.3 TAX SHARING AGREEMENTS. All tax sharing agreements or similar agreements with respect to or involving the Company and the Subsidiary shall be terminated as of the Closing Date and, after the Closing Date, the Company and the Subsidiary shall not be bound thereby or have any liability thereunder. 9. MISCELLANEOUS. 9.1 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party or any of their respective subsidiaries, affiliates, officers, directors, employees or agents shall make any public statement or announcement or any release to trade publications or through the press or otherwise, or make any statement to any third party with respect to this Agreement or the transactions contemplated hereby (including, without limitation, with respect to the entering into of this Agreement and the terms hereof) without the prior written approval of the Buyer and McDermott and Yost, which approval shall not be unreasonably withheld and shall be given within forty-eight (48) hours after delivery of a copy of the proposed press release or public announcement to the Party whose approval is being requested; PROVIDED, HOWEVER, that any Party may make any public disclosure it believes in good faith is required by applicable law, governmental order or regulation, stock exchange rule or regulation or legal proceeding, and then only after notice to the other Parties. The Parties agree and acknowledge that the Buyer will file with the SEC a Form 8-K disclosing the terms of this Agreement, including the financial terms of the Agreement, after the Closing and within the time period prescribed by the Securities Exchange Act. 9.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. 9.3 ENTIRE AGREEMENT. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. -36- 9.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of his or its rights, interests, or obligations hereunder without the prior written approval of the Buyer and McDermott or Yost; PROVIDED, HOWEVER, that the Buyer may (a) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (b) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases the Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder). 9.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 9.6 HEADINGS. The Section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.7 NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two (2) business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to the Sellers: Mr. Noel McDermott 502 Village Circle Santa Cruz, CA 95060 and Mr. Warren P. Yost 10324 Miner Place Cupertino, CA 95014 Copy to: Book & Book, LLP, 1414 Soquel Avenue, Suite 203 Santa Cruz, California 95062 Attention: Dennis Book, Esq. If to the Buyer: MicroTel International Inc. 9485 Haven Avenue, Suite 100 Rancho Cucamonga, California 91730 Attention: Carmine T. Oliva Copy to: Rutan & Tucker, LLP 611 Anton Boulevard, 14th Floor Costa Mesa, California 92626 Attention: Larry A. Cerutti, Esq. -37- Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 9.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of California without giving effect to any choice or conflict of law provision or rule (whether of the State of California or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of California. 9.9 AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by the Buyer, the Sellers, McDermott and Yost. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.10 SEVERABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 9.11 EXPENSES. Each of the Parties will bear his or its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby (and in the case of the costs and expenses of the Company and the Subsidiary, such costs and expenses shall be borne by the Sellers). The Sellers, McDermott and Yost agree that neither the Company nor the Subsidiary has borne or will bear any of the Sellers', McDermott's or Yost's costs and expenses (including any expenses of their financial advisors and any of their legal fees and expenses in excess of $25,000) in connection with this Agreement or any of the transactions contemplated hereby. 9.12 CONSTRUCTION. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. The Parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any Party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty, or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the Party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. -38- 9.13 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 9.14 SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees that the other Parties would be damaged irreparably in the event any of the provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the Parties agrees that the other Parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the Parties and the matter (subject to the provisions set forth in SECTION 9.15), in addition to any other remedy to which they may be entitled, at law or in equity. 9.15 SUBMISSION TO JURISDICTION. Each of the Parties submits to the jurisdiction of any state or federal court sitting in Orange County, California, any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each Party also agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of any other Party with respect thereto. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in SECTION 9.7. Nothing in this SECTION 9.15, however, shall affect the right of any Party to serve legal process in any other manner permitted by law or at equity. Each Party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity. (Signatures contained on following page) -39- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date first above written. BUYER: MICROTEL INTERNATIONAL INC., a Delaware corporation By: /S/ CARMINE T. OLIVA ------------------------------------------------------ Carmine T. Oliva, Chairman, President and Chief Executive Officer SELLERS: /S/ NOEL MCDERMOTT, TRUSTEEE, BY WARREN P. YOST, --------------------------------------------------------- ATTORNEY-IN-FACT --------------------------------------------------------- Noel McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 ADDRESS: 502 Village Circle Santa Cruz, CA 95060 /S/ WARREN P. YOST, TRUSTEE --------------------------------------------------------- Warren P. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988 /S/ GAIL A. YOST, TRUSTEE --------------------------------------------------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988 ADDRESS: 10324 Miner Place Cupertino, CA 95014 MCDERMOTT: /S/ NOEL MCDERMOTT, BY WARREN P. YOST, ATTORNEY-IN-FACT ------------------------------------------------------- Noel C. McDermott, individually YOST: /S/ WARREN P. YOST --------------------------------------------------------- Warren P. Yost, individually -40- EX-2.2 3 microtel_10qex2-2.txt EXHIBIT 2.2 SUBORDINATED SECURED PROMISSORY NOTE $1,681,318.68 July 13, 2004 Rancho Cucamonga, California FOR VALUE RECEIVED, MicroTel International Inc., a Delaware corporation (the "COMPANY"), promises to pay to Noel McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 ("HOLDER"), or his assigns, the principal sum of One Million Six Hundred Eighty-One Thousand Three Hundred Eighteen Dollars and Sixty-Eight Cents ($1,681,318.68), together with interest as computed below. This Note is one of the Long Term Notes issued pursuant to the Stock Purchase Agreement of even date herewith (as amended, modified or supplemented, the "STOCK PURCHASE AGREEMENT") between the Company and the Sellers (as defined in the Stock Purchase Agreement). The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which Holder, by the acceptance of this Note, agrees: 1. CERTAIN DEFINITIONS. As used in this Note, the following terms shall have the following definitions: "AFFILIATE," with respect to any Person, means (i) any director, officer or employee of such Person, (ii) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person, and (iii) any Person beneficially owning or holding 10% or more of any class of voting securities of such Person or any corporation of which such Person beneficially owns or holds, in the aggregate, 10% or more of any class of voting securities. The term "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. The term "Affiliate," when used herein without reference to any Person, shall mean an Affiliate of the Company. "APPLICABLE INTEREST RATE" shall mean the rate per annum equal to the LIBOR rate in effect on the first day of each calendar month during the term of this Note plus five percent (5%), and shall continue in effect for the balance of that month; PROVIDED, HOWEVER, that the Applicable Interest Rate shall not exceed seven percent (7%) per annum during the first two years of the term of this Note, eight percent (8%) per annum during the third and fourth years of the term of this Note, and nine percent (9%) per annum thereafter. "COLLATERAL AGENT" has the meaning set forth in the Pledge and Security Agreement dated as of the date hereof executed by the Company; Noel McDermott; Noel McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988. "COMPANY" includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note. "CXR" shall mean CXR Telcom Corporation, a wholly-owned subsidiary of the Company. "EVENT OF DEFAULT" has the meaning given in SECTION 7. "HOLDER" means the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered holder of this Note. "LARUS" shall mean Larus Corporation, a California corporation. "LIBOR" means the 30-day London Inter-Bank Offered Rate as reported in the WALL STREET JOURNAL. "LONG TERM NOTES" has the meaning set forth in the Stock Purchase Agreement. "MATURITY DATE" means July 1, 2010. "NOTE" means this Subordinated Secured Promissory Note. "OBLIGATIONS" means and includes all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Holder of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note and the other Long Term Notes, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by the Company hereunder and thereunder. "PERSON" means and includes an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. "SENIOR INDEBTEDNESS" means the principal of and unpaid interest on all indebtedness of the Company or any Subsidiary regardless of whether incurred on, before or after the date of this Note (i) for money borrowed from any bank, savings and loan or other financial institution, and is evidenced by notes, bonds, debentures or other written obligations, and (ii) any renewals or extensions of any indebtedness described in (i) above; PROVIDED, HOWEVER, that the term shall not include (a) any lease financing arrangement involving the Company or any Subsidiary and (b) indebtedness which by the terms of the instrument creating or evidencing it is subordinated to or on a parity with this Note. "STOCK PURCHASE AGREEMENT" has the meaning given in the introductory paragraph hereof. -2- "SUBSIDIARY" means any Person (i) the shares of stock, membership interests, partnership interests or other forms of equity of which having ordinary voting power to elect a majority of the directors, managers or partners, as the case may be, of that Person are owned, directly or indirectly, by the Company or a Subsidiary of the Company or (ii) which is controlled, directly or indirectly, by the Company or any Subsidiary of the Company. "TRANSFER" has the meaning set forth in SECTION 6.2(A). "VISTA" means Vista Corporation, a California corporation. 2. PAYMENTS OF PRINCIPAL AND INTEREST. Beginning on July 12, 2004, the outstanding principal balance of this Note shall bear interest at the Applicable Interest Rate, payable monthly in arrears unless prepaid as provided herein. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months. Payments of principal and interest shall be payable in cash as follows: (a) principal payments which, in each case, shall be equal to $23,351.64 (other than the final payment), shall be paid by the Company to Holder on a monthly basis no later than the first day of each month of each year so long as any balance of principal and interest of this Note remains outstanding. The final monthly principal payment shall be in an amount equal to $23,352.24. The first principal payment shall be due on August 1, 2004; (b) interest payments hereunder shall be paid monthly, in arrears, by the Company to Holder no later than the first day of each month of each year so long as any balance of principal and interest of this Note remains outstanding. The first interest payment shall be due on August 1, 2004 (which payment shall represent all accrued interest from July 12, 2004 through July 31, 2004); and (c) any remaining outstanding balance of principal and interest of this Note shall be due and payable on the Maturity Date or at such earlier time as provided herein. 3. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made shall be due on a Saturday, Sunday or a public holiday under the laws of the State of California, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date. 4. PREPAYMENT. Upon five (5) days prior written notice to Holder, the Company may prepay this Note in whole or in part; PROVIDED, HOWEVER, that: (i) any prepayment of this Note may only be made in connection with the prepayment of all Long Term Notes issued under the Stock Purchase Agreement on a pro rata basis, based on the respective aggregate outstanding principal amounts of each such Long Term Note, and (ii) any such prepayment will be applied first to the payment of expenses due under this Note, second to interest accrued on this Note and third, if the amount of prepayment exceeds the amount of all such expenses and accrued interest, to the payment of principal of this Note. -3- 5. GUARANTEES; SECURITY. (a) The Obligations due under this Note are guaranteed by the following: (i) a Continuing Guarantee dated as of the date hereof and executed by CXR in favor of Holder and the Collateral Agent; (ii) a Continuing Guarantee dated as of the date hereof and executed by Larus in favor of Holder and the Collateral Agent; and (iii) a Continuing Guarantee dated as of the date hereof and executed by Vista in favor of Holder and the Collateral Agent. (b) The Obligations of the Company under this Note are secured by the following: (i) a Pledge and Security Agreement dated as of the date hereof and executed by the Company in favor of Holder and the Collateral Agent; (ii) a Security Agreement dated as of the date hereof and executed by Larus in favor of Holder and the Collateral Agent; (iii) a Security Agreement dated as of the date hereof and executed by CXR in favor of Holder and the Collateral Agent; (iv) a Security Agreement dated as of the date hereof and executed by Vista in favor of Holder and the Collateral Agent. 6. CERTAIN COVENANTS. 6.1 AFFIRMATIVE COVENANTS. (a) NOTICE OF DEFAULTS. Promptly upon the occurrence thereof, the Company shall furnish to Holder a written notice of the occurrence of any Event of Default hereunder or any event of default with respect to any Senior Indebtedness. (b) INSPECTION RIGHTS. Holder and its representatives shall have the right, at any time during normal business hours, upon reasonable prior notice, to visit and inspect the properties of the Company and its corporate, financial and operating records, and make abstracts therefrom, and to discuss the Company's affairs, finances and accounts with its directors, officers and independent public accountants. 6.2 NEGATIVE COVENANTS. While any amount is outstanding under this Note, without the prior written consent of the Collateral Agent: (a) ASSET DISPOSITIONS. The Company shall not sell, lease, transfer, license or otherwise dispose of (collectively, a "TRANSFER") (i) any of the assets or property of Larus acquired pursuant to the terms of the Stock Purchase Agreement, or (ii) any of the assets or property of CXR, whether now owned or hereafter acquired; PROVIDED, HOWEVER, that the Company may make any Transfers of the assets or property of Larus or CXR in the ordinary course of its business (x) consisting of the sale of inventory, and (y) consisting of sales of equipment or other assets that are worn-out, no longer needed for the business of the Company or obsolete. -4- (b) MERGERS AND ACQUISITIONS. The Company shall not consolidate with or merge into Larus or CXR any other Person (other than an Affiliate) or permit any other Person (other than an Affiliate) to merge into Larus or CXR; PROVIDED, HOWEVER, that the Company may consolidate or merge Larus with CXR. 7. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "EVENT OF DEFAULT" under this Note: 7.1 FAILURE TO PAY. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest or other payment required under the terms of this Note on the date due and such payment shall not have been made within ninety (90) days of the Company's receipt of Holder's written notice to the Company of such failure to pay. 7.2 BREACHES OF OTHER COVENANTS. The Company shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note (other than those specified in SECTION 7.1) and such failure shall continue for ninety (90) days. 7.3 REPRESENTATIONS AND WARRANTIES. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of the Company to Holder in writing in connection with this Note shall be false, incorrect, incomplete or misleading in any material respect when made or furnished. 7.4 OTHER PAYMENT OBLIGATIONS. The Company be in default under the terms of any Senior Indebtedness; PROVIDED, HOWEVER, that if the Company is able to cure its default thereunder and does, in fact, cure such default pursuant to the terms and conditions contained thereunder, then such event shall not be considered an Event of Default hereunder. 7.5 VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing. 7.6 INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of its property, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement. -5- 8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in SECTIONS 7.5 AND 7.6) and at any time thereafter during the continuance of such Event of Default, Holder may (a) take full and immediate control of Larus or, in the event that the assets of Larus are combined with the assets of CXR (collectively, the "LARUS ENTITY"), the Larus portions of the Larus Entity, and (b) declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in SECTIONS 7.5 AND 7.6, immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Holder may exercise any other right power or remedy permitted by law, either by suit in equity or by action at law, or both. 9. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company's Senior Indebtedness. 9.1 INSOLVENCY PROCEEDINGS. If there shall occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, (i) no amount shall be paid by the Company in respect of the principal of, interest on or other amounts due with respect to this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of Holder which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. 9.2 DEFAULT ON SENIOR INDEBTEDNESS. If there shall occur an event of default which has been declared in writing with respect to any Senior Indebtedness, as defined therein, or in the instrument under which it is outstanding, permitting the Holder to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note. 9.3 FURTHER ASSURANCES. By acceptance of this Note, Holder agrees to execute and deliver customary forms of subordination agreement or intercreditor agreement requested from time to time by holders of Senior Indebtedness, and as a condition to Holder's rights hereunder, the Company may require that Holder execute such forms of subordination agreement or intercreditor agreement; PROVIDED, HOWEVER, that such forms shall not impose on Holder terms less favorable than those provided herein. -6- 9.4 OTHER INDEBTEDNESS. No indebtedness which does not constitute Senior Indebtedness shall be senior in any respect to the indebtedness represented by this Note. 9.5 SUBROGATION. Subject to the payment in full of all Senior Indebtedness, Holder shall be subrogated to the rights of the holders of such Senior Indebtedness (to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this SECTION 9) to receive payments and distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by the Company to or on account of this Note; and for purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which Holder would be entitled except for the provisions of this SECTION 9 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. 9.6 NO IMPAIRMENT. Subject to the rights, if any, of the holders of Senior Indebtedness under this SECTION 9 to receive cash, securities or other properties otherwise payable or deliverable to Holder, nothing contained in this SECTION 9 shall impair, as between the Company and Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. 9.7 LIEN SUBORDINATION. Any lien of Holder, whether now or hereafter existing in connection with the amounts due under this Note, on any assets or property of the Company or any Subsidiary or any proceeds or revenues therefrom which Holder may have at any time as security for any amounts due and obligations under this Note shall be subordinate to all liens now or hereafter granted to a holder of Senior Indebtedness by the Company or by law, notwithstanding the date, order or method of attachment or perfection of any such lien or the provisions of any applicable law. 9.8 RELIANCE OF HOLDERS OF SENIOR INDEBTEDNESS. Holder, by its acceptance hereof, shall be deemed to acknowledge and agree that the foregoing subordination provisions are, and are intended to be, an inducement to and a consideration of each holder of Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the creation of the indebtedness evidenced by this Note, and each such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and holding, or in continuing to hold, such Senior Indebtedness. -7- 10. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer described in SECTION 12 below, the rights and obligations of the Company and Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. 11. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Collateral Agent. 12. TRANSFER OF THIS NOTE. With respect to any offer, sale or other disposition of this Note, Holder will give written notice to the Company prior thereto, describing briefly the manner thereof. 13. ASSIGNMENT BY THE COMPANY. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Collateral Agent. 14. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery at the respective addresses of the parties as set forth in the Stock Purchase Agreement or on the register maintained by the Company. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. 15. PARI PASSU NOTES. Holder acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Long Term Notes issued pursuant to the Stock Purchase Agreement or pursuant to the terms of such Long Term Notes. In the event Holder receives payments in excess of its pro rata share of the Company's payments to the holders of all of the Long Term Notes, then Holder shall hold in trust all such excess payments for the benefit of the holders of the other Long Term Notes and shall pay such amounts held in trust to such other holders upon demand by such holders. 16. PAYMENT. Payment shall be made in lawful tender of the United States. 17. USURY. In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. 18. EXPENSES; WAIVERS. If action is instituted to collect this Note, the non-prevailing party promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by the prevailing party in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. -8- 19. GOVERNING LAW. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California, or of any other state. [signature page follows] -9- IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above. MICROTEL INTERNATIONAL INC., a Delaware corporation By: /S/ CARMINE T. OLIVA --------------------------------------------- Carmine T. Oliva, Chairman, President and Chief Executive Officer -10- EX-2.3 4 microtel_10qex2-3.txt EXHIBIT 2.3 SUBORDINATED SECURED PROMISSORY NOTE $1,318,681.32 July 13, 2004 Rancho Cucamonga, California FOR VALUE RECEIVED, MicroTel International Inc., a Delaware corporation (the "COMPANY"), promises to pay to Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988 (collectively, the "HOLDER"), or their assigns, the principal sum of One Million Three Hundred Eighteen Thousand Six Hundred Eighty-One Dollars and Thirty-Two Cents ($1,318,681.32), together with interest as computed below. This Note is one of the Long Term Notes issued pursuant to the Stock Purchase Agreement of even date herewith (as amended, modified or supplemented, the "STOCK PURCHASE AGREEMENT") between the Company and the Sellers (as defined in the Stock Purchase Agreement). The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which Holder, by the acceptance of this Note, agrees: 1. CERTAIN DEFINITIONS. As used in this Note, the following terms shall have the following definitions: "AFFILIATE," with respect to any Person, means (i) any director, officer or employee of such Person, (ii) any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person, and (iii) any Person beneficially owning or holding 10% or more of any class of voting securities of such Person or any corporation of which such Person beneficially owns or holds, in the aggregate, 10% or more of any class of voting securities. The term "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. The term "Affiliate," when used herein without reference to any Person, shall mean an Affiliate of the Company. "APPLICABLE INTEREST RATE" shall mean the rate per annum equal to the LIBOR rate in effect on the first day of each calendar month during the term of this Note plus five percent (5%), and shall continue in effect for the balance of that month; PROVIDED, HOWEVER, that the Applicable Interest Rate shall not exceed seven percent (7%) per annum during the first two years of the term of this Note, eight percent (8%) per annum during the third and fourth years of the term of this Note, and nine percent (9%) per annum thereafter. "COLLATERAL AGENT" has the meaning set forth in the Pledge and Security Agreement dated as of the date hereof executed by the Company; Noel McDermott; Noel McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995; and Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9, 1988. "COMPANY" includes the corporation initially executing this Note and any Person which shall succeed to or assume the obligations of the Company under this Note. "CXR" shall mean CXR Telcom Corporation, a wholly-owned subsidiary of the Company. "EVENT OF DEFAULT" has the meaning given in SECTION 7. "HOLDER" means the Person specified in the introductory paragraph of this Note or any Person who shall at the time be the registered holder of this Note. "LARUS" shall mean Larus Corporation, a California corporation. "LIBOR" means the 30-day London Inter-Bank Offered Rate as reported in the WALL STREET JOURNAL. "LONG TERM NOTES" has the meaning set forth in the Stock Purchase Agreement. "MATURITY DATE" means July 1, 2010. "NOTE" means this Subordinated Secured Promissory Note. "OBLIGATIONS" means and includes all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to Holder of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under or pursuant to the terms of this Note and the other Long Term Notes, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by the Company hereunder and thereunder. "PERSON" means and includes an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority. "SENIOR INDEBTEDNESS" means the principal of and unpaid interest on all indebtedness of the Company or any Subsidiary regardless of whether incurred on, before or after the date of this Note (i) for money borrowed from any bank, savings and loan or other financial institution, and is evidenced by notes, bonds, debentures or other written obligations, and (ii) any renewals or extensions of any indebtedness described in (i) above; PROVIDED, HOWEVER, that the term shall not include (a) any lease financing arrangement involving the Company or any Subsidiary and (b) indebtedness which by the terms of the instrument creating or evidencing it is subordinated to or on a parity with this Note. "STOCK PURCHASE AGREEMENT" has the meaning given in the introductory paragraph hereof. "SUBSIDIARY" means any Person (i) the shares of stock, membership interests, partnership interests or other forms of equity of which having ordinary voting power to elect a majority of the directors, managers or partners, as the case may be, of that Person are owned, directly or indirectly, by the Company or a Subsidiary of the Company or (ii) which is controlled, directly or indirectly, by the Company or any Subsidiary of the Company. -2- "TRANSFER" has the meaning set forth in SECTION 6.2(a). "VISTA" means Vista Labs Incorporated, a California corporation. 2. PAYMENTS OF PRINCIPAL AND INTEREST. Beginning on July 12, 2004, the outstanding principal balance of this Note shall bear interest at the Applicable Interest Rate, payable monthly in arrears unless prepaid as provided herein. Interest shall be computed on the basis of a 360-day year of twelve (12) 30-day months. Payments of principal and interest shall be payable in cash as follows: (a) principal payments which, in each case, shall be equal to $18,315.01 (other than the final payment), shall be paid by the Company to Holder on a monthly basis no later than the first day of each month of each year so long as any balance of principal and interest of this Note remains outstanding. The final monthly principal payment shall be in an amount equal to $18,315.61. The first principal payment shall be due on August 1, 2004; (b) interest payments hereunder shall be paid monthly, in arrears, by the Company to Holder no later than the first day of each month of each year so long as any balance of principal and interest of this Note remains outstanding. The first interest payment shall be due on August 1, 2004 (which payment shall represent all accrued interest from July 12, 2004 through July 31, 2004); and (c) any remaining outstanding balance of principal and interest of this Note shall be due and payable on the Maturity Date or at such earlier time as provided herein. 3. PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made shall be due on a Saturday, Sunday or a public holiday under the laws of the State of California, such payment may be due on the next succeeding business day and such next succeeding day shall be included in the calculation of the amount of accrued interest payable on such date. 4. PREPAYMENT. Upon five (5) days prior written notice to Holder, the Company may prepay this Note in whole or in part; PROVIDED, HOWEVER, that: (i) any prepayment of this Note may only be made in connection with the prepayment of all Long Term Notes issued under the Stock Purchase Agreement on a pro rata basis, based on the respective aggregate outstanding principal amounts of each such Long Term Note, and (ii) any such prepayment will be applied first to the payment of expenses due under this Note, second to interest accrued on this Note and third, if the amount of prepayment exceeds the amount of all such expenses and accrued interest, to the payment of principal of this Note. 5. GUARANTEES; SECURITY. (a) The Obligations due under this Note are guaranteed by the following: -3- (i) a Continuing Guarantee dated as of the date hereof and executed by CXR in favor of Holder and the Collateral Agent; (ii) a Continuing Guarantee dated as of the date hereof and executed by Larus in favor of Holder and the Collateral Agent; and (iii) a Continuing Guarantee dated as of the date hereof and executed by Vista in favor of Holder and the Collateral Agent. (b) The Obligations of the Company under this Note are secured by the following: (i) a Pledge and Security Agreement dated as of the date hereof and executed by the Company in favor of Holder and the Collateral Agent; (ii) a Security Agreement dated as of the date hereof and executed by Larus in favor of Holder and the Collateral Agent; (iii) a Security Agreement dated as of the date hereof and executed by CXR in favor of Holder and the Collateral Agent; (iv) a Security Agreement dated as of the date hereof and executed by Vista in favor of Holder and the Collateral Agent. 6. CERTAIN COVENANTS. 6.1 AFFIRMATIVE COVENANTS. (a) NOTICE OF DEFAULTS. Promptly upon the occurrence thereof, the Company shall furnish to Holder a written notice of the occurrence of any Event of Default hereunder or any event of default with respect to any Senior Indebtedness. (b) INSPECTION RIGHTS. Holder and its representatives shall have the right, at any time during normal business hours, upon reasonable prior notice, to visit and inspect the properties of the Company and its corporate, financial and operating records, and make abstracts therefrom, and to discuss the Company's affairs, finances and accounts with its directors, officers and independent public accountants. 6.2 NEGATIVE COVENANTS. While any amount is outstanding under this Note, without the prior written consent of the Collateral Agent: (a) ASSET DISPOSITIONS. The Company shall not sell, lease, transfer, license or otherwise dispose of (collectively, a "TRANSFER") (i) any of the assets or property of Larus acquired pursuant to the terms of the Stock Purchase Agreement, or (ii) any of the assets or property of CXR, whether now owned or hereafter acquired; PROVIDED, HOWEVER, that the Company may make any Transfers of the assets or property of Larus or CXR in the ordinary course of its business (x) consisting of the sale of inventory, and (y) consisting of sales of equipment or other assets that are worn-out, no longer needed for the business of the Company or obsolete. -4- (b) MERGERS AND ACQUISITIONS. The Company shall not consolidate with or merge into Larus or CXR any other Person (other than an Affiliate) or permit any other Person (other than an Affiliate) to merge into Larus or CXR; PROVIDED, HOWEVER, that the Company may consolidate or merge Larus with CXR. 7. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "EVENT OF DEFAULT" under this Note: 7.1 FAILURE TO PAY. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest or other payment required under the terms of this Note on the date due and such payment shall not have been made within ninety (90) days of the Company's receipt of Holder's written notice to the Company of such failure to pay. 7.2 BREACHES OF OTHER COVENANTS. The Company shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note (other than those specified in SECTION 7.1) and such failure shall continue for ninety (90) days. 7.3 REPRESENTATIONS AND WARRANTIES. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of the Company to Holder in writing in connection with this Note shall be false, incorrect, incomplete or misleading in any material respect when made or furnished. 7.4 OTHER PAYMENT OBLIGATIONS. The Company be in default under the terms of any Senior Indebtedness; PROVIDED, HOWEVER, that if the Company is able to cure its default thereunder and does, in fact, cure such default pursuant to the terms and conditions contained thereunder, then such event shall not be considered an Event of Default hereunder. 7.5 VOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of effecting any of the foregoing. 7.6 INVOLUNTARY BANKRUPTCY OR INSOLVENCY PROCEEDINGS. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company or of all or a substantial part of its property, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement. -5- 8. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence of any Event of Default (other than an Event of Default referred to in SECTIONS 7.5 AND 7.6) and at any time thereafter during the continuance of such Event of Default, Holder may (a) take full and immediate control of Larus or, in the event that the assets of Larus are combined with the assets of CXR (collectively, the "LARUS ENTITY"), the Larus portions of the Larus Entity, and (b) declare all outstanding Obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in SECTIONS 7.5 AND 7.6, immediately and without notice, all outstanding Obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Holder may exercise any other right power or remedy permitted by law, either by suit in equity or by action at law, or both. 9. SUBORDINATION. The indebtedness evidenced by this Note is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all of the Company's Senior Indebtedness. 9.1 INSOLVENCY PROCEEDINGS. If there shall occur any receivership, insolvency, assignment for the benefit of creditors, bankruptcy, reorganization, or arrangements with creditors (whether or not pursuant to bankruptcy or other insolvency laws), sale of all or substantially all of the assets, dissolution, liquidation, or any other marshaling of the assets and liabilities of the Company, (i) no amount shall be paid by the Company in respect of the principal of, interest on or other amounts due with respect to this Note at the time outstanding, unless and until the principal of and interest on the Senior Indebtedness then outstanding shall be paid in full, and (ii) no claim or proof of claim shall be filed with the Company by or on behalf of Holder which shall assert any right to receive any payments in respect of the principal of and interest on this Note except subject to the payment in full of the principal of and interest on all of the Senior Indebtedness then outstanding. 9.2 DEFAULT ON SENIOR INDEBTEDNESS. If there shall occur an event of default which has been declared in writing with respect to any Senior Indebtedness, as defined therein, or in the instrument under which it is outstanding, permitting the Holder to accelerate the maturity thereof, then, unless and until such event of default shall have been cured or waived or shall have ceased to exist, or all Senior Indebtedness shall have been paid in full, no payment shall be made in respect of the principal of or interest on this Note. 9.3 FURTHER ASSURANCES. By acceptance of this Note, Holder agrees to execute and deliver customary forms of subordination agreement or intercreditor agreement requested from time to time by holders of Senior Indebtedness, and as a condition to Holder's rights hereunder, the Company may require that Holder execute such forms of subordination agreement or intercreditor agreement; PROVIDED, HOWEVER, that such forms shall not impose on Holder terms less favorable than those provided herein. -6- 9.4 OTHER INDEBTEDNESS. No indebtedness which does not constitute Senior Indebtedness shall be senior in any respect to the indebtedness represented by this Note. 9.5 SUBROGATION. Subject to the payment in full of all Senior Indebtedness, Holder shall be subrogated to the rights of the holders of such Senior Indebtedness (to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this SECTION 9) to receive payments and distributions of assets of the Company applicable to the Senior Indebtedness. No such payments or distributions applicable to the Senior Indebtedness shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by the Company to or on account of this Note; and for purposes of such subrogation, no payments or distributions to the holders of Senior Indebtedness to which Holder would be entitled except for the provisions of this SECTION 9 shall, as between the Company and its creditors, other than the holders of Senior Indebtedness and Holder, be deemed to be a payment by the Company to or on account of the Senior Indebtedness. 9.6 NO IMPAIRMENT. Subject to the rights, if any, of the holders of Senior Indebtedness under this SECTION 9 to receive cash, securities or other properties otherwise payable or deliverable to Holder, nothing contained in this SECTION 9 shall impair, as between the Company and Holder, the obligation of the Company, subject to the terms and conditions hereof, to pay to Holder the principal hereof and interest hereon as and when the same become due and payable, or shall prevent Holder, upon default hereunder, from exercising all rights, powers and remedies otherwise provided herein or by applicable law. 9.7 LIEN SUBORDINATION. Any lien of Holder, whether now or hereafter existing in connection with the amounts due under this Note, on any assets or property of the Company or any Subsidiary or any proceeds or revenues therefrom which Holder may have at any time as security for any amounts due and obligations under this Note shall be subordinate to all liens now or hereafter granted to a holder of Senior Indebtedness by the Company or by law, notwithstanding the date, order or method of attachment or perfection of any such lien or the provisions of any applicable law. 9.8 RELIANCE OF HOLDERS OF SENIOR INDEBTEDNESS. Holder, by its acceptance hereof, shall be deemed to acknowledge and agree that the foregoing subordination provisions are, and are intended to be, an inducement to and a consideration of each holder of Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the creation of the indebtedness evidenced by this Note, and each such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and holding, or in continuing to hold, such Senior Indebtedness. 10. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer described in SECTION 12 below, the rights and obligations of the Company and Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties. -7- 11. WAIVER AND AMENDMENT. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the Collateral Agent. 12. TRANSFER OF THIS NOTE. With respect to any offer, sale or other disposition of this Note, Holder will give written notice to the Company prior thereto, describing briefly the manner thereof. 13. ASSIGNMENT BY THE COMPANY. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Collateral Agent. 14. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or mailed by registered or certified mail, postage prepaid, or by recognized overnight courier or personal delivery at the respective addresses of the parties as set forth in the Stock Purchase Agreement or on the register maintained by the Company. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when received. 15. PARI PASSU NOTES. Holder acknowledges and agrees that the payment of all or any portion of the outstanding principal amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Long Term Notes issued pursuant to the Stock Purchase Agreement or pursuant to the terms of such Long Term Notes. In the event Holder receives payments in excess of its pro rata share of the Company's payments to the holders of all of the Long Term Notes, then Holder shall hold in trust all such excess payments for the benefit of the holders of the other Long Term Notes and shall pay such amounts held in trust to such other holders upon demand by such holders. 16. PAYMENT. Payment shall be made in lawful tender of the United States. 17. USURY. In the event any interest is paid on this Note which is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Note. 18. EXPENSES; WAIVERS. If action is instituted to collect this Note, the non-prevailing party promises to pay all costs and expenses, including, without limitation, reasonable attorneys' fees and costs, incurred by the prevailing party in connection with such action. The Company hereby waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument. -8- 19. GOVERNING LAW. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California, or of any other state. [signature page follows] -9- IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above. MICROTEL INTERNATIONAL INC., a Delaware corporation By: /S/ CARMINE T. OLIVA --------------------------------------------- Carmine T. Oliva, Chairman, President and Chief Executive Officer -10- EX-2.4 5 microtel_10qex2-4.txt EXHIBIT 2.4 PLEDGE AND SECURITY AGREEMENT THIS PLEDGE AND SECURITY AGREEMENT (the "PLEDGE AGREEMENT"), executed this 13th day of July, 2004, is made by and among MicroTel International Inc., a Delaware corporation ("PLEDGOR"), Noel McDermott, an individual ("COLLATERAL AGENT"), and the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. Pledgor and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Pledgor of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"). B. Pursuant to the terms of the Stock Purchase Agreement, Pledgor issued certain long term promissory notes (which are defined in the Stock Purchase Agreement as well as herein as the "LONG TERM NOTES") to each of the Lenders to satisfy a portion of the aggregate consideration to be paid by Pledgor for the purchase of the shares of Larus from Lenders. C. In order to induce Lenders to extend the credit evidenced by the Long Term Notes, Pledgor has agreed to enter into this Pledge Agreement to pledge and grant Collateral Agent, for the benefit of itself and the Lenders, the security interest in the Collateral described below. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS AND INTERPRETATION. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Long Term Notes shall have the respective meanings given to those terms in the Long Term Notes, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. THE PLEDGE. To secure the Obligations as defined in SECTION 3 hereof, Pledgor hereby pledges and grants to Collateral Agent a security interest in all of Pledgor's right, title and interest, whether now existing or hereafter arising, in all instruments, certificated and uncertificated securities, money and general intangibles of, relating to or arising from the following property (the "COLLATERAL"): (a) the equity securities of Larus acquired by Pledgor pursuant to the Stock Purchase Agreement and the equity securities of the Larus Entity, if applicable (collectively, the "PLEDGED SECURITIES"); (b) all dividends (including cash dividends), other distributions (including redemption proceeds), or other property, securities or instruments in respect of or in exchange for the Pledged Securities, whether by way of dividends, stock dividends, recapitalizations, mergers, consolidations, split-ups, combinations or exchanges of shares or otherwise; and (c) all proceeds of the foregoing (the "PROCEEDS"). 3. SECURITY FOR OBLIGATIONS. The obligations secured by this Pledge Agreement (the "OBLIGATIONS") shall mean and include all obligations of Pledgor as provided in the Long Term Notes. 4. DELIVERY OF COLLATERAL; FINANCING STATEMENTS. All certificates or instruments representing or evidencing the Collateral shall be promptly delivered to Collateral Agent and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Collateral Agent. Concurrently with the execution of this Pledge Agreement, Pledgor shall execute and deliver to Collateral Agent the UCC-1 financing statement provided by Collateral Agent. 5. REPRESENTATIONS WARRANTIES. Pledgor hereby represents and warrants to Collateral Agent and the Lenders as follows: (a) AUTHORIZATION. Pledgor has full power and authority to enter into this MicroTel Pledge Agreement. (b) STOCK POWERS. The stock powers and assignments separate from certificate are duly executed and give Collateral Agent and Lenders the authority they purport to confer. (c) ISSUANCE OF PLEDGED SECURITIES, ETC. The Pledged Securities are owned by Pledgor free and clear of any and all liens, pledges, encumbrances or charges, and Pledgor has not optioned or otherwise agreed to sell, hypothecate, pledge, or otherwise encumber or dispose of the Pledged Securities except for any liens, pledges, encumbrances or charges in favor of the Senior Lenders. (d) SECURITY INTEREST. The pledge of the Collateral creates a valid security interest in the Collateral securing the payment of the Obligations and the obligations hereunder. (e) RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. On and as of the date any property becomes Collateral, the foregoing representations and warranties shall be deemed restated with respect to such additional Collateral. 6. COVENANTS. Pledgor hereby agrees as follows: (a) LIENS ON COLLATERAL. Pledgor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Collateral other than in favor of the Senior Lenders. -2- (b) FURTHER ASSURANCES. Pledgor agrees that at any time and from time to time, at Pledgor's expense, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. 7. VOTING RIGHTS; DIVIDENDS; ETC. (a) RIGHTS PRIOR TO AN EVENT OF DEFAULT. So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Securities or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement; and (ii) Pledgor shall be entitled to receive and retain free and clear of the security interest of Collateral Agent and Lenders hereunder any and all dividends and interest paid in respect of the Pledged Securities. (b) RIGHTS FOLLOWING AN EVENT OF DEFAULT. Upon the occurrence and during the continuance of an Event of Default: (i) all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to SECTION 7(a)(i) and to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to SECTION 7(a)(ii) shall cease and all such rights shall thereupon become vested in Collateral Agent which shall thereupon have the sole right, but not the obligation, to exercise such voting and other consensual rights and to receive and hold as Collateral such dividends and interest payments; and (ii) all dividends and interest payments which are received by Pledgor contrary to the provisions of SECTION 7(b)(i) shall be received in trust for the benefit of Collateral Agent and Lenders, shall be segregated from other funds of Pledgor and shall be forthwith delivered to Collateral Agent as Collateral in the same form as so received (with any necessary endorsement). 8. EVENTS OF DEFAULT; REMEDIES. (a) EVENT OF DEFAULT. An Event of Default shall be deemed to have occurred under this Pledge Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes). (b) RIGHTS UNDER THE UCC. In addition to all other rights granted hereby, and otherwise by law, Collateral Agent shall have, with respect to the Collateral, the rights and obligations of a secured party under the UCC. -3- (c) NOTICE, ETC. In any case where notice of sale is required, ten (10) days notice shall be deemed reasonable notice. Collateral Agent may have resort to the Collateral or any portion thereof with no requirement on the part of Collateral Agent to proceed first against any other Person (as defined in the Long Term Notes) or property. (d) OTHER REMEDIES. Upon the occurrence and during the continuance of an Event of Default, at the request of Collateral Agent, Pledgor shall assemble and make available to Collateral Agent all records relating to the Pledged Securities. (e) APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Collateral Agent at the time of, or received by Collateral Agent after, the occurrence of an Event of Default) shall be paid to and applied as follows: (i) first, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Collateral Agent; (ii) second, to the payment to each Lender of the amount then owing or unpaid on such Lender's Long Term Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon such Long Term Note, then its Pro Rata Share of the amount remaining to be distributed (to be applied first to accrued interest and second to outstanding principal); and (iii) third, to the payment of the surplus, if any, to Pledgor, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. For purposes of this Pledge Agreement, the term "Pro Rata Share" shall mean, when calculating a Lender's portion of any distribution or amount, that distribution or amount (expressed as a percentage) equal to a fraction (i) the numerator of which is the original outstanding principal amount of such Lender's Long Term Note and (ii) the denominator of which is the original aggregate outstanding principal amount of all Long Term Notes issued under the Stock Purchase Agreement. In the event that a Lender receives payments or distributions in excess of its Pro Rata Share, then such Lender shall hold in trust all such excess payments or distributions for the benefit of the other Lenders and shall pay such amounts held in trust to such other holders upon demand by such holders. 9. AUTHORIZED ACTION BY COLLATERAL AGENT. (a) Pledgor hereby appoints Collateral Agent as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor or otherwise, from time to time in Collateral Agent's discretion and to the full extent permitted by law to take any action and to execute any instrument which Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Pledge Agreement in accordance with -4- the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. (b) This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Collateral Agent hereunder are solely to protect the Collateral Agent and Lenders' interests in the Collateral and shall not impose any duty upon Collateral Agent to exercise any such powers. Collateral Agent shall be accountable only for amounts that he actually receives as a result of the exercise of such powers and in no event shall Collateral Agent or any of his employees or agents be responsible to Pledgor for any act or failure to act, except for gross negligence or willful misconduct. 10. COLLATERAL AGENT. (a) APPOINTMENT. The Lenders hereby appoint Noel McDermott as Collateral Agent for the Lenders under this Pledge Agreement (in such capacity, the "COLLATERAL AGENT") to serve from the date hereof until the termination of this Pledge Agreement. (b) POWERS AND DUTIES OF COLLATERAL AGENT, INDEMNITY BY LENDERS. (i) Each Lender hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein, together with such powers as are reasonably incidental thereto. Collateral Agent may execute any of his duties hereunder by or through agents or employees at his discretion. (ii) Upon the death, resignation or removal of the Collateral Agent, the Lenders shall appoint a successor collateral agent to act under the Long Term Notes and this Pledge Agreement. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after Collateral Agent's death, giving of notice of resignation or removal as Collateral Agent, then Collateral Agent shall be deemed to be Warren P. Yost or his successor-in-interest to his Long Term Note. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collateral agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder, and the Collateral Agent shall be discharged from his duties and obligations. After Collateral Agent's death, resignation or removal hereunder as the Collateral Agent, the provisions of this SECTION 10 shall continue in effect for his benefit in respect of any actions taken or omitted to be taken by him while he was acting as such Collateral Agent. 11. MISCELLANEOUS. (a) NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Pledgor, Collateral Agent or Lenders under this Pledge Agreement shall be in writing and telecopied, mailed or delivered to each party at the telecopier number or its address set forth below (or to such other telecopy number or address as the recipient of any notice shall have notified the other in writing). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. Pledgor: MicroTel International Inc. 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 Attention: Carmine T. Oliva Telephone: (909) 987-9220 Facsimile: (909) 987-9228 Collateral Agent: Noel McDermott 502 Village Circle Santa Cruz, CA 95060 Telephone: ____________________ Facsimile: _____________________ Lenders: See the Schedule of Lenders on EXHIBIT A. (b) NONWAIVER. No failure or delay on Pledgor, Collateral Agent or Lenders' part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) AMENDMENTS AND WAIVERS. This Pledge Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Pledgor and Collateral Agent. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) ASSIGNMENTS. This Pledge Agreement shall be binding upon and inure to the benefit of Lenders, Collateral Agent and Pledgor and their respective successors and assigns; PROVIDED, HOWEVER, that Pledgor may not assign its rights and duties hereunder without the prior written consent of Collateral Agent. (e) CUMULATIVE RIGHTS, ETC. The rights, powers and remedies of Lenders and Collateral Agent under this Pledge Agreement shall be in addition to all rights, powers and remedies given to Lenders and Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, the Long Term Notes or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent's rights hereunder. Pledgor waives any right to require Collateral Agent or Lenders to proceed against any Person or to exhaust any collateral or to pursue any remedy in Collateral Agent or Lenders' power. -5- (f) PARTIAL INVALIDITY. If at any time any provision of this Pledge Agreement is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Pledge Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) EXPENSES. Pledgor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Collateral Agent with respect to any amendments or waivers hereof requested by Pledgor or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Collateral Agent or Lenders' rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting this Pledge Agreement, the Long Term Notes or the Obligations or any bankruptcy or similar proceeding involving Pledgor or any of its Subsidiaries). (h) GOVERNING LAW. This Pledge Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC). (i) JURY TRIAL. PLEDGOR, LENDERS AND COLLATERAL AGENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS MICROTEL PLEDGE AGREEMENT. [Signature page follows] -6- IN WITNESS WHEREOF, the parties have caused this Pledge Agreement to be executed as of the day and year first above written. PLEDGOR: MicroTel International Inc., a Delaware corporation By: /S/ Carmine T. Oliva ---------------------- Carmine T. Oliva, Chairman, President and Chief Executive Officer LENDERS: See Schedule of Lenders on EXHIBIT A for signature COLLATERAL AGENT: /S/ Noel Mcdermott, by Warren P. Yost, Attorney-in-fact ------------------------------------------------------- Noel McDermott, an individual [Signatures continued on next page] -7- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL AMOUNT LENDER'S NAME AND ADDRESS OF NOTE LENDER'S SIGNATURE ------------------------- ------- ------------------ Noel McDermott, as Trustee of the Noel C. $1,680,000 /S/ Noel Mcdermott, Trustee, by Warren P. McDermott Revocable Living Trust dated ----------------------------------------- December 18, 1995 Yost, Attorney-in-fact 502 Village Circle ---------------------- Santa Cruz, CA 95060 Noel McDermott, Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 Warren P. Yost and Gail A. Yost, as Co-Trustees $1,320,000 /S/ Warren P. Yost Under Declaration of Trust dated March 9, 1988 ------------------ 10324 Miner Place Warren P. Yost, Co-Trustee Under Declaration Cupertino, CA 95014 of Trust dated March 9, 1988 /S/ Gail A. Yost ---------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988
A-1 STOCK POWER AND ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Pledge and Security Agreement dated as of July ___, 2004 the undersigned hereby sells, assigns and transfers unto Noel McDermott, as Collateral Agent, 910,000 shares of common stock of Larus Corporation, a California corporation, standing in the undersigned's name on the books of said corporation represented by certificate number ___ delivered herewith, and does hereby irrevocably constitute and appoint Noel McDermott as attorney-in-fact, with full power of substitution, to transfer said stock on the books of said corporation. Dated: As of July ___, 2004 By: MicroTel International Inc. /S/ Carmine T. Oliva --------------------------------------------- (Signature) Carmine T. Oliva, Chairman, President and CEO --------------------------------------------- (Please Print Name) --------------------------------------------- (Spouse's Signature, if any) --------------------------------------------- (Please Print Spouse's Name) This Stock Power and Assignment Separate From Certificate was executed by MicroTel International Inc. in conjunction with the terms of a Pledge Agreement dated as of July ___, 2004. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE AND NAME LINES. EX-2.5 6 microtel_10qex2-5.txt EXHIBIT 2.5 INTERCREDITOR AGREEMENT THIS INTERCREDITOR AGREEMENT (this "AGREEMENT"), executed this 13th day of July, 2004, is made by and among MicroTel International Inc., a Delaware corporation (the "BORROWER") and the persons listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "Lenders"). RECITALS A. Borrower and the Lenders are parties to the Stock Purchase Agreement of event date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"). B. Pursuant to the terms of the Stock Purchase Agreement, Borrower issued the Short Term Notes and the Long Term Notes to each of the Lenders to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the shares of common stock of Larus from the Lenders. C. CXR, Larus and Vista are each delivering a Continuing Guarantee dated as of the date hereof pursuant to which each entity guarantees the obligations of Borrower under the terms of the Long Term Notes (collectively, the "CONTINUING GUARANTEES"). D. CXR, Larus and Vista are each delivering a Security Agreement dated as of the date hereof (collectively, the "SECURITY AGREEMENTS") to Lenders pursuant to which their respective obligations to Lenders under the Continuing Guarantees are secured by the assets of CXR, Larus and Vista, respectively . E. Borrower is delivering a Pledge and Security Agreement dated as of the date hereof (the "PLEDGE AGREEMENT") to Lenders pursuant to which the obligations of Borrower to Lenders are secured by the equity securities of Larus and the Larus Entity. F. Lenders desire to set forth in this Agreement their respective rights and obligations with respect to the Notes, the Continuing Guarantees, the Pledge Agreement, the Security Agreements and the exercise of rights with respect thereto. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "COLLATERAL" shall have the meanings set forth in the Pledge Agreement and Security Agreements, collectively. "COLLATERAL AGENT" shall have the meaning set forth in the Pledge Agreement. "CXR" shall have the meaning set forth in the Long Term Notes. "EVENT OF DEFAULT" shall mean the occurrence of any event that will constitute a default by Borrower under any Note. "INDEBTEDNESS" shall mean the aggregate outstanding principal amount, together with accrued but unpaid interest (including any interest accruing after the commencement of any action or proceeding under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable domestic or foreign federal or state bankruptcy, insolvency or other similar law, and any other interest that would have accrued but for the commencement of such proceeding), premiums and any other amounts (including any fees or expenses) owed or payable with respect to the Notes. "LARUS" has the meaning given in the recitals hereof. "LARUS ENTITY" shall have the meaning set forth in the Long Term Notes. "LONG TERM NOTES" shall have the meaning set forth in the Stock Purchase Agreement. "NOTES" shall mean the Short Term Notes and the Long Term Notes, collectively. "SENIOR LENDERS" shall have the meaning set forth in the Long Term Notes. "SHORT TERM NOTES" shall have the meaning set forth in the Stock Purchase Agreement. "VISTA" shall mean Vista Corporation, a California corporation. 2. INTERCREDITOR AGREEMENT. 2.1 PARI PASSU STATUS IN NOTES AND COLLATERAL SECURING THE GUARANTEE. Each of the Lenders hereby acknowledges and agrees that no Lender shall have priority over any other Lender with respect to any payments of principal or interest in respect of the Notes, or any Collateral securing the Notes, where applicable. Rather, each of the Lenders hereby acknowledges and agrees that its rights and priority are PARI PASSU with the rights and priority of each of the other Lenders. In addition, and without limitation of the generality of the foregoing, each Lender hereby confirms that regardless of the relative times of attachment or perfection thereof or the order of filing of financing statements, mortgages or other documents, and regardless of anything to the contrary contained in any documents executed in connection with any of the Notes (including without limitation the Stock Purchase Agreement, Pledge Agreement, Security Agreements, Continuing Guarantees and this Agreement), any security interests or liens granted from time to time to any Lender shall in all respects be PARI PASSU with the security interests and liens granted from time to time to each of the other Lenders. 2.2 NOTICES OF DEFAULT. Each of the Lenders shall provide a copy to Collateral Agent and each of the other Lenders of any written notice provided by such Lender to Borrower with respect to any Event of Default. Such notices shall be delivered in accordance with SECTION 5 below within three (3) calendar days of the date any such notice is given to Borrower. -2- 2.3 DISPOSITION OF BORROWER'S ASSETS. In the event of (i) an Event of Default, (ii) any insolvency, bankruptcy, receivership, liquidation, reorganization, assignment for the benefit of creditors or other similar proceeding relating to the Borrower, whether voluntary or involuntary, (iii) any proceeding for the voluntary liquidation, dissolution or other winding-up of the Borrower, whether involving insolvency or bankruptcy proceedings or not, or (iv) any attachment of, foreclosure on, or other judicial action with respect to all or any portion of the assets of the Borrower, or any transfer of such assets in lieu of any such judicial action, or any creation of any lien, security interest, mortgage, or deed of trust on any such assets other than in favor of the Senior Lenders, then, and in any such event, any payment or other distribution of any character, whether in cash, securities or other property out of or in respect of the assets of the Borrower or any proceeds thereof or any such security to which the Lenders are entitled, shall be shared by the Lenders on a PARI PASSU basis with the amount thereto to which each such Lender is entitled determined in accordance with the Pledge Agreement, the Security Agreements and the Continuing Guarantees; PROVIDED, HOWEVER, that no Lender shall take any action without written notice to Collateral Agent and the other Lenders. 2.4 PAYMENTS TO BE HELD IN TRUST. If any Lender shall have received any payment, distribution or security out of any of the assets of the Borrower, whether arising out of or as a result of any event described in SECTION 2.3 above or otherwise, the receiving party thereof shall promptly provide Collateral Agent and each of the Lenders a clear and detailed accounting thereof, and shall promptly take all action necessary to implement the sharing contemplated by SECTION 2.3 above and by the Pledge Agreement, the Security Agreements and the Continuing Guarantees. Any such payment, distribution or security so received shall be deemed to be held in trust by the receiving party thereof for the benefit of the Lenders until such sharing has been implemented and completed as contemplated by SECTION 2.3 above and by the Pledge Agreement, the Security Agreements and the Continuing Guarantees. 2.5 COOPERATION. Each of the Lenders agrees to use reasonable best efforts to cooperate with one another in the realization upon and liquidation of the assets of Borrower following an Event of Default, and to promptly advise Collateral Agent and the other Lenders of any actions taken with respect thereto, or of any modification or amendment of any or all of the documents with respect to the Indebtedness; PROVIDED, HOWEVER, that no Lender shall, enter into any such modification or amendment that would (i) extend the term of such Indebtedness, (ii) increase the applicable rate of interest thereunder, or (iii) increase the amount of Borrower's indebtedness thereunder, without the prior written approval of the other Lenders. 3. RIGHT TO AMEND, ETC. Any demand for payment of any Indebtedness or delivery of collateral from Borrower upon the occurrence of an Event of Default made by any Lender may be rescinded in whole or in part by such Lender. Lenders may exercise or refrain from exercising any rights or remedies against the Borrower and others, if any, liable under the Indebtedness. The Indebtedness shall conclusively be deemed to have been created, contracted and incurred and permitted to remain outstanding in reliance upon the provisions of this Agreement. -3- 4. FURTHER ASSURANCES. The Borrower, for itself and its respective successors and assigns, agrees to execute and deliver to Collateral Agent and Lenders such further documents and instruments and to take such further action as Collateral Agent and Lenders may at any time or times reasonably request in order to carry out the provisions and intent of this Agreement. 5. NOTICES. All notices and other communications hereunder to any Lender shall be in writing and shall be personally delivered or mailed by first class mail, postage prepaid, to the respective addresses set forth under the signature of such Lender set forth on EXHIBIT A to this Agreement, or to such other address or addresses as the party to whom such notice is directed may have designated in writing to the other parties hereto. All notices and other communications hereunder to Borrower shall be in writing and shall be personally delivered or mailed by first class mail, postage prepaid, to the following address: MicroTel International Inc. 9485 Haven Avenue, Suite 100 Rancho Cucamonga, California 91730 Attention: Carmine T. Oliva or to such other address or addresses as the party to whom such notice is directed may have designated in writing to the other parties hereto. A notice shall be deemed to have been given upon the earlier to occur of (i) three (3) days after the date on which it is deposited in the U.S. mails or (ii) receipt by the party to whom such notice is directed. 6. SUCCESSORS; CONTINUING EFFECT, ETC. This Agreement is being entered into for the benefit of, and shall be binding upon, Lenders and their respective successors and assigns. This Agreement shall be a continuing agreement and shall be irrevocable and shall remain in full force and effect so long as there is Indebtedness outstanding. 7. MISCELLANEOUS. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by the laws of the State of California without reference to the choice of law principles thereof. -4- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. BORROWER: MICROTEL INTERNATIONAL INC., a Delaware corporation By: /S/ CARMINE T. OLIVA ------------------------------------------------ Carmine T. Oliva, Chairman, President and Chief Executive Officer LENDERS: See Schedule of Lenders on EXHIBIT A for signatures. [Signatures continued on next page] -5- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL LENDER'S NAME AND ADDRESS AMOUNT OF NOTE LENDER'S SIGNATURE ------------------------- -------------- ------------------ Noel McDermott, as Trustee of the Noel C. $1,680,000 /S/ NOEL MCDERMOTT, TRUSTEE, BY WARREN P. McDermott Revocable Living Trust dated ----------------------------------------- December 18, 1995 YOST, ATTORNEY-IN-FACT 502 Village Circle ---------------------- Santa Cruz, CA 95060 Noel McDermott, Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 Warren P. Yost and Gail A. Yost, as $1,320,000 /S/ WARREN P. YOST Co-Trustees Under Declaration of Trust dated Warren P. Yost, Co-Trustee Under Declaration March 9, 1988 of Trust dated March 9, 1988 10324 Miner Place Cupertino, CA 95014 /S/ GAIL A. YOST ---------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988
A-1 EX-2.6 7 microtel_10qex2-6.txt EXHIBIT 2.6 CONTINUING GUARANTEE THIS CONTINUING GUARANTEE (this "GUARANTEE"), executed this 13th day of July, 2004, is executed by Larus Corporation, a California corporation (the "GUARANTOR"), in favor of the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Guarantor from the Lenders. B. The execution and delivery of this Guarantee by Guarantor is a condition and inducement to the willingness of Borrower and Lenders to enter into the Stock Purchase Agreement. C. Guarantor is a wholly-owned subsidiary of Borrower and will derive substantial direct and indirect benefits from the performance of the Stock Purchase Agreement and the transactions contemplated thereby. NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, it is agreed as follows: 1. DEFINITIONS; CERTAIN MATTERS OF CONSTRUCTION. For the purpose of this Guarantee, (a) unless otherwise set forth herein, capitalized terms or matters of construction deemed or established in any of the Long Term Notes are applied herein as defined or established therein and (b) the following terms have the respective meanings set forth below: "BORROWER" has the meaning specified in the recitals to this Guarantee. "CLAIM" has the meaning specified in SECTION 8. "COLLATERAL" has the meaning set forth in the Security Agreement. "COLLATERAL AGENT" has the meaning set forth in the Security Agreement. "GUARANTEE" means this Continuing Guarantee, including any and all amendments, modifications and supplements. "GUARANTEE OBLIGATIONS" means all liabilities and obligations of Guarantor to Collateral Agent and Lenders as set forth in this Guarantee, whether now existing or hereafter arising. "GUARANTEE TERMINATION DATE" means the date on which all Obligations with respect to all of the Long Term Notes cease to be outstanding and the then due and payable Obligations and Guarantee Obligations have been completely satisfied and all Obligations in the nature of a performance obligation have been performed. "GUARANTOR" has the meaning specified in the introductory paragraph of this Guarantee. "INDEMNIFIED PERSON" has the meaning specified in SECTION 8. "LENDERS" means each of those persons and entities that are referenced in EXHIBIT A hereto, and, if all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, including, without limitation, any Transferees pursuant to SECTION 9.9, "Lenders" shall be deemed to refer equally to that Person or Persons. "LIEN" means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien (including judgment liens, liens of mechanics, suppliers and other Persons for the provision of goods or services, and all other liens arising under statute, common law or judicial interpretation), liens securing any claim (including reclamation claims), security interest, easement or encumbrance, preference, priority or other security agreement or other preferential arrangement of any kind or nature whatsoever intended or having the effect of providing security for an obligation (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of, or agreement to give, any financing statement perfecting a security interest under the California Uniform Commercial Code or comparable law of any jurisdiction). "LONG TERM NOTES" shall have the meaning set forth in the Stock Purchase Agreement. "OBLIGATIONS" means all loans, advances, debts, guarantees, liabilities and obligations, for monetary amounts (whether or not those amounts are liquidated or determinable) owing by Borrower to Lenders under the Long Term Notes, and all covenants and duties regarding those amounts of any kind or nature, present or future, contingent or liquidated, whether or not evidenced by any note, agreement or other instrument, the payment or performance of which is provided for or arises now or hereafter under the Long Term Notes, or any Related Agreement, including all interest, fees, charges, expenses, attorneys' fees and any other sum chargeable to Borrower thereunder. "PERSON" means any individual, trustee, sole proprietorship, partnership, limited liability company or partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). "RELATED AGREEMENTS" means the Security Agreement and this Guarantee, as those agreements may from time to time be amended, restated, supplemented or otherwise modified. -2- "SECURITY AGREEMENT" means the Security Agreement of even date herewith executed by Guarantor in favor of Lenders and Collateral Agent, as amended or restated from time to time. "STOCK PURCHASE AGREEMENT" has the meaning specified in the recitals to this Guarantee. "TRANSFEREE" has the meaning specified in SECTION 9.9. 2. THE GUARANTEE. 2.1 GUARANTEE OF THE OBLIGATIONS. (a) In consideration of the extensions of credit pursuant to the Long Term Notes and all other financial accommodations to or for the benefit of Borrower and Guarantor, and for other valuable consideration, the receipt of which Guarantor hereby acknowledges, Guarantor hereby unconditionally and irrevocably guarantees to Lenders and their respective successors, endorsees, transferees and assigns the prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of the Obligations, whether now or hereafter existing, and whether for principal, interest, fees, expenses or otherwise, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due (including in all cases all amounts which would become due but for the operation of the provisions of any bankruptcy law). (b) This Guarantee constitutes a guarantee of payment and performance when due and not of collection, and Guarantor specifically agrees that it shall not be necessary or required that Lenders or any of their respective successors, endorsees, transferees or assigns assert any claim or demand or enforce any remedy whatsoever against Borrower or any other Person before or as a condition to the obligations of Guarantor under this Guarantee. 2.2 ABSOLUTE GUARANTEE. The Guarantee Obligations shall remain in full force and effect without regard to, and shall not be impaired or affected by, or be deemed to be satisfied by, nor shall Guarantors be exonerated, discharged or released (by virtue of the provisions of Sections 2809, 2819, 2845, 2848, 2849 or 2850 of the California Civil Code or any other law, rule, arrangement or relationship) by, any of the following events: (a) Lenders' exercise or enforcement of, or failure or delay in exercising or enforcing, legal proceedings to collect the Obligations or the Guarantee Obligations or any power, right, or remedy with respect to any of the Obligations or the Guarantee Obligations, including: (i) any suspension of Lenders' right to enforce against Borrower, Guarantor or any other guarantor of the Obligations or the Guarantee Obligations; or (ii) any change in the time, manner, or place of payment of, or in any other term of, any or all of the Obligations or the Guarantee Obligations, or any other amendment to, or waiver of, the Long Term Notes, any Related Agreement or any other agreement or instrument governing or evidencing any of the Obligations or the Guarantee Obligations; -3- (b) any insolvency, bankruptcy, reorganization, arrangement, adjustment, composition, assignment for the benefit of creditors, appointment of a receiver or trustee for all or any part of Borrower's or Guarantor's assets or of the assets of any other guarantor of the Obligations, liquidation, winding-up or dissolution of Borrower, Guarantor or any other guarantor of the Obligations; (c) any limitation, discharge, cessation or partial satisfaction of the Obligations, the Guarantee Obligations or the obligations of any other guarantor of the Obligations, whether by operation of any statute, regulation or rule of law or otherwise (but other than full satisfaction) regardless of the intervention or omission of Lenders, or any invalidity, voidability, unenforceability or irregularity, or future change to or amendment of, in whole or in part, this Guarantee, the Long Term Notes, any other Related Agreement or any other document evidencing any Obligations or Guarantee Obligations; (d) any merger, acquisition, consolidation or change in structure of Borrower, Guarantor or any other guarantor of the Obligations; or any sale, lease, transfer or other disposition of any or all of the assets or shares of Borrower, Guarantor or any other guarantor of the Obligations; (e) any assignment or other transfer, in whole or in part, of Lenders' interest in and rights under the Long Term Notes or any Related Agreement, including this Guarantee, or of Lenders' interest in the Obligations or the Guarantee Obligations; (f) any claim, defense, counterclaim or setoff on the part of Borrower including, but not limited to, any defense or incapacity, disability or lack of corporate or other authority to execute any documents relating to the Obligations, the Guarantee Obligations or any other guarantee of the Obligations; (g) any cancellation, renunciation or surrender of any pledge, guarantee or any debt instrument evidencing the Obligations or the Guarantee Obligations other than full satisfaction of the Obligations and the Guarantee Obligations; (h) Lenders' vote, claim, distribution, election, acceptance, action or inaction in any bankruptcy or reorganization case related to the Obligations or the Guarantee Obligations; (i) any other action or circumstances that might otherwise constitute a defense available to, or a legal or equitable discharge of, any surety, guarantor or pledgor other than Guarantor; or (j) the fact that any of the Obligations or the Guarantee Obligations may arise out of any agreement or transaction that may be unenforceable in whole or in part, it being agreed by Guarantor that the Guarantee Obligations shall not be discharged until the Guarantee Termination Date (and then after the Guarantee Termination Date, the Guarantee Obligations shall be subject to reinstatement under SECTION 5). -4- 2.3 DEMAND BY LENDERS. In addition to the terms set forth in SECTIONS 2.1 AND 2.2, and in no manner imposing any limitation on those terms, it is expressly understood and agreed that, if any of the Obligations are declared to be or otherwise become immediately due and payable, then Guarantor shall, upon demand in writing therefor by Collateral Agent or any of the Lenders to Guarantor, immediately pay the Guarantee Obligations to all Lenders in the manner described under SECTION 7. Payment by Guarantor shall be made to Lenders to be credited and applied to the Obligations, in immediately available funds in lawful money of the United States of America to an account designated in writing by Collateral Agent or Lenders. Any payment received by Lenders with respect to the Obligations shall reduce the Guarantee Obligations by the amount of the payment. 2.4 GUARANTOR WAIVERS. In addition to any other waivers contained herein, Guarantor waives and agrees as follows: (a) The Guarantee Obligations are the immediate, direct, primary, and absolute liabilities of Guarantor, and are independent of, and not co-extensive with, the Obligations or the obligations of any other guarantor. Guarantor expressly waives any right he may now or in the future have (pursuant to Sections 2845 and 2850 of the California Civil Code or any other law, rule, arrangement or relationship) to require Lenders to, and Lenders shall not have any obligations to, first pursue or enforce against Borrower any of the properties or assets of Borrower or any other security, guarantee or pledge that may now or hereafter be held by Lenders for the Obligations or for the Guarantee Obligations, or to apply the security, guarantee or pledge to the Obligations or to the Guarantee Obligations, or to pursue any other remedy in Lenders' power that Guarantor may or may not be able to pursue himself and that may lighten Guarantor's burden. (b) Lenders shall not be under any obligation to marshal any assets in favor of Guarantor or in payment of any or all of the Obligations or the Guarantee Obligations. (c) Except as specifically provided in SECTION 2.3 or as otherwise provided for in this Guarantee or applicable law, Guarantor waives, to the fullest extent permitted by applicable law: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of the Long Term Notes or any or all of the Related Agreements; (ii) all rights to notice and a hearing prior to Lenders' taking possession or control of, or to Lenders' replevy, attachment or levy upon, or any bond or security which might be required by any court prior to allowing Lenders to exercise any of their remedies; (iii) the benefit of all evaluation, appraisal and exemption laws; (iv) notice of any extension, modification, renewal or amendment of any of the terms of the Long Term Notes or any Related Agreement relating to the Obligations or the Guarantee Obligations; (v) notice of the occurrence of any default or event of default with respect to the Obligations, the Guarantee Obligations or otherwise; and (vi) notice of any exercise or non-exercise by Lenders of any right, power or remedy with respect to the Obligations or the Guarantee Obligations. (d) Guarantor acknowledges that he has been advised by counsel of their choice with respect to this Guarantee, the Long Term Notes and the Related Agreements and the transactions evidenced hereby and thereby. -5- (e) Guarantor agrees that until the Guarantee Termination Date it shall have no right of subrogation, reimbursement, indemnity or contribution, all of which Guarantor expressly waives. (f) If Lenders may, under applicable law, proceed to realize their benefits under the Long Term Notes or any Related Agreement, then Lenders may, at their sole option, determine which of their remedies or rights they may pursue without affecting any of their rights and remedies under this Guarantee. If Lenders bid at any foreclosure or trustee's sale or at any public or private sale permitted by law, Lenders may bid all or less than the amount of the Obligations or the Guarantee Obligations and the amount of the bid need not be paid by Lenders but shall be credited and applied as set forth in SECTION 7. The amount of the successful bid at any sale, whether Lenders or any other party (including Guarantor) is the successful bidder, shall be deemed to be prima facie evidence of the fair market value of the assets purchased and the amount remaining after application of the bid amount in the manner set forth in SECTION 7 shall be deemed to be prima facie evidence of the amount of the Guarantee Obligations guaranteed under this Guarantee, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Lenders might otherwise be entitled but for the bidding at any such sale. (g) Guarantor waives and agrees that it shall not at any time insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Guarantor of the Guarantee Obligations or the enforcement by Lenders of this Guarantee. (h) A separate action or actions may be brought and prosecuted by Lenders against Guarantor whether or not an action is brought against Borrower, or whether Borrower is joined in any action or actions. 2.5 ADDITIONAL WAIVERS. Guarantor expressly acknowledges that: (a) In addition to the waivers set forth in SECTION 2.4, Guarantor also expressly, knowingly and intentionally waives and relinquishes any and all rights, defenses or benefits that Guarantor may have based upon an election of remedies by Lenders which in any manner impairs, affects, reduces, releases, destroys or extinguishes Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower or against any other Person or any security for the Guarantee Obligations by way of subrogation, indemnity, contribution, reimbursement or otherwise. In particular, Guarantor agrees that this Guarantee will remain fully effective and that Guarantor will be liable to Lenders for any Guarantee Obligations. (b) Until all Obligations have been performed in full, Guarantor shall not have any right to subrogation, and Guarantor expressly waives (i) any right (pursuant to Section 2848 of the California Civil Code or any other law, rule, arrangement or relationship) to enforce any remedy which Lenders now have or may hereafter have against Borrower and (ii) any benefit of, and any right to participate in (pursuant to Section 2849 of the California Civil Code or any other law, rule, arrangement or relationship), any security now or hereafter held by Lenders. Guarantor also agrees that this Guarantee will remain fully effective and Guarantor will be liable to Lenders for any Guarantee Obligations. -6- 2.6 WAIVERS OF DEFENSES. Guarantor waives any defense based upon or arising by reason of: (a) any defense of Borrower or any other Person, other than payment in full; (b) the cessation of liability or limitation from any cause whatsoever of the Obligations or any portion thereof, other than payment in full; (c) any lack of authority of any agent or other person acting or purporting to act on behalf of Borrower, or any defect in the formation of Borrower; (d) the application by Borrower of the proceeds of the Obligations for purposes other than the purposes represented to, or intended or understood by, Lenders or Guarantor; (e) any act or omission by Lenders that directly or indirectly results in or aids the discharge of Borrower or any portion of the Obligations by operation of law or otherwise; or (f) any modification of the Obligations in any form whatsoever, including the renewal, extension, acceleration or other change in time for payment of the Obligations, or other change in the terms of the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.7 BENEFITS OF GUARANTEE. The provisions of this Guarantee are for the benefit of Lenders and their respective successors, transferees, endorsees and assigns, and nothing herein shall impair, as among Borrower, Guarantor and Lenders, the Obligations. No transfer, endorsement or assignment shall increase or diminish any of the Guarantee Obligations hereunder. This Guarantee binds Guarantor, and Guarantor may not assign, transfer or endorse this Guarantee. If all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, any reference to "Lenders" herein shall be deemed to refer equally to that Person or Persons. 2.8 CONTINUING GUARANTEE. Guarantor agrees that (a) this is a continuing guarantee, (b) this Guarantee shall remain in full force and effect until the Guarantee Termination Date (and may be reinstated after the Guarantee Termination Date pursuant to SECTION 5) and (c) the Guarantee Obligations hereunder shall extend to each and every extension or renewal, if any, of the Obligations; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.9 SUBORDINATION. (a) Guarantor hereby agrees that, until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5), all obligations and all indebtedness of Borrower to Guarantor and any and all present and future indebtedness regardless of its nature or manner of origination now or hereafter to become due and owing by Borrower to Guarantor (collectively, the "SUBORDINATED INDEBTEDNESS"), are hereby subordinated and postponed and shall be inferior, in all respects, to the Guarantee Obligations. -7- (b) In no circumstance shall any Subordinated Indebtedness be entitled to any collateral security; PROVIDED, that if any collateral security exists, Guarantor hereby agrees that any now existing or hereafter arising Lien upon any of the assets of Borrower in favor of Guarantor, whether created by contract, assignment, subrogation, reimbursement, indemnity, operation of law, principles of equity or otherwise, shall be junior and inferior to, and is hereby subordinated in priority to any now existing or hereafter arising Liens in favor of Lenders, regardless of the time, manner or order of creation, attachment or perfection of the respective Liens. (c) Guarantor hereby agrees that it shall not: (i) assert, collect, accept payment on or enforce any of the Subordinated Indebtedness or take collateral or other security to secure payment of the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (ii) demand payment of, accelerate the maturity of or declare a default or event of default under the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (iii) cause or permit Borrower to make or give, or receive or accept, payment in any form (direct or indirect, including by transfer to an affiliate or subsidiary of Borrower or Guarantor) on account of the Subordinated Indebtedness, or make any transfers in respect of the Subordinated Indebtedness, or give any collateral security for the Subordinated Indebtedness. Any payment, transfer or collateral security so made or given by Borrower and received or accepted by Guarantor shall be held in trust by Guarantor for Collateral Agent and Lenders, and Guarantor shall immediately turn over, in kind, any such payment to Collateral Agent for application in reduction of, or (in the case of property other than cash) as security for, the Guarantee Obligations. 2.10 NO SETOFF, DEFENSE OR COUNTERCLAIM. Guarantor represents, warrants and agrees that, as of the date of this Guarantee, the Guarantee Obligations are not subject to any setoff or defense of any kind against Lenders or Borrower, and Guarantor specifically waives its rights to assert any such defense or right of setoff. Guarantor further agrees that the Guarantee Obligations shall not be subject to any counterclaims or setoffs against Lenders or counterclaims, setoffs or defenses against Borrower that may arise in the future. 3. FURTHER ASSURANCES. Guarantor agrees that it will, at its expense, upon the reasonable written request of Lenders, from time to time, promptly execute and deliver to Lenders any additional instruments or documents considered necessary by Lenders to cause this Guarantee to be, become or remain valid and effective in accordance with its terms. 4. PAYMENTS FREE AND CLEAR OF TAXES. Any and all payments by or on behalf of Guarantor shall be made, in accordance with this SECTION 4, free and clear of and without deduction for any and all present or future taxes. If Guarantor is required by law to deduct any taxes from or in respect of any sum payable hereunder to Lenders, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 4), Lenders receive an amount equal to the sum they would have received had no deductions been made, (ii) Guarantor shall make the deductions and (iii) Guarantor shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Upon request by Collateral Agent or Lenders, Guarantor shall furnish to Collateral Agent or Lenders a receipt for any taxes paid by Guarantor pursuant to this SECTION 4 or, if no taxes are payable with respect to any -8- payments required to be made by Guarantor hereunder, either a certificate from each appropriate taxing authority or an opinion of counsel, which opinion and counsel shall be acceptable to Collateral Agent, in either case stating that the payment is exempt from or not subject to taxes. If taxes are properly paid by Collateral Agent or Lenders as a result of payments under this Guarantee, Guarantor will, upon demand of Collateral Agent, indemnify Collateral Agent and Lenders for the payments, together with any interest, penalties and reasonable expenses in connection therewith plus interest thereon at a rate agreed between Collateral Agent and Guarantor. 5. REINSTATEMENT. This Guarantee shall remain in full force and effect and continue to be effective, as the case may be, if at any time payment or performance of the Obligations or the Guarantee Obligations, or any part thereof, is, pursuant to applicable law, avoided, rescinded or reduced in amount, or must otherwise be restored or returned by Lenders, or any other obligee of the Obligations or the Guarantee Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though the payment or performance had not been made. If any payment or part thereof is avoided, rescinded, reduced, restored or returned, the Obligations or the Guarantee Obligations, as the case may be, shall be reinstated and deemed reduced only by the amount paid and not so avoided, rescinded, reduced, restored or returned. 6. DEFAULTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes), Lenders may declare all of the Guarantee Obligations, immediately and without demand, notice or legal process of any kind, to be, and the Guarantee Obligations shall immediately become, due and payable, and then, or at any subsequent time, Lenders may exercise any or all of their rights and remedies under this Guarantee, the Long Term Notes or any Related Agreement and under applicable law, and may, in addition: (a) make demand upon Guarantor for the payment of the Guarantee Obligations; and (b) resort to Collateral for payment of the Guarantee Obligations, without notice, declaration or demand by Collateral Agent or Lenders to the extent not prohibited by applicable law. 7. APPLICATION OF PAYMENTS. Any payment made by Guarantor under this Guarantee shall be applied (i) first, to the satisfaction of Guarantor's indemnification liabilities pursuant to SECTION 8, (ii) second, to the payment of Obligations with respect to accrued but unpaid interest on the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, (iii) third, to the payment of the principal amount of the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, and (iv) fourth, to all other outstanding Obligations. 8. INDEMNIFICATION. Guarantor shall: (i) indemnify and hold harmless Lenders and their respective affiliates, officers, partners, directors, employees, attorneys and agents (each, an "INDEMNIFIED PERSON") from and against any and all suits, actions, fines, deficiencies, penalties, proceedings, claims, damages, losses, liabilities, expenses and taxes (including reasonable -9- attorneys' fees and disbursements and other out-of-pocket costs of investigations or defense, including those incurred upon any appeal) (each, a "CLAIM") that may be instituted or asserted against or incurred by an Indemnified Person (A) as the result of credit having been extended under the Long Term Notes and the Related Agreements, (B) in connection with or arising out of the transactions contemplated hereunder and thereunder or (C) in connection with any action to enforce payment of the Guarantee Obligations regardless of whether the Indemnified Person is a party to any Claim; and (ii) reimburse each Indemnified Person, immediately upon the Indemnified Person's demand, for any reasonable legal or other out-of-pocket expenses incurred in connection with investigating, defending or participating in any Claim, whether commenced or threatened (whether or not the Indemnified Person is a party to any action or proceeding out of which any expenses arise); PROVIDED, HOWEVER, that Guarantor shall not be liable for any indemnification to an Indemnified Person to the extent that any Claim results solely from an Indemnified Person's gross negligence or willful misconduct. NEITHER LENDERS NOR ANY OTHER INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF ANY OTHER PARTY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY OTHER PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED UNDER THE LONG TERM NOTES AND/OR ANY RELATED AGREEMENT OR OTHERWISE IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. The liabilities of Guarantor under this SECTION 8 shall survive the termination of this Guarantee. 9. MISCELLANEOUS. 9.1 ENTIRE AGREEMENT; AMENDMENTS. This Guarantee, together with the Long Term Notes and the Related Agreements (a) constitutes the entire agreement between the parties with respect to the subject matter hereof and (b) may not be amended or supplemented except by a writing signed by Lenders and the Collateral Agent. 9.2 SECTION TITLES. The Section titles contained in this Guarantee are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 9.3 SEVERABILITY. If any one or more of the provisions contained in this Guarantee is determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of that provision or provisions in every other respect, and the remaining provisions of this Guarantee, shall not be in any way impaired. 9.4 CONFLICT OF TERMS. If any provision of this Guarantee is inconsistent with any provision of the Long Term Notes or any Related Agreement, the provision of the Long Term Notes or the Related Agreement, as the case may be, shall govern and control. 9.5 NON-WAIVER. None of the liabilities of Guarantor, and no right or remedy of Lenders under this Guarantee, shall be deemed to have been suspended or waived by Lenders, nor shall Lenders be estopped from asserting any right or remedy, by Lenders' conduct or oral statements, but any suspension or waiver of any right or remedy by Lenders must be in writing and signed by Lenders. Any suspension or waiver by Lenders of any of their respective rights or remedies under this Guarantee shall not suspend or waive any prior or subsequent right or remedy, whether of the same or of a different type. -10- 9.6 GUARANTEE TERMINATION DATE. This Guarantee is a continuing Guarantee that shall remain in full force and effect until the Guarantee Termination Date, at which time this Guarantee shall terminate and be of no further force and effect, subject to the reinstatement provisions of SECTION 5. 9.7 LIMITATION OF LIABILITY. Neither Lenders nor any of their respective officers, directors, partners, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Guarantee. 9.8 GOVERNING LAW. In all respects, including all matters of construction, validity and performance, this Guarantee and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in that state, without regard to principles of conflicts of laws. 9.9 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Guarantee by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties ("TRANSFEREE") hereto. Lenders may assign any and all of their rights under this Guarantee, the Long Term Notes and the Related Agreements to any Transferee in connection with any assignment of all or any portion of any Long Term Note and upon assignment the Transferee shall be entitled to all of the rights of Lenders hereunder and under any applicable Related Agreement to the same extent as if the Transferee were an original party hereto. Guarantor may not assign or transfer its obligations under this Guarantee. IN WITNESS WHEREOF, Guarantor has caused this Continuing Guarantee to be executed as of the day and year first above written. GUARANTOR Larus Corporation, a California corporation By: /S/ CARMINE T. OLIVA ------------------------------------- Carmine T. Oliva, Chief Executive Officer -11- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL LENDER'S NAME AND ADDRESS AMOUNT OF NOTE ------------------------- -------------- Noel McDermott, as Trustee of the Noel C. McDermott Revocable $1,680,000 Living Trust dated December 18, 1995 502 Village Circle Santa Cruz, CA 95060 Warren P. Yost and Gail A. Yost, as Co-Trustees Under $1,320,000 Declaration of Trust dated March 9, 1988 10324 Miner Place Cupertino, CA 95014 A-1 EX-2.7 8 microtel_10qex2-7.txt EXHIBIT 2.7 CONTINUING GUARANTEE THIS CONTINUING GUARANTEE (this "GUARANTEE"), executed this 13th day of July, 2004, is executed by Vista Labs Incorporated, a California corporation (the "GUARANTOR"), in favor of the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"), from the Lenders. B. The execution and delivery of this Guarantee by Guarantor is a condition and inducement to the willingness of Borrower and Lenders to enter into the Stock Purchase Agreement. C. Guarantor is an affiliate of Borrower and will derive substantial direct and indirect benefits from the performance of the Stock Purchase Agreement and the transactions contemplated thereby. NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, it is agreed as follows: 1. DEFINITIONS; CERTAIN MATTERS OF CONSTRUCTION. For the purpose of this Guarantee, (a) unless otherwise set forth herein, capitalized terms or matters of construction deemed or established in any of the Long Term Notes are applied herein as defined or established therein and (b) the following terms have the respective meanings set forth below: "BORROWER" has the meaning specified in the recitals to this Guarantee. "CLAIM" has the meaning specified in SECTION 8. "COLLATERAL" has the meaning set forth in the Security Agreement. "COLLATERAL AGENT" has the meaning set forth in the Security Agreement. "GUARANTEE" means this Continuing Guarantee, including any and all amendments, modifications and supplements. "GUARANTEE OBLIGATIONS" means all liabilities and obligations of Guarantor to Collateral Agent and Lenders as set forth in this Guarantee, whether now existing or hereafter arising. "GUARANTEE TERMINATION DATE" means the date on which all Obligations with respect to all of the Long Term Notes cease to be outstanding and the then due and payable Obligations and Guarantee Obligations have been completely satisfied and all Obligations in the nature of a performance obligation have been performed. "GUARANTOR" has the meaning specified in the introductory paragraph of this Guarantee. "INDEMNIFIED PERSON" has the meaning specified in SECTION 8. "LARUS" has the meaning specified in the recitals to this Guarantee. "LENDERS" means each of those persons and entities that are referenced in EXHIBIT A hereto, and, if all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, including, without limitation, any Transferees pursuant to SECTION 9.9, "Lenders" shall be deemed to refer equally to that Person or Persons. "LIEN" means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien (including judgment liens, liens of mechanics, suppliers and other Persons for the provision of goods or services, and all other liens arising under statute, common law or judicial interpretation), liens securing any claim (including reclamation claims), security interest, easement or encumbrance, preference, priority or other security agreement or other preferential arrangement of any kind or nature whatsoever intended or having the effect of providing security for an obligation (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of, or agreement to give, any financing statement perfecting a security interest under the California Uniform Commercial Code or comparable law of any jurisdiction). "LONG TERM NOTES" shall have the meaning set forth in the Stock Purchase Agreement. "OBLIGATIONS" means all loans, advances, debts, guarantees, liabilities and obligations, for monetary amounts (whether or not those amounts are liquidated or determinable) owing by Borrower to Lenders under the Long Term Notes, and all covenants and duties regarding those amounts of any kind or nature, present or future, contingent or liquidated, whether or not evidenced by any note, agreement or other instrument, the payment or performance of which is provided for or arises now or hereafter under the Long Term Notes, or any Related Agreement, including all interest, fees, charges, expenses, attorneys' fees and any other sum chargeable to Borrower thereunder. "PERSON" means any individual, trustee, sole proprietorship, partnership, limited liability company or partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). -2- "RELATED AGREEMENTS" means the Security Agreement and this Guarantee, as those agreements may from time to time be amended, restated, supplemented or otherwise modified. "SECURITY AGREEMENT" means the Security Agreement of even date herewith executed by Guarantor in favor of Lenders and Collateral Agent, as amended or restated from time to time. "STOCK PURCHASE AGREEMENT" has the meaning specified in the recitals to this Guarantee. "TRANSFEREE" has the meaning specified in SECTION 9.9. 2. THE GUARANTEE. 2.1 GUARANTEE OF THE OBLIGATIONS. (a) In consideration of the extensions of credit pursuant to the Long Term Notes and all other financial accommodations to or for the benefit of Borrower and Guarantor, and for other valuable consideration, the receipt of which Guarantor hereby acknowledges, Guarantor hereby unconditionally and irrevocably guarantees to Lenders and their respective successors, endorsees, transferees and assigns the prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of the Obligations, whether now or hereafter existing, and whether for principal, interest, fees, expenses or otherwise, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due (including in all cases all amounts which would become due but for the operation of the provisions of any bankruptcy law). (b) This Guarantee constitutes a guarantee of payment and performance when due and not of collection, and Guarantor specifically agrees that it shall not be necessary or required that Lenders or any of their respective successors, endorsees, transferees or assigns assert any claim or demand or enforce any remedy whatsoever against Borrower or any other Person before or as a condition to the obligations of Guarantor under this Guarantee. 2.2 ABSOLUTE GUARANTEE. The Guarantee Obligations shall remain in full force and effect without regard to, and shall not be impaired or affected by, or be deemed to be satisfied by, nor shall Guarantors be exonerated, discharged or released (by virtue of the provisions of Sections 2809, 2819, 2845, 2848, 2849 or 2850 of the California Civil Code or any other law, rule, arrangement or relationship) by, any of the following events: (a) Lenders' exercise or enforcement of, or failure or delay in exercising or enforcing, legal proceedings to collect the Obligations or the Guarantee Obligations or any power, right, or remedy with respect to any of the Obligations or the Guarantee Obligations, including: (i) any suspension of Lenders' right to enforce against Borrower, Guarantor or any other guarantor of the Obligations or the Guarantee Obligations; or (ii) any change in the time, manner, or place of payment of, or in any other term of, any or all of the Obligations or the Guarantee Obligations, or any other amendment to, or waiver of, the Long Term Notes, any Related Agreement or any other agreement or instrument governing or evidencing any of the Obligations or the Guarantee Obligations; -3- (b) any insolvency, bankruptcy, reorganization, arrangement, adjustment, composition, assignment for the benefit of creditors, appointment of a receiver or trustee for all or any part of Borrower's or Guarantor's assets or of the assets of any other guarantor of the Obligations, liquidation, winding-up or dissolution of Borrower, Guarantor or any other guarantor of the Obligations; (c) any limitation, discharge, cessation or partial satisfaction of the Obligations, the Guarantee Obligations or the obligations of any other guarantor of the Obligations, whether by operation of any statute, regulation or rule of law or otherwise (but other than full satisfaction) regardless of the intervention or omission of Lenders, or any invalidity, voidability, unenforceability or irregularity, or future change to or amendment of, in whole or in part, this Guarantee, the Long Term Notes, any other Related Agreement or any other document evidencing any Obligations or Guarantee Obligations; (d) any merger, acquisition, consolidation or change in structure of Borrower, Guarantor or any other guarantor of the Obligations; or any sale, lease, transfer or other disposition of any or all of the assets or shares of Borrower, Guarantor or any other guarantor of the Obligations; (e) any assignment or other transfer, in whole or in part, of Lenders' interest in and rights under the Long Term Notes or any Related Agreement, including this Guarantee, or of Lenders' interest in the Obligations or the Guarantee Obligations; (f) any claim, defense, counterclaim or setoff on the part of Borrower including, but not limited to, any defense or incapacity, disability or lack of corporate or other authority to execute any documents relating to the Obligations, the Guarantee Obligations or any other guarantee of the Obligations; (g) any cancellation, renunciation or surrender of any pledge, guarantee or any debt instrument evidencing the Obligations or the Guarantee Obligations other than full satisfaction of the Obligations and the Guarantee Obligations; (h) Lenders' vote, claim, distribution, election, acceptance, action or inaction in any bankruptcy or reorganization case related to the Obligations or the Guarantee Obligations; (i) any other action or circumstances that might otherwise constitute a defense available to, or a legal or equitable discharge of, any surety, guarantor or pledgor other than Guarantor; or (j) the fact that any of the Obligations or the Guarantee Obligations may arise out of any agreement or transaction that may be unenforceable in whole or in part, it being agreed by Guarantor that the Guarantee Obligations shall not be discharged until the Guarantee Termination Date (and then after the Guarantee Termination Date, the Guarantee Obligations shall be subject to reinstatement under SECTION 5). -4- 2.3 DEMAND BY LENDERS. In addition to the terms set forth in SECTIONS 2.1 AND 2.2, and in no manner imposing any limitation on those terms, it is expressly understood and agreed that, if any of the Obligations are declared to be or otherwise become immediately due and payable, then Guarantor shall, upon demand in writing therefor by Collateral Agent or any of the Lenders to Guarantor, immediately pay the Guarantee Obligations to all Lenders in the manner described under SECTION 7. Payment by Guarantor shall be made to Lenders to be credited and applied to the Obligations, in immediately available funds in lawful money of the United States of America to an account designated in writing by Collateral Agent or Lenders. Any payment received by Lenders with respect to the Obligations shall reduce the Guarantee Obligations by the amount of the payment. 2.4 GUARANTOR WAIVERS. In addition to any other waivers contained herein, Guarantor waives and agrees as follows: (a) The Guarantee Obligations are the immediate, direct, primary, and absolute liabilities of Guarantor, and are independent of, and not co-extensive with, the Obligations or the obligations of any other guarantor. Guarantor expressly waives any right he may now or in the future have (pursuant to Sections 2845 and 2850 of the California Civil Code or any other law, rule, arrangement or relationship) to require Lenders to, and Lenders shall not have any obligations to, first pursue or enforce against Borrower any of the properties or assets of Borrower or any other security, guarantee or pledge that may now or hereafter be held by Lenders for the Obligations or for the Guarantee Obligations, or to apply the security, guarantee or pledge to the Obligations or to the Guarantee Obligations, or to pursue any other remedy in Lenders' power that Guarantor may or may not be able to pursue himself and that may lighten Guarantor's burden. (b) Lenders shall not be under any obligation to marshal any assets in favor of Guarantor or in payment of any or all of the Obligations or the Guarantee Obligations. (c) Except as specifically provided in SECTION 2.3 or as otherwise provided for in this Guarantee or applicable law, Guarantor waives, to the fullest extent permitted by applicable law: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of the Long Term Notes or any or all of the Related Agreements; (ii) all rights to notice and a hearing prior to Lenders' taking possession or control of, or to Lenders' replevy, attachment or levy upon, or any bond or security which might be required by any court prior to allowing Lenders to exercise any of their remedies; (iii) the benefit of all evaluation, appraisal and exemption laws; (iv) notice of any extension, modification, renewal or amendment of any of the terms of the Long Term Notes or any Related Agreement relating to the Obligations or the Guarantee Obligations; (v) notice of the occurrence of any default or event of default with respect to the Obligations, the Guarantee Obligations or otherwise; and (vi) notice of any exercise or non-exercise by Lenders of any right, power or remedy with respect to the Obligations or the Guarantee Obligations. (d) Guarantor acknowledges that he has been advised by counsel of their choice with respect to this Guarantee, the Long Term Notes and the Related Agreements and the transactions evidenced hereby and thereby. -5- (e) Guarantor agrees that until the Guarantee Termination Date it shall have no right of subrogation, reimbursement, indemnity or contribution, all of which Guarantor expressly waives. (f) If Lenders may, under applicable law, proceed to realize their benefits under the Long Term Notes or any Related Agreement, then Lenders may, at their sole option, determine which of their remedies or rights they may pursue without affecting any of their rights and remedies under this Guarantee. If Lenders bid at any foreclosure or trustee's sale or at any public or private sale permitted by law, Lenders may bid all or less than the amount of the Obligations or the Guarantee Obligations and the amount of the bid need not be paid by Lenders but shall be credited and applied as set forth in SECTION 7. The amount of the successful bid at any sale, whether Lenders or any other party (including Guarantor) is the successful bidder, shall be deemed to be prima facie evidence of the fair market value of the assets purchased and the amount remaining after application of the bid amount in the manner set forth in SECTION 7 shall be deemed to be prima facie evidence of the amount of the Guarantee Obligations guaranteed under this Guarantee, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Lenders might otherwise be entitled but for the bidding at any such sale. (g) Guarantor waives and agrees that it shall not at any time insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Guarantor of the Guarantee Obligations or the enforcement by Lenders of this Guarantee. (h) A separate action or actions may be brought and prosecuted by Lenders against Guarantor whether or not an action is brought against Borrower, or whether Borrower is joined in any action or actions. 2.5 ADDITIONAL WAIVERS. Guarantor expressly acknowledges that: (a) In addition to the waivers set forth in SECTION 2.4, Guarantor also expressly, knowingly and intentionally waives and relinquishes any and all rights, defenses or benefits that Guarantor may have based upon an election of remedies by Lenders which in any manner impairs, affects, reduces, releases, destroys or extinguishes Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower or against any other Person or any security for the Guarantee Obligations by way of subrogation, indemnity, contribution, reimbursement or otherwise. In particular, Guarantor agrees that this Guarantee will remain fully effective and that Guarantor will be liable to Lenders for any Guarantee Obligations. (b) Until all Obligations have been performed in full, Guarantor shall not have any right to subrogation, and Guarantor expressly waives (i) any right (pursuant to Section 2848 of the California Civil Code or any other law, rule, arrangement or relationship) to enforce any remedy which Lenders now have or may hereafter have against Borrower and (ii) any benefit of, and any right to participate in (pursuant to Section 2849 of the California Civil Code or any other law, rule, arrangement or relationship), any security now or hereafter held by Lenders. Guarantor also agrees that this Guarantee will remain fully effective and Guarantor will be liable to Lenders for any Guarantee Obligations. -6- 2.6 WAIVERS OF DEFENSES. Guarantor waives any defense based upon or arising by reason of: (a) any defense of Borrower or any other Person, other than payment in full; (b) the cessation of liability or limitation from any cause whatsoever of the Obligations or any portion thereof, other than payment in full; (c) any lack of authority of any agent or other person acting or purporting to act on behalf of Borrower, or any defect in the formation of Borrower; (d) the application by Borrower of the proceeds of the Obligations for purposes other than the purposes represented to, or intended or understood by, Lenders or Guarantor; (e) any act or omission by Lenders that directly or indirectly results in or aids the discharge of Borrower or any portion of the Obligations by operation of law or otherwise; or (f) any modification of the Obligations in any form whatsoever, including the renewal, extension, acceleration or other change in time for payment of the Obligations, or other change in the terms of the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.7 BENEFITS OF GUARANTEE. The provisions of this Guarantee are for the benefit of Lenders and their respective successors, transferees, endorsees and assigns, and nothing herein shall impair, as among Borrower, Guarantor and Lenders, the Obligations. No transfer, endorsement or assignment shall increase or diminish any of the Guarantee Obligations hereunder. This Guarantee binds Guarantor, and Guarantor may not assign, transfer or endorse this Guarantee. If all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, any reference to "Lenders" herein shall be deemed to refer equally to that Person or Persons. 2.8 CONTINUING GUARANTEE. Guarantor agrees that (a) this is a continuing guarantee, (b) this Guarantee shall remain in full force and effect until the Guarantee Termination Date (and may be reinstated after the Guarantee Termination Date pursuant to SECTION 5) and (c) the Guarantee Obligations hereunder shall extend to each and every extension or renewal, if any, of the Obligations; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.9 SUBORDINATION. (a) Guarantor hereby agrees that, until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5), all obligations and all indebtedness of Borrower to Guarantor and any and all present and future indebtedness regardless of its nature or manner of origination now or hereafter to become due and owing by Borrower to Guarantor (collectively, the "SUBORDINATED INDEBTEDNESS"), are hereby subordinated and postponed and shall be inferior, in all respects, to the Guarantee Obligations. -7- (b) In no circumstance shall any Subordinated Indebtedness be entitled to any collateral security; PROVIDED, that if any collateral security exists, Guarantor hereby agrees that any now existing or hereafter arising Lien upon any of the assets of Borrower in favor of Guarantor, whether created by contract, assignment, subrogation, reimbursement, indemnity, operation of law, principles of equity or otherwise, shall be junior and inferior to, and is hereby subordinated in priority to any now existing or hereafter arising Liens in favor of Lenders, regardless of the time, manner or order of creation, attachment or perfection of the respective Liens. (c) Guarantor hereby agrees that it shall not: (i) assert, collect, accept payment on or enforce any of the Subordinated Indebtedness or take collateral or other security to secure payment of the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (ii) demand payment of, accelerate the maturity of or declare a default or event of default under the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (iii) cause or permit Borrower to make or give, or receive or accept, payment in any form (direct or indirect, including by transfer to an affiliate or subsidiary of Borrower or Guarantor) on account of the Subordinated Indebtedness, or make any transfers in respect of the Subordinated Indebtedness, or give any collateral security for the Subordinated Indebtedness. Any payment, transfer or collateral security so made or given by Borrower and received or accepted by Guarantor shall be held in trust by Guarantor for Collateral Agent and Lenders, and Guarantor shall immediately turn over, in kind, any such payment to Collateral Agent for application in reduction of, or (in the case of property other than cash) as security for, the Guarantee Obligations. 2.10 NO SETOFF, DEFENSE OR COUNTERCLAIM. Guarantor represents, warrants and agrees that, as of the date of this Guarantee, the Guarantee Obligations are not subject to any setoff or defense of any kind against Lenders or Borrower, and Guarantor specifically waives its rights to assert any such defense or right of setoff. Guarantor further agrees that the Guarantee Obligations shall not be subject to any counterclaims or setoffs against Lenders or counterclaims, setoffs or defenses against Borrower that may arise in the future. 3. FURTHER ASSURANCES. Guarantor agrees that it will, at its expense, upon the reasonable written request of Lenders, from time to time, promptly execute and deliver to Lenders any additional instruments or documents considered necessary by Lenders to cause this Guarantee to be, become or remain valid and effective in accordance with its terms. 4. PAYMENTS FREE AND CLEAR OF TAXES. Any and all payments by or on behalf of Guarantor shall be made, in accordance with this SECTION 4, free and clear of and without deduction for any and all present or future taxes. If Guarantor is required by law to deduct any taxes from or in respect of any sum payable hereunder to Lenders, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 4), Lenders receive an amount equal to the sum they would have received had no deductions been made, (ii) Guarantor shall make the deductions and (iii) Guarantor shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Upon request by Collateral Agent or Lenders, Guarantor shall -8- furnish to Collateral Agent or Lenders a receipt for any taxes paid by Guarantor pursuant to this SECTION 4 or, if no taxes are payable with respect to any payments required to be made by Guarantor hereunder, either a certificate from each appropriate taxing authority or an opinion of counsel, which opinion and counsel shall be acceptable to Collateral Agent, in either case stating that the payment is exempt from or not subject to taxes. If taxes are properly paid by Collateral Agent or Lenders as a result of payments under this Guarantee, Guarantor will, upon demand of Collateral Agent, indemnify Collateral Agent and Lenders for the payments, together with any interest, penalties and reasonable expenses in connection therewith plus interest thereon at a rate agreed between Collateral Agent and Guarantor. 5. REINSTATEMENT. This Guarantee shall remain in full force and effect and continue to be effective, as the case may be, if at any time payment or performance of the Obligations or the Guarantee Obligations, or any part thereof, is, pursuant to applicable law, avoided, rescinded or reduced in amount, or must otherwise be restored or returned by Lenders, or any other obligee of the Obligations or the Guarantee Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though the payment or performance had not been made. If any payment or part thereof is avoided, rescinded, reduced, restored or returned, the Obligations or the Guarantee Obligations, as the case may be, shall be reinstated and deemed reduced only by the amount paid and not so avoided, rescinded, reduced, restored or returned. 6. DEFAULTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes), Lenders may declare all of the Guarantee Obligations, immediately and without demand, notice or legal process of any kind, to be, and the Guarantee Obligations shall immediately become, due and payable, and then, or at any subsequent time, Lenders may exercise any or all of their rights and remedies under this Guarantee, the Long Term Notes or any Related Agreement and under applicable law, and may, in addition: (a) make demand upon Guarantor for the payment of the Guarantee Obligations; and (b) resort to Collateral for payment of the Guarantee Obligations, without notice, declaration or demand by Collateral Agent or Lenders to the extent not prohibited by applicable law. 7. APPLICATION OF PAYMENTS. Any payment made by Guarantor under this Guarantee shall be applied (i) first, to the satisfaction of Guarantor's indemnification liabilities pursuant to SECTION 8, (ii) second, to the payment of Obligations with respect to accrued but unpaid interest on the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, (iii) third, to the payment of the principal amount of the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, and (iv) fourth, to all other outstanding Obligations. 8. INDEMNIFICATION. Guarantor shall: (i) indemnify and hold harmless Lenders and their respective affiliates, officers, partners, directors, employees, attorneys and agents (each, an "INDEMNIFIED PERSON") from and against any and all suits, actions, fines, deficiencies, penalties, proceedings, claims, damages, losses, liabilities, expenses and taxes (including reasonable attorneys' fees and disbursements and other out-of-pocket costs of investigations or defense, including those incurred upon any appeal) (each, a "CLAIM") that may be instituted or asserted against or incurred by an -9- Indemnified Person (A) as the result of credit having been extended under the Long Term Notes and the Related Agreements, (B) in connection with or arising out of the transactions contemplated hereunder and thereunder or (C) in connection with any action to enforce payment of the Guarantee Obligations regardless of whether the Indemnified Person is a party to any Claim; and (ii) reimburse each Indemnified Person, immediately upon the Indemnified Person's demand, for any reasonable legal or other out-of-pocket expenses incurred in connection with investigating, defending or participating in any Claim, whether commenced or threatened (whether or not the Indemnified Person is a party to any action or proceeding out of which any expenses arise); PROVIDED, HOWEVER, that Guarantor shall not be liable for any indemnification to an Indemnified Person to the extent that any Claim results solely from an Indemnified Person's gross negligence or willful misconduct. NEITHER LENDERS NOR ANY OTHER INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF ANY OTHER PARTY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY OTHER PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED UNDER THE LONG TERM NOTES AND/OR ANY RELATED AGREEMENT OR OTHERWISE IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. The liabilities of Guarantor under this SECTION 8 shall survive the termination of this Guarantee. 9. MISCELLANEOUS. 9.1 ENTIRE AGREEMENT; AMENDMENTS. This Guarantee, together with the Long Term Notes and the Related Agreements (a) constitutes the entire agreement between the parties with respect to the subject matter hereof and (b) may not be amended or supplemented except by a writing signed by Lenders and the Collateral Agent. 9.2 SECTION TITLES. The Section titles contained in this Guarantee are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 9.3 SEVERABILITY. If any one or more of the provisions contained in this Guarantee is determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of that provision or provisions in every other respect, and the remaining provisions of this Guarantee, shall not be in any way impaired. 9.4 CONFLICT OF TERMS. If any provision of this Guarantee is inconsistent with any provision of the Long Term Notes or any Related Agreement, the provision of the Long Term Notes or the Related Agreement, as the case may be, shall govern and control. 9.5 NON-WAIVER. None of the liabilities of Guarantor, and no right or remedy of Lenders under this Guarantee, shall be deemed to have been suspended or waived by Lenders, nor shall Lenders be estopped from asserting any right or remedy, by Lenders' conduct or oral statements, but any suspension or waiver of any right or remedy by Lenders must be in writing and signed by Lenders. Any suspension or waiver by Lenders of any of their respective rights or remedies under this Guarantee shall not suspend or waive any prior or subsequent right or remedy, whether of the same or of a different type. -10- 9.6 GUARANTEE TERMINATION DATE. This Guarantee is a continuing Guarantee that shall remain in full force and effect until the Guarantee Termination Date, at which time this Guarantee shall terminate and be of no further force and effect, subject to the reinstatement provisions of SECTION 5. 9.7 LIMITATION OF LIABILITY. Neither Lenders nor any of their respective officers, directors, partners, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Guarantee. 9.8 GOVERNING LAW. In all respects, including all matters of construction, validity and performance, this Guarantee and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in that state, without regard to principles of conflicts of laws. 9.9 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Guarantee by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties ("TRANSFEREE") hereto. Lenders may assign any and all of their rights under this Guarantee, the Long Term Notes and the Related Agreements to any Transferee in connection with any assignment of all or any portion of any Long Term Note and upon assignment the Transferee shall be entitled to all of the rights of Lenders hereunder and under any applicable Related Agreement to the same extent as if the Transferee were an original party hereto. Guarantor may not assign or transfer its obligations under this Guarantee. IN WITNESS WHEREOF, Guarantor has caused this Continuing Guarantee to be executed as of the day and year first above written. GUARANTOR Vista Labs Incorporated, a California corporation By: /S/ CARMINE T. OLIVA -------------------------------------------- Carmine T. Oliva, Chief Executive Officer -11- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL LENDER'S NAME AND ADDRESS AMOUNT OF NOTE ------------------------- -------------- Noel McDermott, as Trustee of the Noel C. McDermott Revocable $1,680,000 Living Trust dated December 18, 1995 502 Village Circle Santa Cruz, CA 95060 Warren P. Yost and Gail A. Yost, as Co-Trustees Under $1,320,000 Declaration of Trust dated March 9, 1988 10324 Miner Place Cupertino, CA 95014 A-1 EX-2.8 9 microtel_10qex2-8.txt EXHIBIT 2.8 CONTINUING GUARANTEE THIS CONTINUING GUARANTEE (this "GUARANTEE"), executed this 13th day of July, 2004, is executed by CXR Telcom Corporation, a Delaware corporation (the "GUARANTOR"), in favor of the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"), from the Lenders. B. The execution and delivery of this Guarantee by Guarantor is a condition and inducement to the willingness of Borrower and Lenders to enter into the Stock Purchase Agreement. C. Guarantor is a wholly-owned subsidiary of Borrower and will derive substantial direct and indirect benefits from the performance of the Stock Purchase Agreement and the transactions contemplated thereby. NOW, THEREFORE, in consideration of the promises and the covenants hereinafter contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, it is agreed as follows: 1. DEFINITIONS; CERTAIN MATTERS OF CONSTRUCTION. For the purpose of this Guarantee, (a) unless otherwise set forth herein, capitalized terms or matters of construction deemed or established in any of the Long Term Notes are applied herein as defined or established therein and (b) the following terms have the respective meanings set forth below: "BORROWER" has the meaning specified in the recitals to this Guarantee. "CLAIM" has the meaning specified in SECTION 8. "COLLATERAL" has the meaning set forth in the Security Agreement. "COLLATERAL AGENT" has the meaning set forth in the Security Agreement. "GUARANTEE" means this Continuing Guarantee, including any and all amendments, modifications and supplements. "GUARANTEE OBLIGATIONS" means all liabilities and obligations of Guarantor to Collateral Agent and Lenders as set forth in this Guarantee, whether now existing or hereafter arising. "GUARANTEE TERMINATION DATE" means the date on which all Obligations with respect to all of the Long Term Notes cease to be outstanding and the then due and payable Obligations and Guarantee Obligations have been completely satisfied and all Obligations in the nature of a performance obligation have been performed. "GUARANTOR" has the meaning specified in the introductory paragraph of this Guarantee. "INDEMNIFIED PERSON" has the meaning specified in SECTION 8. "LARUS" has the meaning specified in the recitals to this Guarantee. "LENDERS" means each of those persons and entities that are referenced in EXHIBIT A hereto, and, if all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, including, without limitation, any Transferees pursuant to SECTION 9.9, "Lenders" shall be deemed to refer equally to that Person or Persons. "LIEN" means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien (including judgment liens, liens of mechanics, suppliers and other Persons for the provision of goods or services, and all other liens arising under statute, common law or judicial interpretation), liens securing any claim (including reclamation claims), security interest, easement or encumbrance, preference, priority or other security agreement or other preferential arrangement of any kind or nature whatsoever intended or having the effect of providing security for an obligation (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing and the filing of, or agreement to give, any financing statement perfecting a security interest under the California Uniform Commercial Code or comparable law of any jurisdiction). "LONG TERM NOTES" shall have the meaning set forth in the Stock Purchase Agreement. "OBLIGATIONS" means all loans, advances, debts, guarantees, liabilities and obligations, for monetary amounts (whether or not those amounts are liquidated or determinable) owing by Borrower to Lenders under the Long Term Notes, and all covenants and duties regarding those amounts of any kind or nature, present or future, contingent or liquidated, whether or not evidenced by any note, agreement or other instrument, the payment or performance of which is provided for or arises now or hereafter under the Long Term Notes, or any Related Agreement, including all interest, fees, charges, expenses, attorneys' fees and any other sum chargeable to Borrower thereunder. "PERSON" means any individual, trustee, sole proprietorship, partnership, limited liability company or partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government (whether Federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof). -2- "RELATED AGREEMENTS" means the Security Agreement and this Guarantee, as those agreements may from time to time be amended, restated, supplemented or otherwise modified. "SECURITY AGREEMENT" means the Security Agreement of even date herewith executed by Guarantor in favor of Lenders and Collateral Agent, as amended or restated from time to time. "STOCK PURCHASE AGREEMENT" has the meaning specified in the recitals to this Guarantee. "TRANSFEREE" has the meaning specified in SECTION 9.9. 2. THE GUARANTEE. 2.1 GUARANTEE OF THE OBLIGATIONS. (a) In consideration of the extensions of credit pursuant to the Long Term Notes and all other financial accommodations to or for the benefit of Borrower and Guarantor, and for other valuable consideration, the receipt of which Guarantor hereby acknowledges, Guarantor hereby unconditionally and irrevocably guarantees to Lenders and their respective successors, endorsees, transferees and assigns the prompt payment (whether at stated maturity, by acceleration or otherwise) and performance of the Obligations, whether now or hereafter existing, and whether for principal, interest, fees, expenses or otherwise, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent or now or hereafter existing or due or to become due (including in all cases all amounts which would become due but for the operation of the provisions of any bankruptcy law). (b) This Guarantee constitutes a guarantee of payment and performance when due and not of collection, and Guarantor specifically agrees that it shall not be necessary or required that Lenders or any of their respective successors, endorsees, transferees or assigns assert any claim or demand or enforce any remedy whatsoever against Borrower or any other Person before or as a condition to the obligations of Guarantor under this Guarantee. 2.2 ABSOLUTE GUARANTEE. The Guarantee Obligations shall remain in full force and effect without regard to, and shall not be impaired or affected by, or be deemed to be satisfied by, nor shall Guarantors be exonerated, discharged or released (by virtue of the provisions of Sections 2809, 2819, 2845, 2848, 2849 or 2850 of the California Civil Code or any other law, rule, arrangement or relationship) by, any of the following events: (a) Lenders' exercise or enforcement of, or failure or delay in exercising or enforcing, legal proceedings to collect the Obligations or the Guarantee Obligations or any power, right, or remedy with respect to any of the Obligations or the Guarantee Obligations, including: (i) any suspension of Lenders' right to enforce against Borrower, Guarantor or any other guarantor of the Obligations or the Guarantee Obligations; or (ii) any change in the time, manner, or place of payment of, or in any other term of, any or all of the Obligations or the Guarantee Obligations, or any other amendment to, or waiver of, the Long Term Notes, any Related Agreement or any other agreement or instrument governing or evidencing any of the Obligations or the Guarantee Obligations; -3- (b) any insolvency, bankruptcy, reorganization, arrangement, adjustment, composition, assignment for the benefit of creditors, appointment of a receiver or trustee for all or any part of Borrower's or Guarantor's assets or of the assets of any other guarantor of the Obligations, liquidation, winding-up or dissolution of Borrower, Guarantor or any other guarantor of the Obligations; (c) any limitation, discharge, cessation or partial satisfaction of the Obligations, the Guarantee Obligations or the obligations of any other guarantor of the Obligations, whether by operation of any statute, regulation or rule of law or otherwise (but other than full satisfaction) regardless of the intervention or omission of Lenders, or any invalidity, voidability, unenforceability or irregularity, or future change to or amendment of, in whole or in part, this Guarantee, the Long Term Notes, any other Related Agreement or any other document evidencing any Obligations or Guarantee Obligations; (d) any merger, acquisition, consolidation or change in structure of Borrower, Guarantor or any other guarantor of the Obligations; or any sale, lease, transfer or other disposition of any or all of the assets or shares of Borrower, Guarantor or any other guarantor of the Obligations; (e) any assignment or other transfer, in whole or in part, of Lenders' interest in and rights under the Long Term Notes or any Related Agreement, including this Guarantee, or of Lenders' interest in the Obligations or the Guarantee Obligations; (f) any claim, defense, counterclaim or setoff on the part of Borrower including, but not limited to, any defense or incapacity, disability or lack of corporate or other authority to execute any documents relating to the Obligations, the Guarantee Obligations or any other guarantee of the Obligations; (g) any cancellation, renunciation or surrender of any pledge, guarantee or any debt instrument evidencing the Obligations or the Guarantee Obligations other than full satisfaction of the Obligations and the Guarantee Obligations; (h) Lenders' vote, claim, distribution, election, acceptance, action or inaction in any bankruptcy or reorganization case related to the Obligations or the Guarantee Obligations; (i) any other action or circumstances that might otherwise constitute a defense available to, or a legal or equitable discharge of, any surety, guarantor or pledgor other than Guarantor; or (j) the fact that any of the Obligations or the Guarantee Obligations may arise out of any agreement or transaction that may be unenforceable in whole or in part, it being agreed by Guarantor that the Guarantee Obligations shall not be discharged until the Guarantee Termination Date (and then after the Guarantee Termination Date, the Guarantee Obligations shall be subject to reinstatement under SECTION 5). -4- 2.3 DEMAND BY LENDERS. In addition to the terms set forth in SECTIONS 2.1 AND 2.2, and in no manner imposing any limitation on those terms, it is expressly understood and agreed that, if any of the Obligations are declared to be or otherwise become immediately due and payable, then Guarantor shall, upon demand in writing therefor by Collateral Agent or any of the Lenders to Guarantor, immediately pay the Guarantee Obligations to all Lenders in the manner described under SECTION 7. Payment by Guarantor shall be made to Lenders to be credited and applied to the Obligations, in immediately available funds in lawful money of the United States of America to an account designated in writing by Collateral Agent or Lenders. Any payment received by Lenders with respect to the Obligations shall reduce the Guarantee Obligations by the amount of the payment. 2.4 GUARANTOR WAIVERS. In addition to any other waivers contained herein, Guarantor waives and agrees as follows: (a) The Guarantee Obligations are the immediate, direct, primary, and absolute liabilities of Guarantor, and are independent of, and not co-extensive with, the Obligations or the obligations of any other guarantor. Guarantor expressly waives any right he may now or in the future have (pursuant to Sections 2845 and 2850 of the California Civil Code or any other law, rule, arrangement or relationship) to require Lenders to, and Lenders shall not have any obligations to, first pursue or enforce against Borrower any of the properties or assets of Borrower or any other security, guarantee or pledge that may now or hereafter be held by Lenders for the Obligations or for the Guarantee Obligations, or to apply the security, guarantee or pledge to the Obligations or to the Guarantee Obligations, or to pursue any other remedy in Lenders' power that Guarantor may or may not be able to pursue himself and that may lighten Guarantor's burden. (b) Lenders shall not be under any obligation to marshal any assets in favor of Guarantor or in payment of any or all of the Obligations or the Guarantee Obligations. (c) Except as specifically provided in SECTION 2.3 or as otherwise provided for in this Guarantee or applicable law, Guarantor waives, to the fullest extent permitted by applicable law: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of the Long Term Notes or any or all of the Related Agreements; (ii) all rights to notice and a hearing prior to Lenders' taking possession or control of, or to Lenders' replevy, attachment or levy upon, or any bond or security which might be required by any court prior to allowing Lenders to exercise any of their remedies; (iii) the benefit of all evaluation, appraisal and exemption laws; (iv) notice of any extension, modification, renewal or amendment of any of the terms of the Long Term Notes or any Related Agreement relating to the Obligations or the Guarantee Obligations; (v) notice of the occurrence of any default or event of default with respect to the Obligations, the Guarantee Obligations or otherwise; and (vi) notice of any exercise or non-exercise by Lenders of any right, power or remedy with respect to the Obligations or the Guarantee Obligations. (d) Guarantor acknowledges that he has been advised by counsel of their choice with respect to this Guarantee, the Long Term Notes and the Related Agreements and the transactions evidenced hereby and thereby. -5- (e) Guarantor agrees that until the Guarantee Termination Date it shall have no right of subrogation, reimbursement, indemnity or contribution, all of which Guarantor expressly waives. (f) If Lenders may, under applicable law, proceed to realize their benefits under the Long Term Notes or any Related Agreement, then Lenders may, at their sole option, determine which of their remedies or rights they may pursue without affecting any of their rights and remedies under this Guarantee. If Lenders bid at any foreclosure or trustee's sale or at any public or private sale permitted by law, Lenders may bid all or less than the amount of the Obligations or the Guarantee Obligations and the amount of the bid need not be paid by Lenders but shall be credited and applied as set forth in SECTION 7. The amount of the successful bid at any sale, whether Lenders or any other party (including Guarantor) is the successful bidder, shall be deemed to be prima facie evidence of the fair market value of the assets purchased and the amount remaining after application of the bid amount in the manner set forth in SECTION 7 shall be deemed to be prima facie evidence of the amount of the Guarantee Obligations guaranteed under this Guarantee, notwithstanding that any present or future law or court decision or ruling may have the effect of reducing the amount of any deficiency claim to which Lenders might otherwise be entitled but for the bidding at any such sale. (g) Guarantor waives and agrees that it shall not at any time insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by Guarantor of the Guarantee Obligations or the enforcement by Lenders of this Guarantee. (h) A separate action or actions may be brought and prosecuted by Lenders against Guarantor whether or not an action is brought against Borrower, or whether Borrower is joined in any action or actions. 2.5 ADDITIONAL WAIVERS. Guarantor expressly acknowledges that: (a) In addition to the waivers set forth in SECTION 2.4, Guarantor also expressly, knowingly and intentionally waives and relinquishes any and all rights, defenses or benefits that Guarantor may have based upon an election of remedies by Lenders which in any manner impairs, affects, reduces, releases, destroys or extinguishes Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower or against any other Person or any security for the Guarantee Obligations by way of subrogation, indemnity, contribution, reimbursement or otherwise. In particular, Guarantor agrees that this Guarantee will remain fully effective and that Guarantor will be liable to Lenders for any Guarantee Obligations. (b) Until all Obligations have been performed in full, Guarantor shall not have any right to subrogation, and Guarantor expressly waives (i) any right (pursuant to Section 2848 of the California Civil Code or any other law, rule, arrangement or relationship) to enforce any remedy which Lenders now have or may hereafter have against Borrower and (ii) any benefit of, and any right to participate in (pursuant to Section 2849 of the California Civil Code or any other law, rule, arrangement or relationship), any security now or hereafter held by Lenders. Guarantor also agrees that this Guarantee will remain fully effective and Guarantor will be liable to Lenders for any Guarantee Obligations. -6- 2.6 WAIVERS OF DEFENSES. Guarantor waives any defense based upon or arising by reason of: (a) any defense of Borrower or any other Person, other than payment in full; (b) the cessation of liability or limitation from any cause whatsoever of the Obligations or any portion thereof, other than payment in full; (c) any lack of authority of any agent or other person acting or purporting to act on behalf of Borrower, or any defect in the formation of Borrower; (d) the application by Borrower of the proceeds of the Obligations for purposes other than the purposes represented to, or intended or understood by, Lenders or Guarantor; (e) any act or omission by Lenders that directly or indirectly results in or aids the discharge of Borrower or any portion of the Obligations by operation of law or otherwise; or (f) any modification of the Obligations in any form whatsoever, including the renewal, extension, acceleration or other change in time for payment of the Obligations, or other change in the terms of the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.7 BENEFITS OF GUARANTEE. The provisions of this Guarantee are for the benefit of Lenders and their respective successors, transferees, endorsees and assigns, and nothing herein shall impair, as among Borrower, Guarantor and Lenders, the Obligations. No transfer, endorsement or assignment shall increase or diminish any of the Guarantee Obligations hereunder. This Guarantee binds Guarantor, and Guarantor may not assign, transfer or endorse this Guarantee. If all or any part of the Obligations are transferred, endorsed or assigned by Lenders to any Person or Persons, any reference to "Lenders" herein shall be deemed to refer equally to that Person or Persons. 2.8 CONTINUING GUARANTEE. Guarantor agrees that (a) this is a continuing guarantee, (b) this Guarantee shall remain in full force and effect until the Guarantee Termination Date (and may be reinstated after the Guarantee Termination Date pursuant to SECTION 5) and (c) the Guarantee Obligations hereunder shall extend to each and every extension or renewal, if any, of the Obligations; PROVIDED, HOWEVER, that nothing herein shall result in or effectuate an increase in the amount of the Obligations or Guarantee Obligations for which Guarantor shall be responsible beyond which is contemplated by this Guarantee and the Long Term Notes absent consent of the Guarantor. 2.9 SUBORDINATION. (a) Guarantor hereby agrees that, until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5), all obligations and all indebtedness of Borrower to Guarantor and any and all present and future indebtedness regardless of its nature or manner of origination now or hereafter to become due and owing by Borrower to Guarantor (collectively, the "SUBORDINATED INDEBTEDNESS"), are hereby subordinated and postponed and shall be inferior, in all respects, to the Guarantee Obligations. -7- (b) In no circumstance shall any Subordinated Indebtedness be entitled to any collateral security; PROVIDED, that if any collateral security exists, Guarantor hereby agrees that any now existing or hereafter arising Lien upon any of the assets of Borrower in favor of Guarantor, whether created by contract, assignment, subrogation, reimbursement, indemnity, operation of law, principles of equity or otherwise, shall be junior and inferior to, and is hereby subordinated in priority to any now existing or hereafter arising Liens in favor of Lenders, regardless of the time, manner or order of creation, attachment or perfection of the respective Liens. (c) Guarantor hereby agrees that it shall not: (i) assert, collect, accept payment on or enforce any of the Subordinated Indebtedness or take collateral or other security to secure payment of the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (ii) demand payment of, accelerate the maturity of or declare a default or event of default under the Subordinated Indebtedness until the Guarantee Termination Date (and for any period during which this Guarantee is reinstated pursuant to SECTION 5); (iii) cause or permit Borrower to make or give, or receive or accept, payment in any form (direct or indirect, including by transfer to an affiliate or subsidiary of Borrower or Guarantor) on account of the Subordinated Indebtedness, or make any transfers in respect of the Subordinated Indebtedness, or give any collateral security for the Subordinated Indebtedness. Any payment, transfer or collateral security so made or given by Borrower and received or accepted by Guarantor shall be held in trust by Guarantor for Collateral Agent and Lenders, and Guarantor shall immediately turn over, in kind, any such payment to Collateral Agent for application in reduction of, or (in the case of property other than cash) as security for, the Guarantee Obligations. 2.10 NO SETOFF, DEFENSE OR COUNTERCLAIM. Guarantor represents, warrants and agrees that, as of the date of this Guarantee, the Guarantee Obligations are not subject to any setoff or defense of any kind against Lenders or Borrower, and Guarantor specifically waives its rights to assert any such defense or right of setoff. Guarantor further agrees that the Guarantee Obligations shall not be subject to any counterclaims or setoffs against Lenders or counterclaims, setoffs or defenses against Borrower that may arise in the future. 3. FURTHER ASSURANCES. Guarantor agrees that it will, at its expense, upon the reasonable written request of Lenders, from time to time, promptly execute and deliver to Lenders any additional instruments or documents considered necessary by Lenders to cause this Guarantee to be, become or remain valid and effective in accordance with its terms. 4. PAYMENTS FREE AND CLEAR OF TAXES. Any and all payments by or on behalf of Guarantor shall be made, in accordance with this SECTION 4, free and clear of and without deduction for any and all present or future taxes. If Guarantor is required by law to deduct any taxes from or in respect of any sum payable hereunder to Lenders, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 4), Lenders receive an amount equal to the sum they would have received had no deductions been made, (ii) Guarantor shall make the deductions and (iii) Guarantor shall pay the full amount deducted to the relevant taxing or other authority in accordance with applicable law. Upon request by Collateral Agent or Lenders, Guarantor shall furnish to Collateral Agent or Lenders a receipt for any taxes paid by Guarantor pursuant to this SECTION 4 or, if no taxes are payable with respect to any -8- payments required to be made by Guarantor hereunder, either a certificate from each appropriate taxing authority or an opinion of counsel, which opinion and counsel shall be acceptable to Collateral Agent, in either case stating that the payment is exempt from or not subject to taxes. If taxes are properly paid by Collateral Agent or Lenders as a result of payments under this Guarantee, Guarantor will, upon demand of Collateral Agent, indemnify Collateral Agent and Lenders for the payments, together with any interest, penalties and reasonable expenses in connection therewith plus interest thereon at a rate agreed between Collateral Agent and Guarantor. 5. REINSTATEMENT. This Guarantee shall remain in full force and effect and continue to be effective, as the case may be, if at any time payment or performance of the Obligations or the Guarantee Obligations, or any part thereof, is, pursuant to applicable law, avoided, rescinded or reduced in amount, or must otherwise be restored or returned by Lenders, or any other obligee of the Obligations or the Guarantee Obligations, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though the payment or performance had not been made. If any payment or part thereof is avoided, rescinded, reduced, restored or returned, the Obligations or the Guarantee Obligations, as the case may be, shall be reinstated and deemed reduced only by the amount paid and not so avoided, rescinded, reduced, restored or returned. 6. DEFAULTS AND REMEDIES. Upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes), Lenders may declare all of the Guarantee Obligations, immediately and without demand, notice or legal process of any kind, to be, and the Guarantee Obligations shall immediately become, due and payable, and then, or at any subsequent time, Lenders may exercise any or all of their rights and remedies under this Guarantee, the Long Term Notes or any Related Agreement and under applicable law, and may, in addition: (a) make demand upon Guarantor for the payment of the Guarantee Obligations; and (b) resort to Collateral for payment of the Guarantee Obligations, without notice, declaration or demand by Collateral Agent or Lenders to the extent not prohibited by applicable law. 7. APPLICATION OF PAYMENTS. Any payment made by Guarantor under this Guarantee shall be applied (i) first, to the satisfaction of Guarantor's indemnification liabilities pursuant to SECTION 8, (ii) second, to the payment of Obligations with respect to accrued but unpaid interest on the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, (iii) third, to the payment of the principal amount of the Long Term Notes on a pro rata basis based on the respective aggregate outstanding principal amounts of each Long Term Note, and (iv) fourth, to all other outstanding Obligations. 8. INDEMNIFICATION. Guarantor shall: (i) indemnify and hold harmless Lenders and their respective affiliates, officers, partners, directors, employees, attorneys and agents (each, an "INDEMNIFIED PERSON") from and against any and all suits, actions, fines, deficiencies, penalties, proceedings, claims, damages, losses, liabilities, expenses and taxes (including reasonable attorneys' fees and disbursements and other out-of-pocket costs of -9- investigations or defense, including those incurred upon any appeal) (each, a "CLAIM") that may be instituted or asserted against or incurred by an Indemnified Person (A) as the result of credit having been extended under the Long Term Notes and the Related Agreements, (B) in connection with or arising out of the transactions contemplated hereunder and thereunder or (C) in connection with any action to enforce payment of the Guarantee Obligations regardless of whether the Indemnified Person is a party to any Claim; and (ii) reimburse each Indemnified Person, immediately upon the Indemnified Person's demand, for any reasonable legal or other out-of-pocket expenses incurred in connection with investigating, defending or participating in any Claim, whether commenced or threatened (whether or not the Indemnified Person is a party to any action or proceeding out of which any expenses arise); PROVIDED, HOWEVER, that Guarantor shall not be liable for any indemnification to an Indemnified Person to the extent that any Claim results solely from an Indemnified Person's gross negligence or willful misconduct. NEITHER LENDERS NOR ANY OTHER INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY HERETO, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF ANY OTHER PARTY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH ANY OTHER PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED UNDER THE LONG TERM NOTES AND/OR ANY RELATED AGREEMENT OR OTHERWISE IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. The liabilities of Guarantor under this SECTION 8 shall survive the termination of this Guarantee. 9. MISCELLANEOUS. 9.1 ENTIRE AGREEMENT; AMENDMENTS. This Guarantee, together with the Long Term Notes and the Related Agreements (a) constitutes the entire agreement between the parties with respect to the subject matter hereof and (b) may not be amended or supplemented except by a writing signed by Lenders and the Collateral Agent. 9.2 SECTION TITLES. The Section titles contained in this Guarantee are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 9.3 SEVERABILITY. If any one or more of the provisions contained in this Guarantee is determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of that provision or provisions in every other respect, and the remaining provisions of this Guarantee, shall not be in any way impaired. 9.4 CONFLICT OF TERMS. If any provision of this Guarantee is inconsistent with any provision of the Long Term Notes or any Related Agreement, the provision of the Long Term Notes or the Related Agreement, as the case may be, shall govern and control. 9.5 NON-WAIVER. None of the liabilities of Guarantor, and no right or remedy of Lenders under this Guarantee, shall be deemed to have been suspended or waived by Lenders, nor shall Lenders be estopped from asserting any right or remedy, by Lenders' conduct or oral statements, but any suspension or waiver of any right or remedy by Lenders must be in writing and signed by Lenders. Any suspension or waiver by Lenders of any of their respective rights or remedies under this Guarantee shall not suspend or waive any prior or subsequent right or remedy, whether of the same or of a different type. -10- 9.6 GUARANTEE TERMINATION DATE. This Guarantee is a continuing Guarantee that shall remain in full force and effect until the Guarantee Termination Date, at which time this Guarantee shall terminate and be of no further force and effect, subject to the reinstatement provisions of SECTION 5. 9.7 LIMITATION OF LIABILITY. Neither Lenders nor any of their respective officers, directors, partners, employees, agents or counsel shall be liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Guarantee. 9.8 GOVERNING LAW. In all respects, including all matters of construction, validity and performance, this Guarantee and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the State of California applicable to contracts made and performed in that state, without regard to principles of conflicts of laws. 9.9 SUCCESSORS AND ASSIGNS. All covenants and agreements in this Guarantee by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties ("TRANSFEREE") hereto. Lenders may assign any and all of their rights under this Guarantee, the Long Term Notes and the Related Agreements to any Transferee in connection with any assignment of all or any portion of any Long Term Note and upon assignment the Transferee shall be entitled to all of the rights of Lenders hereunder and under any applicable Related Agreement to the same extent as if the Transferee were an original party hereto. Guarantor may not assign or transfer its obligations under this Guarantee. IN WITNESS WHEREOF, Guarantor has caused this Continuing Guarantee to be executed as of the day and year first above written. GUARANTOR CXR Telcom Corporation, a Delaware corporation By: /S/ CARMINE T. OLIVA ------------------------------------------ Carmine T. Oliva, Chief Executive Officer -11- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL LENDER'S NAME AND ADDRESS AMOUNT OF NOTE ------------------------- -------------- Noel McDermott, as Trustee of the Noel C. McDermott Revocable $1,680,000 Living Trust dated December 18, 1995 502 Village Circle Santa Cruz, CA 95060 Warren P. Yost and Gail A. Yost, as Co-Trustees Under $1,320,000 Declaration of Trust dated March 9, 1988 10324 Miner Place Cupertino, CA 95014 A-1 EX-2.9 10 microtel_10qex2-9.txt EXHIBIT 2.9 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "SECURITY AGREEMENT"), executed this 13th day of July, 2004, is made by and among Larus Corporation, a California corporation ("GUARANTOR"), Noel McDermott, an individual ("COLLATERAL AGENT"), and the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Guarantor. B. Pursuant to the terms of the Stock Purchase Agreement, Borrower issued certain long term promissory notes (which are defined in the Stock Purchase Agreement as well as herein as the "LONG TERM NOTES") to each of the Lenders to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the shares of Guarantor from Lenders. C. Guarantor is delivering a Continuing Guarantee of even date herewith (the "GUARANTEE") in favor of Lenders pursuant to which the obligations of Borrower to Lenders under the Long Term Notes are guaranteed by Guarantor. D. In order to induce Lenders to extend the credit evidenced by the Long Term Notes, Guarantor has agreed to enter into this Security Agreement to grant Collateral Agent, for the benefit of itself and the Lenders, the security interest in the Collateral described below. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS AND INTERPRETATION. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Long Term Notes shall have the respective meanings given to those terms in the Long Term Notes, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. GRANT OF SECURITY INTEREST. To secure the Obligations as defined in SECTION 3 hereof, Guarantor hereby grants to Collateral Agent a security interest in the following property, whether now owned or hereafter acquired by the Guarantor (the "COLLATERAL"): all tangible and intangible assets of Guarantor, including, but not limited to, all existing and future inventory, accounts receivable, furniture, fixtures, equipment, patents, patent applications, trademarks, copyrights, trade secrets, and any other property interest or proprietary right, as well as any document, instrument or drawings embodying the same, and all additions and accessions thereto, substitutions and replacements therefor, and all proceeds thereof. 3. SECURITY FOR OBLIGATIONS. The obligations secured by this Security Agreement (the "OBLIGATIONS") shall mean and include all obligations of Borrower as provided in the Long Term Notes. 4. POSSESSION AND LOCATION OF COLLATERAL. Unless and until any default occurs hereunder as set forth in SECTION 11 hereof, Guarantor shall have possession of the Collateral for its use and enjoyment in any lawful manner not inconsistent with this Security Agreement or the Long Term Notes. The Collateral will be kept at Guarantor's place of business (or such other place as Guarantor customarily keeps the Collateral) with respect to such assets and will not be moved therefrom without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. Guarantor shall not replace or make material alterations in the Collateral without the prior written consent of Collateral Agent. The consent of Collateral Agent required hereby shall not be unreasonably withheld. 5. FINANCING STATEMENTS. Concurrently with the execution of this Security Agreement, Guarantor shall execute and deliver to Collateral Agent the UCC-1 financing statement provided by Collateral Agent. 6. TRANSFER, TAXES, LIENS AND ENCUMBRANCES. Guarantor has title to the Collateral free and clear of any lien, security interest or encumbrance, except for the security interests of the Senior Lenders and the security interest created by this Security Agreement. Title to the Collateral will remain in and continue to be vested in Guarantor. Guarantor will defend the Collateral and will not sell, offer to sell or otherwise transfer the Collateral, any portion thereof, or any interest therein, without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. The consent of Collateral Agent required hereby shall not be unreasonably withheld. Guarantor shall pay all taxes, assessments and other charges made against the Collateral. 7. RISK OF LOSS AND INSPECTION OF COLLATERAL. Guarantor shall have all risk of loss of the Collateral, and Guarantor will keep the Collateral in good order and repair. Collateral Agent shall have the right, at any reasonable time, to enter upon the premises where the Collateral is located to examine and inspect the Collateral in person or by agent. Any refusal to permit such entry shall be a breach of this Security Agreement. 8. INSURANCE. Guarantor shall keep the Collateral insured, at its own expense, in an amount not less than its full insurable value, against loss by fire, theft, vandalism and malicious mischief, storm, earthquake and extended coverage, and Guarantor shall cause the Lenders to be named loss payees in such insurance, and furnish to Collateral Agent written evidence thereof. 9. REPRESENTATIONS WARRANTIES. Guarantor hereby represents and warrants to Collateral Agent and the Lenders as follows: (a) AUTHORIZATION. Guarantor has full power and authority to enter into this Security Agreement. -2- (b) RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. On and as of the date any property becomes Collateral, the foregoing representations and warranties shall be deemed restated with respect to such additional Collateral. 10. COVENANTS. Guarantor hereby agrees as follows: (a) LIENS ON COLLATERAL. Guarantor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Collateral other than in favor of the Senior Lenders. (b) FURTHER ASSURANCES. Guarantor agrees that at any time and from time to time, at Guarantor's expense, Guarantor will promptly execute and deliver all further instruments and documents and take all further action, that may be necessary or desirable, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. 11. EVENTS OF DEFAULT; REMEDIES. (a) EVENT OF DEFAULT. An Event of Default shall be deemed to have occurred under this Security Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes). (b) RIGHTS UNDER THE UCC. In addition to all other rights granted hereby, and otherwise by law, Collateral Agent shall have, with respect to the Collateral, the rights and obligations of a secured party under the UCC. (c) NOTICE, ETC. In any case where notice of sale is required, ten (10) days notice shall be deemed reasonable notice. Collateral Agent may have resort to the Collateral or any portion thereof with no requirement on the part of Collateral Agent to proceed first against any other Person (as defined in the Long Term Notes) or property. (d) OTHER REMEDIES. Upon the occurrence and during the continuance of an Event of Default, (i) at the request of Collateral Agent, Guarantor shall assemble and make available to Collateral Agent all of the Collateral at a place or places reasonably convenient to both Guarantor and Collateral Agent. (e) APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Collateral Agent at the time of, or received by Collateral Agent after, the occurrence of an Event of Default) shall be paid to and applied as follows: (i) first, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Collateral Agent; -3- (ii) second, to the payment to each Lender of the amount then owing or unpaid on such Lender's Long Term Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon such Long Term Note, then its Pro Rata Share of the amount remaining to be distributed (to be applied first to accrued interest and second to outstanding principal); and (iii) third, to the payment of the surplus, if any, to Guarantor, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. For purposes of this Security Agreement, the term "Pro Rata Share" shall mean, when calculating a Lender's portion of any distribution or amount, that distribution or amount (expressed as a percentage) equal to a fraction (i) the numerator of which is the original outstanding principal amount of such Lender's Long Term Note and (ii) the denominator of which is the original aggregate outstanding principal amount of all Long Term Notes issued under the Stock Purchase Agreement. In the event that a Lender receives payments or distributions in excess of its Pro Rata Share, then such Lender shall hold in trust all such excess payments or distributions for the benefit of the other Lenders and shall pay such amounts held in trust to such other holders upon demand by such holders. 12. AUTHORIZED ACTION BY COLLATERAL AGENT. (a) Guarantor hereby appoints Collateral Agent as Guarantor's attorney-in-fact, with full authority in the place and stead of Guarantor and in the name of Guarantor or otherwise, from time to time in Collateral Agent's discretion and to the full extent permitted by law to take any action and to execute any instrument which Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Security Agreement in accordance with the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Guarantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. (b) This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Collateral Agent hereunder are solely to protect the Collateral Agent and Lenders' interests in the Collateral and shall not impose any duty upon Collateral Agent to exercise any such powers. Collateral Agent shall be accountable only for amounts that he actually receives as a result of the exercise of such powers and in no event shall Collateral Agent or any of his employees or agents be responsible to Guarantor for any act or failure to act, except for gross negligence or willful misconduct. -4- 13. COLLATERAL AGENT. (a) APPOINTMENT. The Lenders hereby appoint Noel McDermott as Collateral Agent for the Lenders under this Security Agreement (in such capacity, the "COLLATERAL AGENT") to serve from the date hereof until the termination of this Security Agreement. (b) POWERS AND DUTIES OF COLLATERAL AGENT, INDEMNITY BY LENDERS. (i) Each Lender hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein, together with such powers as are reasonably incidental thereto. Collateral Agent may execute any of his duties hereunder by or through agents or employees at his discretion. (ii) Upon the death, resignation or removal of the Collateral Agent, the Lenders shall appoint a successor collateral agent to act under the Long Term Notes and this Security Agreement. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after Collateral Agent's death, giving of notice of resignation or removal as Collateral Agent, then Collateral Agent shall be deemed to be Warren P. Yost or his successor-in-interest to his Long Term Note. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collateral agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder, and the Collateral Agent shall be discharged from his duties and obligations. After Collateral Agent's death, resignation or removal hereunder as the Collateral Agent, the provisions of this SECTION 13 shall continue in effect for his benefit in respect of any actions taken or omitted to be taken by him while he was acting as such Collateral Agent. 14. MISCELLANEOUS. (a) NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Guarantor, Collateral Agent or Lenders under this Security Agreement shall be in writing and telecopied, mailed or delivered to each party at the telecopier number or its address set forth below (or to such other telecopy number or address as the recipient of any notice shall have notified the other in writing). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. Guarantor: Larus Corporation 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 Telephone: _____________________ Facsimile: ______________________ -5- Collateral Agent: Noel McDermott 502 Village Circle Santa Cruz, CA 95060 Telephone: ____________________ Facsimile: _____________________ Lenders: See the Schedule of Lenders on EXHIBIT A. (b) NONWAIVER. No failure or delay on Guarantor, Collateral Agent or Lenders' part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) AMENDMENTS AND WAIVERS. This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Guarantor and Collateral Agent. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) ASSIGNMENTS. This Security Agreement shall be binding upon and inure to the benefit of Lenders, Collateral Agent and Guarantor and their respective successors and assigns; PROVIDED, HOWEVER, that Guarantor may not assign its rights and duties hereunder without the prior written consent of Collateral Agent. (e) CUMULATIVE RIGHTS, ETC. The rights, powers and remedies of Lenders and Collateral Agent under this Security Agreement shall be in addition to all rights, powers and remedies given to Lenders and Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, the Long Term Notes, the Guarantee, or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent's rights hereunder. Guarantor waives any right to require Collateral Agent or Lenders to proceed against any Person or to exhaust any collateral or to pursue any remedy in Collateral Agent or Lenders' power. (f) PARTIAL INVALIDITY. If any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) EXPENSES. Guarantor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Collateral Agent with respect to any amendments or waivers hereof requested by Guarantor or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Collateral Agent or Lenders' rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting this Security Agreement, the Long Term Notes, the Guarantee or the Obligations or any bankruptcy or similar proceeding involving Guarantor). -6- (h) GOVERNING LAW. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC). (i) JURY TRIAL. GUARANTOR, LENDERS AND COLLATERAL AGENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed as of the day and year first above written. GUARANTOR: Larus Corporation, a California corporation By: /S/ CARMINE T. OLIVA ------------------------------------------------- Carmine T. Oliva, Chief Executive Officer LENDERS: See Schedule of Lenders on EXHIBIT A for signatures. COLLATERAL AGENT: /S/ NOEL MCDERMOTT, BY WARREN P. YOST, ATTORNEY-IN-FACT ------------------------------------------------------- Noel McDermott [Signatures continued on next page] -7- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL AMOUNT LENDER'S NAME AND ADDRESS OF NOTE LENDER'S SIGNATURE ------------------------- ------- ------------------ Noel McDermott, as Trustee of the Noel C. $1,680,000 /S/ NOEL MCDERMOTT, TRUSTEE, BY WARREN P. McDermott Revocable Living Trust dated ---------------------------------------- December 18, 1995 YOST, ATTORNEY-IN-FACT 502 Village Circle ---------------------- Santa Cruz, CA 95060 Noel McDermott, Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 Warren P. Yost and Gail A. Yost, as Co-Trustees $1,320,000 /S/ WARREN P. YOST Under Declaration of Trust dated March 9, 1988 ------------------ 10324 Miner Place Warren P. Yost, Co-Trustee Under Declaration Cupertino, CA 95014 of Trust dated March 9, 1988 /S/ GAIL A. YOST ---------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988
A-1 EX-2.10 11 microtel_10qex2-10.txt EXHIBIT 2.10 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "SECURITY AGREEMENT"), executed this 13th day of July, 2004, is made by and among Vista Labs Incorporated, a California corporation ("GUARANTOR"), Noel McDermott, an individual ("COLLATERAL AGENT"), and the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"). B. Pursuant to the terms of the Stock Purchase Agreement, Borrower issued certain long term promissory notes (which are defined in the Stock Purchase Agreement as well as herein as the "LONG TERM NOTES") to each of the Lenders to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the shares of Larus from Lenders. C. Guarantor is delivering a Continuing Guarantee of even date herewith (the "GUARANTEE") in favor of Lenders pursuant to which the obligations of Borrower to Lenders under the Long Term Notes are guaranteed by Guarantor. D. In order to induce Lenders to extend the credit evidenced by the Long Term Notes, Guarantor has agreed to enter into this Security Agreement to grant Collateral Agent, for the benefit of itself and the Lenders, the security interest in the Collateral described below. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS AND INTERPRETATION. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Long Term Notes shall have the respective meanings given to those terms in the Long Term Notes, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. GRANT OF SECURITY INTEREST. To secure the Obligations as defined in SECTION 3 hereof, Guarantor hereby grants to Collateral Agent a security interest in the following property, whether now owned or hereafter acquired by the Guarantor (the "COLLATERAL"): all tangible and intangible assets of Guarantor, including, but not limited to, all existing and future inventory, accounts receivable, furniture, fixtures, equipment, patents, patent applications, trademarks, copyrights, trade secrets, and any other property interest or proprietary right, as well as any document, instrument or drawings embodying the same, and all additions and accessions thereto, substitutions and replacements therefor, and all proceeds thereof. 3. SECURITY FOR OBLIGATIONS. The obligations secured by this Security Agreement (the "OBLIGATIONS") shall mean and include all obligations of Borrower as provided in the Long Term Notes. 4. POSSESSION AND LOCATION OF COLLATERAL. Unless and until any default occurs hereunder as set forth in SECTION 11 hereof, Guarantor shall have possession of the Collateral for its use and enjoyment in any lawful manner not inconsistent with this Security Agreement or the Long Term Notes. The Collateral will be kept at Guarantor's place of business (or such other place as Guarantor customarily keeps the Collateral) with respect to such assets and will not be moved therefrom without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. Guarantor shall not replace or make material alterations in the Collateral without the prior written consent of Collateral Agent. The consent of Collateral Agent required hereby shall not be unreasonably withheld. 5. FINANCING STATEMENTS. Concurrently with the execution of this Security Agreement, Guarantor shall execute and deliver to Collateral Agent the UCC-1 financing statement provided by Collateral Agent. 6. TRANSFER, TAXES, LIENS AND ENCUMBRANCES. Guarantor has title to the Collateral free and clear of any lien, security interest or encumbrance, except for the security interests of the Senior Lenders and the security interest created by this Security Agreement. Title to the Collateral will remain in and continue to be vested in Guarantor. Guarantor will defend the Collateral and will not sell, offer to sell or otherwise transfer the Collateral, any portion thereof, or any interest therein, without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. The consent of Collateral Agent required hereby shall not be unreasonably withheld. Guarantor shall pay all taxes, assessments and other charges made against the Collateral. 7. RISK OF LOSS AND INSPECTION OF COLLATERAL. Guarantor shall have all risk of loss of the Collateral, and Guarantor will keep the Collateral in good order and repair. Collateral Agent shall have the right, at any reasonable time, to enter upon the premises where the Collateral is located to examine and inspect the Collateral in person or by agent. Any refusal to permit such entry shall be a breach of this Security Agreement. 8. INSURANCE. Guarantor shall keep the Collateral insured, at its own expense, in an amount not less than its full insurable value, against loss by fire, theft, vandalism and malicious mischief, storm, earthquake and extended coverage, and Guarantor shall cause the Lenders to be named loss payees in such insurance, and furnish to Collateral Agent written evidence thereof. 9. REPRESENTATIONS WARRANTIES. Guarantor hereby represents and warrants to Collateral Agent and the Lenders as follows: (a) AUTHORIZATION. Guarantor has full power and authority to enter into this Security Agreement. -2- (b) RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. On and as of the date any property becomes Collateral, the foregoing representations and warranties shall be deemed restated with respect to such additional Collateral. 10. COVENANTS. Guarantor hereby agrees as follows: (a) LIENS ON COLLATERAL. Guarantor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Collateral other than in favor of the Senior Lenders. (b) FURTHER ASSURANCES. Guarantor agrees that at any time and from time to time, at Guarantor's expense, Guarantor will promptly execute and deliver all further instruments and documents and take all further action, that may be necessary or desirable, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. 11. EVENTS OF DEFAULT; REMEDIES. (a) EVENT OF DEFAULT. An Event of Default shall be deemed to have occurred under this Security Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes). (b) RIGHTS UNDER THE UCC. In addition to all other rights granted hereby, and otherwise by law, Collateral Agent shall have, with respect to the Collateral, the rights and obligations of a secured party under the UCC. (c) NOTICE, ETC. In any case where notice of sale is required, ten (10) days notice shall be deemed reasonable notice. Collateral Agent may have resort to the Collateral or any portion thereof with no requirement on the part of Collateral Agent to proceed first against any other Person (as defined in the Long Term Notes) or property. (d) OTHER REMEDIES. Upon the occurrence and during the continuance of an Event of Default, (i) at the request of Collateral Agent, Guarantor shall assemble and make available to Collateral Agent all of the Collateral at a place or places reasonably convenient to both Guarantor and Collateral Agent. (e) APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Collateral Agent at the time of, or received by Collateral Agent after, the occurrence of an Event of Default) shall be paid to and applied as follows: (i) first, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Collateral Agent; -3- (ii) second, to the payment to each Lender of the amount then owing or unpaid on such Lender's Long Term Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon such Long Term Note, then its Pro Rata Share of the amount remaining to be distributed (to be applied first to accrued interest and second to outstanding principal); and (iii) third, to the payment of the surplus, if any, to Guarantor, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. For purposes of this Security Agreement, the term "Pro Rata Share" shall mean, when calculating a Lender's portion of any distribution or amount, that distribution or amount (expressed as a percentage) equal to a fraction (i) the numerator of which is the original outstanding principal amount of such Lender's Long Term Note and (ii) the denominator of which is the original aggregate outstanding principal amount of all Long Term Notes issued under the Stock Purchase Agreement. In the event that a Lender receives payments or distributions in excess of its Pro Rata Share, then such Lender shall hold in trust all such excess payments or distributions for the benefit of the other Lenders and shall pay such amounts held in trust to such other holders upon demand by such holders. 12. AUTHORIZED ACTION BY COLLATERAL AGENT. (a) Guarantor hereby appoints Collateral Agent as Guarantor's attorney-in-fact, with full authority in the place and stead of Guarantor and in the name of Guarantor or otherwise, from time to time in Collateral Agent's discretion and to the full extent permitted by law to take any action and to execute any instrument which Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Security Agreement in accordance with the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Guarantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. (b) This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Collateral Agent hereunder are solely to protect the Collateral Agent and Lenders' interests in the Collateral and shall not impose any duty upon Collateral Agent to exercise any such powers. Collateral Agent shall be accountable only for amounts that he actually receives as a result of the exercise of such powers and in no event shall Collateral Agent or any of his employees or agents be responsible to Guarantor for any act or failure to act, except for gross negligence or willful misconduct. -4- 13. COLLATERAL AGENT. (a) APPOINTMENT. The Lenders hereby appoint Noel McDermott as Collateral Agent for the Lenders under this Security Agreement (in such capacity, the "COLLATERAL AGENT") to serve from the date hereof until the termination of this Security Agreement. (b) POWERS AND DUTIES OF COLLATERAL AGENT, INDEMNITY BY LENDERS. (i) Each Lender hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein, together with such powers as are reasonably incidental thereto. Collateral Agent may execute any of his duties hereunder by or through agents or employees at his discretion. (ii) Upon the death, resignation or removal of the Collateral Agent, the Lenders shall appoint a successor collateral agent to act under the Long Term Notes and this Security Agreement. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after Collateral Agent's death, giving of notice of resignation or removal as Collateral Agent, then Collateral Agent shall be deemed to be Warren P. Yost or his successor-in-interest to his Long Term Note. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collateral agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder, and the Collateral Agent shall be discharged from his duties and obligations. After Collateral Agent's death, resignation or removal hereunder as the Collateral Agent, the provisions of this SECTION 13 shall continue in effect for his benefit in respect of any actions taken or omitted to be taken by him while he was acting as such Collateral Agent. 14. MISCELLANEOUS. (a) NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Guarantor, Collateral Agent or Lenders under this Security Agreement shall be in writing and telecopied, mailed or delivered to each party at the telecopier number or its address set forth below (or to such other telecopy number or address as the recipient of any notice shall have notified the other in writing). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. Guarantor: Vista Labs Incorporated 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 Telephone: Facsimile: -5- Collateral Agent: Noel McDermott 502 Village Circle Santa Cruz, CA 95060 Telephone: ____________________ Facsimile: _____________________ Lenders: See the Schedule of Lenders on EXHIBIT A. (b) NONWAIVER. No failure or delay on Guarantor, Collateral Agent or Lenders' part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) AMENDMENTS AND WAIVERS. This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Guarantor and Collateral Agent. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) ASSIGNMENTS. This Security Agreement shall be binding upon and inure to the benefit of Lenders, Collateral Agent and Guarantor and their respective successors and assigns; PROVIDED, HOWEVER, that Guarantor may not assign its rights and duties hereunder without the prior written consent of Collateral Agent. (e) CUMULATIVE RIGHTS, ETC. The rights, powers and remedies of Lenders and Collateral Agent under this Security Agreement shall be in addition to all rights, powers and remedies given to Lenders and Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, the Long Term Notes, the Guarantee, or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent's rights hereunder. Guarantor waives any right to require Collateral Agent or Lenders to proceed against any Person or to exhaust any collateral or to pursue any remedy in Collateral Agent or Lenders' power. (f) PARTIAL INVALIDITY. If any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) EXPENSES. Guarantor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Collateral Agent with respect to any amendments or waivers hereof requested by Guarantor or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Collateral Agent or Lenders' rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting this Security Agreement, the Long Term Notes, the Guarantee or the Obligations or any bankruptcy or similar proceeding involving Guarantor). -6- (h) GOVERNING LAW. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC). (i) JURY TRIAL. GUARANTOR, LENDERS AND COLLATERAL AGENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed as of the day and year first above written. GUARANTOR: Vista Labs Incorporated, a California corporation By: /S/ CARMINE T. OLIVA ----------------------------------------- Carmine T. Oliva, Chief Executive Officer LENDERS: See Schedule of Lenders on EXHIBIT A for signatures. COLLATERAL AGENT: S/ NOEL MCDERMOTT, BY WARREN P. YOST, ATTORNEY-IN-FACT ------------------------------------------------------ Noel McDermott [Signatures continued on next page] -7- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL AMOUNT LENDER'S NAME AND ADDRESS OF NOTE LENDER'S SIGNATURE ------------------------- ------- ------------------ Noel McDermott, as Trustee of the Noel C. $1,680,000 S/ NOEL MCDERMOTT, TRUSTEE, BY WARREN P. McDermott Revocable Living Trust dated ---------------------------------------- December 18, 1995 YOST, ATTORNEY-IN-FACT 502 Village Circle ---------------------- Santa Cruz, CA 95060 Noel McDermott, Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 Warren P. Yost and Gail A. Yost, as Co-Trustees $1,320,000 /S/ WARREN P. YOST Under Declaration of Trust dated March 9, 1988 ------------------ 10324 Miner Place Warren P. Yost, Co-Trustee Under Declaration Cupertino, CA 95014 of Trust dated March 9, 1988 /S/ GAIL A. YOST ---------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988
A-1 EX-2.11 12 microtel_10qex2-11.txt EXHIBIT 2.11 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "SECURITY AGREEMENT"), executed this 13th day of July, 2004, is made by and among CXR Telcom Corporation, a Delaware corporation ("GUARANTOR"), Noel McDermott, an individual ("COLLATERAL AGENT"), and the persons and entities listed on the Schedule of Lenders attached hereto as EXHIBIT A (each, a "LENDER" and collectively, the "LENDERS"). RECITALS A. MicroTel International Inc., a Delaware corporation (the "BORROWER"), and the Lenders are parties to the Stock Purchase Agreement of even date herewith (the "STOCK PURCHASE AGREEMENT") relating to the purchase by Borrower of all of the issued and outstanding shares of common stock of Larus Corporation, a California corporation ("LARUS"). B. Pursuant to the terms of the Stock Purchase Agreement, Borrower issued certain long term promissory notes (which are defined in the Stock Purchase Agreement as well as herein as the "LONG TERM NOTES") to each of the Lenders to satisfy a portion of the aggregate consideration to be paid by Borrower for the purchase of the shares of Larus from Lenders. C. Guarantor is delivering a Continuing Guarantee of even date herewith (the "GUARANTEE") in favor of Lenders pursuant to which the obligations of Borrower to Lenders under the Long Term Notes are guaranteed by Guarantor. D. In order to induce Lenders to extend the credit evidenced by the Long Term Notes, Guarantor has agreed to enter into this Security Agreement to grant Collateral Agent, for the benefit of itself and the Lenders, the security interest in the Collateral described below. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. DEFINITIONS AND INTERPRETATION. Unless otherwise defined herein, all other capitalized terms used herein and defined in the Long Term Notes shall have the respective meanings given to those terms in the Long Term Notes, and all terms defined in the California Uniform Commercial Code (the "UCC") shall have the respective meanings given to those terms in the UCC. 2. GRANT OF SECURITY INTEREST. To secure the Obligations as defined in SECTION 3 hereof, Guarantor hereby grants to Collateral Agent a security interest in the following property, whether now owned or hereafter acquired by the Guarantor (the "COLLATERAL"): all tangible and intangible assets of Guarantor, including, but not limited to, all existing and future inventory, accounts receivable, furniture, fixtures, equipment, patents, patent applications, trademarks, copyrights, trade secrets, and any other property interest or proprietary right, as well as any document, instrument or drawings embodying the same, and all additions and accessions thereto, substitutions and replacements therefor, and all proceeds thereof. 3. SECURITY FOR OBLIGATIONS. The obligations secured by this Security Agreement (the "OBLIGATIONS") shall mean and include all obligations of Borrower as provided in the Long Term Notes. 4. POSSESSION AND LOCATION OF COLLATERAL. Unless and until any default occurs hereunder as set forth in SECTION 11 hereof, Guarantor shall have possession of the Collateral for its use and enjoyment in any lawful manner not inconsistent with this Security Agreement or the Long Term Notes. The Collateral will be kept at Guarantor's place of business (or such other place as Guarantor customarily keeps the Collateral) with respect to such assets and will not be moved therefrom without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. Guarantor shall not replace or make material alterations in the Collateral without the prior written consent of Collateral Agent. The consent of Collateral Agent required hereby shall not be unreasonably withheld. 5. FINANCING STATEMENTS. Concurrently with the execution of this Security Agreement, Guarantor shall execute and deliver to Collateral Agent the UCC-1 financing statement provided by Collateral Agent. 6. TRANSFER, TAXES, LIENS AND ENCUMBRANCES. Guarantor has title to the Collateral free and clear of any lien, security interest or encumbrance, except for the security interests of the Senior Lenders and the security interest created by this Security Agreement. Title to the Collateral will remain in and continue to be vested in Guarantor. Guarantor will defend the Collateral and will not sell, offer to sell or otherwise transfer the Collateral, any portion thereof, or any interest therein, without the prior written consent of Collateral Agent, except that Guarantor may make sales of inventory items in the ordinary course of business. The consent of Collateral Agent required hereby shall not be unreasonably withheld. Guarantor shall pay all taxes, assessments and other charges made against the Collateral. 7. RISK OF LOSS AND INSPECTION OF COLLATERAL. Guarantor shall have all risk of loss of the Collateral, and Guarantor will keep the Collateral in good order and repair. Collateral Agent shall have the right, at any reasonable time, to enter upon the premises where the Collateral is located to examine and inspect the Collateral in person or by agent. Any refusal to permit such entry shall be a breach of this Security Agreement. 8. INSURANCE. Guarantor shall keep the Collateral insured, at its own expense, in an amount not less than its full insurable value, against loss by fire, theft, vandalism and malicious mischief, storm, earthquake and extended coverage, and Guarantor shall cause the Lenders to be named loss payees in such insurance, and furnish to Collateral Agent written evidence thereof. 9. REPRESENTATIONS WARRANTIES. Guarantor hereby represents and warrants to Collateral Agent and the Lenders as follows: (a) AUTHORIZATION. Guarantor has full power and authority to enter into this Security Agreement. (b) RESTATEMENT OF REPRESENTATIONS AND WARRANTIES. On and as of the date any property becomes Collateral, the foregoing representations and warranties shall be deemed restated with respect to such additional Collateral. -2- 10. COVENANTS. Guarantor hereby agrees as follows: (a) LIENS ON COLLATERAL. Guarantor agrees not to create, incur, assume or suffer to exist any lien or security interest of any kind upon the Collateral other than in favor of the Senior Lenders. (b) FURTHER ASSURANCES. Guarantor agrees that at any time and from time to time, at Guarantor's expense, Guarantor will promptly execute and deliver all further instruments and documents and take all further action, that may be necessary or desirable, or that Collateral Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Collateral Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. 11. EVENTS OF DEFAULT; REMEDIES. (a) EVENT OF DEFAULT. An Event of Default shall be deemed to have occurred under this Security Agreement upon the occurrence and during the continuance of an Event of Default (as defined in the Long Term Notes). (b) RIGHTS UNDER THE UCC. In addition to all other rights granted hereby, and otherwise by law, Collateral Agent shall have, with respect to the Collateral, the rights and obligations of a secured party under the UCC. (c) NOTICE, ETC. In any case where notice of sale is required, ten (10) days notice shall be deemed reasonable notice. Collateral Agent may have resort to the Collateral or any portion thereof with no requirement on the part of Collateral Agent to proceed first against any other Person (as defined in the Long Term Notes) or property. (d) OTHER REMEDIES. Upon the occurrence and during the continuance of an Event of Default, (i) at the request of Collateral Agent, Guarantor shall assemble and make available to Collateral Agent all of the Collateral at a place or places reasonably convenient to both Guarantor and Collateral Agent. (e) APPLICATION OF COLLATERAL PROCEEDS. The proceeds and/or avails of the Collateral, or any part thereof, and the proceeds and the avails of any remedy hereunder (as well as any other amounts of any kind held by Collateral Agent at the time of, or received by Collateral Agent after, the occurrence of an Event of Default) shall be paid to and applied as follows: (i) first, to the payment of reasonable costs and expenses, including all amounts expended to preserve the value of the Collateral, of foreclosure or suit, if any, and of such sale and the exercise of any other rights or remedies, and of all proper fees, expenses, liability and advances, including reasonable legal expenses and attorneys' fees, incurred or made hereunder by Collateral Agent; -3- (ii) second, to the payment to each Lender of the amount then owing or unpaid on such Lender's Long Term Note, and in case such proceeds shall be insufficient to pay in full the whole amount so due, owing or unpaid upon such Long Term Note, then its Pro Rata Share of the amount remaining to be distributed (to be applied first to accrued interest and second to outstanding principal); and (iii) third, to the payment of the surplus, if any, to Guarantor, its successors and assigns, or to whomsoever may be lawfully entitled to receive the same. For purposes of this Security Agreement, the term "Pro Rata Share" shall mean, when calculating a Lender's portion of any distribution or amount, that distribution or amount (expressed as a percentage) equal to a fraction (i) the numerator of which is the original outstanding principal amount of such Lender's Long Term Note and (ii) the denominator of which is the original aggregate outstanding principal amount of all Long Term Notes issued under the Stock Purchase Agreement. In the event that a Lender receives payments or distributions in excess of its Pro Rata Share, then such Lender shall hold in trust all such excess payments or distributions for the benefit of the other Lenders and shall pay such amounts held in trust to such other holders upon demand by such holders. 12. AUTHORIZED ACTION BY COLLATERAL AGENT. (a) Guarantor hereby appoints Collateral Agent as Guarantor's attorney-in-fact, with full authority in the place and stead of Guarantor and in the name of Guarantor or otherwise, from time to time in Collateral Agent's discretion and to the full extent permitted by law to take any action and to execute any instrument which Collateral Agent may deem reasonably necessary or advisable to accomplish the purposes of this Security Agreement in accordance with the terms and provisions hereof, including without limitation, to receive, endorse and collect all instruments made payable to Guarantor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. (b) This power of attorney is a power coupled with an interest and shall be irrevocable. The powers conferred on Collateral Agent hereunder are solely to protect the Collateral Agent and Lenders' interests in the Collateral and shall not impose any duty upon Collateral Agent to exercise any such powers. Collateral Agent shall be accountable only for amounts that he actually receives as a result of the exercise of such powers and in no event shall Collateral Agent or any of his employees or agents be responsible to Guarantor for any act or failure to act, except for gross negligence or willful misconduct. -4- 13. COLLATERAL AGENT. (a) APPOINTMENT. The Lenders hereby appoint Noel McDermott as Collateral Agent for the Lenders under this Security Agreement (in such capacity, the "COLLATERAL AGENT") to serve from the date hereof until the termination of this Security Agreement. (b) POWERS AND DUTIES OF COLLATERAL AGENT, INDEMNITY BY LENDERS. (i) Each Lender hereby irrevocably authorizes the Collateral Agent to take such action and to exercise such powers hereunder as provided herein, together with such powers as are reasonably incidental thereto. Collateral Agent may execute any of his duties hereunder by or through agents or employees at his discretion. (ii) Upon the death, resignation or removal of the Collateral Agent, the Lenders shall appoint a successor collateral agent to act under the Long Term Notes and this Security Agreement. If no such successor collateral agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after Collateral Agent's death, giving of notice of resignation or removal as Collateral Agent, then Collateral Agent shall be deemed to be Warren P. Yost or his successor-in-interest to his Long Term Note. Upon the acceptance of any appointment as successor collateral agent hereunder by a successor collateral agent, such successor collateral agent shall thereupon succeed to and become vested with all rights, powers, privileges, duties and obligations of Collateral Agent hereunder, and the Collateral Agent shall be discharged from his duties and obligations. After Collateral Agent's death, resignation or removal hereunder as the Collateral Agent, the provisions of this SECTION 13 shall continue in effect for his benefit in respect of any actions taken or omitted to be taken by him while he was acting as such Collateral Agent. 14. MISCELLANEOUS. (a) NOTICES. Except as otherwise provided herein, all notices, requests, demands, consents, instructions or other communications to or upon Guarantor, Collateral Agent or Lenders under this Security Agreement shall be in writing and telecopied, mailed or delivered to each party at the telecopier number or its address set forth below (or to such other telecopy number or address as the recipient of any notice shall have notified the other in writing). All such notices and communications shall be effective (a) when sent by Federal Express or other overnight service of recognized standing, on the business day following the deposit with such service; (b) when mailed by registered or certified mail, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d) when telecopied, upon confirmation of receipt. Guarantor: CXR Telcom Corporation 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 Telephone: _______________________ Facsimile: ________________________ -5- Collateral Agent: Noel McDermott 502 Village Circle Santa Cruz, CA 95060 Telephone: ____________________ Facsimile: _____________________ Lenders: See the Schedule of Lenders on EXHIBIT A. (b) NONWAIVER. No failure or delay on Guarantor, Collateral Agent or Lenders' part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right. (c) AMENDMENTS AND WAIVERS. This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Guarantor and Collateral Agent. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) ASSIGNMENTS. This Security Agreement shall be binding upon and inure to the benefit of Lenders, Collateral Agent and Guarantor and their respective successors and assigns; PROVIDED, HOWEVER, that Guarantor may not assign its rights and duties hereunder without the prior written consent of Collateral Agent. (e) CUMULATIVE RIGHTS, ETC. The rights, powers and remedies of Lenders and Collateral Agent under this Security Agreement shall be in addition to all rights, powers and remedies given to Lenders and Collateral Agent by virtue of any applicable law, rule or regulation of any governmental authority, the Long Term Notes, the Guarantee, or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Collateral Agent's rights hereunder. Guarantor waives any right to require Collateral Agent or Lenders to proceed against any Person or to exhaust any collateral or to pursue any remedy in Collateral Agent or Lenders' power. (f) PARTIAL INVALIDITY. If any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby. (g) EXPENSES. Guarantor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Collateral Agent with respect to any amendments or waivers hereof requested by Guarantor or in the enforcement or attempted enforcement of any of the Obligations or in preserving any of Collateral Agent or Lenders' rights and remedies (including, without limitation, all such fees and expenses incurred in connection with any "workout" or restructuring affecting this Security Agreement, the Long Term Notes, the Guarantee or the Obligations or any bankruptcy or similar proceeding involving Guarantor). -6- (h) GOVERNING LAW. This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC). (i) JURY TRIAL. GUARANTOR, LENDERS AND COLLATERAL AGENT, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT. IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed as of the day and year first above written. GUARANTOR: CXR Telcom Corporation, a Delaware corporation By: /S/ CARMINE R. OLIVA ---------------------------------------------------- Carmine T. Oliva, Chief Executive Officer LENDERS: See Schedule of Lenders on EXHIBIT A for signatures. COLLATERAL AGENT: /S/ NOEL MCDERMOTT, BY WARREN P. YOST, ATTORNEY-IN-FACT ------------------------------------------------------- Noel McDermott [Signatures continued on next page] -7- EXHIBIT A --------- SCHEDULE OF LENDERS PRINCIPAL AMOUNT LENDER'S NAME AND ADDRESS OF NOTE LENDER'S SIGNATURE ------------------------- ------- ------------------ Noel McDermott, as Trustee of the Noel C. $1,680,000 /S/ NOEL MCDERMOTT, TRUSTEE, BY WARREN P. McDermott Revocable Living Trust dated ----------------------------------------- December 18, 1995 YOST, ATTORNEY-IN-FACT 502 Village Circle ---------------------- Santa Cruz, CA 95060 Noel McDermott, Trustee of the Noel C. McDermott Revocable Living Trust dated December 18, 1995 Warren P. Yost and Gail A. Yost, as Co-Trustees $1,320,000 /S/ WARREN P. YOST Under Declaration of Trust dated March 9, 1988 ------------------ 10324 Miner Place Warren P. Yost, Co-Trustee Under Declaration Cupertino, CA 95014 of Trust dated March 9, 1988 /S/ GAIL A. YOST ---------------- Gail A. Yost, Co-Trustee Under Declaration of Trust dated March 9, 1988
A-1 EX-10.1 13 microtel_lease10-1.txt EXHIBIT 10.1 [LOGO-CA Assoc. of Realtors] COMMERCIAL LEASE AGREEMENT (C.A.R. Form CL, Revised 10/01) Date (For reference only):_______________ Noel C. McDermott and Warren P. Yost ("Landlord") and Microtel International Incorporated ("Tenant") agree as follows: 1. PROPERTY: Landlord rents to Tenant and Tenant rents from Landlord, the real property and improvements described as: 894 Faulstich Court, San Jose, CA 925112-1361 ("Premises"), which compromise approximately 100% of the total square footage of rentable space in the entire property. See Exhibit A for a further description of the Premises. 2. TERM: The term shall be for 7 years and 0 months, beginning on (date) July 1, 2004 ("Commence Date"). (Check A or B): [X] A. Lease: and shall terminate on (date) June 30, 2011 at Midnight AM PM. Any holding over after the term of this agreement expires, with Landlord's consent, shall create a month-to-month tenancy that either party may terminate as specified in paragraph 2B. Rent shall be at a rate equal to the rent for the immediately preceding month, payable in advance. All other terms and conditions of this agreement shall remain in full force and effect. [ ] B. Month-to-month: and continues as a month-to-month tenancy. Either party may terminate the tenancy by giving written notice to the other at least 30 days prior to the intended termination date, subject to any applicable local laws. Such notice may be given on any date. [X] C. RENEWAL OR EXTENSION TERMS: See attached addendum Exhibit B. 3: BASE RENT: A. Tenant agrees to pay Base Rent at the rate of (CHECK ONE ONLY:) [ ] (1) $__________ per month, for the term of the agreement. [ ] (2) $__________ per month, for the first 12 months of the agreement. Commencing with the 13th month, and upon expiration of each 12 months thereafter, rent shall be adjusted according to any increase in the U.S. Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor for All Urban Consumers ("CPI") for ________________________ (the city nearest the location of the Premises), based on the following formula: Base Rent will be multiplied by the most current CPI preceding the first calendar month during which the adjustment is to take effect, and divided by the most recent CPI preceding the Commencement Date. In no event shall any adjusted Base Rent be less than the Base Rent for the month immediately preceding the adjustment. If the CPI is no longer published, then the adjustment to Base Rent shall be based on an alternate index that most closely reflects the CPI. [ ] (3) $__________ per month for the period commencing __________ and ending __________ and $__________ per month for the period commencing __________ and ending __________ and $__________ per month for the period commencing __________ and ending __________. [ ] (4) In accordance with the attached rent schedule. [X] (5) Other: Specified in Exhibit C. B. Base Rent is payable in advance on the 1st (or _____) day of each calendar month, and is delinquent on the next day. C. If Commencement Date falls on any day other than the first day of the month, Base Rent for the first calendar month shall be prorated based on a 30-day period. If Tenant has paid one full month's Base Rent in advance of Commencement Date, Base Rent for the second calendar month shall be prorated based on a 30-day period. 4. RENT: A. Definition: ("Rent") shall mean all monetary obligations of Tenant to Landlord under the terms of this agreement, except security deposit. B. Payment: Rent shall be paid to (Name) Noel C. McDermott and Warren P. Yost, at (address) 502 Village Circle, Santa Cruz, CA 95060, or at any other location specified by Landlord in writing to Tenant. C. Timing: Base Rent shall be paid as specified in paragraph 3. All other Rent shall be paid within 30 days after Tenant is billed by Landlord. Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 1 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ 5. EARLY POSSESSION: Tenant is entitled to possession of the Premises on N/A. If Tenant is in possession prior to the Commencement Date, during this time (i) Tenant is not obligated to pay Base Rent, and (ii) Tenant is is not obligated to pay Rent other than Base Rent. Whether or not Tenant is obligated to pay Rent prior to Commencement Date, Tenant is obligated to comply with all other terms of this agreement. 6. SECURITY DEPOSIT: A. Tenant agrees to pay Landlord $35,000.00 as a security deposit. Tenant agrees not to hold Broker responsible for its return. (IF CHECKED:) [ ] If Base Rent increases during the term of this agreement, Tenant agrees to increase security deposit by the same portion as the increase in Base Rent. B. All or any portion of the security deposit may be used, as reasonably necessary, to: (i) cure Tenant's default in payment of Rent, late charges, non-sufficient funds ("NSF") fees, or other sums due; (ii) repair damage, excluding ordinary wear and tear, caused by Tenant or by a guest or licensee of Tenant; (iii) broom clean the Premises, if necessary, upon termination of tenancy; and (iv) cover any other unfulfilled obligation of Tenant. SECURITY DEPOSIT SHALL NOT BE USED BY TENANT IN LIEU OF PAYMENT OF LAST MONTH'S RENT. If all or any portion of the security deposit is used during the tenancy, Tenant agrees to reinstate the total security deposit within 5 days after written notice is delivered to Tenant. Within 30 days after Landlord receives possession of the Premises, Landlord shall: (i) furnish Tenant and itemized statement indicating the amount of any security deposit received and the basis for its disposition, and (ii) return any remain portion of security deposit to Tenant. However, if the Landlord's only claim upon the security deposit is for unpaid Rent, then the remain portion of the security deposit, after deduction of unpaid Rent, shall be returned within 14 days after the Landlord receives possession. C. No interest will be paid on security deposit, unless required by local ordinance. 7. PAYMENTS: PAYMENT BALANCE TOTAL DUE RECEIVED DUE DUE DATE --------- -------- --- -------- A. Rent From July 1 $27,000.00/ $__________ $__________ July 1 To July 31 month B. Security Deposit $35,000.00 $__________ $__________ July 1 C. Other: Taxes, Insurance & Maintenance Category $____________ $__________ $__________ as incurred D. Other: Late Payment of Security Deposit Category $100.00/day $__________ $__________ July 1 E. Total: $____________ $__________ $__________ 8. PARKING: Tenant is entitled to 45 unreserved and N/A reserved vehicle parking spaces. The right to parking |X| is [ ] is not included in the Base Rent charged pursuant to paragraph 3. If not included in the Base Rent, the parking rental fee shall be an additional $ N/A per month. Parking space(s) are to be used for parking operable motor vehicles, except for trailers, boats, campers, buses or trucks (other than pick-up trucks). Tenant shall park in assigned space(s) only. Parking space(s) are to be kept clean. Vehicles leaking oil, gas or other motor vehicle fluids shall not be parked in parking spaces or on the Premises. Mechanical work or storage of inoperable vehicles is not allowed in parking space(s) or elsewhere on the Premises. No overnight parking is permitted. 9. ADDITIONAL STORAGE: Storage is permitted as follows: N/A. The right to additional storage space is is not included in the Base Rent charged pursuant to paragraph 3. If not included in Base rent, storage space shall be an additional $ N/A per month. Tenant shall store only personal property that Tenant owns, and shall not store property that is claimed by another, or in which another has any right, title, or interest. Tenant shall not store any improperly packaged food or perishable goods, flammable materials, explosives, or other dangerous or hazardous material. Tenant shall pay for, and be responsible for, the clean-up of any contamination caused by Tenant's use of the storage area. 10. LATE CHARGE; INTEREST; NSF CHECKS: Tenant acknowledges that either late payment of Rent or issuance of a NSF check may cause Landlord to incur costs and expenses, the exact amount of which are extremely difficult and impractical to determine. These costs my include, but are not limited to, processing, enforcement and accounting expenses, and late charges imposed on Landlord. If any installment of Rent due from Tenant is not received by Landlord within 10 calendar days after date due, or if a check is returned NSF, Tenant shall pay to Landlord, respectively, $ 50 as late charge, plus 10% Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 2 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ interest per annum on the delinquent amount and $100.00 as a NSF fee, any of which shall be deemed additional Rent. Landlord and Tenant agree that these charges represent a fair and reasonable estimate of the costs Landlord may incur by reason of Tenant's late or NSF payment. Any late charge, delinquent interest, or NSF fee due shall be paid with the current installment of Rent. Landlord's acceptance of any late change or NSF fee shall not constitute a waiver as to any default of Tenant. Landlord's right to collect a Late Charge or NSF fee shall not be deemed an extension of the date Rent is due under paragraph 4, or prevent Landlord from exercising any other rights and remedies under this agreement, and as provided by law. 11. CONDITION OF PREMISES: Tenant has examined the Premises and acknowledges that Premise is clean and in operative condition, with the following exceptions:_________________________________________________. Items listed as exceptions shall be dealt with in the following manner:_______________________________________________________________. ______________________________________________________________________. 12. ZONING AND LAND USE: Tenant accepts the Premises subject to all local, state and federal laws, regulations and ordinances ("Laws"). Landlord makes no representations or warranty that Premises are now or in the future will be suitable for Tenant's use. Tenant has made it own investigation regarding all applicable Laws. 13. TENANT OPERATING EXPENSES: Tenant agrees to pay for all utilities and services directly billed to Tenant____________________________________. 14. PROPERTY OPERATING EXPENSES: A. Tenant agrees to pay its proportionate share of Landlord's estimated monthly property operating expenses, including but not limited to, common area maintenance, consolidated utility and service bills, insurance, and real estate taxes, based on the ratio of the square footage of the Premises to the total square footage of the rentable space in the entire property. 100% of space . OR B. [ ] (If checked) Paragraph 14 does not apply. 15. USE: The Premises are for the sole use as LIGHT MANUFACTURING/ TELECOMMUNICATIONS EQUIPMENT . No other use is permitted without Landlord's prior written consent. If any use by tenant causes an increase in the premium on Landlord's existing property insurance, Tenant shall pay for the increased cost. Tenant will comply with all Laws affecting its use of the Premises. 16. RULES/REGULATIONS: Tenant agrees to comply with all rules and regulations of Landlord (and, if applicable, Owner's Association) that are at any time posted on the Premises or delivered to Tenant. Tenant shall not, and shall ensure that guests and licenses of Tenant do not, disturb, annoy, endanger, or interfere with other tenants of the building or neighbors, or use the Premises for any unlawful purposes, including, but not limited to, using, manufacturing, selling, storing, or transporting illicit drugs or other contraband, or violate any law or ordinance, or committing a waste or nuisance on or about the Premises. 17. MAINTENANCE: A. Tenant OR [ ] (if checked, Landlord) shall professionally maintain the Premises including heating, air conditioning, electrical, plumbing and water systems, if any, and keep glass, windows and doors in operable and safe condition. Unless Landlord is checked, if Tenant fails to maintain the Premises, Landlord may contract for or perform such maintenance, and charge Tenant for Landlord's cost. B. Landlord OR [ ] (if checked, Tenant) shall maintain the roof, foundation, exterior walls, common areas and PARKING LOT . 18. ALTERATIONS: Tenant shall not make any alterations in or about the Premises, including installation of trade fixtures and signs, without Landlord's prior written consent, which shall not be unreasonably withheld. Any alterations to the Premises shall be done according to Law and with required permits. Tenant shall give Landlord advance notice of the commencement date of any planned alteration, so that Landlord, at its option, may post a Notice of Non-Responsibility to prevent potential liens against Landlord's interest in the Premises. Landlord may also require Tenant to provide Landlord with lien releases from any contractor performing work on the Premises. 19. GOVERNMENT IMPOSED ALTERATIONS. Any alterations required by Law as a result of Tenant's use shall be Tenant's responsibility. Landlord shall be responsible for any other alterations required by Law. 20. ENTRY: Tenant shall make Premises available to Landlord or Landlord's agent for the purpose of entering to make inspections, necessary or agreed repairs, alterations, or improvements, or to supply necessary or agreed services, or to show Premises to prospective or actual purchasers, tenants, mortgagees, lenders, appraisers, or contractors. Landlord and Tenant agree that 24 hours notice (oral or written) shall Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 3 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ be reasonable and sufficient notice. In an emergency, Landlord or Landlord's representative may enter Premises at any time without prior notice. 21. SIGNS: Tenant authorizes Landlord to place a FOR SALE sign o the Premises at any time, and a FOR LEASE sign on the Premises within the 90 (or [ ] _________________) day period preceding the termination of the agreement. 22. SUBLETTING/ASSIGNMENT: Tenant shall not sublet or encumber all or any part of Premises, or assign or transfer this agreement or any interest in it, without the prior written consent of Landlord, which shall not be unreasonably withheld. Unless such consent is obtained, any subletting, assignment, transfer, or encumbrance of the Premises, agreement, or tenancy, by voluntary act of Tenant, operation of law, or otherwise, shall be null and void, and at the option of Landlord, terminate this agreement. Any proposed sublessee, assignee, or transferee shall submit to Landlord an application and credit information for Landlord's approval, and, if approved, sign a separate written agreement with Landlord and Tenant. Landlord's consent to any one sublease, assignment, or transfer, shall not be construed as consent to any subsequent sublease, assignment or transfer, and does not release Tenant of Tenant's obligation under this agreement. 23. POSSESSION: If Landlord is unable to deliver possession of Premises on Commencement date, such date shall be extended to the date on which possession is made available to Tenant. However, the expiration date shall remain the same as specified in paragraph 2. If Landlord is unable to deliver possession within 60 (or [ ] ____________) calendar days after agreed Commencement Date, Tenant may terminate this agreement by giving written notice to Landlord, and shall be refunded all Rent and security deposit paid. 24. TENANT'S OBLIGATIONS UPON VACATING PREMISES: Upon termination of agreement, Tenant shall: (i) give Landlord all copies of all keys or opening devices to Premises, including any common areas; (ii) vacate Premises and surrender it to Landlord empty of all persons and personal property; (iii) vacate all parking and storage spaces; (iv) deliver Premises to Landlord in the same condition as referenced in paragraph 11; (v) clean Premises; (vi) give written notice to Landlord of Tenant's forwarding address; and, (vii) ______________________________________________________________________. All improvements installed by Tenant, with or without Landlord's consent, become the property of Landlord upon termination. Landlord may nevertheless require Tenant to remove any such improvement that did not exist at the time possession was made available to Tenant. 25. BREACH OF CONTRACT/EARLY TERMINATION: In event Tenant, prior to expiration of this agreement, breaches any obligation in this agreement, abandons the premises, or gives notice of tenant's intent to terminate this tenancy prior to its expiration, in addition to any obligations established by paragraph 24, Tenant shall also be responsible for lost rent, rental commissions, advertising expenses, and painting costs necessary to ready Premises for re-rental. Landlord may also recover from Tenant: (i) the worth, at the time of award, of the unpaid Rent that had been earned at the time of termination; (ii) the worth, at the time of award, of the amount by which the unpaid Rent that would have bee earned after expiration until the time of award exceeds the amount of such rental loss the Tenant proves could have been reasonably avoided; and (iii) the worth, at the time of award, of the amount by which the unpaid Rent for the balance of the term after the time of the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided. Landlord may elect to continue the tenancy in effect for so long as Landlord does not terminate Tenant's right to possession, by either written notice of termination of possession or by reletting the Premises to another who takes possession, and Landlord may enforce all Landlord's rights and remedies under this agreement, including the right to recover the Rent as it becomes due. 26. DAMAGE TO PREMISES: If, by no fault of Tenant, Premises are totally or partially damaged or destroyed by fire, earthquake, accident or other casualty, Landlord shall have the right to restore the Premises by repair or rebuilding. If Landlord elects to repair or rebuild, and is able to complete such restoration within 90 days from the date of damage, subject to terms of this paragraph, this agreement shall remain in full force and effect. If Landlord is unable to restore the Premises within this time, or if Landlord elects not to restore, then either Landlord or Tenant may terminate this agreement by giving the other written notice. Rent shall be abated as of the date of damage. The abated amount shall be the current monthly Base Rent prorated on a 30-day basis. If this agreement is not terminated, and the damage is not repaired, then Rent shall be reduced based on the extent to which the damage interferes with Tenant's reasonable use of Premises. Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 4 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ If damage occurs as a result of an act of Tenant or Tenant's guest, only Landlord shall have the right of termination, and no reduction in Rent shall be made. 27. HAZARDOUS MATERIALS: Tenant shall not use, store, generate, release or dispose of any hazardous material on the Premises or the property of which the Premises are part. However, Tenant is permitted to make use of such materials that are required to be used in the normal course of Tenant's business provided that Tenant complies with all applicable Laws related to the hazardous materials. Tenant is responsible for the cost of removal and remediation, or any clean-up of any contamination caused by Tenant. 28. CONDEMNATION: If all or part of the Premises is condemned for public use, either party may terminate this agreement as of the date possession is given to the condemner. All condemnation proceeds, exclusive of those allocated by the condemner to Tenant's relocation costs and trade fixture, belong to Landlord. 29. INSURANCE: Tenant's personal property, fixtures, equipment, inventory and vehicles are not insured by Landlord against loss or damage due to fire, theft, vandalism, rain, water, criminal or negligent acts of others, or any other cause. Tenant is to carry Tenant's own property insurance to protect Tenant from any such loss. In addition, Tenant shall carry liability insurance in an amount of not less than $ 3M . Tenant's liability insurance shall name Landlord and Landlord's agent as additional insured. Tenant, upon Landlord's request, shall provide Landlord with a certificate of insurance establishing Tenant's compliance. Landlord shall maintain liability insurance insuring Landlord, but not Tenant, in an amount of at least $1M, plus property insurance in an amount sufficient to cover the replacement cost of the property. Tenant is advised to carry business interruption insurance in an amount at least sufficient to cover Tenant's complete rental obligation to Landlord. Landlord is advised to obtain a policy of rental loss insurance. Both Landlord and Tenant release each other, and waive their respective rights to subrogation against each other, for loss or damage covered by insurance. 30. TENANCY STATEMENT (ESTOPPEL CERTIFICATE): Tenant shall execute and return a tenancy statement (estoppel certificate), delivered to Tenant by Landlord or Landlord's agent, within 3 days after its receipt. The tenancy statement shall acknowledge that this agreement is unmodified and in full force, or in full force as modified, and state the modifications. Failure to comply with this requirement: (i) shall be deemed Tenant's acknowledgment that the tenancy statement is true and correct, and may be relied upon by a prospective lender or purchaser; and (ii) may be treated by Landlord as a material breach of this agreement. Tenant shall also prepare, execute, and deliver to Landlord any financial statement (which will be held in confidence) reasonably requested by a prospective lender or buyer. 31. LANDLORD'S TRANSFER: Tenant agrees that the transferee of Landlord's interest shall be substituted as Landlord under this agreement. Landlord will be released of any further obligation to Tenant regarding the security deposit, only if the security deposit is returned to Tenant upon such transfer, or if the security deposit is actually transferred to the transferee. For all other obligations under this agreement, Landlord is released of any further liability to Tenant, upon Landlord's transfer. 32. SUBORDINATION: This agreement shall be subordinate to all existing liens and, at Landlord's option, the lien of any first deed of trust or first mortgage subsequently placed upon the real property of which the Premises are a part, and to any advances made on the security of the Premises, and to all renewals, modifications, consolidations, replacements, and extensions. However, as to the lien of any deed of trust or mortgage entered into after execution of this agreement, Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant pays the Rent and observes and performs all of the provisions of this agreement, unless this agreement is otherwise terminated pursuant to its terms. If any mortgagee, trustee, or ground lessor elects to have this agreement placed in a security position prior to the lien of a mortgage, deed of trust, or ground lease, and gives written notice to Tenant, this agreement shall be deemed prior to that mortgage, deed of trust, or ground lease, of the date of recording. 33. TENANT REPRESENTATIONS; CREDIT: Tenant warrants that all statements in Tenant's financial documents and rental application are accurate. Tenant authorizes Landlord and Broker(s) to obtain Tenant's credit report at time of application and periodically during tenancy in connection with approval, modification, or enforcement of this agreement. Landlord may cancel this agreement: (i) before occupancy begins, upon disapproval of the credit report(s); or (ii) at any time, upon discovering that information in Tenant's application is false. A negative credit report reflecting on Tenant's record may be submitted to a credit reporting agency, if Tenant fails to pay Rent or comply with any other obligation under this agreement. Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 5 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ 34. DISPUTE RESOLUTION: A. MEDIATION: Tenant and Landlord agree to mediate any dispute or claim arising between them out of this agreement, or any resulting transaction, before resorting to arbitration or court action, subject to paragraph 34B(2) below. Paragraphs 34B(2) and (3) apply whether or not the arbitration provision is initialed. Mediation fees, if any, shall be divided equally among the parties involved. If for any dispute or claim to which this paragraph applies, any party commences an action without first attempting to resolve the matter through mediation, or refuses to mediate after a request has been made, then that party shall not be entitled to recover attorney fees, even if they would otherwise be available to that party in any such action. THIS MEDIATION PROVISION APPLIES WHETHER OR NOT THE ARBITRATION PROVISION IS INITIALED. B. ARBITRATION OF DISPUTES: (1) Tenant and Landlord agree that any dispute or claim in Law or equity arising between them out of this agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration, including and subject to paragraphs 34B(2) and (3) below. The arbitrator shall be a retired judge or justice, or an attorney with a least 5 years of real estate transactional law experience, unless the parties mutually agree to a different arbitrator, who shall render an award in accordance with substantive California Law. In all other respects, the arbitration shall be conducted in accordance with Part III, Title 9 of the California Code of Civil Procedure. Judgment upon the award of the arbitrator(s) may be entered in any court having jurisdiction. The parties shall have the right to discovery in accordance to the Code of Civil Procedure ss.1283.05. (2) EXCLUSIONS FROM MEDIATION AND ARBITRATION: The following matters are excluded from Mediation and Arbitration hereunder: (i) a judicial or non-judicial foreclosure or other action or proceeding to enforce a deed of trust, mortgage, or installment land sale contract as defined in Civil Code ss.2985; (ii) an unlawful detainer action; (iii) the filing or enforcement of a mechanic's lien; (iv) any matter that is within the jurisdiction of a probate, small claims or bankruptcy court; and (v) an action for bodily injury or wrongful death, or for latent or patent defects to which Code of Civil Procedure ss.337.1 or ss.337.15 applies. The filing of a court action to enable the recording of a notice of pending action, for order of attachment, receivership, injunction, or other provisional remedies, shall not constitute a violation of the mediation and arbitration provision. (3) BROKER: Tenant and Landlord agree to mediate and arbitrate disputes or claims involving either or both Brokers, provided either or both Brokers shall have agreed to such mediation or arbitration, prior to, or within a reasonable time after the dispute or claim is presented to Brokers. Any election by either or both Brokers to participate in mediation or arbitration shall not result in Brokers being deemed parties to the agreement. "NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATERS INCLUDED IN THE `ARBITRATION OF DISPUTES' PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE `ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY." "WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE `ARBITRATION OF DISPUTES' PROVISION TO NEUTRAL ARBITRATION." Landlord's Initials _______, _______ Tenant's Initials _______, _______ 35. JOINT AND INDIVIDUAL OBLIGATIONS: If there is more than one Tenant, each one shall be individually and completely responsible for the performance of all obligations of Tenant under this agreement, jointly with every other Tenant, and individually, whether or not in possession. Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 6 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ 36. NOTICE: Notices may be served by mail, facsimile, or courier at the following address or location, or at any other location subsequently designated:
Landlord: Noel C. McDermott and William P. Yost Tenant: MicroTel International, Inc. 502 Village Circle 9485 Haven Avenue, Suite 100 Santa Cruz, CA 95060 Rancho Cucamonga, CA 91730 _______________________________________________ _____________________________________ _______________________________________________ _____________________________________
Notice is deemed effective upon the earliest of the following: (i) personal receipt by either party or their agent; (ii) written acknowledgment of notice; or (iii) 5 days after mailing notice to such location by first class mail, postage pre-paid. 37. WAIVER: The waiver of any breach shall not be construed as a continuing waiver of the same breach or a waiver of any subsequent breach. 38. INDEMNIFICATION: Tenant shall indemnify, defend and hold Landlord harmless from all claims, disputes, litigation judgments and attorney fees arising out of Tenant's use of the Premises. 39. OTHER TERMS AND CONDITIONS/SUPPLEMENTS: None ------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- ---------------------------------------------------------------------- The following ATTACHED supplements/exhibits are incorporated in this agreement: Exhibit A, B, C & D ----------------------------------------------------------------------- 40. ATTORNEY FEES: In any action or proceeding arising out of this agreement the prevailing party between Landlord and Tenant shall be entitled to reasonable attorney fees and costs for the non-prevailing Landlord or Tenant except as provided in paragraph 34A. 41. ENTIRE CONTRACT: Time is of the essence. All prior agreements between Landlord and Tenant are incorporated in this agreement which constitutes the entire contract. It is intended as a final expression of the parties' agreement, and may not be contradicted by evidence of any prior agreement or contemporaneous oral agreement. The parties further intend that this agreement constitutes the complete and exclusive statement of its terms, and that no extrinsic evidence whatsoever may be introduced in any judicial or other proceeding, if any, involving this agreement. Any provision of this agreement that is held to be invalid shall not affect the validity or enforceability of any other provision in this agreement. This agreement shall be binding upon, and inure to the benefit of, the heirs, assignees and successors to the parties. 42. BROKERAGE: Landlord and Tenant shall each pay to Broker(s) the fee agreed to, if any, in a separate written agreement. Neither Tenant nor Landlord has utilized the services of, or for any other reason owes compensation to, a licensed real estate broker (individual or corporate), agent, finder, or other entity, other than as named in this agreement, in connection with any act relating to the Premises, including, but not limited to, inquires, introductions, consultations, and negotiations leading to this agreement. Tenant and Landlord each agree to indemnify, defend and hold harmless the other, and the Brokers specified herein, and their agents, from and against any costs, expenses, or liability for compensation claimed inconsistent with the warranty and representation in this paragraph 42. 43. AGENCY CONFIRMATION: The following agency relationships are hereby confirmed for this transactions: Listing Agent:______________________________ (Print Firm Name) is the agent of (check one): the Landlord exclusively; or both the Tenant and Landlord. Selling Agent:______________________________ (Print Firm Name)(if not same as Listing Agent) is the agent of (check one): the Tenant exclusively; or the Landlord exclusively; or both the Tenant and Landlord. Real Estate Brokers are not parties to the agreement between Tenant and Landlord. Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 7 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ - -------------------------------------------------------------------------------- Landlord and Tenant acknowledge and agree that Brokers: (i) do not guarantee the condition of the Premises; (ii) cannot verify representations made by others; (iii) will not verify zoning and land use restrictions; (iv) cannot provide legal or tax advice; (v) will not provide other advice or information that exceeds the knowledge, education or experience required to obtain a real estate license. Furthermore, if Brokers are not also acting as Landlord in this agreement, Brokers: (vi) do not decide what rental rate a Tenant should pay or Landlord should accept; and (vii) do not decide upon the length or other terms of tenancy. Landlord and Tenant agree that they will seek legal, tax, insurance, and other desired assistance from appropriate professionals. - --------------------------------------------------------------------------------
Tenant By: MicroTel International Inc. /s/ Carmine T. Oliva, CEO, Chairman & Pres. Date 7/12/04 -------------------------------------------------------------------------------- --------- MicroTel International Inc. - -------------------------------------------------------------------------------------------------------- (Print Name) Address City State Zip ---------------------------------------------- ------------------ ---------- ----------- Tenant Date --------------------------------------------------------------------- ------------------------- (Print Name) Address City State Zip ---------------------------------------------- ------------------ ---------- ----------- Landlord Noel C. McDermott, By Warren P. Yost, Attorney-in-Fact Date 7/12/04 ----------------------------------------------------------- ------------------------------- (Owner or agent with authority to enter into this agreement) Address 502 Village Circle City Santa Clara State CA Zip 95060 ----------------------------------------- ---------------------------------------------------- Landlord Warren P. Yost Date 7/12/04 ---------------------------------------------------------------------- ----------- (Owner or agent with authority to enter into this agreement) Address 10324 Miner Place City Cupertino State CA Zip 95014 --------------------------------------------- ----------------------- ---------- ------- Agency relationships are confirmed as above. Real estate brokers who are not also Landlord in this agreement are not a party to the agreement between Landlord and Tenant. Real Estate Broker (Leasing Firm) ------------------------------------------------------------------------ By (Agent) Date ----------------------------------------------------------------------- ----------------- Address City State Zip ------------------------------------------------ ---------------- -------- ------------- Telephone Fax -------------------------------------------- --------------------------------------- E-mail -------------------------------------------------------------------------- Real Estate Broker (Leasing Firm) ------------------------------------------------------------------------ By (Agent) Date ----------------------------------------------------------------------- ----------------- Address City State Zip ------------------------------------------------ ---------------- -------- ------------- Telephone Fax -------------------------------------------- --------------------------------------- E-mail --------------------------------------------------------------------------
Landlord and Tenant acknowledge receipt of a copy of this page. Landlord's initials ( NCM by WPY ) ( WPY ) Tenant's initials ( CTO ) (_____) -------------------------------------------- Reviewed by Broker of Designee __________ Date__________ -------------------------------------------- Commercial Lease Agreement (CL-11 Page 8 of 8) Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ EXHIBIT A: PROPERTY DESCRIPTION Property: 894 Faulstich Court San Jose, CA 95112-1361 Description: Manufacturing building Building area: thirty thousand (30,000) square feet Steel building construction Over fifteen (15) percent build out Approximately forty-five (45) parking spaces Situated on fee simple land Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ EXHIBIT B: RENEWAL OR EXTENSION TERMS The lessee will have the right for three 5-year renewal options adjusted to market rate at the time of each renewal with an identical rate adjuster each month, as specified tin Exhibit C. Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ EXHIBIT C: BASE RENT Seven (7) year, noncancelable lease, at a beginning rate of $0.90 per square foot, plus any upward adjustment in the Federal Funds Discount Rate in effect at the time of closing referenced to the Federal Reserve Discount Rate of one percent (1%) in effect on the signing date of April 22, 2004 stated in the Binding Agreement in Principle Regarding the Purchase of Outstanding Capital Stock of Larus Corporation and Vista Corporation. The lease is triple net and is adjusted as described following: The portion of the monthly lease payment that is allocated by the lessor to cover interest payments on the mortgage covering the facility (the "Interest Component") will be subject to adjustment, upwards and/or downwards, at the beginning of each month to reflect any changes in the financial index used by the lessor's lender relating to the lessor's mortgage on the facility (the "Index Rate") from the beginning of the prior monthly period. The maximum adjustment in any given year shall be 1-1/2% with a maximum cumulative adjustment over the term of the lease of 8%. No adjustment shall be made if such adjustment would reduce the monthly square foot rental amount to an amount below $0.90. By way of example, if at the beginning of the second month, after the effective date of the lease, the Index Rate has increased by 0.25% since the effective date of the lease, the Interest Component portion of the lease rate would be increased by 0.25% until the next adjustment, if any. Premises 894 Faulstich Court, San Jose CA 95112-1361 Date________________ EXHIBIT D: TENANT IMPROVEMENTS A Lessor leasehold improvement allowance of $11.00 per square foot. EX-10.2 14 microtel_10qex10-2.txt EXHIBIT 10.2 WELLS FARGO LETTERHEAD Inland Empire Commercial Banking 4141 Inland Empire Boulevard, Suite 350 Ontario, CA 91764 June 1, 2004 XET Corporation and CXR Telcom Corporation 9485 Haven Avenue, Suite 100 Rancho Cucamonga, CA 91730 Ladies and Gentlemen: This letter is to confirm that WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), subject to all terms and conditions contained herein, has agreed to make available the credit described below to XET CORPORATION ("XET") and CXR TELCOM CORPORATION ("CXR") (each individually, a "Borrower"). Each reference herein to "Borrower" shall mean each and every party, collectively and individually, defined above as a Borrower. 1. A revolving line of credit under which Bank will make advances to Borrower from time to time up to and including June 1, 2005, not to exceed at any time the maximum principal amount of Three Million Dollars ($3,000,000.00) ("Line of Credit"), the proceeds of which shall be used to finance working capital requirements. 2. A term loan in the principal amount of One Hundred Fifty Thousand Dollars ($150,000.00) ("Term Loan"), the proceeds of which shall be used to refinance existing equipment loan with Wells Fargo Business Credit and to provide additional working capital. Bank's commitment to grant the Term Loan shall terminate on July 1, 2004. The Line of Credit and the Term Loan shall be collectively referred to herein as the "Loans." I. CREDIT TERMS: 1. LINE OF CREDIT: (a) LINE OF CREDIT NOTE. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated as of June 1, 2004 ("Line of Credit Note"), all terms of which are incorporated herein by this reference. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 2 (b) CONVERSION TO FORMULA LINE OF CREDIT. Notwithstanding anything herein to the contrary, if average outstanding borrowings under the Loans exceed Two Million Dollars ($2,000,000.00) in the aggregate for a period of thirty (30) consecutive days (a "Conversion Event"), the Line of Credit shall be converted to a formula-based Line of Credit as set forth herein. Immediately upon the occurrence of a Conversion Event and continuing up to and including such time as a Reconversion Event (as such term is defined in Section 1.1 (c) below), if any, occurs hereunder, outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any time exceed an aggregate of eighty percent (80%) of Borrower's eligible accounts receivable, plus fifteen percent (15%) of the value of Borrower's eligible raw material inventory, plus thirty percent (30%) of the value of finished goods inventory (exclusive of work in process and inventory which is obsolete, unsaleable, damaged, consigned or offsite items), with value defined as the lower of cost or market value. All of the foregoing shall be determined by Bank upon receipt and review of all collateral reports required hereunder and such other documents and collateral information as Bank may from time to time require. Borrower acknowledges that said borrowing base was established by Bank with the understanding that, among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than five percent (5%) of Borrower's gross sales for said period. If such dilution of Borrower's accounts for the immediately preceding three (3) months at any time exceeds five percent (5%) of Borrower's gross sales for said period, or if there at any time exists any other matters, events, conditions or contingencies which Bank reasonably believes may affect payment of any portion of Borrower's accounts, Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such additional dilution and/or establish additional reserves against Borrower's eligible accounts receivable. As used herein, "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of Borrower's business, upon which Borrower's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (i) any account which is more than sixty (60) days past due; (ii) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (iii) any account which represents an obligation of any state or municipal government or of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which the assignment provisions of the Federal Assignment of Claims Act, as amended or recodified from time to time, have been complied with to Bank's satisfaction); XET Corporation and CXR Telcom Corporation June 1, 2004 Page 3 (iv) any account which represents an obligation of an account debtor located in a foreign country; (v) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (vi) that portion of any account, which represents interim or progress billings or retention rights on the part of the account debtor; (vii) any account which represents an obligation of any account debtor when twenty percent (20%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (i) above; (viii) that portion of any account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five percent (25%) of Borrower's total accounts; (ix) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. Borrower expressly acknowledges that the foregoing provisions regarding conversion of the Line of Credit to a formula-based Line of Credit are being relied upon by Bank in extending the Line of Credit to Borrower. (c) RECONVERSION TO NON-FORMULA LINE OF CREDIT. If, following a Conversion Event, average outstanding borrowings under the Loans are equal to or less than Two Million Dollars ($2,000,000.00) in the aggregate for a period of thirty consecutive days (a "Reconversion Event"), the Line of Credit shall be reconverted to a non-formula based Line of Credit until such time as a Conversion Event, if any, shall occur hereunder. (d) BORROWING AND REPAYMENT. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; PROVIDED, HOWEVER, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 4 2. TERM LOAN: (a) TERM NOTE. Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note dated as of June 1, 2004 ("Term Note"), all terms of which are incorporated herein by this reference. (b) REPAYMENT. The principal amount of the Term Loan shall be repaid in accordance with the provisions of the Term Note. (c) PREPAYMENT. Borrower may prepay principal on the Term Loan solely in accordance with the provisions of the Term Note. 3. COLLATERAL: As security for all indebtedness of Borrower to Bank under the Line of Credit, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivable, other rights to payment and general intangibles, inventory and equipment. As security for all indebtedness of Borrower to Bank under the Term Loan, Borrower hereby grants to Bank security interests of first priority in all Borrower's equipment. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. 4. GUARANTIES: All indebtedness of Borrower to Bank shall be guaranteed jointly and severally by MicroTel International Inc. ("MII") in the principal amount of $3,150,000.00, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. II. INTEREST/FEES: 1. INTEREST. The outstanding principal balance of each credit subject hereto shall bear interest, at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 5 2. COMPUTATION AND PAYMENT. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby. 3. COMMITMENT FEE. Borrower shall pay to Bank a non-refundable commitment fee for the Term Loan equal to Five Hundred Dollars ($500.00), which fee shall be due and payable in full upon execution of this agreement. 4. UNUSED COMMITMENT FEE. Borrower shall pay to Bank a fee equal to one quarter percent (0.25%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the first day after each calendar quarter end. III. REPRESENTATIONS AND WARRANTIES: Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this letter and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this letter. 1. LEGAL STATUS OF XET. XET is a corporation, duly organized and existing and in good standing under the laws of the State of New Jersey, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 2. LEGAL STATUS OF CXR. CXR is a corporation, duly organized and existing and in good standing under the laws of the State of Delaware, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. 3. AUTHORIZATION AND VALIDITY. This letter and each promissory note, contract, instrument and other document deemed necessary by Bank to evidence any extension of credit to Borrower pursuant to the terms and conditions hereof, or now or at any time hereafter required by or delivered to Bank in connection with this letter (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 6 4. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. 5. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. 6. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated March 31, 2004, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the condition or operation of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. 7. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. 8. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this letter to any other obligation of Borrower. 9. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and all rights to trademarks, trade names, patents and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. 10. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event, as defined in ERISA, has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 7 11. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. 12. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. IV. CONDITIONS: 1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this letter is subject to fulfillment to Bank's satisfaction of all of the following conditions: (a) DOCUMENTATION. Bank shall have received each of the Loan Documents, duly executed and in form and substance satisfactory to Bank. (b) FINANCIAL CONDITION. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower, or any such guarantor. 2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: XET Corporation and CXR Telcom Corporation June 1, 2004 Page 8 (a) COMPLIANCE. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this letter and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no default hereunder, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such a default, shall have occurred and be continuing or shall exist. (b) DOCUMENTATION. Bank shall have received all additional documents which may be required in connection with such extension of credit. V. COVENANTS: Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: 1. PUNCTUAL PAYMENT. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any credit subject hereto at any time exceeds any limitation on borrowings applicable thereto. 2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same and inspect the properties of Borrower. 3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 120 days after and as of the end of each fiscal year, a consolidated and consolidating audited financial statement and copy of the 10-K report of Borrower and MII, filed with the Securities Exchange Commission, prepared by a certified public accountant, acceptable to Bank, to include a balance sheet, income statements, and statement of cash flows and retained earnings; (b) not later than 30 days after and as of the end of each fiscal month, a consolidated and consolidating financial statement of Borrower and MII, prepared by Borrower and MII, to include a balance sheet, income statements, and statement of cash flows and retained earnings; XET Corporation and CXR Telcom Corporation June 1, 2004 Page 9 (c) commencing upon occurrence of a Conversion Event, if any, and continuing up to and including such time as a Reconversion Event, if any, occurs, not later than 10 days after and as of each month end, a borrowing base certificate, an inventory collateral report, an aged listing of accounts receivable and accounts payable, and a reconciliation of accounts; (d) not later than 30 days after and as of the end of each fiscal year, projections of consolidated financial statements; (e) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no default hereunder nor any condition, act or event which with the giving of notice or the passage of time or both would constitute such a default; (f) from time to time such other information as Bank may reasonably request. 4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of a governmental agency applicable to Borrower and/or its business. 5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. 6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. 7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. 8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 10 9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower's financial statements for the period ending March 31, 2004: (a) Current Ratio not less than 1.50 to 1.0, determined as of each fiscal quarter end, with "Current Ratio" defined as total current assets divided by total current liabilities. (b) Tangible Net Worth of Borrower and MII on a consolidated basis, not at any time less than $5,200,000.00, measured quarterly, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Total Liabilities divided by Tangible Net Worth of Borrower and domestic operations of MII, on a consolidated basis, not at any time greater than 2.00 to 1.00, determined as of each fiscal quarter end, with "Total Liabilities" defined as the aggregate of current liabilities and noncurrent liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (d) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year, and net profit after taxes not less than $1.00 in each fiscal quarter immediately following a fiscal quarter in which Borrower incurred a net loss after taxes. (e) Minimum Debt Service Coverage Ratio of not less than 1.50:1.00 on a trailing four (4) quarter basis, with "Debt Service Coverage Ratio" defined as net income plus depreciation plus amortization minus non-financed capital expenditures divided by current portion of long term debt, measured quarterly. 10. DIVIDENDS, DISTRIBUTIONS. Not declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding. VI. DEFAULT, REMEDIES: 1. DEFAULT, REMEDIES. Upon the violation of any term or condition of any of the Loan Documents, or upon the occurrence of any default or defined event of default under any of the Loan Documents: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies XET Corporation and CXR Telcom Corporation June 1, 2004 Page 11 available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of any such breach or default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. 2. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. VII. MISCELLANEOUS: 1. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this letter must be in writing delivered to each party at its address first set forth above, or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 2. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this letter and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 12 3. SUCCESSORS, ASSIGNMENT. This letter shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; PROVIDED, HOWEVER, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith Bank may disclose all documents and information which Bank now has or hereafter may acquire relating to any credit subject hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder. 4. ENTIRE AGREEMENT; AMENDMENT. This letter and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This letter may be amended or modified only in writing signed by each party hereto. 5. NO THIRD PARTY BENEFICIARIES. This letter is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this letter or any other of the Loan Documents to which it is not a party. 6. SEVERABILITY OF PROVISIONS. If any provision of this letter shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this letter. 7. GOVERNING LAW. This letter shall be governed by and construed in accordance with the laws of the State of California. 8. ARBITRATION. (a) ARBITRATION. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 13 (b) GOVERNING RULES. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association ("AAA"); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; PROVIDED, HOWEVER, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide XET Corporation and CXR Telcom Corporation June 1, 2004 Page 14 (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) DISCOVERY. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) PAYMENT OF ARBITRATION COSTS AND FEES. The arbitrator shall award all costs and expenses of the arbitration proceeding. (h) REAL PROPERTY COLLATERAL; JUDICIAL REFERENCE. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically XET Corporation and CXR Telcom Corporation June 1, 2004 Page 15 enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (i) MISCELLANEOUS. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. 9. JOINT AND SEVERAL LIABILITY. (a) For purposes of this Section VII. 9 only, XET and CXR shall be referred to individually as a "Borrower" and collectively as the "Borrowers." (b) Each Borrower has determined and represents to Bank that it is in its best interests and in pursuance of its legitimate business purposes to induce Bank to extend credit pursuant to this Agreement. Each Borrower acknowledges and represents that its business is related to the business of the other Borrower, the availability of the commitments provided for in this Agreement benefits both Borrowers, and advances and other credit extensions made under this Agreement will be for and inure to the benefit of Borrowers, individually and together. (c) Each Borrower has determined and represents to Bank that it has, and after giving effect to the transactions contemplated by this Agreement will have, assets having a fair saleable value in excess of its debts, after giving effect to any rights of contribution or subrogation which may be available to such Borrower, and each Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts as such debts mature. (d) Each Borrower agrees that it is jointly and severally liable to Bank for, and each Borrower agrees to pay to Bank when due the full amount of, all indebtedness now existing or hereafter arising to Bank under or in connection with the Agreement and all modifications, extensions and renewals thereof, including, without limitation, all advances disbursed to either Borrower under the Line of Credit, all interest which accrues thereon, all principal and interest due to Bank in connection with the Term Loan, and all fees, costs and expenses chargeable to Borrowers or any of them in connection with this Agreement. The obligations of Borrowers to Bank for this Agreement shall be in addition to any obligations of any Borrower to Bank under any other agreement heretofore or hereafter given to Bank unless said other agreement is expressly modified or revoked in writing, and this Agreement shall not, unless expressly herein provided, affect or invalidate any such other agreement. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 16 (e) The liability of each Borrower for the Loans shall be reinstated and revived and the rights of Bank shall continue if and to the extent that for any reason any amount at any time paid on account of the Loans by the other Borrower or any other person or entity is rescinded or must otherwise be restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. (f) Each Borrower authorizes Bank, without notice to or demand on such Borrower, and without affecting such Borrower's liability for the Loans, from time to time to: (a) alter, compromise, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the liabilities and obligations of the other Borrower to Bank on account of the Loans; (b) take and hold security from the other Borrower for the payment of the Loans, and exchange, enforce, waive, subordinate or release any such security; (c) apply such security and direct the order or manner of sale thereof, including without limitation, a non-judicial sale permitted by the terms of the controlling security agreement, as Bank in its discretion may determine; (d) release or substitute any one or more of the endorsers or any guarantors of the Loans, or any other party obligated thereon; and (e) apply payments received by Bank from the other Borrower to indebtedness of the other Borrower to Bank other than the Loans. (g) Each Borrower represents and warrants to Bank that it has established adequate means of obtaining from the other Borrower on a continuing basis financial and other information pertaining to the other Borrower's financial condition, and each Borrower agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect its risks hereunder. Each Borrower further agrees that Bank shall have no obligation to disclose to it any information or material about the other Borrower which is acquired by Bank in any manner. (h) Each Borrower waives any right to require Bank to: (i) proceed against the other Borrower or any other person; (ii) proceed against or exhaust any security held from the other Borrower or any other person; (iii) pursue any other remedy in Bank's power; (iv) apply payments received by Bank from the other Borrower to the Loans; or (v) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest or notices of dishonor in connection with the Loans. (i) Each Borrower waives any defense to its liability for the Loans based upon or arising by reason of: (i) any disability or other defense of the other Borrower or any other person; XET Corporation and CXR Telcom Corporation June 1, 2004 Page 17 (ii) the cessation or limitation from any cause whatsoever, other than payment in full, of the liability of the other Borrower for the Loans; (iii) any lack of authority of any officer, director, partner, agent or other person acting or purporting to act on behalf of the other Borrower or any defect in the formation of the other Borrower; (iv) the application by the other Borrower of the proceeds of the Loans for purposes other than the purposes intended or understood by Bank or Borrowers; (v) any act or omission by Bank which directly or indirectly results in or aids the discharge of the other Borrower by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Bank against the other Borrower; (vi) any impairment of the value of any interest in any security for the Loans, including, without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security; or (vii) any modification of the obligations or liabilities of the other Borrower for the Loans, including, without limitation, the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of, the indebtedness of the other Borrower for the Loans, including increase or decrease of the rate of interest thereon. (j) Until the Loans and all indebtedness of Borrowers to Bank arising under or in connection with the Agreement shall have been paid in full, no Borrower shall have any right of subrogation. Each Borrower waives all rights and defenses it may have arising out of (i) any election of remedies by Bank, even though that election of remedies, such as a non-judicial foreclosure with respect to any security for the Loans, destroys its rights of subrogation or its rights to proceed against the other Borrower for reimbursement, or (ii) any loss of rights it may suffer by reason of any rights, powers or remedies of the other Borrower in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging any Borrower's indebtedness for the Loans. Until the Loans and all indebtedness of each Borrower to Bank arising under or in connection with this Agreement shall have been paid in full, each Borrower waives any right to enforce any remedy which Bank now has or may hereafter have against the other Borrower or any other person, and waives any benefit of, or any right to participate in, any security now or hereafter held by Bank. XET Corporation and CXR Telcom Corporation June 1, 2004 Page 18 Your acknowledgment of this letter shall constitute acceptance of the foregoing terms and conditions. Bank's commitment to extend any credit to Borrower pursuant to the terms of this letter shall terminate on July 1, 2004, unless this letter is acknowledged by Borrower and returned to Bank on or before that date. Sincerely, WELLS FARGO BANK, NATIONAL ASSOCIATION By: /S/ JOSPEH E. HOPPER ------------------------ Joseph E. Hopper Relationship Manager Acknowledged and accepted as of 6/14/04 XET CORPORATION By: /S/ RANDOLPH FOOTE -------------------------- Title: CFO/VP/SEC CXR TELCOM CORPORATION By: /S/ RANDOLPH FOOTE -------------------------- Title: CFO/VP/SEC EX-10.3 15 microtel_10qex10-3.txt EXHIBIT 10.3 REVOLVING LINE OF CREDIT NOTE $3,000,000.00 Ontario, California June 1, 2004 FOR VALUE RECEIVED, the undersigned XET CORPORATION and CXR TELCOM CORPORATION ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Inland Empire RCBO, 4141 Inland Empire Blvd., Ontario, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Three Million Dollars ($3,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. INTEREST: (a) INTEREST. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a rate per annum one half percent (0.50%) above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. (b) PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on the first day of each month, commencing July 1, 2004. (c) DEFAULT INTEREST. From and after the Maturity Date of this Note (as defined below), or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) BORROWING AND REPAYMENT. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 1, 2005 (the "Maturity Date"). (b) ADVANCES. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Randolph Foote or Carmine Oliva or Sid Sananikone, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of any Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. (c) APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. EARLY TERMINATION OF COMMITMENT FEE: In the event that Borrower requests termination of the commitment hereunder at any time prior to the Maturity Date, Borrower shall pay to Bank a non-refundable termination fee equal to Thirty Thousand Dollars ($30,000.00), which shall be due and payable in full prior to termination of the commitment by Bank. EVENTS OF DEFAULT: The occurrence of any of the following shall constitute an "Event of Default' under this Note: (a) The failure to pay any principal, interest, fees or other charges when due hereunder or under any contract, instrument or document executed in connection with this Note. (b) The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. (c) The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity. (d) Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation, or any other liability of any kind to any person or entity, including the holder. -2- (e) Any financial statement provided by any Borrower or Third Party Obligor to Bank proves to be incorrect, false or misleading in any material respect. (f) Any sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of its business. (g) Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust, mortgage or other document executed in connection with or securing this Note. (h) MISCELLANEOUS: (a) REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of California. -3- IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. XET CORPORATION By: /S/ RANDOLPH FOOTE -------------------------------- Title: VP/CFO/SEC CXR TELCOM CORPORATION By: /S/ RANDOLPH FOOTE --------------------------------- Title: VP/CFO/SEC -4- EX-10.4 16 microtel_10qex10-4.txt EXHIBIT 10.4 WELLS FARGO TERM NOTE - -------------------------------------------------------------------------------- $150,000 Ontario, California June 1, 2004 FOR VALUE RECEIVED, the undersigned XET Corporation and CXR Telcom Corporation ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Inland Empire RCBO, 4141 Inland Empire Blvd., Suite #350, Ontario, CA 91764, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $150,000.00, with interest thereon as set forth herein. 1. INTEREST: 1.1 INTEREST. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) at a rate per annum 1.50000% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. 1.2 PAYMENT OF INTEREST. Interest accrued on this Note shall be payable on the 1st day of each month, commencing July 1, 2004. 1.3 DEFAULT INTEREST. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note. 2. REPAYMENT AND PREPAYMENT: 2.1 REPAYMENT. Principal shall be payable on the 1st day of each month in installments of $4,166.67 each, commencing July 1, 2004, and continuing up to and including May 1, 2007, with a final installment consisting of all remaining unpaid principal due and payable in full on June 1, 2007. 2.2 APPLICATION OF PAYMENTS. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. 2.3 PREPAYMENT. Borrower may prepay principal on this Note at any time, in any amount and without penalty. All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid. -1- 3. EVENTS OF DEFAULT: The occurrence of any of the following shall constitute an "Event of Default" under this Note: 3.1 The failure to pay any principal, interest, fees or other charges when due hereunder or under any contract, instrument or document executed in connection with this Note. 3.2 The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. 3.3 The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation, partnership, joint venture or other type of entity. 3.4 Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation, or any other liability of any kind to any person or entity, including the holder. 3.5 Any financial statement provided by any Borrower or Third Party Obligor to Bank proves to be incorrect, false or misleading in any material respect. 3.6 Any sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of its business. 3.7 Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust, mortgage or other document executed in connection with or securing this Note. 4. MISCELLANEOUS: 4.1 REMEDIES. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended -2- or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. 4.2 OBLIGATIONS JOINT AND SEVERAL. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 4.3 GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. XET Corporation By: /S/ RANDOLPH FOOTE --------------------------------- Title: VP/CFO, SECRETARY CXR Telcom Corporation By: /S/ RANDOLPH FOOTE --------------------------------- Title: VP/CFO, SECRETARY -3- EX-10.5 17 microtel_10qex10-5.txt EXHIBIT 10.5 WELLS FARGO CONTINUING GUARANTY - -------------------------------------------------------------------------------- TO: WELLS FARGO BANK, NATIONAL ASSOCIATION 1. GUARANTY; DEFINITIONS. In consideration of any credit or other financial accommodation heretofore, now or hereafter extended or made to XET Corporation and CXR Telcom Corporation ("Borrowers"), or any of them, by WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned MicroTel International Inc. ("Guarantor"), jointly and severally unconditionally guarantees and promises to pay to Bank or order, on demand in lawful money of the United States of America and in immediately available funds, any and all Indebtedness of any of the Borrowers to Bank. The term "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrowers, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrowers may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION UNDER OTHER GUARANTIES. The liability of Guarantor shall not exceed at any time the sum of $3,150,000.00 for principal, plus all interest thereon and costs and expenses pertaining to the enforcement of this Guaranty and/or the collection of the Indebtedness of any of the Borrowers to Bank. Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrowers to exceed Guarantor's liability. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all past, present and future Indebtedness of each of the Borrowers to Bank, including that arising under successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, and notwithstanding the death, incapacity, dissolution, liquidation or bankruptcy of any of the Borrowers or Guarantor or any other event or proceeding affecting any of the Borrowers or Guarantor. This Guaranty shall not apply to any new Indebtedness created after actual receipt by Bank of written notice of its revocation as to such new Indebtedness; provided however, that loans or advances made by Bank to any of the Borrowers after revocation under commitments existing prior to receipt by Bank of such revocation, and extensions, renewals or modifications, of any kind, of Indebtedness incurred by any of the Borrowers or committed by Bank prior to receipt by Bank of such revocation, shall not be considered new Indebtedness. Any such notice must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its office at Inland Empire RCBO, 4141 Inland Empire Blvd., Suite #350, Ontario, CA 91764, or at such other address as Bank shall from time to time designate. Any payment by Guarantor with respect to the Indebtedness shall not reduce Guarantor's maximum obligation hereunder unless written notice to that effect is actually received by Bank at or prior to the time of such payment. The obligations of Guarantor hereunder shall be in addition to any obligations of Guarantor under any other guaranties of any liabilities or obligations of any of the Borrowers or any other persons heretofore or hereafter given to Bank unless said other guaranties are expressly modified or revoked in writing; and this Guaranty shall not, unless expressly herein provided, affect or invalidate any such other guaranties. -1- 3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are joint and several and independent of the obligations of Borrowers, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against any of the Borrowers or any other person, or whether any of the Borrowers or any other person is joined in any such action or actions. Guarantor acknowledges that this Guaranty is absolute and unconditional, there are no conditions precedent to the effectiveness of this Guaranty, and this Guaranty is in full force and effect and is binding on Guarantor as of the date written below, regardless of whether Bank obtains collateral or any guaranties from others or takes any other action contemplated by Guarantor. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof, and Guarantor agrees that any payment of any Indebtedness or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to Guarantor's liability hereunder. The liability of Guarantor hereunder shall be reinstated and revived and the rights of Bank shall continue if and to the extent that for any reason any amount at any time paid on account of any Indebtedness guaranteed hereby is rescinded or must otherwise be restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any amount so paid must be rescinded or restored shall be made by Bank in its sole discretion; provided however, that if Bank chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold Bank harmless from and against all costs and expenses, including reasonable attorneys' fees, expended or incurred by Bank in connection therewith, including without limitation, in any litigation with respect thereto. 4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or after revocation hereof, without notice to or demand on Guarantor, and without affecting Guarantor's liability hereunder, from time to time to: (a) alter, compromise, renew, extend, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Indebtedness or any portion thereof, and exchange, enforce, waive, subordinate or release any such security; (c) apply such security and direct the order or manner of sale thereof, including without limitation, a non-judicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as Bank in its discretion may determine; (d) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness, or any portion thereof, or any other party thereto; and (e) apply payments received by Bank from any of the Borrowers to any Indebtedness of any of the Borrowers to Bank, in such order as Bank shall determine in its sole discretion, whether or not such Indebtedness is covered by this Guaranty, and Guarantor hereby waives any provision of law regarding application of payments which specifies otherwise. Bank may without notice assign this Guaranty in whole or in part. Upon Bank's request, Guarantor agrees to provide to Bank copies of Guarantor's financial statements. -2- 5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Bank that: (a) this Guaranty is executed at Borrowers' request; (b) Guarantor shall not, without Bank's prior written consent, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of all or a substantial or material part of Guarantor's assets other than in the ordinary course of Guarantor's business; (c) Bank has, made no representation to Guarantor as to the creditworthiness of any of the Borrowers; and (d) Guarantor has established adequate means of obtaining from each of the Borrowers on a continuing basis financial: and other information pertaining to Borrowers' financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Bank shall have no obligation to disclose to Guarantor any information or material about any of the Borrowers which is acquired by Bank in any manner. 6. GUARANTOR'S WAIVERS. 6.1 Guarantor waives any right to require Bank to: (a) proceed against any of the Borrowers or any other person; (b) marshal assets or proceed against or exhaust any security held from any of the Borrowers or any other person; (c) give notice of the terms, time and place of any public or private sale or other disposition of personal property security held from any of the Borrowers or any other person; (d) take any action or pursue any other remedy in Bank's power; or (e) make any presentment or demand for performance, or give any notice of nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any obligations or evidences of indebtedness held by Bank as security for or which constitute in whole or in part the Indebtedness guaranteed hereunder, or in connection with the creation of new or additional Indebtedness. 6.2 Guarantor waives any defense to its obligations hereunder based upon or arising by reason of: (a) any disability or other defense of any of the Borrowers or any other person; (b) the cessation or limitation from any cause whatsoever, other than payment in full, of the Indebtedness of any of the Borrowers or any other person; (c) any lack of authority of any officer, director, partner, agent or other person acting or purporting to act on behalf of any of the Borrowers which is a corporation, partnership or other type of entity, or any defect in the formation of any such Borrower; (d) the application by any of the Borrowers of the proceeds of any Indebtedness for purposes other than the purposes represented by Borrowers to, or intended or understood by, Bank or Guarantor; (e) any act or omission by Bank which directly or indirectly results in or aids the discharge of any of the Borrowers or any portion of the Indebtedness by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Bank against any of the Borrowers; (f) any impairment of the value of any interest in any security for the Indebtedness or any portion thereof, including without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security; (g) any modification of the Indebtedness, in any form whatsoever, including any modification made after revocation hereof to any indebtedness incurred prior to such revocation, and including without limitation the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; or (h) any requirement that Bank give any notice of acceptance of this Guaranty. Until all Indebtedness shall have been paid in full, Guarantor shall have no right of subrogation, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have -3- against any of the Borrowers or any other person, and waives any benefit of, or any right to participate in, any security now or hereafter held by Bank. Guarantor further waives all rights and defenses Guarantor may have arising out of (i) any election of remedies by Bank, even though that election of remedies, such as a non-judicial foreclosure with respect to any security for any portion of the Indebtedness, destroys Guarantor's rights of subrogation or Guarantor's rights to proceed against any of the Borrowers for reimbursement, or (ii) any loss of rights Guarantor may suffer by reason of any rights, powers or remedies of any of the Borrowers in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging Borrowers' Indebtedness, whether by operation of Sections 726, 580a or 580d of the Code of Civil Procedure as from time to time amended, or otherwise, including any rights Guarantor may have to a Section 580a fair market value hearing to determine the size of a deficiency following any foreclosure sale or other disposition of any real property security for any portion of the Indebtedness. 7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANK'S POSSESSION. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Bank by law, Bank shall have a lien upon and a right of setoff against all monies, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Bank, whether held in a general or special account or deposit or for safekeeping or otherwise, and every such lien and right of setoff may be exercised without demand upon or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of Bank, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by Bank in writing. 8. SUBORDINATION. Any Indebtedness of any of the Borrowers now or hereafter held by Guarantor is hereby subordinated to the Indebtedness of Borrowers to Bank. Such Indebtedness of Borrowers to Guarantor is assigned to Bank as security for this Guaranty and the Indebtedness and, if Bank requests, shall be collected and received by Guarantor as trustee for Bank and paid over to Bank on account of the Indebtedness of Borrowers to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any notes or other instruments now or hereafter evidencing such Indebtedness of any of the Borrowers to Guarantor shall be marked with a legend that the same are subject to this Guaranty and, if Bank so requests, shall be delivered to Bank. Bank is hereby authorized in the name of Guarantor from time to time to file financing statements and continuation statements and execute such other documents and take such other action as Bank deems necessary or appropriate to perfect, preserve and enforce its rights hereunder. 9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank hereunder are cumulative. No delay, failure or discontinuance of Bank in exercising any right, power or remedy hereunder shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by bank of any breach of this Guaranty, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. -4- 10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with the enforcement of any of Bank's rights, powers or remedies and/or the collection of any amounts which become due to Bank under this Guaranty, and the prosecution or defense of any action in any way related to this Guaranty, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Guarantor or any other person or entity. All of the foregoing shall be paid by Guarantor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Guarantor may not assign or transfer any of its interests or rights hereunder without Bank's prior written consent. Guarantor acknowledges that Bank has the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, any Indebtedness of Borrowers to Bank and any obligations with respect thereto, including this Guaranty. In connection therewith, Bank may disclose all documents and information which Bank now has or hereafter acquires relating to Guarantor and/or this Guaranty, whether furnished by Borrowers, Guarantor or otherwise. Guarantor further agrees that Bank may disclose such documents and information to Borrowers. 12. AMENDMENT. This Guaranty may be amended or modified only in writing signed by Bank and Guarantor. 13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Guaranty as a Guarantor hereby expressly agrees that recourse may be had against his or her separate property for all his or her obligations under this Guaranty. 14. APPLICATION OF SINGULAR AND PLURAL. In all cases where there is but a single Borrower, then all words used herein in the plural shall be deemed to have been used in the singular where the context and construction so require; and when there is more than one Borrower named herein, or when this Guaranty is executed by more than one Guarantor, the word "Borrowers" and the word "Guarantor" respectively shall mean all or any one or more of them as the context requires. 15. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF PROVISIONS. Guarantor warrants and agrees that each of the waivers set forth herein is made with Guarantor's full knowledge of its significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any waiver or other provision of this Agreement shall be held to be prohibited by or invalid under applicable public policy or law, such waiver or other provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such waiver or other provision or any remaining provisions of this Agreement. -5- 16. GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. 17. ARBITRATION. 17.1 ARBITRATION. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (a) the loan and related loan and security documents which are the subject of this Guaranty and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (b) requests for additional credit. 17.2 GOVERNING RULES. Any arbitration proceeding will (a) proceed in a location in California selected by the American Arbitration Association ("AAA"); (b) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (c) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. 17.3 NO WAIVER OF PROVISIONAL REMEDIES, SELF-HELP AND FORECLOSURE. The arbitration requirement does not limit the right of any party to (a) foreclose against real or personal property collateral; (b) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (c) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (a), (b) and (c) of this paragraph. 17.4 ARBITRATOR QUALIFICATIONS AND POWERS. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue -6- is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. 17.5 DISCOVERY. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. 17.6 CLASS PROCEEDINGS AND CONSOLIDATIONS. The resolution of any dispute arising pursuant to the terms of this Guaranty shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. -7- EX-10.6 18 microtel_10qex10-6.txt EXHIBIT 10.6 SECURITY AGREEMENT WELLS FARGO EQUIPMENT - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned XET Corporation, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all goods, tools, machinery, furnishings, furniture and other equipment, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, whether in the possession of Debtor or any other person and whether located on Debtor's property or elsewhere, and all improvements, replacements, accessions and additions thereto and embedded software included therein (collectively called "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (a) all accounts, contract rights, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles and other rights to payment of every kind now or at any time hereafter arising from any such sale, lease, collection, exchange or other disposition of any of the foregoing, (b) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and (c) all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the -1- exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; and (g) Debtor is not in the business of selling goods of the kind included within the Collateral subject to this Agreement, and Debtor acknowledges that no sale or other disposition of any Collateral, including without limitation, any Collateral which Debtor may deem to be surplus, has been or shall be consented to or acquiesced in by Bank, except as specifically set forth in writing by Bank. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (b) to insure the Collateral with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (c) to operate the Collateral in accordance with all applicable statutes, rules and regulations relating to the use and control thereof, and not to use the Collateral for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from repairs to or storage of the Collateral, except in favor of Bank; (e) to pay when due all license fees, registration fees and other charges in connection with any Collateral; (f) not to remove the Collateral from Debtor's premises unless the Collateral consists of mobile goods as defined in the California Uniform Commercial Code, in which case Debtor agrees not to remove or permit the removal of the Collateral from its state of domicile for a period in excess of 30 -2- calendar days; (g) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein; (h) not to rent, lease or charter the Collateral; (i) to permit Bank to inspect the Collateral at any time; (j) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (k) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (l) not to commingle Proceeds or collections thereunder with other property; (m) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Collateral or Proceeds in any material respect; (n) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (o) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep the Collateral in good and saleable condition and repair, to deal with the Collateral in accordance with the standards and practices adhered to generally by owners of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the Indebtedness or replacement of the Collateral; (l) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting the Collateral; and (n) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. -3- 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. -4- 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this -5- Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of the State of New Jersey. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730. Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: NONE. IN WITNESS WHEREOF, this Agreement has been duly executed as of June 1, 2004. XET Corporation By: /S/ RANDOLPH FOOTE ------------------------------- Title: VP/CFO/SEC ----------------------------- -6- EX-10.7 19 microtel_10qex10-7.txt EXHIBIT 10.7 SECURITY AGREEMENT WELLS FARGO EQUIPMENT - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned CXR Telecom Corporation, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all goods, tools, machinery, furnishings, furniture and other equipment, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, whether in the possession of Debtor or any other person and whether located on Debtor's property or elsewhere, and all improvements, replacements, accessions and additions thereto and embedded software included therein (collectively called "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, (a) all accounts, contract rights, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles and other rights to payment of every kind now or at any time hereafter arising from any such sale, lease, collection, exchange or other disposition of any of the foregoing, (b) all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and (c) all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the -1- exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; and (g) Debtor is not in the business of selling goods of the kind included within the Collateral subject to this Agreement, and Debtor acknowledges that no sale or other disposition of any Collateral, including without limitation, any Collateral which Debtor may deem to be surplus, has been or shall be consented to or acquiesced in by Bank, except as specifically set forth in writing by Bank. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security interest in Collateral and Proceeds; (b) to insure the Collateral with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (c) to operate the Collateral in accordance with all applicable statutes, rules and regulations relating to the use and control thereof, and not to use the Collateral for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from repairs to or storage of the Collateral, except in favor of Bank; (e) to pay when due all license fees, registration fees and other charges in connection with any Collateral; (f) not to remove the Collateral from Debtor's premises unless the Collateral consists of mobile goods as defined in the California Uniform Commercial Code, in which case Debtor agrees not to remove or permit the removal -2- of the Collateral from its state of domicile for a period in excess of 30 calendar days; (g) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein; (h) not to rent, lease or charter the Collateral; (i) to permit Bank to inspect the Collateral at any time; (j) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (k) if requested by Bank, to receive and use reasonable diligence to collect Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (l) not to commingle Proceeds or collections thereunder with other property; (m) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Collateral or Proceeds in any material respect; (n) in the event Bank elects to receive payments of Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (o) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep the Collateral in good and saleable condition and repair, to deal with the Collateral in accordance with the standards and practices adhered to generally by owners of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the Indebtedness or replacement of the Collateral; (l) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting the Collateral; and (n) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. -3- 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. -4- 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or -5- appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of the State of Delaware. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730. Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: NONE. IN WITNESS WHEREOF, this Agreement has been duly executed as of June 1, 2004. CXR Telecom Corporation By: /S/ RANDOLPH FOOTE ------------------------------- Title: VP/CFO/SEC ----------------------------- -6- EX-10.8 20 microtel_10qex10-8.txt EXHIBIT 10.8 CONTINUING SECURITY AGREEMENT WELLS FARGO RIGHTS TO PAYMENT AND INVENTORY - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned XET Corporation, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all accounts, deposit accounts, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles, software, letter of credit rights, health-care insurance receivables and other rights to payment (collectively called "Rights to Payments"), now existing or at any time hereafter, and prior to the termination hereof, arising (whether they arise from the sale, lease or other disposition of inventory or from performance of contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever), including all securities, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the same or the property described therein, and in all goods returned by or repossessed from Debtor's customers, together with a security interest in all inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, raw materials, component parts and embedded software, work in process or materials used or consumed in Debtor's business and all warehouse receipts, bills of lading and other documents evidencing goods owned or acquired by Debtor, and all goods covered thereby, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, and all products thereof (collectively called "Inventory"), whether in the possession of Debtor, warehousemen, bailees or any other person, or in process of delivery and whether located at Debtor's places of business or elsewhere (with all Rights to Payment and Inventory referred to herein collectively as the "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. -1- 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (g) all persons appearing to be obligated on Rights to Payment and Proceeds have authority and capacity to contract and are bound as they appear to be; (h) all property subject to chattel paper has been properly registered and filed in compliance with law and to perfect the interest of Debtor in such property; and (i) all Rights to Payment and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution, including where applicable Federal Reserve Regulation Z and any State consumer credit laws. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security, interest in Collateral and Proceeds; (b) to insure Inventory and, where applicable, Rights to Payment with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to -2- Bank; (c) not to use any Inventory for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to remove Inventory from Debtor's premises, except for deliveries to buyers in the ordinary course of Debtor's business and except Inventory which consists of mobile goods as defined in the California Uniform Commercial Code, in which case Debtor agrees not to remove or permit the removal of the Inventory from its state of domicile for a period in excess of 30 calendar days; (e) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from the storage of Inventory, except in favor of Bank; (f) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein, except sales of Inventory to buyers in the ordinary course of Debtor's business; (g) to furnish reports to Bank of all acquisitions, returns, sales and other dispositions of the Inventory in such form and detail and at such times as Bank may require; (h) to permit Bank to inspect the Collateral at any time; (i) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (j) if requested by Bank, to receive and use reasonable diligence to collect Rights to Payment and Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Rights to Payment and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (k) not to commingle Rights to Payment, Proceeds or collections thereunder with other property; (l) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Rights to Payment or Proceeds in any material respect; (m) on demand, to deliver to Bank returned property resulting from, or payment equal to, such allowances or credits on any Rights to Payment or Proceeds or to execute such documents and do such other things as Bank may reasonably request for the purpose of perfecting, preserving and enforcing its security interest in such returned property; (n) from time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences thereof; (o) in the event Bank elects to receive payments of Rights to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (p) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep all Collateral in good and saleable condition in accordance with the standards and practices adhered to generally by users and manufacturers of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittance and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing -3- statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the Indebtedness or replacement of the Collateral; (1) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting the Collateral; (n) to make withdrawals from and to close deposit accounts or other accounts with any financial institution, wherever located, into which Proceeds may have been deposited, and to apply funds so withdrawn to payment of the Indebtedness; (o) to preserve or release the interest evidenced by chattel paper to which Bank is entitled hereunder and to endorse and deliver any evidence of title incidental thereto; and (p) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial -4- Code or otherwise provided by law, including without limitation, the right (a) to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. With respect to any sale by Bank of any Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the right to sell such Collateral using any or all of Debtor's trademarks, trade names, trade name rights and/or proprietary labels or marks. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. -5- 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. -6- 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of the State of New Jersey. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730 Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: NONE IN WITNESS WHEREOF, this Agreement has been duly executed as of June 1, 2004. XET Corporation By: /S/ RANDOLPH FOOTE -------------------------------- Title: VP/CFO/SEC ----------------------------- -7- EX-10.9 21 microtel_10qex10-9.txt EXHIBIT 10.9 CONTINUING SECURITY AGREEMENT WELLS FARGO RIGHTS TO PAYMENT AND INVENTORY - -------------------------------------------------------------------------------- 1. GRANT OF SECURITY INTEREST. For valuable consideration, the undersigned CXR Telecom Corporation, or any of them ("Debtor"), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") a security interest in all accounts, deposit accounts, chattel paper (whether electronic or tangible), instruments, promissory notes, documents, general intangibles, payment intangibles, software, letter of credit rights, health-care insurance receivables and other rights to payment (collectively called "Rights to Payments"), now existing or at any time hereafter, and prior to the termination hereof, arising (whether they arise from the sale, lease or other disposition of inventory or from performance of contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever), including all securities, guaranties, warranties, indemnity agreements, insurance policies, supporting obligations and other agreements pertaining to the same or the property described therein, and in all goods returned by or repossessed from Debtor's customers, together with a security interest in all inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, raw materials, component parts and embedded software, work in process or materials used or consumed in Debtor's business and all warehouse receipts, bills of lading and other documents evidencing goods owned or acquired by Debtor, and all goods covered thereby, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, and all products thereof (collectively called "Inventory"), whether in the possession of Debtor, warehousemen, bailees or any other person, or in process of delivery and whether located at Debtor's places of business or elsewhere (with all Rights to Payment and Inventory referred to herein collectively as the "Collateral"), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, all rights to payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and all rights to payment with respect to any claim or cause of action affecting or relating to any of the foregoing (hereinafter called "Proceeds"). 2. OBLIGATIONS SECURED. The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 3. TERMINATION. This Agreement will terminate upon the performance of all obligations of Debtor to Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement. -1- 4. OBLIGATIONS OF BANK. Bank has no obligation to make any loans hereunder. Any money received by Bank in respect of the Collateral may be deposited, at Bank's option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder. 5. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to Bank that: (a) Debtor's legal name is exactly as set forth on the first page of this Agreement, and all of Debtor's organizational documents or agreements delivered to Bank are complete and accurate in every respect; (b) Debtor is the owner and has possession or control of the Collateral and Proceeds; (c) Debtor has the exclusive right to grant a security interest in the Collateral and Proceeds; (d) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (e) all statements contained herein and, where applicable, in the Collateral are true and complete in all material respects; (f) no financing statement covering any of the Collateral or Proceeds, and naming any secured party other than Bank, is on file in any public office; (g) all persons appearing to be obligated on Rights to Payment and Proceeds have authority and capacity to contract and are bound as they appear to be; (h) all property subject to chattel paper has been properly registered and filed in compliance with law and to perfect the interest of Debtor in such property; and (i) all Rights to Payment and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution, including where applicable Federal Reserve Regulation Z and any State consumer credit laws. 6. COVENANTS OF DEBTOR. 6.1 Debtor Agrees in general: (a) to pay Indebtedness secured hereby when due; (b) to indemnify Bank against all losses, claims, demands, liabilities and expenses of every kind caused by property subject hereto; (c) to pay all costs and expenses, including reasonable attorneys' fees, incurred by Bank in the perfection and preservation of the Collateral or Bank's interest therein and/or the realization, enforcement and exercise of Bank's rights, powers and remedies hereunder; (d) to permit Bank to exercise its powers; (e) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; (f) not to change its name, and as applicable, its chief executive office, its principal residence or the jurisdiction in which it is organized and/or registered without giving Bank prior written notice thereof; (g) not to change the places where Debtor keeps any Collateral or Debtor's records concerning the Collateral and Proceeds without giving Bank prior written notice of the address to which Debtor is moving same; and (h) to cooperate with Bank in perfecting all security interests granted herein and in obtaining such agreements from third parties as Bank deems necessary, proper or convenient in connection with the preservation, perfection or enforcement of any of its rights hereunder. 6.2 Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (a) that Bank is authorized to file financing statements in the name of Debtor to perfect Bank's security, interest in Collateral and Proceeds; (b) to insure Inventory and, where applicable, Rights to Payment with Bank named as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to -2- Bank; (c) not to use any Inventory for any unlawful purpose or in any way that would void any insurance required to be carried in connection therewith; (d) not to remove Inventory from Debtor's premises, except for deliveries to buyers in the ordinary course of Debtor's business and except Inventory which consists of mobile goods as defined in the California Uniform Commercial Code, in which case Debtor agrees not to remove or permit the removal of the Inventory from its state of domicile for a period in excess of 30 calendar days; (e) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from the storage of Inventory, except in favor of Bank; (f) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein, except sales of Inventory to buyers in the ordinary course of Debtor's business; (g) to furnish reports to Bank of all acquisitions, returns, sales and other dispositions of the Inventory in such form and detail and at such times as Bank may require; (h) to permit Bank to inspect the Collateral at any time; (i) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (j) if requested by Bank, to receive and use reasonable diligence to collect Rights to Payment and Proceeds, in trust and as the property of Bank, and to immediately endorse as appropriate and deliver such Rights to Payment and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (k) not to commingle Rights to Payment, Proceeds or collections thereunder with other property; (l) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Rights to Payment or Proceeds in any material respect; (m) on demand, to deliver to Bank returned property resulting from, or payment equal to, such allowances or credits on any Rights to Payment or Proceeds or to execute such documents and do such other things as Bank may reasonably request for the purpose of perfecting, preserving and enforcing its security interest in such returned property; (n) from time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences thereof; (o) in the event Bank elects to receive payments of Rights to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (p) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep all Collateral in good and saleable condition in accordance with the standards and practices adhered to generally by users and manufacturers of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims. 7. POWERS OF BANK. Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank's officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor's name or otherwise; (b) to give notice to account debtors or others of Bank's rights in the Collateral and Proceeds, to enforce or forebear from enforcing the same and make extension or modification agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittance and compromise disputes in connection therewith; (d) to release or substitute security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing -3- statements, continuation statements, termination statements, statements of assignment, applications for registration or like papers to perfect, preserve or release Bank's interest in the Collateral and Proceeds; (g) to receive, open and read mail addressed to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (i) to verify facts concerning the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j) to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank's sole option, toward repayment of the Indebtedness or replacement of the Collateral; (1) to exercise all rights, powers and remedies which Debtor would have, but for this Agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor's premises in inspecting the Collateral; (n) to make withdrawals from and to close deposit accounts or other accounts with any financial institution, wherever located, into which Proceeds may have been deposited, and to apply funds so withdrawn to payment of the Indebtedness; (o) to preserve or release the interest evidenced by chattel paper to which Bank is entitled hereunder and to endorse and deliver any evidence of title incidental thereto; and (p) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder. 8. PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS. Debtor agrees to pay, prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of this Agreement, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement. 9. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by Debtor herein shall prove to be incorrect, false or misleading in any material respect when made; (c) Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any impairment of the rights of Bank in any Collateral or Proceeds or any attachment or like levy on any property of Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value. 10. REMEDIES. Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor. Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right (a) -4- to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank, and (b) to sell, lease, license or otherwise dispose of any or all Collateral. All rights, powers, privileges and remedies of Bank shall be cumulative. No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. It is agreed that public or private sales or other dispositions, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auctions, are all commercially reasonable since differences in the prices generally realized in the different kinds of dispositions are ordinarily offset by the differences in the costs and credit risks of such dispositions. While an Event of Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any Collateral or Proceeds except on terms approved by Bank; (c) at Bank's request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor's premises and take possession of the Collateral. With respect to any sale by Bank of any Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the right to sell such Collateral using any or all of Debtor's trademarks, trade names, trade name rights and/or proprietary labels or marks. Debtor further agrees that Bank shall have no obligation to process or prepare any Collateral for sale or other disposition. 11. DISPOSITION OF COLLATERAL AND PROCEEDS; TRANSFER OF INDEBTEDNESS. In disposing of Collateral hereunder, Bank may disclaim all warranties of title, possession, quiet enjoyment and the like. Any proceeds of any disposition of any Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorneys' fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect. Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given. 12. STATUTE OF LIMITATIONS. Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale or other disposition and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due to the payment in full of all Indebtedness secured hereunder. -5- 13. MISCELLANEOUS. When there is more than one Debtor named herein: (a) the word "Debtor" shall mean all or any one or more of them as the context requires; (b) the obligations of each Debtor hereunder are joint and several; and (c) until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank. Debtor hereby waives any right to require Bank to (i) proceed against Debtor or any other person, (ii) proceed against or exhaust any security from Debtor or any other person, (iii) perform any obligation of Debtor with respect to any Collateral or Proceeds, and (d) make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any Collateral or Proceeds. Debtor further waives any right to direct the application of payments or security for any Indebtedness of Debtor or indebtedness of customers of Debtor. 14. NOTICES. All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or principal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U. S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. 15. COSTS, EXPENSES AND ATTORNEYS' FEES. Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank's ability to exercise any of its rights or remedies with respect thereto. All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank's Prime Rate in effect from time to time. 16. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modified only in writing signed by Bank and Debtor. 17. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement. -6- 18. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement. 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor warrants that Debtor is an organization registered under the laws of the State of Delaware. Debtor warrants that its chief executive office (or principal residence, if applicable) is located at the following address: 9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730 Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional addresses: NONE IN WITNESS WHEREOF, this Agreement has been duly executed as of June 1, 2004. CXR Telecom Corporation By: /S/ RANDOLPH FOOTE -------------------------------- Title: VP/CFO/SEC ----------------------------- -7- EX-31 22 microtel_10qex-31.txt EXHIBIT 31 CERTIFICATIONS I, Carmine T. Oliva, certify that: 1. I have reviewed this Form 10-Q of MicroTel International Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2004 /s/ CARMINE T. OLIVA - ----------------------------- Carmine T. Oliva Chief Executive Officer (principal executive officer) I, Randolph D. Foote, certify that: 1. I have reviewed this Form 10-Q of MicroTel International Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2004 /s/ RANDOLPH D. FOOTE - ----------------------------- Randolph D. Foote Chief Financial Officer (principal financial officer) EX-32 23 microtel_10qex-32.txt EXHIBIT 32 CERTIFICATION 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 quarterly report on Form 10-Q of MicroTel International Inc. (the "Company") for the period ended June 30, 2004 (the "Report"), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, 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: August 16, 2004 By: /s/ CARMINE T. OLIVA ------------------------------- Carmine T. Oliva Chief Executive Officer (principal executive officer) Dated: August 16, 2004 By: /s/ RANDOLPH D. FOOTE ------------------------------- Randolph D. Foote Chief Financial Officer (principal financial officer) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version 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-----