-----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, Qa4UFK62tOuCSxMv1KIvFJHU2z0+Tm1CsSIQi+Qbm+QtDjXjAU0bIRxFxdJafPIN YcNVKPBaDZaacU3rMk8bww== 0001047469-98-030903.txt : 19980814 0001047469-98-030903.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-030903 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10346 FILM NUMBER: 98684565 BUSINESS ADDRESS: STREET 1: 4290 E BRICKELL ST STREET 2: STE 102 CITY: ONTARIO STATE: CA ZIP: 91761-1511 BUSINESS PHONE: 9094564321 MAIL ADDRESS: STREET 1: 4290 E BRICKELL STREET STREET 2: STE 102 CITY: ONTARIO STATE: CA ZIP: 91761-1511 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended JUNE 30, 1998 or ( ) Transition report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 For the transition period N/A 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.) 4290 E. Brickell Street, Ontario California 91761 - --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (909) 456-4321 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange - --------------------------------- on which registered ---------------------- Common Stock $.0033 par value None - ----------------------------------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: None - ----------------------------------------------------------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of July 31, 1998, there were 11,930,444 shares of common stock outstanding. MICROTEL INTERNATIONAL, INC. INDEX TO FORM 10-Q
PAGE PART I - FINANCIAL INFORMATION Item l. Financial Statements Consolidated Condensed Balance Sheets June 30, 1998 and December 31, 1997 3 Consolidated Condensed Statements of Operations Three and Six Months Ended June 30, 1998 and l997 4 Consolidated Condensed Statements of Cash Flows Six Months Ended June 30, 1998 and l997 5 Notes to Consolidated Condensed Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II - OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
-2- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (in thousands)
PROFORMA (SEE NOTE 7) JUNE 30, JUNE 30, DEC. 31, 1998 1998 1997 ------------- ----------- ----------- ASSETS Cash and cash equivalents $ 923 $ 2,311 $ 1,921 Accounts receivable 6,849 6,849 6,749 Inventories 6,288 6,288 7,087 Other current assets 715 715 869 ------------- ----------- ----------- Total current assets 14,775 16,163 16,626 Property, plant and equipment-net 2,032 2,032 4,968 Goodwill-net 1,809 1,809 1,906 Other assets 2,490 2,602 1,940 ------------- ----------- ----------- $ 21,106 $ 22,606 $ 25,440 ------------- ----------- ----------- ------------- ----------- ----------- LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable $ 4,320 $ 4,320 $ 3,630 Current portion of long-term debt 880 880 1,216 Accounts payable 4,540 4,540 6,621 Accrued expenses 3,542 3,542 3,837 ------------- ----------- ----------- Total current liabilities 13,282 13,282 15,304 Long-term debt, less current portion 1,664 1,664 2,530 Other liabilities 720 720 789 Minority interest 94 94 88 ------------- ----------- ----------- Total liabilities 15,760 15,760 18,711 Redeemable preferred stock 459 1,836 714 Stockholders' equity: Common stock 39 39 39 Additional paid-in capital 20,005 20,128 19,960 Accumulated deficit (15,056) (15,056) (13,877) Foreign currency translation adjustment (101) (101) (107) ------------- ----------- ----------- Total stockholders' equity 4,887 5,010 6,015 ------------- ----------- ----------- $ 21,106 $ 22,606 $ 25,440 ------------- ----------- ----------- ------------- ----------- -----------
See accompanying notes to consolidated condensed financial statements. -3- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (in thousands, except per share amounts) Net sales $ 8,971 $ 12,029 $ 18,713 $ 19,736 Cost of sales 5,555 8,875 13,061 14,972 ------------ ------------ ------------ ------------ Gross profit 3,416 3,154 5,652 4,764 Operating expenses: Selling, general and administrative 2,796 3,643 5,914 5,555 Engineering and product development 574 694 1,145 792 ------------ ------------ ------------ ------------ Income (loss) from operations 46 (1,183) (1,407) (1,583) Other expense (income) Interest expense 177 262 344 460 Gain on sale of subsidiary 90 -- (580) -- Other (25) (8) (43) (7) ------------ ------------ ------------ ------------ Loss before income taxes (196) (1,437) (1,128) (2,036) Income taxes expense (benefit) 22 (2) 37 2 ------------ ------------ ------------ ------------ Net loss $ (218) $ (1,435) $ (1,165) $ (2,038) ------------ ------------ ------------ ------------ Basic and diluted loss per share $ (0.02) $ (0.13) $ (0.10) $ (0.24) ------------ ------------ ------------ ------------ Weighted average number of shares used in calculating 11,929 11,005 11,928 8,638 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated condensed financial statements. -4- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 1997 ------------ ---------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,165) $ (2,038) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 312 356 Amortization of intangibles 97 287 Gain on sale of subsidiary (580) -- Other noncash items (64) 46 Changes in operating assets and liabilities: Accounts receivable (515) (1,177) Inventories 6 1,265 Other assets (56) (62) Accounts payable and accrued expenses (295) (1,443) ------------ ---------- Cash used in operating activities (2,260) (2,766) CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (178) (23) Proceeds from sale of subsidiary 1,350 -- Cash acquired in reverse acquisition -- 264 ------------ ---------- Cash provided by investing activities 1,172 241 CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from notes payable 640 (699) Net repayments of long-term debt (1,015) (476) Preferred stock dividends paid -- (140) Private placement of convertible preferred stock 459 -- Private placement of common stock -- 4,258 ------------ ---------- Cash provided by financing activities 84 2,943 EFFECT OF EXCHANGE RATE CHANGES ON CASH 6 -- ------------ ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (998) 418 ------------ ---------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,921 886 ------------ ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 923 $ 1,304 ------------ ----------
See accompanying notes to consolidated condensed financial statements. -5- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 6 AND 8 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the "Company") is a holding company for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A. and, effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom Corporation and CXR S.A. design, manufacture and market electronic telecommunication test instruments and data transmission and networking equipment. XIT designs, manufactures, and markets information technology products, including displays and input components, subsystem assemblies power supplies, hybrid microelectronic and other circuits. The Company conducts its operations out of various facilities in the U.S., France, England, and Japan and organizes itself in three product line sectors - Instrumentation and Test Equipment, Components and Subsystem Assemblies, and Circuits. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of June 30, 1998 and December 31, 1997 and the results of operations and cash flows for the related interim periods ended June 30, 1998 and 1997. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements included in its 1997 Annual Report on Form 10-K. -6- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (2) LOSS PER SHARE The following table illustrates the computation of basic and diluted loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ------- ------ ------ ------ NUMERATOR: Net loss $(218) $(1,435) $(1,165) $(2,038) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock -- 17 13 34 ------- ------ ------ ------ Loss attributable to common stockholders (218) (1,452) (1,178) (2,072) DENOMINATOR: Weighted average number of common shares outstanding during the period 11,929 11,005 11,928 8,638 ------- ------ ------ ------ Basic and diluted loss per share $(.02) $(.13) $ (.10) $(.24) ------- ------ ------ ------ ------- ------ ------ ------
The computation of diluted loss per share excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. (3) COMPREHENSIVE INCOME In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Comprehensive income (loss) is comprised of net income (loss) and all changes to stockholders' equity except those due to investment by owners (changes in paid-in capital) and distributions to owners (dividends). For interim reporting purposes, SFAS 130 requires disclosure of total comprehensive income (loss). Comprehensive loss, consisting of net loss, foreign currency translation effects and accretion of preferred stock, was $272,000 and $1,452,000 for the three months ended June 30, 1998 and 1997, respectively and $1,184,000 and $2,072,000 for the six months ended June 30, 1998 and 1997, respectively. -7- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (4) INVENTORIES Inventories consist of the following.
June 30, 1998 December 31, 1997 -------------- ----------------- Raw materials $ 2,475,000 $ 3,044,000 Work-in-process 2,172,000 2,333,000 Finished goods 1,641,000 1,710,000 -------------- -------------- $ 6,288,000 $ 7,087,000 -------------- -------------- -------------- --------------
(5) BANKING ARRANGEMENTS The Company's XIT subsidiary had a line of credit with a bank (the "XIT Debt") which provided for maximum borrowings of $3,500,000 collateralized by substantially all assets of XIT and its domestic subsidiaries with interest at the bank's prime rate (8.5% at June 30, 1998) plus 1%. The XIT Debt agreement required maintenance of certain financial ratios and contained other restrictive covenants. XIT was not in compliance with certain covenants of the XIT Debt agreement at December 31, 1997 and at June 30, 1998. Although the bank did not waive compliance with such debt covenants, it entered into a forbearance agreement with the Company in which it agreed to forbear from exercising its rights under the terms of the XIT Debt agreement provided the Company obtain a replacement credit facility. Outstanding borrowings under this line of credit were $2,831,000 and $2,377,000 at June 30, 1998 and December 31, 1997, respectively. On July 8, 1998, the Company finalized a $10.5 million credit facility with a commercial finance company which provided a term loan of approximately $1.5 million and a revolving line of credit of up to $8 million based upon assets available from either existing or future-acquired operations of which the Company has utilized approximately $4 million, and a capital equipment expenditure credit line of up to $1 million. This credit facility replaced the existing credit facilities of the Company's domestic operating companies, which included the XIT Debt and CXR Telcom Corporation's line of credit, both of which were paid in full at the closing and provides expanded borrowing capability based upon available assets. (6) LITIGATION The Company and its subsidiaries are, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. -8- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (6) LITIGATION (CONTINUED) FRANCIS JOHN GORRY V. MICROTEL INTERNATIONAL, INC. In 1994, Francis John Gorry, a former officer of the Company, alleged that the Company breached a consulting agreement between he and the Company. Subsequently, the Company and Mr. Gorry entered into an agreement which called for certain cash payments to Mr. Gorry and for the issuance to Mr. Gorry and subsequent registration of shares of the Company's common stock by April 30, 1996. The Company failed to timely issue the stock and on May 21, 1996, Mr. Gorry filed suit against the Company (the "1996 Suit"). Shortly thereafter, the Company and Mr. Gorry entered into a Settlement Agreement which was thereafter amended twice. Based upon the execution of the Settlement Agreement, the court dismissed Mr. Gorry's suit without prejudice. The cash payments specified under the terms of the Settlement Agreement, as amended, were timely made and the shares of the Company's common stock were issued to Mr. Gorry and subsequently registered pursuant to the terms of the Settlement Agreement, as amended. On June 18, 1998, Mr. Gorry made a motion to the court for an order vacating the dismissal of the 1996 Suit for the purpose of entering judgment against the Company, claiming the common shares delivered to him did not conform to the terms of the Settlement Agreement, as amended. On July 17, 1998, the court granted Mr. Gorry's motion. The Company will appeal the court's decision as it believes the claim which forms the basis for Mr. Gorry's motion is without merit. SCHEINFELD V. MICROTEL INTERNATIONAL, INC. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by Mr. Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint upon the defendants. On June 30, 1997, the complaint was served, and the Company has subsequently answered, denying the material allegations of the complaint. In August 1997, the Company served discovery requests on Mr. Scheinfeld, who was initially obligated to respond by September 12, 1997. On March 2, 1998, Mr. Scheinfeld responded to such discovery requests which response is currently under review by counsel to the Company. Currently, the parties are actively engaged in settlement discussions. -9- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS LITIGATION (CONTINUED) DANIEL DROR V. MICROTEL INTERNATIONAL, INC. In November 1996, the Company entered into an agreement (the "Agreement") with the former Chairman of the Company, which involved certain mutual obligations. In December 1997, the former Chairman defaulted on the repayment of the first installment of a debt obligation which was an obligation set forth in the Agreement. Also in December 1997, the former Chairman of the Company, filed suit in the District Court for Galveston County, Texas alleging the Company has breached an alleged oral modification of the Agreement. In January 1998, the Company answered the complaint denying the allegation and the matter is currently being litigated in Texas. The Company believes that the former Chairman's claim is without merit and intends to vigorously defend itself. Subsequently, the Company brought an action in California against the former Chairman for breach of the Agreement and which seeks recovery of all stock, warrants and debt due the Company. The parties are currently conducting settlement discussions in an attempt to resolve both this litigation and the following matter ("Other litigation"). OTHER LITIGATION In December 1997, Elk International Corporation Limited, a stockholder of the Company, brought an action in Texas against the Company's current Chairman and an unrelated party, alleging certain misrepresentations during the merger discussions between XIT and the Company. (7) PRIVATE PLACEMENT In June 1998 the Company sold 50 shares of Series A convertible preferred stock (the "Preferred Shares") at $10,000 per share to one institutional investor. On July 8, 1998, the Company sold an additional 150 Preferred Shares at the same per share price to two other institutional investors. Included with the sale of such Preferred Shares were a total of one million warrants to purchase the Company's common stock exercisable at $1.25 per share and expiring May 22, 2001. The unaudited proforma June 30, 1998 balance sheet information presented elsewhere herein has been prepared to reflect the Company's financial position assuming the transactions which were completed in July 1998 had occurred as of June 30, 1998. -10- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (7) PRIVATE PLACEMENT (CONTINUED) The Company received net proceeds totaling approximately $1,847,000 after deduction of commissions and transaction-related expenses, and utilized such proceeds for working capital. The Preferred Shares are convertible into the common stock of the Company at the option of the holder thereof at any time after the ninetieth (90th) day of issuance thereof at the conversion price per share of Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices over the forty (40) trading days prior to the exercise date of any such conversion. No more than 20% of the aggregate number of Preferred Shares originally purchased and owned by any single entity may be converted in any thirty (30) day period after the ninetieth (90th) day of issuance. In the event of any liquidation, dissolution or winding up of the Company, the holders of shares of Preferred Shares are entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Company's common stock, an amount per share equal to $10,000 for each outstanding Preferred Share. Any unconverted Preferred Shares may be redeemed at the option of the Company for cash at a per share price equal to $11,500 per Preferred Share and any Preferred Shares which remain outstanding as of May 22, 2003 are subject to mandatory redemption by the Company at the same per-share redemption price. (8) NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. The new standard requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. The Company does not expect adoption of SFAS 131 to have a material effect on its financial position or results of operations. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997 and will require restatement of disclosures for earlier periods provided for comparative purposes. SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer considered useful. The Company has not determined the effect, if any, of adoption of SFAS 132 on its financial position or results of operations. -11- MICROTEL INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. As discussed in Note 1 to the consolidated condensed financial statements, the financial statements presented are those of XIT Corporation ("XIT") resulting from the reverse acquisition by XIT of MicroTel International, Inc. (the "Company") and its subsidiaries in a merger on March 26, 1997 (the "Merger"). The pre-merger Company and "accounting acquiree" is described as CXR in the discussion below. The Company's Components and Subsystem Assemblies, and Instrumentation and Test Equipment Sectors are referred to as "the Components Sector" and "the Test Equipment Sector", respectively, in the discussion below for brevity. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997 Net sales for the second quarter of 1998 decreased by $3,058,000 or 25% from those in the same period of the prior year. This decrease resulted primarily from the inclusion of the operating results of the Company's XCEL Arnold Circuits, Inc. subsidiary ("XACI") in the second quarter of 1997. The XACI operating results are not included in the same period in 1998 because the Company sold XACI effective as of March 31, 1998. XACI represented approximately $2,680,000 of the decrease and the remainder resulted from decreases in net sales at the Company's other Circuits sector operations. Although net sales for the Company's Components sector increased approximately 7% for the second quarter of 1998 over that of the same period in 1997 as a result of a combination of both volume and price increases, this increase was offset by a corresponding decline in net sales of the Test Equipment sector resulting principally from declines in the sale of transmission products in the second quarter of 1998 compared with the second quarter of 1997. Gross profit, as a percentage of net sales, increased from 26% in the second quarter of 1997 to 38% in the second quarter of 1998. This increase resulted primarily from the absence in the second quarter of 1998 of the negative operating results experienced by XACI in the same period in 1997. Consequently, the Company's Circuits sector's gross profit rose to 22% of net sales for the second quarter of 1998 from 7% for the same period in 1997. Additionally, the Company's Components sector realized an increase in gross profit as a percentage of net sales to 37% in the second quarter of 1998 versus 28% for the same period in the prior year. This increase resulted from both the increase in -12- sales noted above, certain price increases instituted by the sector in the fourth quarter of 1997 and implementation of a marketing strategy designed to increase sales of higher margin products while concurrently decreasing sales of products with lower gross profit margins. Gross profit margin as a percentage of net sales in the Test Equipment sector rose slightly to 45% in the second quarter of 1998 from 43% in the same period of 1997 as higher margins from the domestic operation's sale of newer test instruments more than offset the small decline in gross margin percentage from foreign operations which experienced an increase in the sale of third-party versus in-house products. Operating expenses (selling, general and administrative, and engineering and product development) decreased approximately $970,000 from $4,337,000 in the second quarter of 1997 to $3,370,000 in the second quarter of 1998. The principal elements of this decline were: (i) a decrease in 1998 of such expenses for the Circuits sector of approximately $420,000 resulting from the absence of such expenses associated with XACI in 1998; (ii) a decrease in such expenses for the Components sector of approximately $220,000 resulting from reductions in general and administrative costs across the entire sector but most significantly in the United Kingdom operations; and (iii) a decrease in the Test Equipment sector of approximately $330,000 resulting from reductions in general and administrative costs associated with the relocation of the Company's CXR Telcom subsidiary to a smaller, more efficient facility in the fourth quarter of 1997 as well as reduced engineering and product development expenses. Selling expenses in all sectors as a percentage of sales were substantially the same in the second quarter of 1998 compared to the second quarter of 1997. Total general and administrative expenses decreased by approximately $540,000 or 26% in the second quarter of 1998 over the same period in 1997 as a result of cost reductions in the Components sector and the absence of such expenses for XACI for the second quarter of 1998. Excluding XACI, general and administrative expenses for the Circuits sector increased only $20,000 but increased as a percentage of net sales from 10% in the second quarter of 1997 to 14% in the same period in 1998 as a direct result of the decline in net sales for the sector. In the Components Sector, general and administrative expenses decreased by approximately $320,000 and also decreased as a percentage of net sales from 20% in the second quarter of 1997 to 9% for the same period in 1998 as the sector's operating companies in the United Kingdom and Japan decreased staffing and facility costs as noted above. General and administrative expenses for the Test Equipment sector remained constant at approximately 8.5% of net sales while engineering and product development expenses declined slightly as a percent of net sales from 14% in the second quarter of 1997 to 12% in the second quarter of 1998 due to smaller expenditures required by the sector's European operations. Overall corporate administrative costs were substantially the same in the second quarter of 1998 compared with the same period in 1997. Interest expense decreased by $85,000 in the second quarter of 1998 versus the second quarter of 1997 reflecting lower average borrowings during the 1998 period. Other income (expense) is principally comprised of foreign currency exchange gains and losses incurred during the respective periods. As a result of the merger with XIT, the Company experienced a more than 50% ownership change for federal income tax purposes. As a result, an annual limitation will be placed upon the Company's ability to realize the benefit of its net operating loss and credit carryforwards. The amount of this annual limitation, as well as the impact of the application of other possible limitations under the consolidated return regulations, has not been definitively determined at this time. Management believes sufficient uncertainty exists regarding the realizability of the deferred tax asset items and that a valuation allowance, equal to the net deferred tax asset amount, is required. -13- SIX MONTHS ENDED JUNE 30, 1998 VERSUS JUNE 30, 1997 Net sales for the first six months of 1998 decreased by approximately $1,020,000 or 5% from those in the same period of the prior year and was comprised of: (i) a decline in net sales of the Company's Circuits sector of approximately $3,630,000, of which approximately $3,180,000 resulted from the inclusion of the operating results of XACI for the entire period in 1997 versus only the first three months of the first half of 1998 as a result of the sale of XACI which was effective as of March 31, 1998; (ii) a decrease in net sales of the Company's Components sector of approximately $760,000; and (iii) an increase in net sales for the Company's Test Equipment sector of $3,370,000 resulting from the inclusion of CXR for the entire six month period of 1998 versus only three months and five days during the first half of 1997 as a result of the Merger. For the first six months of 1998, CXR experienced an increase in net sales of approximately $375,000 over the same period in 1997. Gross profit, as a percentage of net sales, increased from 24% in the first six months of 1997 to 30% in the same period in 1998. This increase resulted primarily from the inclusion of the operating results of CXR for the entire six month period in 1998 versus three months and five days during the first six months of 1997. In the first half of 1998, CXR contributed approximately $3,590,000 or 64% of the Company's total gross profit compared with $2,220,000 or 47% in the first half of 1997. Gross profit, as a percentage of net sales, in the Company's Circuits and Components sectors remained essentially constant from the first half of 1997 to 1998 but decreased by approximately $480,000 resulting from the decrease in net sales in both sectors as noted above. Operating expenses (selling, general and administrative, and engineering and product development) increased $712,000 from $6,347,000 in the first six months of 1997 to $7,059,000 in the same period of 1998. The principal element of this increase was the inclusion of the operating results of CXR for the entire six month period in 1998 versus three months and five days during the first six months of 1997 partially offset by the absence of such expenses in the second quarter of 1998 relating to XACI, subsequent to its sale. Specifically, selling expenses experienced a net increase of approximately $560,000 in the first half of 1998 over 1997, primarily as the result of an increase of approximately $890,000 attributable to the inclusion of CXR and a decrease of approximately $310,000 resulting from the absence due to the sale of XACI. The increase in general and administrative expense attributable to the inclusion of CXR for the entire six month period in 1998 was substantially offset by the reduction in such expenses resulting from the sale of XACI. Engineering and product development expenses increased approximately $350,000 in 1998 from 1997, substantially all of which was attributable to the inclusion of CXR for the full six month period in 1998. Selling expenses as a percentage of sales for the Circuits sector were substantially the same in the first six month of 1998 compared to the same period in 1997 while such expenses increased from 4.8% to 7.6% of net sales from 1997 to 1998 for the Components sector and from 18% to 21% for the Test Equipment sector as a result of spreading relatively fixed selling costs over lower net sales. General and administrative expenses decreased approximately $200,000 in the first six months of 1998 compared with the same period in 1997 principally as a result of a decrease in such expenses for the Components sector resulting from reductions in such costs across the entire sector, but most significantly in the United Kingdom operations which reduced staffing and facilities expenses during the second half of 1997. Excluding XACI, general and administrative expenses for the Circuits sector increased only $23,000 but increased as a percentage of net sales from 7% in the first six months of 1997 to 10% in the same period in 1998 as a direct result of the decline in net sales for the sector. In the Components Sector, general and administrative expenses decreased by approximately $590,000 and also decreased as a percentage of net sales from 18% in the first six months of 1997 compared to 10% for the -14- same period in 1998 as the sector's operating companies in the United Kingdom and Japan decreased personnel and facility costs as noted above. Corporate administrative costs increased for the first six months of 1998 increased by approximately $130,000 over the same period in 1997 resulting principally from audit and tax return preparation expenses associated with the change in the Company's fiscal year-end. Interest expense decreased by $116,000 in the first six months of 1998 versus the same period in 1997 reflecting lower average borrowings during the 1998 period. Other income (expense) is principally comprised of foreign currency exchange gains and losses incurred during the respective periods. LIQUIDITY AND CAPITAL RESOURCES Cash of $2,260,000 was used in operations in the first six months of 1998 versus cash of $2,766,000 used in operations in the first six months of 1997. The decrease in cash used resulted from improved operating results in the 1998 period coupled with changes in working capital management during the respective periods. Significant cash was consumed by XACI to fund continued operating losses until its sale at the end of the first quarter of 1998. During the first quarter of 1998, the Company also paid down approximately $660,000 in accrued expenses and accounts payable in connection with a $2.2 million order received from AT&T in 1997, $1.4 million of which was shipped in the fourth quarter of 1997. Although collection of accounts receivable remained stable during the first six months of 1998, at the end of the second quarter, the Company's accounts receivable rose sharply due to significant shipments by the Test Equipment sector at quarter-end. Effective as of March 31, 1998, the Company sold XACI, its principal circuits subsidiary, and in early April, received $1,350,000 in cash and a note for $650,000 upon the closing of the sale in early April. The cash received was utilized to reduce certain long and short-term bank borrowings and other current debt. The Company's XIT subsidiary had a line of credit with a bank (the "XIT Debt") which provided for maximum borrowings of $3,500,000 collateralized by substantially all assets of XIT and its domestic subsidiaries with interest at the bank's prime rate (8.5% at June 30, 1998) plus 1%. The XIT Debt agreement required maintenance of certain financial ratios and contained other restrictive covenants. XIT was not in compliance with certain covenants of the XIT Debt agreement at December 31, 1997 and at June 30, 1998. Although the bank did not waive compliance with such debt covenants, it entered into a forbearance agreement with the Company in which it agreed to forbear from exercising its rights under the terms of the XIT Debt agreement provided the Company obtain a replacement credit facility. On July 8, 1998, the Company finalized a $10.5 million credit facility with a commercial finance company which provided a term loan of approximately $1.5 million and a revolving line of credit of up to $8 million based upon assets available from either existing or future-acquired operations, of which the Company has utilized approximately $4 million, and a capital equipment expenditure credit line of up to $1 million. This credit facility replaced the existing credit facilities of the Company's domestic operating companies, which included the XIT Debt and CXR Telcom Corporation's line of credit, both of which were paid in full at the closing, and provides expanded borrowing capability based upon available assets. -15- In June 1998, the Company sold 50 shares of Series A convertible preferred stock (the "Preferred Shares") at $10,000 per share to one institutional investor. On July 8, 1998, the Company sold an additional 150 Preferred Shares at the same per share price to two other institutional investors. Included with the sale of such Preferred Shares were a total of one million warrants to purchase the Company's common stock exercisable at $1.25 per share and expiring May 22, 2001. The unaudited proforma June 30, 1998 balance sheet information presented elsewhere herein has been prepared to reflect the Company's financial position assuming the transactions which were completed in July 1998 had occurred as of June 30, 1998. In total, the Company received net proceeds of approximately $1,847,000 after deduction of commissions and transaction-related expenses and utilized such proceeds for working capital. The Preferred Shares are convertible into the common stock of the Company (see Note 7 to the Consolidated Condensed Financial Statements included elsewhere in this report). YEAR 2000 ISSUE The Company continues to assess the impact, if any, of the Year 2000 issue on its computer applications and operating systems, products and interactions with third parties. At its domestic facilities, the Company is currently installing accounting and operations management computer applications which are year 2000 compliant and which operate on computer operating systems which are also year 2000 compliant. The Company estimates that the completion of its conversion to such computer systems will occur during 1999. The Company did not initiate such changes in application and operating software systems in order to accommodate the year 2000 issue but rather to upgrade and enhance its management information systems capability. As a part of its selection criteria, the Company considered the impact of the year 2000 issue. While the Company currently believes that the impact of the change to the year 2000 will not have a material effect on the Company's operations or financial condition, its assessment of this issue is not yet complete and therefore some uncertainty exists as to whether material year 2000 issues exist. LEGAL PROCEEDINGS There are four legal proceedings pending against the Company (see Note 6 to the Consolidated Condensed Financial Statements included elsewhere in this report). Management believes that the outcome of these pending proceedings will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. OUTLOOK From the Merger at the end of March 1997 through early July 1998, the Company directed its attention to stabilizing its financial condition and improving its operating results. In addition, during the second half of 1997 and the first quarter of 1998, the Company expended considerable management time and effort to divest itself of the XACI operation which, due to its substantial operating losses, severely constricted the Company's cash position. The Company's failure to maintain the requisite financial position and consequential default on its major bank debt financing agreement, which was eliminated in early July by the consolidated credit facility referenced above, resulted principally from the operating losses incurred at XACI. The time and effort to manage that situation coupled with efforts to obtain a replacement credit facility absorbed considerable management attention. Nonetheless, with one exception, all operating units attained profitability in the second quarter of 1998. -16- Additionally, the Company added $1.8 million in cash from the private equity placement referenced above. The Company believes these achievements position it to continue to improve its operating results during the remainder of 1998. The Company's overall strategy is to expand its Test Equipment sector through the acquisition and/or development of new products, product lines and/or separate operating companies while concurrently continuing to evaluate existing lower-margin or loss operations elsewhere throughout the Company with a view toward divestment so as to redirect capital to the higher margin Test Equipment sector. In addition, the Company will continue to seek to maximize short to intermediate term profitability on existing maturing product lines in all sectors through price increases and lower operating costs. Over the last nine months, the Test Equipment sector in the United States market has successfully acquired and integrated the products of a state-of-the-art, customer-premises test equipment manufacturer located in St. Charles, Illinois. The acquired products have replaced existing, aged products and, in a short period of time, have become a significant portion of the net sales of the US operation. Production of this product line has been transferred to and consolidated with the CXR Telcom facility in Fremont, California and the St. Charles facility has been repositioned as an engineering, R&D and customer support center. Additionally, the French Test Equipment subsidiary has begun to market a broader range of test, transmission and networking products sourced through licensing, reseller and other agreements. These actions, in conjunction with the reduction of lower margin Circuits sector business and the restructured marketing focus in the Components sector on higher margin products, has resulted in the Company reducing its net loss in the first quarter of 1998 from approximately $950,000 to just over $200,000 in the second quarter of 1998. The Company believes continued improvement in operating results will continue in the third quarter despite this traditionally weak summer period in the Test Equipment sector - particularly in European - as demand for product in the other sectors remains stable. In the US Test Equipment Sector, the recent completion of mergers of various Regional Bell Operating Companies is beginning to produce new opportunities. The consolidation of Southwest Bell and Pacific Bell now appears complete and release of equipment purchases is once again beginning to return to traditional levels. Although the NYNEX and Bell Atlantic merger had initially created some uncertainty and delayed capital equipment purchases, this merger now affords the Company the opportunity to provide the combined entity with the Company's newer test equipment products. Domestic sales of transmission products are expected to improve with the introduction of Remote Access Server products for Internet applications as well as trial systems for other transmission products which are currently in place. Additionally, in-house efforts are being directed toward developing software which will allow the recently acquired test equipment products to be marketed in both the Pacific Rim and Latin America. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. The new standard requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. The Company does not expect adoption of SFAS 131 to have a material effect on its financial position or results of operations. -17- Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997 and will require restatement of disclosures for earlier periods provided for comparative purposes. SFAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer considered useful. The Company has not determined the effect, if any, of adoption of SFAS 132 on its financial position or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None PART II - OTHER INFORMATION Item 1. Legal Proceedings See Note 6 - Litigation in the accompanying Notes to Unaudited Consolidated Condensed Financial Statements; Part II, Item 1 of the Registrant's Quarterly Report on Form 10-Q filed on May 15, 1998; and, Legal Proceedings section of Item 3 of the Registrant's Annual Report on Form 10-K filed on April 15, 1998 for a description of previously reported proceedings. Item 2. Changes in Securities and Use of Proceeds (a) None. (b) None. (c) During June and July 1998, the Company, through its Placement Agent Pacific Continental Securities Corporation, completed the sale to three institutional investors of 200 shares of Series A convertible preferred stock (the "Preferred Shares") at $10,000 per share and one million warrants to purchase the Company's common stock exercisable at $1.25 per share, expiring May 22, 2001. The offering was completed on July 8, 1998 and the Company received net proceeds of approximately $1,847,000 after deduction of commissions and transaction-related expenses and utilized such proceeds for working capital. The Preferred Shares are convertible into the common stock of the Company at the option of the holder thereof at any time after the ninetieth (90th) day of issuance thereof at the conversion price per share of Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices over the forty (40) trading days prior to the exercise date of any such conversion. No more than 20% of the aggregate number of Preferred Shares originally purchased and owned by any single may be converted in any thirty (30) day period after the ninetieth (90th) day of issuance. In the event of any liquidation, dissolution or winding up of the Company, the holders of shares of Preferred Shares are entitled to receive, prior and in preference to any distribution of -18- any of the assets of this corporation to the holders of the company's common stock by reason of their ownership, an amount per share equal to $10,000 for each outstanding Preferred Share. Any unconverted Preferred Shares may be redeemed at the option of the Company for cash at a per share price equal to $11,500 per Preferred Share and any Preferred Shares which remain outstanding as of May 22, 2003 are subject to mandatory redemption by the Company at the same per-share redemption price. (d) Not applicable. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders On June 11, 1998, the Company held its Annual Meeting of Stockholders. Matters voted on and results of the voting were as follows: A. Election of Directors:
Name Class Votes Received Votes Withheld ---- ----- -------------- -------------- David A. Barrett I 7,541,152 39,515 Laurence P. Finnegan, Jr. II 7,541,281 39,386 Jack Talan II 3,966,229 3,614,438
Carmine T. Oliva and Robert Runyon are Class III directors whose term of office expires at the Company's Annual Meeting of Stockholders in 1999. Adoption of the Company's 1997 Stock Incentive Plan:
For Against Abstain Not Voted --- ------- ------- --------- 4,264,393 340,971 614,870 2,360,433
C. Ratification of Selection by the Board of Directors of BDO Seidman, LLP as Independent Accountants:
For Against Abstain --- ------- ------- 7,428,243 13,001 139,423
Item 5. Other Information None. -19- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Exhibit Description Number ----------- ------ 10.47 Loan and Security Agreement between Congress Financial Corporation (Western) and MicroTel International, Inc., XIT Corporation, CXR Telcom Corporation and HyComp, Inc. dated June 23, 1998. 10.48 Security Agreement between Congress Financial Corporation (Western) and XIT Corporation dated June 23, 1998. 10.49 Subscription Agreement for the sale of Series A Convertible Preferred Stock of MicroTel International, Inc. to Fortune Fund Limited Seeker III. 10.50 Subscription Agreement for the sale of Series A Convertible Preferred Stock of MicroTel International, Inc. to Rana General Holding, Ltd. 10.51 Subscription Agreement for the sale of Series A Convertible Preferred Stock of MicroTel International, Inc. to Resonace Ltd. 10.52 Form of Warrant to purchase the Common Stock of MicroTel International, Inc. issued in connection with the sale of Series A Convertible Preferred Stock.. 10.53 Amended Certificate of Designations, Preferences and Rights of Preferred Stock of MicroTel International, Inc. a Delaware Corporation. 10.54 Employment Agreement between MicroTel International, Inc. and James P. Butler dated May 1, 1998. 27 Unaudited Financial Data Schedule for the six months ended June 30, 1998.
(b) Reports on Form 8-K: Reports on Form 8-K were filed as follows: (1) Dated April 9, 1998 under Item 2. Acquisition and Disposition of Assets was filed on April 4, 1997 and subsequently amended on Form 8-KA filed June 3, 1998. (2) Dated July 8, 1998 under Item 5. Other Events was filed on July 30, 1998. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MicroTel International, Inc. August 13, 1998 /s/ Carmine T. Oliva ------------------------------- Carmine T. Oliva Chief Executive Officer (Principal Executive Officer) /s/ James P. Butler ------------------------------- James P. Butler Chief Financial Officer (Principal Accounting and Financial Officer) -21- EX-10.47 2 EXHIBIT 10.47 LOAN AND SECURITY AGREEMENT BY AND BETWEEN CONGRESS FINANCIAL CORPORATION (WESTERN) AS LENDER AND MICROTEL INTERNATIONAL, INC. XIT CORPORATION CXR TELCOM CORPORATION AND HYCOMP, INC. AS BORROWER DATED: JUNE 23, 1998 TABLE OF CONTENTS PAGE(S) ------- SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Letter of Credit Accommodations. . . . . . . . . . . . . . . . . . 9 2.3 Term Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2.4 Cap Ex Loans . . . . . . . . . . . . . . . . . . . . . . . . . . .11 SECTION 3. INTEREST AND FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 3.2 Closing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . .12 3.3 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . .13 3.4 Servicing Fee. . . . . . . . . . . . . . . . . . . . . . . . . . .13 3.5 Unused Line Fee. . . . . . . . . . . . . . . . . . . . . . . . . .13 3.6 Compensation Adjustment. . . . . . . . . . . . . . . . . . . . . .13 SECTION 4. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . . . .14 1.1 Conditions Precedent to Initial Loans and Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . .14 1.2 Conditions Precedent to All Loans and Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . .16 SECTION 5. GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . .16 SECTION 6. COLLECTION AND ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . .17 6.1 Borrower's Loan Account. . . . . . . . . . . . . . . . . . . . . .17 6.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 6.3 Collection of Accounts . . . . . . . . . . . . . . . . . . . . . .17 6.4 Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 6.5 Authorization to Make Loans. . . . . . . . . . . . . . . . . . . .19 6.6 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . .19 SECTION 7. COLLATERAL REPORTING AND COVENANTS. . . . . . . . . . . . . . . . . . . .19 7.1 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . .19 7.2 Accounts Covenants . . . . . . . . . . . . . . . . . . . . . . . .19 7.3 Inventory Covenants. . . . . . . . . . . . . . . . . . . . . . . .21 7.4 Equipment Covenants. . . . . . . . . . . . . . . . . . . . . . . .21 7.5 Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . .22 7.6 Right to Cure. . . . . . . . . . . . . . . . . . . . . . . . . . .22 7.7 Access to Premises . . . . . . . . . . . . . . . . . . . . . . . .22 SECTION 8. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . .23 8.1 Corporate Existence, Power and Authority; Subsidiaries . . . . . .23 8.2 Financial Statements; No Material Adverse Change . . . . . . . . .23 8.3 Chief Executive Office; Collateral Locations . . . . . . . . . . .23 8.4 Priority of Liens; Title to Properties . . . . . . . . . . . . . .23 8.5 Tax Returns. . . . . . . . . . . . . . . . . . . . . . . . . . . .24 8.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 8.7 Compliance with Other Agreements and Applicable Laws . . . . . . .24 i PAGE(S) ------ 8.8 Environmental Compliance . . . . . . . . . . . . . . . . . . . . .24 8.9 Employee Benefits... . . . . . . . . . . . . . . . . . . . . . . .25 8.10 Accuracy and Completeness of Information . . . . . . . . . . . . .25 8.11 Survival of Warranties; Cumulative . . . . . . . . . . . . . . . .25 SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . .26 9.1 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . .26 9.2 New Collateral Locations . . . . . . . . . . . . . . . . . . . . .26 9.3 Compliance with Laws, Regulations. . . . . . . . . . . . . . . . .26 9.4 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . .27 9.5 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 9.6 Financial Statements and Other Information . . . . . . . . . . . .28 9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc. . . . . .29 9.8 Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . .29 9.9 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . .29 9.10 Loans, Investments, Guarantees, Etc. . . . . . . . . . . . . . . .30 9.11 Dividends and Redemptions. . . . . . . . . . . . . . . . . . . . .30 9.12 Transactions with Affiliates . . . . . . . . . . . . . . . . . . .30 9.13 Intentionally Omitted. . . . . . . . . . . . . . . . . . . . . . .30 9.14 Adjusted Net Worth . . . . . . . . . . . . . . . . . . . . . . . .30 9.15 Compliance with ERISA. . . . . . . . . . . . . . . . . . . . . . .30 9.16 Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . .31 9.17 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .31 SECTION 10. EVENTS OF DEFAULT AND REMEDIES. . . . . . . . . . . . . . . . . . . . . .32 10.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . . . .32 10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . .34 11.1 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. . . . . . . . . . . . . . . . . . . . . . . . .34 11.2 Waiver of Notices. . . . . . . . . . . . . . . . . . . . . . . . .35 11.3 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . .35 11.4 Waiver of Counterclaims. . . . . . . . . . . . . . . . . . . . . .36 11.5 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . .36 SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . .36 12.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 12.2 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 12.3 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . .37 12.4 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 12.5 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . .38
ii INDEX TO EXHIBITS AND SCHEDULES Exhibit A Information Certificate iii LOAN AND SECURITY AGREEMENT This Loan and Security Agreement dated June 23, 1998 is entered into by and between Congress Financial Corporation (Western), a California corporation ("Lender") and Microtel International, Inc. ("Microtel"), a Delaware corporation, XIT Corporation ("XIT"), a New Jersey Corporation, CXR Telcom Corporation ("CXR"), a Delaware corporation, and Hycomp, Inc. ("Hycomp"), a Massachusetts corporation. (Microtel, XIT, CXR and Hycomp are sometimes referred to in this Agreement, jointly and severally, as the "Borrower".) W I T N E S S E T H: WHEREAS, Borrower has requested that Lender enter into certain financing arrangements with Borrower pursuant to which Lender may make loans and provide other financial accommodations to Borrower; and WHEREAS, Lender is willing to make such loans and provide such financial accommodations on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS. All terms used herein which are defined in Article 1 or Article 9 of the California Uniform Commercial Code shall have the respective meanings given therein unless otherwise defined in this Agreement. All references to the plural herein shall also mean the singular and to the singular shall also mean the plural. All references to Borrower and Lender pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns. The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with Section 11.3. Any accounting term used herein unless otherwise defined in this Agreement shall have the meaning customarily given to such term in accordance with GAAP. For purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "ACCOUNTS" shall mean all present and future rights of Borrower to payment for goods sold or leased or for services rendered, which are not evidenced by instruments or chattel paper, and whether or not earned by performance. 1.2 "ADJUSTED NET WORTH" shall mean as to any Person, at any time, in accordance with GAAP (except as otherwise specifically set forth below), on a consolidated basis for such Person and its subsidiaries (if any, but not including foreign subsidiaries), the amount equal to: (a) the difference between: (i) the aggregate net book value of all assets of such Person and its subsidiaries, calculating the book value of inventory for this purpose on a first-in-first-out basis, - 1 - after deducting from such book values all appropriate reserves in accordance with GAAP (including all reserves for doubtful receivables, obsolescence, depreciation and amortization) and (ii) the aggregate amount of the indebtedness and other liabilities of such Person and its subsidiaries (including tax and other proper accruals) PLUS (b) indebtedness of such Person and its subsidiaries which is subordinated in right of payment to the full and final payment of all of the Obligations on terms and conditions acceptable to Lender. 1.3 "AVAILABILITY RESERVES" shall mean, as of any date of determination, such amounts as Lender may from time to time establish and revise in good faith reducing the amount of Revolving Loans and Letter of Credit Accommodations which would otherwise be available to Borrower under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Lender in good faith, do or may affect either (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in any dilution with respect to the Accounts of any Borrower), (ii) the assets, business or prospects of Borrower or any Obligor or (iii) the security interests and other rights of Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Lender's good faith belief that any collateral report or financial information furnished by or on behalf of Borrower or any Obligor to Lender is or may have been incomplete, inaccurate or misleading in any material respect or (c) to reflect any state of facts which Lender determines in good faith constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default. Without limiting the generality of the foregoing, Lender (i) shall establish on the date hereof and maintain throughout the term of this Agreement and throughout any renewal term an Availability Reserve for an amount equal to three (3) months of Borrower's gross rent and other obligations as lessee for each leased premises of Borrower which is located in a state where a landlord may be entitled to a priority lien on Collateral to secure unpaid rent and with respect to each such property the landlord has not executed a form of waiver and consent acceptable to Lender, (ii) may establish an additional Availability Reserve on the date hereof, and from time to time hereafter, and maintain such reserve throughout the term of this Agreement and throughout any renewal term in an amount determined by Lender in its discretion to be sufficient to cover the anticipated moving expenses and other costs associated with the transfer of Inventory from each of Borrower's locations to another location acceptable to Lender, and (iii) may establish and maintain an additional Availability Reserve from time to time to compensate for types of Inventory in an amount equal to more than the sales of such Inventory during the prior 18 months. 1.4 "BLOCKED ACCOUNT" shall have the meaning set forth in Section 6.3 hereof. 1.5 "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of New York, the Commonwealth of Pennsylvania or the State of California, and a day on which First Union National Bank or such other bank as Lender may from time to time designate, and Lender are open for the transaction of business. 1.6 "CODE" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. - 2 - 1.7 "COLLATERAL" shall have the meaning set forth in Section 5 hereof. 1.8 "ELIGIBLE ACCOUNTS" shall mean Accounts created by Borrower which are and continue to be acceptable to Lender based on the criteria set forth below. In general, Accounts shall be Eligible Accounts if: (a) such Accounts arise from the actual and BONA FIDE sale and delivery of goods by Borrower or rendition of services by Borrower in the ordinary course of its business which transactions are completed in accordance with the terms and provisions contained in any documents related thereto; (b) such Accounts are not unpaid more than 60 days after their original due date or more than 90 days after the date of the original invoice for them; (c) such Accounts comply with the terms and conditions contained in Section 7.2(c) of this Agreement; (d) such Accounts do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the account debtor may be conditional or contingent; (e) the chief executive office of the account debtor with respect to such Accounts is located in the United States of America or Canada, or, at Lender's option, if either: (i) the account debtor has delivered to Borrower an irrevocable letter of credit issued or confirmed by a bank in the United States satisfactory to Lender, sufficient to cover such Account, payable in the United States of America and in U.S. Dollars, in form and substance satisfactory to Lender and, if required by Lender, the original of such letter of credit has been delivered to Lender or Lender's agent and the issuer thereof notified of the assignment of the proceeds of such letter of credit to Lender, or (ii) such Account is subject to credit insurance payable to Lender issued by an insurer and on terms and in an amount acceptable to Lender, or (iii) such Account is otherwise acceptable in all respects to Lender including, but not limited to, the creditworthiness of the account debtor and the political risk associated therewith, and the ability of the Lender to collect the foreign Account, subject to such lending formulas with respect to each foreign Account as Lender may determine, and each such foreign Account is payable to Borrower at a location in the United States of America and in U.S. Dollars; (f) such Accounts do not consist of progress billings, bill and hold invoices or retainage invoices, except as to bill and hold invoices, if Lender shall have received an agreement in writing from the account debtor, in form and substance satisfactory to Lender, confirming the unconditional obligation of the account debtor to take the goods related thereto and pay such invoice; (g) the account debtor with respect to such Accounts has not asserted a counterclaim, defense or dispute and does not have, and does not engage in transactions which may give rise to, any right of setoff against such Accounts; - 3 - (h) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Accounts or reduce the amount payable or delay payment thereunder; (i) such Accounts are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (j) neither the account debtor nor any officer or employee of the account debtor with respect to such Accounts is an officer, employee or agent of or affiliated with Borrower directly or indirectly by virtue of family membership, ownership, control, management or otherwise; (k) the account debtors with respect to such Accounts are not any foreign government, the United States of America, any State, political subdivision, department, agency or instrumentality thereof, unless, if the account debtor is the United States of America, any State, political subdivision, department, agency or instrumentality thereof, upon Lender's request, the Federal Assignment of Claims Act of 1940, as amended or any similar State or local law, if applicable, has been complied with in a manner satisfactory to Lender; (l) there are no proceedings or actions which are threatened or pending against the account debtors with respect to such Accounts which might result in any material adverse change in any such account debtor's financial condition; (m) such Accounts of a single account debtor or its affiliates do not constitute more than twenty percent (20%) of all otherwise Eligible Accounts (but the portion of the Accounts not in excess of such percentage may be deemed Eligible Accounts); (n) such Accounts are not owed by an account debtor who has Accounts unpaid more than 60 days after their original due date or more than 90 days after the date of the original invoice for them which constitute more than fifty percent (50%) of the total Accounts of such account debtor; (o) such Accounts are owed by account debtors whose total indebtedness to Borrower does not exceed the credit limit with respect to such account debtors as determined by Lender from time to time (but the portion of the Accounts not in excess of such credit limit may still be deemed Eligible Accounts); and (p) such Accounts are owed by account debtors deemed creditworthy at all times by Lender, as determined by Lender. General criteria for Eligible Accounts may be established and revised from time to time by Lender in good faith. Any Accounts which are not Eligible Accounts shall nevertheless be part of the Collateral. 1.9 "ELIGIBLE INVENTORY" shall mean Inventory consisting of finished goods held for resale in the ordinary course of the business of Borrower and raw materials for such finished -4- goods which are acceptable to Lender based on the criteria set forth below. In general, Eligible Inventory shall not include (a) work-in-process; (b) components which are not part of finished goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e) supplies used or consumed in Borrower's business; (f) Inventory at premises other than those owned and controlled by Borrower, except if Lender shall have received an agreement in writing from the person in possession of such Inventory and/or the owner or operator of such premises in form and substance satisfactory to Lender acknowledging Lender's first priority security interest in the Inventory, waiving security interests and claims by such person against the Inventory and permitting Lender access to, and the right to remain on, the premises so as to exercise Lender's rights and remedies and otherwise deal with the Collateral; (g) Inventory in-transit; (h) Inventory subject to a security interest or lien in favor of any person other than Lender except those permitted in this Agreement; (i) bill and hold goods; (j) unserviceable, obsolete or slow moving Inventory; (k) Inventory which is not subject to the first priority, valid and perfected security interest of Lender; (l) returned, damaged and/or defective Inventory; and (m) Inventory purchased or sold on consignment. General criteria for Eligible Inventory may be established and revised from time to time by Lender in good faith. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral. 1.10 "ENVIRONMENTAL LAWS" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to Borrower's business and facilities (whether or not owned by it), including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or hazardous, toxic or dangerous substances, materials or wastes. 1.11 "EQUIPMENT" shall mean all of Borrower's now owned and hereafter acquired equipment, machinery, computers and computer hardware and software (whether owned or licensed), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located. 1.12 "ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.13 "ERISA AFFILIATE" shall mean any person required to be aggregated with Borrower or any of its affiliates under Sections 414(b), 414(c), 414(m) or 414(o) of the Code. 1.14 "EVENT OF DEFAULT" shall mean the occurrence or existence of any event or condition described in Section 10.1 hereof. - 5 - 1.15 "EXCESS AVAILABILITY" shall mean the amount, as determined by Lender, calculated at any time, equal to: (a) the lesser of: (i) the amount of the Revolving Loans available to Borrower as of such time based on the applicable lender formulas multiplied by the Net Amount of Eligible Accounts and the Value of Eligible Inventory, as determined by Lender, and subject to the sublimits and Availability Reserves from time to time established by Lender hereunder, and (ii) the Maximum Credit (less the then outstanding principal amount of the Term Loan), MINUS (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations (but not including for this purpose the then outstanding principal amount of the Term Loan), (ii) the aggregate amount of all then outstanding and unpaid trade payables of Borrower which are more than sixty (60) days past due as of such time, (iii) the aggregate amount of Borrower's book overdrafts, and (iv) the aggregate amount of Borrower's past due lease and notes payable. 1.16 "FINANCING AGREEMENTS" shall mean, collectively, this Agreement and all notes, guarantees, security agreements and other agreements, documents and instruments now or at any time hereafter executed and/or delivered by Borrower or any Obligor in connection with this Agreement, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.17 "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Boards which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of Sections 9.13 and 9.14 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements delivered to Lender prior to the date hereof. 1.18 "HAZARDOUS MATERIALS" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.19 "INFORMATION CERTIFICATE" shall mean the Information Certificate of Borrower constituting Exhibit A hereto containing material information with respect to Borrower, its business and assets provided by or on behalf of Borrower to Lender in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein. 1.20 "INVENTORY" shall mean all of Borrower's now owned and hereafter existing or acquired raw materials, work in process, finished goods and all other inventory of whatsoever kind or nature, wherever located. - 6 - 1.21 "LETTER OF CREDIT ACCOMMODATIONS" shall mean the letters of credit, merchandise purchase or other guaranties which are from time to time either (a) issued, opened or provided by Lender for the account of Borrower or any Obligor or (b) with respect to which Lender has agreed to indemnify the issuer or guaranteed to the issuer the performance by Borrower of its obligations to such issuer. 1.22 "LOANS" shall mean the Revolving Loans, the Cap Ex Loans and the Term Loan. 1.23 "MAXIMUM CREDIT" shall mean the amount of $10,500,000. 1.24 "NET AMOUNT OF ELIGIBLE ACCOUNTS" shall mean the gross amount of Eligible Accounts less (a) sales, excise or similar taxes included in the amount thereof and (b) returns, discounts, claims, credits and allowances of any nature at any time issued, owing, granted, outstanding, available or claimed with respect thereto. 1.25 "OBLIGATIONS" shall mean any and all Revolving Loans, the Cap Ex Loans, the Term Loan, Letter of Credit Accommodations and all other obligations, liabilities and indebtedness of every kind, nature and description owing by Borrower to Lender and/or its affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of any case with respect to Borrower under the United States Bankruptcy Code or any similar statute (including, without limitation, the payment of interest and other amounts which would accrue and become due but for the commencement of such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and however acquired by Lender. 1.26 "OBLIGOR" shall mean any guarantor, endorser, acceptor, surety or other person liable on or with respect to the Obligations or who is the owner of any property which is security for the Obligations, other than Borrower. 1.27 "PARTICIPANT" shall mean any person which at any time participates with Lender in respect of the Loans, the Letter of Credit Accommodations or other Obligations or any portion thereof. 1.28 "PAYMENT ACCOUNT" shall have the meaning set forth in Section 6.3 hereof. 1.29 "PERSON" or "PERSON" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.30 "PRIME RATE" shall mean the rate from time to time publicly announced by First Union National Bank or its successors, at its office in Philadelphia, Pennsylvania, as its prime rate, whether or not such announced rate is the best rate available at such bank. -7- 1.31 "RECORDS" shall mean all of Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of Borrower with respect to the foregoing maintained with or by any other person). 1.32 "REVOLVING LOANS" shall mean the loans now or hereafter made by Lender to or for the benefit of Borrower on a revolving basis (involving advances, repayments and readvances) as set forth in Section 2.1 hereof. 1.33 "TERM LOAN" shall mean collectively the term loans made by Lender to Borrower as provided for in Section 2.3 hereof. 1.34 "VALUE" shall mean, as determined by Lender in good faith, with respect to Inventory, the lower of (a) cost computed on a first-in-first-out basis in accordance with GAAP or (b) market value. SECTION 2. CREDIT FACILITIES. 2.1 REVOLVING LOANS. (a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to the sum of: (i) EIGHTY-FIVE PERCENT (85%) of the Net Amount of Eligible Accounts, plus (ii) the lesser of: (A) the sum of FORTY PERCENT (40%) of the Value of Eligible Inventory consisting of finished goods plus TWENTY-FIVE PERCENT (25%) of the Value of Eligible Inventory consisting of raw materials for such finished goods, or (B) the amount equal to: (1) $500,000 minus FORTY PERCENT (40%) of the then undrawn amounts of the outstanding Letter of Credit Accommodations for the purpose of purchasing finished goods, plus (2) $1,000,000 minus TWENTY-FIVE PERCENT (25%) of the then undrawn amounts of the outstanding Letter of Credit Accommodations for the purpose of purchasing raw materials for such finished goods, less (iii) any Availability Reserves; PROVIDED THAT: -8- (1) Total Revolving Loans to all Borrowers shall not at any time exceed $9,000,000; (2) Total Loans to all Borrowers with respect to finished goods shall not exceed $500,000 at any time outstanding; (3) Total Loans to all Borrowers with respect to raw materials shall not exceed $1,000,000 at any time outstanding; (4) Borrower shall have the right, not more frequently than once per fiscal year, to have the Eligible Inventory appraised by an appraiser acceptable to Lender in its sole discretion, at Borrower's expense, and to have the percentages set forth in Section 2.1.(a)(ii)(A) and (B) adjusted to the lesser of 80% of the orderly liquidation value of such Eligible Inventory as determined by said appraiser, or 100% of the auction value of such Eligible Inventory as determined by said appraiser, in each case net of Lender's estimate as to the costs and expenses of sale of such Eligible Inventory in an auction or orderly liquidation. Revolving Loans will be made separately to each Borrower based on the Eligible Accounts and Eligible Inventory of each Borrower, but subject to the dollar limits set forth above, which shall apply to the total Revolving Loans to all Borrowers. (b) Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower, (i) reduce the lending formula with respect to Eligible Accounts to the extent that Lender determines in good faith that: (A) the dilution with respect to the Accounts for any period (based on the ratio of (1) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (2) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (B) the general creditworthiness of account debtors has declined or (ii) reduce the lending formula(s) with respect to Eligible Inventory to the extent that Lender determines that: (A) the number of days of the turnover, or the mix, of the Inventory for any period has changed in any material respect or (B) the liquidation value of the Eligible Inventory, or any category thereof, has decreased, or (C) the nature and quality of the Inventory has deteriorated in any material respect. In determining whether to reduce the lending formula(s), Lender may consider events, conditions, contingencies or risks which are also considered in determining Eligible Accounts, Eligible Inventory or in establishing Availability Reserves. (c) Except in Lender's discretion, the aggregate amount of the Loans, the Letter of Credit Accommodations and other Obligations outstanding at any time shall not exceed the Maximum Credit. In the event that the outstanding amount of any component of the Loans, or the aggregate amount of the outstanding Loans, Letter of Credit Accommodations and other Obligations exceed the amounts available under the lending formulas set forth in Section 2.1(a) hereof, the sublimits for Letter of Credit Accommodations set forth in Section 2.2(c) or the Maximum Credit, as applicable, such event shall not limit, waive or otherwise affect any rights of Lender in that circumstance or on any future occasions and Borrower shall, upon demand by Lender, which may be made at any time or from time to time, immediately repay to Lender the entire amount of any such excess(es) for which payment is demanded. -9- (d) Without limiting any of the other provisions of this Agreement, all payments of principal and interest and all other sums received by Borrower under that certain promissory note dated March 31, 1998 in the original principal amount of $650,000, which Borrower represents has an unpaid principal balance of $650,000, made by Arnold Circuits, Inc. (the "Arnold's Note") shall be remitted by Borrower to Lender to be applied to the Revolving Loans. 2.2 LETTER OF CREDIT ACCOMMODATIONS. (a) Subject to, and upon the terms and conditions contained herein, at the request of Borrower, Lender agrees to provide or arrange for Letter of Credit Accommodations for the account of Borrower containing terms and conditions acceptable to Lender and the issuer thereof. Any payments made by Lender to any issuer thereof and/or related parties in connection with the Letter of Credit Accommodations shall constitute additional Revolving Loans to Borrower pursuant to this Section 2. (b) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrower shall pay to Lender a letter of credit fee at a rate equal to ONE PERCENT (1%) per annum on the daily outstanding balance of the Letter of Credit Accommodations for the immediately preceding month (or part thereof), payable in arrears as of the first day of each succeeding month; PROVIDED, HOWEVER, that such letter of credit fee shall be increased, at Lender's option, without notice, to three percent (3%) per annum for the period on or after the date of termination or non-renewal of this Agreement, or the date of the occurrence of an Event of Default. Such letter of credit fee shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed and the obligation of Borrower to pay such fee shall survive the termination or non-renewal of this Agreement. (c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Revolving Loans available to Borrower (subject to the Maximum Credit and any Availability Reserves) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the sum of (A) the product of the Value of such Eligible Inventory multiplied by an amount equal to one minus the then applicable Inventory advance rate under Section 2.1(a)(ii), plus (B) freight, taxes, duty and other amounts which Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrower's locations for Eligible Inventory within the United States of America and (ii) if the proposed Letter of Credit Accommodation is for standby letters of credit guaranteeing the purchase of Eligible Inventory or for any other purpose, an amount equal to one hundred percent (100%) of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodation, the amount of Revolving Loans which might otherwise be available to Borrower shall be reduced by the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii). (d) Except in Lender's discretion, (i) the amount of all outstanding Letter of Credit Accommodations and all other commitments and obligations made or incurred by Lender in connection therewith, shall not at any time exceed $1,000,000, and (ii) the amount of all outstanding Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory -10- and all other commitments and obligations made or incurred by Lender in connection therewith shall not at any time exceed: (A) $500,000 minus the amount of the then outstanding Revolving Loans based on Eligible Inventory consisting of finished goods, pursuant to Section 2.1(a)(ii) hereof, plus (B) $1,000,000 minus the amount of the then outstanding Revolving Loans based on Eligible Inventory consisting of raw materials, pursuant to Section 2.1(a)(ii) hereof. At any time an Event of Default exists or has occurred and is continuing, upon Lender's request, Borrower will either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, the Revolving Loans otherwise available to Borrower shall not be reduced as provided in Section 2.2(c) to the extent of such cash collateral. (e) Borrower shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Borrower assumes all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed Borrower's agent. Borrower assumes all risks for, and agrees to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Borrower hereby releases and holds Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Borrower, by any issuer or correspondent or otherwise, unless caused by the gross negligence or willful misconduct of Lender, with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.2(e) shall survive the payment of Obligations and the termination or non-renewal of this Agreement. (f) Nothing contained herein shall be deemed or construed to grant Borrower any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Borrower shall be bound by any interpretation made in good faith by Lender, or any other issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Borrower. Lender shall have the sole and exclusive right and authority to, and Borrower shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances -11- thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in Borrower's name. (g) Any rights, remedies, duties or obligations granted or undertaken by Borrower to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Borrower to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Borrower to Lender and to apply in all respects to Borrower. 2.3 TERM LOAN. (a) Lender is making Term Loans to Borrower in the following original principal amounts (which, as provided in Section 1.33, are collectively referred to in this Agreement as the "Term Loan"): Microtel International, Inc. $729,000 XIT Corporation $379,000 CXR Telcom Corporation $193,000 Hycomp, Inc. $334,000
The Term Loan is (a) evidenced by Term Promissory Notes in the above original principal amounts duly executed and delivered by above Borrowers to Lender concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Term Promissory Notes, and the other Financing Agreements and (c) secured by all of the Collateral. Borrower represents and warrants that the appraisal of its equipment, on which the amount of the Term Loan was based, did not include any equipment which was subject to any liens or security interests in favor of any other party (other than those being terminated concurrently herewith). (b) The Term Loan shall be repayable in 60 equal monthly installments of principal commencing on the first day of the first month following the date the Term Loan is made and continuing on the same day of each succeeding month, provided that the entire unpaid principal balance of the Term Loan shall be due and payable on expiration of the term of this Agreement or termination of this Agreement by either party as provided herein. (c) Borrower may, at its expense, have all (but not less than all) of its machinery and equipment located in the State of California, which is free and clear of any and all other liens and security interests (including Permitted Liens), appraised by Joseph Finn Co. within 30 days after the date hereof, and in the event such appraisal is acceptable to Lender in its discretion, the amount of the Term Loan shall be adjusted to an amount not to exceed the lesser of (i) 100% of the auction value of all of such equipment net of Lender's estimate as to the costs and expenses of sale thereof (without duplication), or (ii) 80% of the orderly liquidation value of -12- all such equipment net of Lender's estimate as to the costs and expenses of sale thereof (without duplication), or (iii) $3,500,000. In the event the amount of the Term Loan is so adjusted, the regular principal payments thereunder shall be adjusted so that each regular principal payment is in an amount equal to the adjusted principal amount thereof divided by the number of remaining payments. 2.4 CAP EX LOANS. Subject to, and upon the terms and conditions contained herein, Lender agrees to make loans (the "Cap Ex Loans") to Borrower from time to time in amounts requested by Borrower up to 75% of the net purchase price of new Equipment purchased after the date hereof and acceptable to Lender in its discretion (provided that not more than $1,000,000 in Cap Ex Loans shall be made hereunder). Cap Ex Loans may not be re-borrowed after being repaid. The net purchase price of Equipment means the purchase price thereof, as shown on the applicable invoice, net of all charges for taxes, freight, delivery, insurance, installation, set-up, training, manuals, fees, service charges and other similar items. Cap Ex Loans shall be made in disbursements of not less than $200,000 each and the proceeds of Cap Ex Loans shall be used exclusively to purchase the applicable Equipment. Each Cap Ex Loan shall be repaid by the Borrower to Lender in 60 equal monthly payments of principal, commencing on the first day of the first month after such Cap Ex Loan was disbursed and continuing until the earlier of the date such Cap Ex Loan has been paid in full or the date this Agreement terminates by its terms or is terminated, at which date the entire unpaid principal balance of the Cap Ex Loans, plus all accrued and unpaid interest thereon, shall be due and payable. SECTION 3. INTEREST AND FEES. 3.1 INTEREST. (a) Borrower shall pay to Lender interest on the outstanding principal amount of the non-contingent Obligations as follows: (1) Borrower shall pay to Lender interest on the outstanding principal amount of the Revolving Loans at the rate of one percent (1%) per annum in excess of the Prime Rate; provided that, regardless of the amount of Revolving Loans outstanding in any month, Borrower shall pay Lender minimum interest on the Revolving Loans in an amount equal to the interest which would have been payable thereon at the interest rate in effect during such month, if the unpaid principal balance of the Revolving Loans was $2,500,000 throughout such month. (2) Borrower shall pay to Lender interest on the outstanding principal amount of the Term Loan and the Cap Ex Loans at the rate of one and one-quarter percent (1.25%) per annum in excess of the Prime Rate. Notwithstanding the foregoing, Borrower shall pay to Lender interest, at Lender's option, without notice, (i) at the rate of 3% per annum in excess of the Prime Rate (in the case of the Revolving Loans) and at the rate of 3.25% per annum in excess of the Prime Rate (in the case of the Term Loan and the Cap Ex Loans) on the non-contingent Obligations for the period from and after the date of termination or non-renewal hereof, or the date of the occurrence of an Event of Default, -13- and for so long as such Event of Default is continuing as determined by Lender and until such time as Lender has received full and final payment of all such Obligations (notwithstanding entry of any judgment against Borrower), and (ii) at the rate of 3% per annum in excess of the Prime Rate on the Revolving Loans at any time outstanding in excess of the amounts available to Borrower under Section 2 (whether or not such excess(es), arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default). All interest accruing hereunder on and after the occurrence of any of the events referred to in Sections 3.1(a)(i) or 3.1(a)(ii) above shall be payable on demand. (b) Interest shall be payable by Borrower to Lender monthly in arrears not later than the first day of each calendar month and shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrower to Lender exceed the maximum amount or the rate permitted under any applicable law or regulation, and if any part or provision of this Agreement is in contravention of any such law or regulation, such part or provision shall be deemed amended to conform thereto. 3.2 CLOSING FEE. Borrower shall pay to Lender as a closing fee the amount of $105,000, which shall be fully earned as of the date hereof. Said closing fee shall be payable $75,000 on the date hereof, and the balance of $30,000 shall be payable on the earlier of (i) the first anniversary of the date hereof, or (ii) the date this Loan Agreement terminates by its terms or is terminated by either party as provided herein. 3.3 FACILITY FEE. [Intentionally Omitted.] 3.4 SERVICING FEE. Borrower shall pay to Lender annually a servicing fee in an amount equal to $36,000 in respect of Lender's services for each year (or part thereof) while this Agreement remains in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be fully earned in advance as of the date hereof and on each annual anniversary hereafter, such annual servicing fee to be payable on a semi-annual basis, in advance, with the first such semi-annual payment, in the amount of $18,000, payable on the date hereof and successive semi-annual payments hereafter, each in the amount of $18,000, on the first day of each six month period hereafter. 3.5 UNUSED LINE FEE. [Intentionally Omitted.] 3.6 COMPENSATION ADJUSTMENT. (a) If after the date of this Agreement the introduction of, or any change in, any law or any governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any interpretation thereof, or compliance by Lender or any Participant therewith: -14- (i) subjects Lender to any tax, duty, charge or withholding on or from payments due from Borrower (excluding franchise taxes imposed upon, and taxation of the overall net income of, Lender or any Participant), or changes the basis of taxation of payments, in either case in respect of amounts due it hereunder, or (ii) imposes or increases or deems applicable any reserve requirement or other reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender or any Participant, or (iii) imposes any other condition the result of which is to increase the cost to Lender or any Participant of making, funding or maintaining the Revolving Loans or Letter of Credit Accommodations or reduces any amount receivable by Lender or any Participant in connection with the Loans or Letter of Credit Accommodations, or requires Lender or any Participant to make payment calculated by references to the amount of loans held or interest received by it, by an amount deemed material by Lender or any Participant, or (iv) imposes or increases any capital requirement or affects the amount of capital required or expected to be maintained by Lender or any Participant or any corporation controlling Lender or any Participant, and Lender or any Participant determines that such imposition or increase in capital requirements or increase in the amount of capital expected to be maintained is based upon the existence of this Agreement or the Loans or Letter of Credit Accommodations hereunder, all of which may be determined by Lender's reasonable allocation of the aggregate of its impositions or increases in capital required or expected to be maintained, and the result of any of the foregoing is to increase the cost to Lender or any Participant of making, renewing or maintaining the Loans or Letter of Credit Accommodations, or to reduce the rate of return to Lender or any Participant on the Loans or Letter of Credit Accommodations, then upon demand by Lender, Borrower shall pay to Lender, and continue to make periodic payments to Lender or any Participant, such additional amounts as may be necessary to compensate Lender or any Participant for any such additional cost incurred or reduced rate of return realized. (b) A certificate of Lender claiming entitlement to compensation as set forth above will be conclusive in the absence of manifest error. Such certificate will set forth the nature of the occurrence giving rise to such compensation, the additional amount or amounts to be paid and the compensation and the method by which such amounts were determined. In determining any additional amounts due from Borrower under this Section 3.6, Lender shall act reasonably and in good faith and will, to the extent that the increased costs, reductions, or amounts received or receivable relate to the Lender's or a Participant's loans or commitments generally and are not specifically attributable to the Loans and commitments hereunder, use averaging and attribution methods which are reasonable and equitable and which cover all loans and commitments under this Agreement by the Lender or such Participant, as the case may be, whether or not the loan documentation for such other loans and commitments permits the Lender or such Participant to receive compensation costs of the type described in this Section 3.6. -15- SECTION 4. CONDITIONS PRECEDENT. 4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT ACCOMMODATIONS. Each of the following is a condition precedent to Lender making the initial Loans and providing the initial Letter of Credit Accommodations hereunder: (a) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination of any interest in and to any assets and properties of Borrower, duly authorized, executed and delivered by it or each of them, including, but not limited to, UCC termination statements for all UCC financing statements and Lender shall have satisfied itself that it has valid, perfected and first priority security interests in and liens upon the Collateral and any other property which is intended as security for the Obligations, or the liability of any Obligor in respect thereto, subject only to the security interests and liens permitted herein or in the other Financing Agreements; (b) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Lender, and Lender shall have received all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings which Lender may have requested in connection therewith, such documents where requested by Lender or its counsel to be certified by appropriate corporate officers or governmental authorities; (c) no material adverse change shall have occurred in the assets, business or prospects of Borrower since the date of Lender's latest field examination and no change or event shall have occurred which would impair the ability of Borrower or any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce the Obligations or realize upon the Collateral; (d) Lender shall have completed a field review of the Records and of such other financial information, projections, budgets, business plans and cash flows as Lender shall reasonably request from time to time, including, but not limited to, current agings of receivables, current perpetual inventory records and/or rollforwards of Accounts and Inventory through the date of closing (including a physical count of the Inventory by a third party acceptable to Lender), together with supporting documentation, including documentation with respect to Inventory in-transit, goods in bonded warehouses or at other third-party locations, that will enable Lender to accurately identify and verify the eligible Collateral at or before closing in a manner satisfactory to Lender, the results of which shall be satisfactory to Lender; (e) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, acknowledgments by lessors, mortgagees and warehousemen of Lender's security interests in the Collateral, waivers by such persons of any security interests, liens or other claims by such persons to the Collateral and -16- agreements permitting Lender access to, and the right to remain on, the premises to exercise its rights and remedies and otherwise deal with the Collateral; (f) Lender shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Lender, and certificates of insurance policies and/or endorsements naming Lender as loss payee; (g) Lender shall have received, in form and substance satisfactory to Lender, such opinion letters of counsel to Borrower with respect to the Financing Agreements and such other matters as Lender may request, provided that the legal opinion with respect to the due incorporation, valid existence and good-standing of Hycomp, Inc. shall be provided by Borrower to Lender within 30 days after the date hereof; (h) the Excess Availability as determined by Lender as of the date hereof, shall be satisfactory to Lender, in its discretion, after giving effect to the initial Loans made or to be made hereunder and the payment of all fees and expenses payable upon the consummation of the initial transactions contemplated by this Agreement; (i) Lender shall have received, in form and substance satisfactory to Lender and its counsel, the assignment of all of Borrower's rights in registered patents, trademarks, service marks and copyrights, as Collateral hereunder, on Lender's standard forms of Collateral Assignments; (j) Lender shall have received, in form and substance satisfactory to Lender, an executed copy of a Blocked Account Agreement, pursuant to Section 6.3(ii) hereof, among Lender, Borrower and such banks as Lender shall specify; and (k) the other Financing Agreements and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Lender, in form and substance satisfactory to Lender; and (l) Imperial Bank shall have terminated its security interests in all assets of all Borrowers, and any other holders of a security interest in Borrower's assets including, without limitation, vendors of Inventory to Borrower, shall have executed intercreditor and subordination agreements in form and substance satisfactory to Lender; and (m) Borrower shall have executed and delivered to Lender a Security Agreement, in such form as Lender shall specify, with respect to Borrower's partnership interest in Capital Source Partners, a Real Estate Partnership, a California general partnership, which is the owner of the real property located at 4290 E. Brickell, Ontario, California, acknowledged and agreed to by said partnership and the other partner therein. (n) Borrower shall have received additional cash equity contributions, concurrently herewith, in an amount not less than $900,000, and Lender shall have received evidence thereof satisfactory to Lender. -17- (o) Lender shall have received cross-corporate continuing guaranties executed by each Borrower with respect to the Obligations of the other Borrowers, on such form as it shall specify. (p) Lender shall have received the original Arnold's Note, duly endorsed to Lender. (q) Lender shall have received, reviewed and approved Borrower's audited December 31, 1997 financial statements. 4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT ACCOMMODATIONS. Each of the following is an additional condition precedent to Lender making Loans and/or providing Letter of Credit Accommodations to Borrower, including the initial Loans and Letter of Credit Accommodations and any future Loans and Letter of Credit Accommodations: (a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto; and (b) no Event of Default and no event or condition which, with notice or passage of time or both, would constitute an Event of Default, shall exist or have occurred and be continuing on and as of the date of the making of such Loan or providing each such Letter of Credit Accommodation and after giving effect thereto. SECTION 5. GRANT OF SECURITY INTEREST. To secure payment and performance of all Obligations, Borrower hereby grants to Lender a continuing security interest in, a lien upon, and a right of set off against, and hereby assigns to Lender as security, the following property and interests in property, whether now owned or hereafter acquired or existing, and wherever located (collectively, the "Collateral"): 5.1 Accounts; 5.2 All present and future contract rights, general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, choses in action and other claims and existing and future leasehold interests in equipment, real estate and fixtures), chattel paper, documents, instruments, investment property, letters of credit, bankers' acceptances and guaranties, (including without limitation the Arnold's Note); 5.3 All present and future monies, securities, credit balances, deposits, deposit accounts and other property of Borrower now or hereafter held or received by or in transit to Lender or its affiliates or at any other depository or other institution from or for the account of Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and -18- all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Accounts and other Collateral, including, without limitation, (a) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (b) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (c) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Accounts or other Collateral, including, without limitation, returned, repossessed and reclaimed goods, and (d) deposits by and property of account debtors or other persons securing the obligations of account debtors; 5.4 Inventory; 5.5 Equipment; 5.6 Records; and 5.7 All products and proceeds of the foregoing, in any form, including, without limitation, insurance proceeds and all claims against third parties for loss or damage to or destruction of any or all of the foregoing. SECTION 6. COLLECTION AND ADMINISTRATION 6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans, all Letter of Credit Accommodations and other Obligations and the Collateral, (b) all payments made by or on behalf of Borrower and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Lender's customary practices as in effect from time to time. 6.2 STATEMENTS. Lender shall render to Borrower each month a statement setting forth the balance in the Borrower's loan account(s) maintained by Lender for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Lender but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrower and conclusively binding upon Borrower as an account stated except to the extent that Lender receives a written notice from Borrower of any specific exceptions of Borrower thereto within thirty (30) days after the date such statement has been mailed by Lender. Until such time as Lender shall have rendered to Borrower a written statement as provided above, the balance in Borrower's loan account(s) shall be presumptive evidence of the amounts due and owing to Lender by Borrower. 6.3 COLLECTION OF ACCOUNTS. (a) Borrower shall establish and maintain, at its expense, blocked accounts or lockboxes and related blocked accounts (in either case, "Blocked Accounts"), as Lender may specify, with such banks as are acceptable to Lender into which Borrower shall promptly deposit and direct its account debtors to directly remit all payments on Accounts and all payments constituting proceeds of Inventory or other Collateral in the identical form in which such -19- payments are made, whether by cash, check or other manner. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Lender, providing that all items received or deposited in the Blocked Accounts are the property of Lender, that the depository bank has no lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on a daily basis, all funds received or deposited into the Blocked Accounts to such bank account of Lender as Lender may from time to time designate for such purpose ("Payment Account"). Borrower agrees that all payments made to such Blocked Accounts or other funds received and collected by Lender, whether on the Accounts or as proceeds of Inventory or other Collateral or otherwise shall be the property of Lender. (b) For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations one (1) Business Days following the date of receipt of immediately available funds by Lender in the Payment Account, or one (1) Business Day following the date of receipt of funds that are not immediately available to Lender in the Payment Account, as applicable. For purposes of calculating the amount of the Revolving Loans available to Borrower such payments will be applied (conditional upon final collection) to the Obligations on the Business Day of receipt by Lender in the Payment Account, if such payments are received within sufficient time (in accordance with Lender's usual and customary practices as in effect from time to time) to credit Borrower's loan account on such day, and if not, then on the next Business Day. In the event that there are no outstanding monetary Obligations at the time such payments or other funds are received, Borrower shall pay a Lender a charge (the "Float Charge") in an amount equal to interest at the Reduced Prime Rate on the amount of such payment or other funds, for one (1) Business Day following the date of receipt of immediately available funds by Lender in the Payment Account, or two (2) Business Days following the date of receipt of funds that are not immediately available to Lender in the Payment Account, as applicable. (c) Borrower and all of its affiliates, subsidiaries, shareholders, directors, employees or agents shall, acting as trustee for Lender, receive, as the property of Lender, any monies, checks, notes, drafts or any other payment relating to and/or proceeds of Accounts or other Collateral which come into their possession or under their control and immediately upon receipt thereof, shall deposit or cause the same to be deposited in the Blocked Accounts, or remit the same or cause the same to be remitted, in kind, to Lender. In no event shall the same be commingled with Borrower's own funds. Borrower agrees to reimburse Lender on demand for any amounts owed or paid to any bank at which a Blocked Account is established or any other bank or person involved in the transfer of funds to or from the Blocked Accounts arising out of Lender's payments to or indemnification of such bank or person, unless such payment or indemnification obligation of Lender was a result of Lender's gross negligence or willful misconduct. The obligation of Borrower to reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the termination or non-renewal of this Agreement. 6.4 PAYMENTS. All Obligations shall be payable to the Payment Account as provided in Section 6.3 or such other place as Lender may designate from time to time. Lender may apply payments received or collected from Borrower or for the account of Borrower (including, without -20- limitation, the monetary proceeds of collections or of realization upon any Collateral) to such of the Obligations, whether or not then due, in such order and manner as Lender determines. At Lender's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrower. Borrower shall make all payments to Lender on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and hold Lender harmless for the amount of any payments or proceeds surrendered or returned. This Section 6.4 shall remain effective notwithstanding any contrary action which may be taken by Lender in reliance upon such payment or proceeds. This Section 6.4 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans and provide the Letter of Credit Accommodations based upon telephonic or other instructions received from anyone purporting to be an officer of Borrower or other authorized person or, at the discretion of Lender, if such Loans are necessary to satisfy any Obligations. All requests for Loans or Letter of Credit Accommodations hereunder shall specify the date on which the requested advance is to be made or Letter of Credit Accommodations established (which day shall be a Business Day) and the amount of the requested Loan. Requests received after 10:30 a.m. (Los Angeles time) on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. All Loans and Letter of Credit Accommodations under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrower when deposited to the credit of Borrower or otherwise disbursed or established in accordance with the instructions of Borrower or in accordance with the terms and conditions of this Agreement. 6.6 USE OF PROCEEDS. Borrower shall use the initial proceeds of the Loans provided by Lender to Borrower hereunder only for: (a) payments to each of the persons listed in the disbursement direction letter furnished by Borrower to Lender on or about the date hereof and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made or Letter of Credit Accommodations provided by Lender to Borrower pursuant to the provisions hereof shall be used by Borrower only for general operating, working capital and other proper corporate purposes of Borrower not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. -21- SECTION 7. COLLATERAL REPORTING AND COVENANTS. 7.1 COLLATERAL REPORTING. Borrower shall provide Lender with the following documents in a form satisfactory to Lender: (a) on a regular basis as required by Lender, a schedule of Accounts; (b) on a monthly basis or more frequently as Lender may request, (i) perpetual inventory reports, (ii) inventory reports by category, and reports as to inventory reserves, and (iii) agings of accounts payable, (c) upon Lender's request, (i) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (ii) copies of shipping and delivery documents, and (iii) copies of purchase orders, invoices and delivery documents for Inventory and Equipment acquired by Borrower; (d) agings of accounts receivable on a monthly basis or more frequently as Lender may request; and (e) such other reports as to the Collateral as Lender shall request from time to time. If any of Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Lender and to follow Lender's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing. 7.2 ACCOUNTS COVENANTS. (a) Borrower shall notify Lender promptly of: (i) any material delay in Borrower's performance of any of its obligations to any account debtor or the assertion of any claims, offsets, defenses or counterclaims by any account debtor, or any disputes with account debtors, or any settlement, adjustment or compromise thereof, (ii) all material adverse information relating to the financial condition of any account debtor and (iii) any event or circumstance which, to Borrower's knowledge would cause Lender to consider any then existing Accounts as no longer constituting Eligible Accounts. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor without Lender's consent, except in the ordinary course of Borrower's business in accordance with practices and policies previously disclosed in writing to Lender. So long as no Event of Default exists or has occurred and is continuing, Borrower shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors or grant any credits, discounts or allowances. (b) Borrower shall promptly report to Lender any return of Inventory by an account debtor having a sales price in excess of $10,000. At any time that Inventory is returned, reclaimed or repossessed, the related Account shall not be deemed an Eligible Account. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold the returned Inventory in trust for Lender, (ii) segregate all returned Inventory from all of its other property, (iii) dispose of the returned Inventory solely according to Lender's instructions, and (iv) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (c) With respect to each Account: (i) the amounts shown on any invoice delivered to Lender or schedule thereof delivered to Lender shall be true and complete, (ii) no -22- payments shall be made thereon except payments immediately delivered to Lender pursuant to the terms of this Agreement, (iii) no credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor except as reported to Lender in accordance with this Agreement and except for credits, discounts, allowances or extensions made or given in the ordinary course of Borrower's business in accordance with practices and policies previously disclosed to Lender, (iv) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, (v) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms. (d) Lender shall have the right at any time or times, in Lender's name or in the name of a nominee of Lender, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise. (e) Borrower shall deliver or cause to be delivered to Lender, with appropriate endorsement and assignment, with full recourse to Borrower, all chattel paper and instruments which Borrower now owns or may at any time acquire immediately upon Borrower's receipt thereof, except as Lender may otherwise agree. (f) Lender may, at any time or times that an Event of Default exists or has occurred and is continuing, (i) notify any or all account debtors that the Accounts have been assigned to Lender and that Lender has a security interest therein and Lender may direct any or all accounts debtors to make payment of Accounts directly to Lender, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Accounts or such other obligations, but without any duty to do so, and Lender shall not be liable for its failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Lender may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Lender's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Lender and are payable directly and only to Lender and Borrower shall deliver to Lender such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Lender may require. 7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower shall at all times maintain inventory records reasonably satisfactory to Lender, keeping correct and accurate records itemizing and describing the kind, type, quality and quantity of Inventory, Borrower's cost therefor and daily withdrawals therefrom and additions thereto; (b) Borrower shall conduct a physical count of the Inventory at least once each year, but at any time or times as Lender may request on or after an Event of Default, and promptly following such physical inventory shall supply Lender with a report in the form and with such specificity as may be reasonably -23- satisfactory to Lender concerning such physical count; (c) Borrower shall not remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Lender, except for sales of Inventory in the ordinary course of Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Lender's request, Borrower shall, at its expense, no more than once in any twelve (12) month period, but at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Inventory in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely; (e) Borrower shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with applicable laws (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (f) Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (g) Borrower shall not sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate Borrower to repurchase such Inventory; (h) Borrower shall keep the Inventory in good and marketable condition; and (i) Borrower shall not, without prior written notice to Lender, acquire or accept any Inventory on consignment or approval. 7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon Lender's request, Borrower shall, at its expense, at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to the Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender; (b) Borrower shall keep the Equipment in good order, repair, running and marketable condition (ordinary wear and tear excepted); (c) Borrower shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws; (d) the Equipment is and shall be used in Borrower's business and not for personal, family, household or farming use; (e) Borrower shall not remove any Equipment from the locations set forth or permitted herein, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrower or to move Equipment directly from one location set forth or permitted herein to another such location and except for the movement of motor vehicles used by or for the benefit of Borrower in the ordinary course of business; (f) the Equipment is now and shall remain personal property and Borrower shall not permit any of the Equipment to be or become a part of or affixed to real property; and (g) Borrower assumes all responsibility and liability arising from the use of the Equipment. 7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and appoints Lender (and all persons designated by Lender) as Borrower's true and lawful attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a) at any time an Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists or has occurred and is continuing (i) demand payment on Accounts or other proceeds of Inventory or other Collateral, (ii) enforce payment of Accounts by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Account or other Collateral, (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Lender -24- deems advisable, (v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Account, (vii) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor, (viii) notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Lender, and open and dispose of all mail addressed to Borrower, and (ix) do all acts and things which are necessary, in Lender's determination, to fulfill Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment or proceeds thereof, (ii) have access to any lockbox or postal box into which Borrower's mail is deposited, (iii) endorse Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Lender's account for application to the Obligations, (iv) endorse Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto or any other Collateral, (v) sign Borrower's name on any verification of Accounts and notices thereof to account debtors and (vi) execute in Borrower's name and file any UCC financing statements or amendments thereto. Borrower hereby releases Lender and its officers, employees and designees from any liabilities arising from any act or acts under this power of attorney and in furtherance thereof, whether of omission or commission, except as a result of Lender's own gross negligence or willful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction. 7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any default by Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against Borrower, (b) discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (c) pay any amount, incur any expense or perform any act which, in Lender's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Lender with respect thereto. Lender may add any amounts so expended to the Obligations and charge Borrower's account therefor, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of Borrower. Any payment made or other action taken by Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly. 7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at the cost and expense of Borrower, (a) Lender or its designee shall have complete access to all of Borrower's premises during normal business hours and after notice to Borrower, or at any time and without notice to Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrower's books and records, including, without limitation, the Records, and (b) Borrower shall promptly furnish to Lender such copies of such books and records or extracts therefrom as Lender may request, and (c) use during normal business hours such of Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Accounts and realization of other Collateral. SECTION 8. REPRESENTATIONS AND WARRANTIES. -25- Borrower hereby represents and warrants to Lender the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans and the providing of Letter of Credit Accommodations by Lender to Borrower: 8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on Borrower's financial condition, results of operation or business or the rights of Lender in or to any of the Collateral. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder are all within Borrower's corporate powers, have been duly authorized and are not in contravention of law or the terms of Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which Borrower is a party or by which Borrower or its property are bound. This Agreement and the other Financing Agreements constitute legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms. Borrower does not have any subsidiaries except as set forth on the Information Certificate. 8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrower which have been or may hereafter be delivered by Borrower to Lender have been prepared in accordance with GAAP and fairly present the financial condition and the results of operations of Borrower as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrower to Lender prior to the date of this Agreement, there has been no material adverse change in the assets, liabilities, properties and condition, financial or otherwise, of Borrower, since the date of the most recent audited financial statements furnished by Borrower to Lender prior to the date of this Agreement. 8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive office of Borrower and Borrower's Records concerning Accounts are located only at the address set forth below and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in the Information Certificate, subject to the right of Borrower to establish new locations in accordance with Section 9.2 below. The Information Certificate correctly identifies any of such locations which are not owned by Borrower and sets forth the owners and/or operators thereof and to the best of Borrower's knowledge, the holders of any mortgages on such locations. 8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral subject only to the liens permitted under Section 9.8 hereof. Borrower has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those granted to Lender and such others as are permitted under Section 9.8 hereof. -26- 8.5 TAX RETURNS. Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it (without requests for extension except as previously disclosed in writing to Lender). All information in such tax returns, reports and declarations is complete and accurate in all material respects. Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed. 8.6 LITIGATION. Except as set forth on the Information Certificate, there is no present investigation by any governmental agency pending, or to the best of Borrower's knowledge threatened, against or affecting Borrower, its assets or business and there is no action, suit, proceeding or claim by any Person pending, or to the best of Borrower's knowledge threatened, against Borrower or its assets or goodwill, or against or affecting any transactions contemplated by this Agreement, which if adversely determined against Borrower would result in any material adverse change in the assets, business or prospects of Borrower or would impair the ability of Borrower to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Lender to enforce any Obligations or realize upon any Collateral. 8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is not in default in any material respect under, or in violation in any material respect of any of the terms of, any agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound and Borrower is in compliance in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders of any foreign, Federal, State or local governmental authority. 8.8 ENVIRONMENTAL COMPLIANCE. (a) Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of Borrower complies in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. (b) There has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor is any pending or to the best of Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower has transported, stored or disposed of any Hazardous Materials. -27- (c) Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Borrower has all licenses, permits, certificates, approvals or similar authorizations required to be obtained or filed in connection with the operations of Borrower under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect. 8.9 EMPLOYEE BENEFITS. (a) Borrower has not engaged in any transaction in connection with which Borrower or any of its ERISA Affiliates could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, including any accumulated funding deficiency described in Section 8.9(c) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan of Borrower or any of its ERISA Affiliates which presents a risk of termination of any such plan by the Pension Benefit Guaranty Corporation. (c) Full payment has been made of all amounts which Borrower or any of its ERISA Affiliates is required under Section 302 of ERISA and Section 412 of the Code to have paid under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan ended prior to the date hereof, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any employee pension benefit plan, including any penalty or tax described in Section 8.9(a) hereof and any deficiency with respect to vested accrued benefits described in Section 8.9(d) hereof. (d) The current value of all vested accrued benefits under all employee pension benefit plans maintained by Borrower that are subject to Title IV of ERISA does not exceed the current value of the assets of such plans allocable to such vested accrued benefits, including any penalty or tax described in Section 8.9(a) hereof and any accumulated funding deficiency described in Section 8.9(c) hereof. The terms "current value" and "accrued benefit" have the meanings specified in ERISA. (e) Neither Borrower nor any of its ERISA Affiliates is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA) that is subject to Title IV of ERISA. 8.10 ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished by or on behalf of Borrower in writing to Lender in connection with this Agreement or any of the other -28- Financing Agreements or any transaction contemplated hereby or thereby, including, without limitation, all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a material adverse affect on the business, assets or prospects of Borrower, which has not been fully and accurately disclosed to Lender in writing. 8.11 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Lender on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Lender regardless of any investigation made or information possessed by Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which Borrower shall now or hereafter give, or cause to be given, to Lender. SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS. 9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve, renew and keep in full, force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all permits, licenses, trademarks, trade names, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted. Borrower shall give Lender thirty (30) days prior written notice of any proposed change in its corporate name, which notice shall set forth the new name and Borrower shall deliver to Lender a copy of the amendment to the Certificate of Incorporation of Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation of Borrower as soon as it is available. 9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new location within the continental United States provided Borrower (a) gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (c) executes and delivers, or causes to be executed and delivered, to Lender such agreements, documents, and instruments as Lender may deem reasonably necessary or desirable to protect its interests in the Collateral at such location, including, without limitation, UCC financing statements and, if Borrower leases such new location, provides a favorable landlord waiver or subordination, or, in the alternative, Lender may apply an Availability Reserve in an amount equal to three (3) months gross rent in a manner consistent with the Availability Reserve established to cover rent as defined in Section 1.5 hereof. 9.3 COMPLIANCE WITH LAWS, REGULATIONS. (a) Borrower shall, at all times, comply in all material respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to it and duly observe all requirements of any Federal, State or local governmental authority, including, without limitation, the Employee Retirement Security Act of 1974, as amended, the Occupational Safety and Hazard Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, -29- rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, all of the Environmental Laws. (b) Borrower shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all Environmental Laws in all of its operations, which system shall include annual reviews of such compliance by employees or agents of Borrower who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to Lender. Borrower shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Borrower shall give both oral and written notice to Lender immediately upon Borrower's receipt of any notice of, or Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental, health or safety matter, which affects Borrower or its business, operations or assets or any properties at which Borrower transported, stored or disposed of any Hazardous Materials. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of Borrower in order to avoid any material non-compliance, with any Environmental Law, Borrower shall, at Lender's request and Borrower's expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests of the site where Borrower's non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or Borrower's response thereto or the estimated costs thereof, shall change in any material respect. (e) Borrower shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of Borrower and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 9.3 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. -30- 9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books. Borrower shall be liable for any tax or penalties imposed on Lender as a result of the financing arrangements provided for herein and Borrower agrees to indemnify and hold Lender harmless with respect to the foregoing, and to repay to Lender on demand the amount thereof, and until paid by Borrower such amount shall be added and deemed part of the Loans, PROVIDED, THAT, nothing contained herein shall be construed to require Borrower to pay any income or franchise taxes attributable to the income of Lender from any amounts charged or paid hereunder to Lender. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. 9.5 INSURANCE. Borrower shall, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrower shall furnish certificates, policies or endorsements to Lender as Lender shall require as proof of such insurance, and, if Borrower fails to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrower. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage and that Lender may act as attorney for Borrower in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Borrower shall cause Lender to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrower shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Lender as its interests may appear and further specify that Lender shall be paid regardless of any act or omission by Borrower or any of its affiliates. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations, whether or not then due, in any order and in such manner as Lender may determine or hold such proceeds as cash collateral for the Obligations. 9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION. (a) Borrower shall keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of Borrower and its subsidiaries (if any) in accordance with GAAP and Borrower shall furnish or cause to be furnished to Lender: (i) within thirty (30) days after the end of each fiscal month (or 45 days after the end of a month which is also the end of Borrower's fiscal year), monthly unaudited consolidated financial statements, and, if Borrower has any subsidiaries, unaudited consolidating financial statements (including in each case balance sheets, statements of income and loss and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its subsidiaries as of the -31- end of and through such fiscal month and (ii) within 105 days after the end of each fiscal year, audited consolidated financial statements and, if Borrower has any subsidiaries, audited consolidating financial statements of Borrower and its subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrower and its subsidiaries as of the end of and for such fiscal year, together with the opinion of independent certified public accountants, which accountants shall be an independent accounting firm selected by Borrower and reasonably acceptable to Lender, that such financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrower and its subsidiaries as of the end of and for the fiscal year then ended. (b) Borrower shall promptly notify Lender in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to the Collateral or any other property which is security for the Obligations or which would result in any material adverse change in Borrower's business, properties, assets, goodwill or condition, financial or otherwise and (ii) the occurrence of any Event of Default or event which, with the passage of time or giving of notice or both, would constitute an Event of Default. (c) Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Lender copies of all financial reports which Borrower sends to its stockholders generally and copies of all reports and registration statements which Borrower files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc. (d) Borrower shall furnish or cause to be furnished to Lender such budgets, forecasts, projections and other information in respect of the Collateral and the business of Borrower, as Lender may, from time to time, reasonably request. Lender is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of Borrower to any court or other government agency or to any participant or assignee or prospective participant or assignee. Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Lender, at Borrower's expense, copies of the financial statements of Borrower and any reports or management letters prepared by such accountants or auditors on behalf of Borrower and to disclose to Lender such information as they may have regarding the business of Borrower. Any documents, schedules, invoices or other papers delivered to Lender may be destroyed or otherwise disposed of by Lender one (1) year after the same are delivered to Lender, except as otherwise designated by Borrower to Lender in writing. 9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower shall not, directly or indirectly, (a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of any stock or indebtedness to any other Person or any of its assets to any other Person (except for (i) sales of Inventory in the ordinary course of business and (ii) the disposition of worn-out or obsolete Equipment or Equipment no longer used in the business of Borrower so long as (A) if an Event of Default exists or has occurred and is continuing, any proceeds are paid to Lender and (B) such sales do not involve Equipment having an aggregate -32- fair market value in excess of $25,000 for all such Equipment disposed of in any fiscal year of Borrower), or (c) form or acquire any subsidiaries, or (d) wind up, liquidate or dissolve or (e) agree to do any of the foregoing. 9.8 ENCUMBRANCES. Borrower shall not create, incur, assume or suffer to exist any security interest, mortgage, pledge, lien, charge or other encumbrance of any nature whatsoever on any of its assets or properties, including, without limitation, the Collateral, EXCEPT: (a) liens and security interests of Lender; (b) liens securing the payment of taxes, either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrower and with respect to which adequate reserves have been set aside on its books; (c) non-consensual statutory liens (other than liens securing the payment of taxes) arising in the ordinary course of Borrower's business to the extent: (i) such liens secure indebtedness which is not overdue or (ii) such liens secure indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to Borrower, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books; (d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of real property which do not interfere in any material respect with the use of such real property or ordinary conduct of the business of Borrower as presently conducted thereon or materially impair the value of the real property which may be subject thereto; and (e) purchase money security interests in Equipment (including capital leases) and purchase money mortgages on real estate not to exceed $100,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of Borrower other than the Equipment or real estate so acquired, and the indebtedness secured thereby does not exceed the cost of the Equipment or real estate so acquired, as the case may be. 9.9 INDEBTEDNESS. Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any obligations or indebtedness, EXCEPT (a) the Obligations; (b) trade obligations and normal accruals in the ordinary course of business not yet due and payable, or with respect to which the Borrower is contesting in good faith the amount or validity thereof by appropriate proceedings diligently pursued and available to Borrower, and with respect to which adequate reserves have been set aside on its books; (c) purchase money indebtedness (including capital leases) to the extent not incurred or secured by liens (including capital leases) in violation of any other provision of this Agreement; and (d) obligations or indebtedness set forth on the Information Certificate; PROVIDED, THAT, (i) Borrower may only make regularly scheduled payments of principal and interest in respect of such indebtedness in accordance with the terms of the agreement or instrument evidencing or giving rise to such indebtedness as in effect on the date hereof, (ii) Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof, or (B) except as otherwise permitted under this Agreement, redeem, retire, defease, purchase or otherwise acquire such indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) Borrower shall furnish to Lender all notices or demands in connection with such indebtedness either received by Borrower or on its behalf, promptly after the receipt thereof, or sent by Borrower or on its behalf, concurrently with the sending thereof, as the case may be. -33- 9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not, directly or indirectly, make any loans or advance money or property to any person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or indebtedness or all or a substantial part of the assets or property of any person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) the indebtedness, performance, obligations or dividends of any Person or agree to do any of the foregoing, EXCEPT: (a) the endorsement of instruments for collection or deposit in the ordinary course of business; (b) investments in: (i) short-term direct obligations of the United States Government, (ii) negotiable certificates of deposit issued by any bank satisfactory to Lender, payable to the order of the Borrower or to bearer and delivered to Lender, and (iii) commercial paper rated A1 or P1; PROVIDED, THAT, as to any of the foregoing, unless waived in writing by Lender, Borrower shall take such actions as are deemed necessary by Lender to perfect the security interest of Lender in such investments, (c) the guarantees set forth in the Information Certificate, (d) loans in the ordinary course of business from one Borrower to another Borrower, and (e) guarantees by a Borrower of a foreign subsidiary of such Borrower in an aggregate amount outstanding at any one time for all Borrowers not to exceed $250,000. 9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, directly or indirectly, declare or pay any dividends on account of any shares of any class of capital stock of Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for such purpose) for any consideration other than common stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing. 9.12 TRANSACTIONS WITH AFFILIATES. Borrower shall not enter into any transaction for the purchase, sale or exchange of property or the rendering of any service to or by any affiliate, except in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than Borrower would obtain in a comparable arm's length transaction with an unaffiliated person; provided that Borrower may sell Inventory in the ordinary course of business to its foreign subsidiaries at not less than 80% of Borrower's regular seller price for such Inventory, provided that the total of such sales to foreign subsidiaries shall be not more than $2,500,000 in the aggregate for all Borrowers in any fiscal year and such sales shall be at a positive gross profit margin. 9.13 [Intentionally Omitted.] 9.14 ADJUSTED NET WORTH. Borrower shall, at all times, maintain Adjusted Net Worth of not less than $_____________. 9.15 COMPLIANCE WITH ERISA. Borrower shall not with respect to any "employee pension benefit plan" maintained by Borrower or any of its ERISA Affiliates: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax or penalty or other liability on prohibited transactions imposed under Section -34- 4975 of the Code or ERISA, (iii) fail to pay to any such employee pension benefit plan any contribution which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation or (vi) incur any withdrawal liability with respect to any multiemployer pension plan. (b) As used in this Section 9.15, the term "employee pension benefit plans," "employee benefit plans", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the Code and ERISA. 9.16 COSTS AND EXPENSES. Borrower shall pay to Lender on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Lender's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including, but not limited to: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) costs and expenses and fees for title insurance and other insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; (c) costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Lender's customary charges and fees with respect thereto; (d) charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations; (e) costs and expenses of preserving and protecting the Collateral; (f) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the security interests and liens of Lender, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Lender arising out of the transactions contemplated hereby and thereby (including, without limitation, preparations for and consultations concerning any such matters); (g) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and Borrower's operations, plus a per diem charge at the rate of $650 per person per day for Lender's examiners in the field and office; and (h) the fees and disbursements of counsel (including legal assistants) to Lender in connection with any of the foregoing. 9.17 FURTHER ASSURANCES. At the request of Lender at any time and from time to time, Borrower shall, at its expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security -35- interests and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Lender may at any time and from time to time request a certificate from an officer of Borrower representing that all conditions precedent to the making of Loans and providing Letter of Credit Accommodations contained herein are satisfied. In the event of such request by Lender, Lender may, at its option, cease to make any further Loans or provide any further Letter of Credit Accommodations until Lender has received such certificate and, in addition, Lender has determined that such conditions are satisfied. Where permitted by law, Borrower hereby authorizes Lender to execute and file one or more UCC financing statements signed only by Lender. SECTION 10. EVENTS OF DEFAULT AND REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more of the following events are referred to herein individually as an "EVENT OF DEFAULT", and collectively as "EVENTS OF DEFAULT": (a) Borrower fails to pay when due any of the Obligations or fails to perform any of the terms, covenants, conditions or provisions contained in this Agreement or any of the other Financing Agreements; (b) Any representation, warranty or statement of fact made by Borrower to Lender in this Agreement, the other Financing Agreements or any other agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect; (c) Any Obligor revokes, terminates or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Lender; (d) Any judgment for the payment of money is rendered against Borrower or any Obligor in excess of $25,000 in any one case or in excess of $50,000 in the aggregate and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against Borrower or any Obligor or any of their assets; (e) Any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or Borrower or any Obligor, which is a partnership, limited liability company or corporation, dissolves or suspends or discontinues doing business; (f) Borrower or any Obligor becomes insolvent (however defined or evidenced), makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors; (g) A case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter -36- in effect (whether at law or in equity) is filed against Borrower or any Obligor or all or any part of its properties and such petition or application is not dismissed within thirty (30) days after the date of its filing or Borrower or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner; (h) A case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by Borrower or any Obligor or for all or any part of its property; or (i) Any default by Borrower or any Obligor under any agreement, document or instrument relating to any indebtedness for borrowed money owing to any person other than Lender, or any capitalized lease obligations, contingent indebtedness in connection with any guarantee, letter of credit, indemnity or similar type of instrument in favor of any person other than Lender, in any case in an amount in excess of $25,000, which default continues for more than the applicable cure period, if any, with respect thereto, or any default by Borrower or any Obligor under any material contract, lease, license or other obligation to any person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto; (j) any change in the controlling ownership of Borrower; (k) the indictment or threatened indictment of Borrower or any Obligor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against Borrower or any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of Borrower or such Obligor; (l) there shall be a material adverse change in the business, assets or prospects of Borrower or any Obligor after the date hereof; or (m) there shall be an event of default under any of the other Financing Agreements. 10.2 REMEDIES. (a) at any time an Event of Default exists or has occurred and is continuing, Lender shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the Uniform Commercial Code and other applicable law, all of which rights and remedies may be exercised without notice to or consent by Borrower or any Obligor, except as such notice or consent is expressly provided for hereunder or required by applicable law. All rights, remedies and powers granted to Lender hereunder, under any of the other Financing Agreements, the Uniform Commercial Code or other applicable law, are cumulative, not exclusive and enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of -37- equity for an injunction to restrain a breach or threatened breach by Borrower of this Agreement or any of the other Financing Agreements. Lender may, at any time or times, proceed directly against Borrower or any Obligor to collect the Obligations without prior recourse to the Collateral. (b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Lender may, in its discretion and without limitation, (i) accelerate the payment of all Obligations and demand immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require Borrower, at Borrower's expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of Borrower, which right or equity of redemption is hereby expressly waived and released by Borrower and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, five (5) days prior notice by Lender to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, Borrower waives the posting of any bond which might otherwise be required. (c) Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in such order as Lender may elect, whether or not then due. Borrower shall remain liable to Lender for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys' fees and legal expenses. (d) Without limiting the foregoing, upon the occurrence of an Event of Default or an event which with notice or passage of time or both would constitute an Event of Default, Lender may, at its option, without notice, (i) cease making Loans or arranging for Letter of Credit Accommodations or reduce the lending formulas or amounts of Revolving Loans and Letter of Credit Accommodations available to Borrower and/or (ii) terminate any provision of -38- this Agreement providing for any future Loans or Letter of Credit Accommodations to be made by Lender to Borrower. SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERSAND CONSENTS; GOVERNING LAW. 11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL WAIVER. (a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of California (without giving effect to principles of conflicts of law). (b) Borrower and Lender irrevocably consent and submit to the non-exclusive jurisdiction of the state courts of the County of Los Angeles, State of California and of the United States District Court for the Central District of California and waive any objection based on venue or FORUM NON CONVENIENS with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Lender shall have the right to bring any action or proceeding against Borrower or its property in the courts of any other jurisdiction which Lender deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against Borrower or its property). (c) Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth on the signature pages hereof and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Lender's option, by service upon Borrower in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrower shall appear in answer to such process, failing which Borrower shall be deemed in default and judgment may be entered by Lender against Borrower for the amount of the claim and other relief requested. (d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS -39- AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. (e) Lender shall not have any liability to Borrower (whether in tort, contract, equity or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Lender, that the losses were the result of acts or omissions constituting gross negligence or willful misconduct. In any such litigation, Lender shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. 11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and commercial paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on Borrower which Lender may elect to give shall entitle Borrower to any other or further notice or demand in the same, similar or other circumstances. 11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision hereof shall be amended, modified, waived or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights, powers and/or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. 11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other than compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto. 11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its directors, agents, employees and counsel, harmless from and against any and all losses, claims, damages, liabilities, costs or expenses imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including, without limitation, amounts paid in settlement, court costs, and the fees and expenses of counsel. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrower shall pay the maximum portion which it is permitted to pay under applicable law to Lender in satisfaction of indemnified matters under this Section. -40- The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS. 12.1 TERM. (a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date two (2) years from the date hereof (the "Renewal Date"), and from year to year thereafter, unless sooner terminated pursuant to the terms hereof. Lender or Borrower may terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving to the other party at least sixty (60) days prior written notice. Borrower may terminate this Agreement prior to the end of the then current term, including any renewal term, for any reason upon sixty (60) days prior written notice to Lender, and in such case Borrower agrees to pay to Lender the applicable early termination fee provided for in Section 12.1(c) hereof. Regardless of the timing of termination, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the effective date of termination or non-renewal of the Financing Agreements, Borrower shall pay to Lender, in full, all outstanding and unpaid Obligations and shall furnish cash collateral to Lender in such amounts as Lender determines are reasonably necessary to secure Lender from loss, cost, damage or expense, including attorneys' fees and legal expenses, in connection with any contingent Obligations, including issued and outstanding Letter of Credit Accommodations and checks or other payments provisionally credited to the Obligations and/or as to which Lender has not yet received final and indefeasible payment. Such cash collateral shall be remitted by wire transfer in Federal funds to such bank account of Lender, as Lender may, in its discretion, designate in writing to Borrower for such purpose. Interest shall be due until and including the next Business Day, if the amounts so paid by Borrower to the bank account designated by Lender are received in such bank account later than 10:30 a.m., Los Angeles time. (b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge Borrower of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Lender's continuing security interest in the Collateral and the rights and remedies of Lender hereunder, under the other Financing Agreements and applicable law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. (c) If for any reason this Agreement is terminated prior to the end of the then current term or renewal term of this Agreement, Borrower agrees to pay to Lender, upon the effective date of such termination, an early termination fee in the amount set forth below if such termination is effective in the period indicated: AMOUNT PERIOD -41- (i) 3% of the Maximum Credit from the date of this Agreement to and including the day preceding the first anniversary of this Agreement (ii) 2% of the Maximum Credit from the first anniversary of this Agreement to and including the Renewal Date, and if the Renewal Date is extended as provided in Section 12.1(a), at any time during a renewal term, if any. The early termination fee provided for in this Section 12.1 shall be deemed included in the Obligations. 12.2 NOTICES. All notices, requests and demands hereunder shall be in writing and (a) made to Lender at its address set forth below and to Borrower at its chief executive office set forth below, or to such other address as either party may designate by written notice to the other in accordance with this provision, and (b) deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. 12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by applicable law. 12.4 SUCCESSORS. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Lender, Borrower and their respective successors and assigns, except that Borrower may not assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may, after notice to Borrower, assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Loans, the Letter of Credit Accommodations or any other interest herein to another financial institution or other person, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. 12.5 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, -42- commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. IN WITNESS WHEREOF, Lender and Borrower have caused these presents to be duly executed as of the day and year first above written. Lender: Borrower: CONGRESS FINANCIAL CORPORATION MICROTEL INTERNATIONAL, INC. (WESTERN) By: By: ------------------------------ ------------------------------ Title: Title: --------------------------- --------------------------- Address: Chief Executive Office: --------------------------------- 225 South Lake Avenue --------------------------------- Suite 1000 Pasadena, California 91101 Borrower: Borrower: XIT CORPORATION CXR TELCOM CORPORATION By: By: ------------------------------ ------------------------------ Title: Title: --------------------------- --------------------------- Chief Executive Office: Chief Executive Office: - --------------------------------- --------------------------------- - --------------------------------- --------------------------------- Borrower: HYCOMP, INC. By: ------------------------------ Title: --------------------------- Chief Executive Office: - --------------------------------- - --------------------------------- -43- EX-10.48 3 EXHIBIT 10.48 SECURITY AGREEMENT (PARTNERSHIP INTEREST) THIS SECURITY AGREEMENT is entered into on June 23, 1998 between Congress Financial Corporation (Western) ("Secured Party") and XIT Corporation ("Pledgor") in connection with that certain Loan and Security Agreement of even date between Secured Party as lender and Pledgor, Microtel International, Inc., CXR Telcom Corporation and Hycomp, Inc., as borrowers (the "Loan Agreement"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. SECURITY INTEREST. 1.1 GRANT OF SECURITY INTEREST. Pledgor hereby pledges to Secured Party and grants Secured Party a security interest in all of the following, whether now owned or hereafter acquired (collectively, the "Collateral"): (a) All of Pledgor's present and future interest in Capital Source Partners, a Real Estate Partnership, a California general partnership (the "Partnership"), including without limitation Pledgor's existing partnership interest in the Partnership and all of Pledgor's present and future interest in the capital, profits, income and distributions of the Partnership (collectively, the "Partnership Interest"); and (b) All rights to, and in connection with, the Security Loan (as defined in Section 5.1(c) of the Partnership Agreement) (the "Security Loan"); and (c) All payments on and with respect to, and all proceeds of, the Partnership Interest and the Security Loan, including without limitation all money, accounts, deposit accounts, chattel paper, documents, notes, drafts, instruments, contract rights, general intangibles, equipment, inventory, goods, insurance proceeds and all other tangible and intangible property resulting from the sale, collection upon, distribution or payment on account of, or other disposition of, the Partnership Interest or the Security Loan (collectively, "Partnership Proceeds"); and (d) All present and future books, records, data and other documentation, relating to the Partnership or the Partnership Interest, including without limitation all reports and financial statements; TO SECURE the payment and performance of all debts, duties, obligations, liabilities, representations, warranties and guaranties of Pledgor to Secured Party, heretofore, now, or hereafter made, incurred or created, of every kind and nature (collectively, the "Obligations"), including, but not limited to, those arising under the Loan Agreement or any other documents relating thereto. (The foregoing documents and agreements, the Loan Agreement, this Agreement, and all other present and future instruments and agreements between Pledgor and Secured Party are referred to in this Agreement as the "Loan Documents.") 1.2 DISTRIBUTIONS. From and after the date of this Agreement, Pledgor shall remit to Secured Party all Partnership Proceeds received by Pledgor, to be applied to the Revolving Loans (as defined in the Loan Agreement), whether or not any Event of Default has 1 occurred. (As used in this Agreement, "Obligor" shall mean the Partnership and all other persons who now are or hereafter become in any way obligated, liable or responsible for any payment or other distribution of any kind on account of the Partnership Interest, or for any other payment of Partnership Proceeds.) All Partnership Proceeds actually received by Secured Party in cash shall be applied to the Revolving Loans. Pledgor shall not commingle such Partnership Proceeds with any of Pledgor's other funds or property; and shall hold such Partnership Proceeds separate and apart from Pledgor's other funds and property in an express trust for Secured Party until paid or delivered to Secured Party. 1.3 NOTICE TO OBLIGORS OF SECURITY INTEREST. Concurrently with Pledgor's execution of this Agreement, Pledgor shall (a) send a notice to the Partnership stating that Pledgor has granted a security interest in the Collateral to Secured Party; (b) cause the Partnership to provide Secured Party with a written agreement, satisfactory to Secured Party in form and substance, in which the Partnership agrees to (i) pay or deliver all Partnership Proceeds directly to Secured Party from and after the date written notice of an Event of Default is given to the Partnership by Secured Party; and (ii) allow Secured Party to make any capital or other contributions or payments (collectively "Subsequent Contributions") on behalf of Pledgor should Secured Party desire to do so, in its sole discretion. From time to time upon Secured Party's request, Pledgor shall give written notice to any or all Obligors containing such additional information and instructions concerning Secured Party's rights under this Agreement as may be specified by Secured Party. The notices referred to in this Section shall be in such form as Secured Party shall specify. From time to time and without notice to Pledgor, Secured Party shall have the right to give notice to any Obligor containing such information and instructions concerning Secured Party's rights under this Agreement as Secured Party determines to be necessary or appropriate. 1.4 RIGHT TO CURE DEFAULTS. If Pledgor fails to perform any of its obligations under the Partnership Agreement, Secured Party, at its option and in its sole and absolute discretion, shall have the right, but not the obligation, to pay or perform any or all of such obligations in such manner and to such extent as Secured Party determines to be necessary or appropriate to preserve or protect Secured Party's security interest in the Collateral. Pledgor shall provide Secured Party with copies of all notices to Pledgor from the Partnership or from the general partners of the Partnership within two business days after Pledgor's receipt of each such notice, including copies of all notices requesting payment of any Subsequent Contribution. All costs and expenses, including attorneys' fees and the amount of any Subsequent Contribution made by Secured Party on Pledgor's behalf, incurred by Secured Party in connection with the payment or performance of such obligations or any Subsequent Contribution shall be payable by Pledgor to Secured Party on Secured Party's demand, shall bear interest at the highest rate applicable to the Obligations from the date of expenditure, and shall be secured by the Collateral. Nothing contained in this Agreement shall be construed to obligate Secured Party to make all or part of any Subsequent Contribution or to pay or perform any of Pledgor's obligations under the Partnership Agreement, and no election by Secured Party to do so in any instance shall obligate Secured Party to do so in any other instance, nor shall it constitute a waiver of the Pledgor's default or of Secured Party's other rights and remedies. 1.5 NO LIABILITY BY SECURED PARTY. Nothing contained in this Agreement shall render Secured Party directly or indirectly liable or responsible to Pledgor, the Partnership, or any other person for (a) the control, operation, or management of the Partnership, (b) the performance or observance of any or all of Pledgor's duties, obligations, representations, or warranties as a 2 partner under the Partnership Agreement or any other agreement or document relating to any or all of the Collateral, or (c) any failure or delay by Secured Party in enforcing or collecting any payment or distribution of any Partnership Proceeds. Secured Party shall have no duty to make any inquiry as to the sufficiency of any Partnership Proceeds received by Secured Party or to collect the same. 2. PLEDGOR'S COVENANTS. 2.1 PLEDGOR'S PARTNERSHIP OBLIGATIONS. Pledgor shall at all times perform and discharge all obligations of Pledgor under the Partnership Agreement in accordance with the terms thereof. Pledgor shall not enter into any amendment or supplement to the Partnership Agreement, nor waive or modify any rights thereunder, nor exercise any voting or other rights or options thereunder, without Secured Party's prior written consent, which shall not be unreasonably withheld. After the occurrence of any Event of Default, Secured Party shall have the right (but not the obligation) to enter into any amendment or supplement to the Partnership Agreement on behalf of Pledgor, waive or modify any rights of Pledgor thereunder, and exercise any voting or other rights or options of Pledgor thereunder. 2.2 INSPECTION. Secured Party and its representatives shall have access to all of Pledgor's books and records included in or relating to the Collateral, at all reasonable times, for the purposes of examination, inspection, verification, copying and for any other reasonable purpose. 2.3 REPORTS. Pledgor shall deliver to Secured Party copies of all financial statements, reports and other information concerning the Partnership and the business and affairs of the Partnership received by Pledgor from time to time within ten (10) days after Pledgor's receipt of each such item. From time to time upon Secured Party's request, Pledgor shall deliver to Secured Party such reports and information concerning the Partnership Interest and the business and affairs of Pledgor as Secured Party may reasonably request. Such reports shall be in such form, for such periods, contain such information, and shall be rendered with such frequency as Secured Party may designate. All reports and information provided to Secured Party by Pledgor shall be complete and accurate in all respects at the time provided. 2.4 NOTICE OF ADVERSE CLAIMS. Pledgor shall immediately notify Secured Party in writing of (a) any claim, demand, right, lien, security interest or encumbrance arising with respect to any or all of the Collateral; (b) any material adverse change in the value of the Collateral and any other occurrence which may materially and adversely affect Secured Party's security interest in the Collateral; and (c) any event or condition which constitutes an Event of Default under this Agreement. 2.5 FURTHER ASSURANCES. Pledgor shall take all actions which may be reasonably necessary or appropriate to maintain, preserve, protect, and defend the Collateral and Secured Party's security interest therein, including all such actions as may be requested by Secured Party. Upon Secured Party's request, Pledgor shall execute and deliver to Secured Party such further documents and agreements, in form and substance satisfactory to Secured Party, as Secured Party may require to effectuate this Agreement or to evidence, perfect, maintain, preserve or protect Secured Party's first-priority security interest in the Collateral. 2.6 LITIGATION COOPERATION. If any suit, action or proceeding is instituted by or against Secured Party with respect to any or all of the Collateral by any third person, Pledgor, 3 at such times and in such manner as may be designated by Secured Party, shall fully cooperate with Secured Party and make itself and its employees and agents available to Secured Party in order to prosecute or defend any such suit, action or proceeding. 2.7 NEGATIVE COVENANTS. Without Secured Party's prior written consent, Pledgor shall not take any of the following actions: (a) sell, lease, transfer, assign, pledge, mortgage, encumber, hypothecate or otherwise dispose of or abandon any or all of the Collateral; or (b) cause or permit any or all of the Collateral to be subject to any lien, security interest, mortgage, pledge, or encumbrance, except for the security interest granted to Secured Party under this Agreement. 3. REPRESENTATIONS AND WARRANTIES. Pledgor represents and warrants to Secured Party that: (a) The sole Partnership Agreement of the Partnership is the Partnership Agreement dated 1996 (but undated as to month and day) (the "Partnership Agreement"), Pledgor has delivered true and correct copies of the Partnership Agreement to Secured Party, the Partnership Agreement sets forth the entirety of the agreement among the partners and any of them relating to the Partnership and is presently in full force and effect; (b) Pledgor has an undivided interest in the capital, profits, income and distributions of the Partnership, as set forth in the Partnership Agreement; (c) Pledgor is not in default in the performance or payment of any of his obligations under the Partnership Agreement; (d) all financial statements and other information provided by Pledgor to Secured Party concerning the Partnership have been true and correct; (e) to the best of Pledgor's knowledge there is no litigation pending or threatened against the Partnership or relating to the Partnership; (e) No consent of any other person and no consent, approval, authorization or other action by, or filing with, any governmental authority, bureau or agency is required in connection with the execution, delivery and performance of Pledgor's obligations under this Agreement; (f) Pledgor is the sole owner of, and has good and marketable title to, the Partnership Interest and all other Collateral, and the Partnership Interest and other Collateral is held free and clear and shall at all times remain free and clear of all claims, demands, rights, liens, security interests and encumbrances, other than the security interest granted to Secured Party under this Agreement; (g) Pledgor's execution of this Agreement and the performance of his obligations hereunder will not result in a breach or violation of any law, governmental rule or regulation, judgment, writ, injunction, decree or order of any court or governmental authority relating to Pledgor or the Collateral, or the Partnership Agreement, or any agreement to which Pledgor is a party or by which Pledgor is bound; and (h) There is no fact which Pledgor has failed to disclose to Secured Party in writing which may materially and adversely affect the properties, business, prospects, profits, or condition of Pledgor or any of the Collateral, or may be necessary to disclose in order to keep the representations and warranties made to Secured Party from being misleading. 4. EVENTS OF DEFAULT; REMEDIES. 4.1 EVENTS OF DEFAULT. If any one or more of the following events shall occur, any such event shall constitute an Event of Default and Pledgor shall provide Secured Party with immediate notice thereof: Any Event of Default under, or as defined in, the Loan Agreement or any other Loan Document shall occur. 4.2. REMEDIES. If an Event of Default shall occur, Pledgor shall give immediate written notice thereof to Secured Party. Upon the occurrence of an Event of Default, and at any time thereafter, Secured Party shall have the right, without notice to or demand upon Pledgor, to exercise any one or more of the following remedies: collect all Partnership Proceeds 4 and apply them to the Obligations in such order as Secured Party shall determine in its sole discretion; sell or otherwise dispose of the Collateral, at a public or private sale, for cash, or other property, or on credit, with the authority to adjourn or postpone any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Secured Party may directly or through any affiliate purchase the Collateral, at any such public disposition, and if permissible under applicable law, at any private disposition. Pledgor and Secured Party hereby agree that it shall conclusively be deemed commercially reasonable for Secured Party, in connection with any sale or disposition of the Collateral, to impose restrictions and conditions as to the investment intent of a purchaser or bidder, the ability of a purchaser or bidder to bear the economic risk of an investment in the Collateral, the knowledge and experience in business and financial matters of a purchaser or bidder, the access of a purchaser or bidder to information concerning the Partnership, as well as legend conditions and stop transfer instructions restricting subsequent transfer of the Collateral, and any other restrictions or conditions which Secured Party believes to be necessary or advisable in order to comply with any state or federal securities or other laws. Pledgor acknowledges that the foregoing restrictions may result in fewer proceeds being received upon such sale then would otherwise be the case. Pledgor hereby agrees to provide to Secured Party any and all information required by Secured Party in connection with any sales of Collateral by Secured Party hereunder. Any and all attorneys' fees, expenses, costs, liabilities and obligations incurred by Secured Party in connection with the foregoing shall be added to and become a part of the Obligations and shall be due from Pledgor to Secured Party upon demand. 4.3. LIABILITY FOR DEFICIENCY. Pledgor shall at all times remain liable for any deficiency remaining on the Obligations after any disposition of any or all of the Collateral and after Secured Party's application of any proceeds to the Obligations. 5. REMEDIES, CUMULATIVE; NO WAIVER. The failure of Secured Party to enforce any of the provisions of this Agreement at any time or for any period of time shall not be construed to be a waiver of any such provision or the right thereafter to enforce the same. All remedies hereunder shall be cumulative and shall be in addition to all rights, powers and remedies given to Secured Party by law. 6. TERM. This Agreement and Secured Party's rights hereunder shall continue in full force and effect until all of the Obligations have been fully paid, performed and discharged and the Loan Agreement and all other Loan Documents have been terminated. 7. POWER OF ATTORNEY. Pledgor irrevocably appoints Secured Party as the attorney in fact of Pledgor, with full power of substitution, coupled with an interest, with full power, in Secured Party's own name or in the name of Pledgor, to execute and deliver all documents and instruments and take all actions as Secured Party shall, in its discretion, deem necessary or advisable in order to carry out the provisions or intent of this Agreement. 8. RELATIONSHIP OF PARTIES. Nothing contained in this Agreement constitutes or shall be construed as (a) the formation of a partnership or joint venture between Secured Party and Pledgor or any other person; or (b) the creation of any confidential or fiduciary relationship of any kind between Secured Party and Pledgor or any other Person. Secured Party shall not be deemed to be a partner, joint venturer, trustee, or fiduciary with respect to Pledgor or any other person as a result of this Agreement or the transactions contemplated hereby. Pledgor acknowledges and agrees that Secured Party has at all times acted only as a lender. Pledgor shall 5 at all times have the right to determine and follow its own policies and practices in the conduct of its business, subject to the terms and conditions of this Agreement. 9. INDEMNIFICATION. Pledgor shall indemnify and hold Secured Party and its agents, employees, officers, directors, attorneys, representatives, affiliates, successors and assigns harmless from and against any and all claims, demands, damages, liabilities, actions, causes of action, suits, costs and expenses, including without limitation reasonable attorney's fees and costs, arising out of or relating to Pledgor's breach of any of his obligations or warranties under this Agreement or any other Loan Document, or any other act or omission by Pledgor, or Secured Party's exercise of any or all of Secured Party's rights or remedies under this Agreement or any other Loan Document. 10. ATTORNEYS' FEES. Upon Secured Party's demand, Pledgor shall reimburse Secured Party for all reasonable costs and expenses, including reasonable attorney's fees and costs, which are incurred by Secured Party, whether before or after any Event of Default, in connection with any or all of the following: (a) the exercise of any or all of Secured Party's rights and remedies under this Agreement or any other Loan Document, whether or not any legal proceedings are instituted by Secured Party; (b) the protection, preservation, management, operation, or maintenance of any or all of the Collateral; (c) the sale or disposition of any or all of the Collateral; (d) any suit, action, or proceeding relating to Pledgor or the Collateral, or any of the Loan Documents, including without limitation any action for relief from the automatic stay arising under Bankruptcy Code Section362(a). Pledgor's obligation to reimburse Secured Party under this Section shall include payment of interest on all amounts expended by Secured Party from the date of expenditure at the highest rate of interest applicable to any of the Obligations. 11. GENERAL PROVISIONS. This Agreement and the Loan Documents are the entire and only agreements between Pledgor and Secured Party with respect to the subject matter hereof, and all representations, warranties, agreements, or undertakings heretofore or contemporaneously made, with respect to the subject matter hereof, which are not set forth herein or therein, are superseded hereby. All rights and remedies under this Agreement, the Loan Agreement and the other Loan Documents are cumulative, and nothing in this Agreement limits any of the terms or provisions of the Loan Agreement or the other Loan Documents. The terms and provisions hereof may not be waived, altered, modified, or amended except in a writing executed by Pledgor and Secured Party. All rights, benefits and privileges hereunder shall inure to the benefit of and be enforceable by Secured Party and its successors and assigns and shall be binding upon Pledgor and its successors and assigns; provided that Pledgor may not transfer any of its rights hereunder without the prior written consent of Secured Party. Paragraph headings are used herein for convenience only. Pledgor acknowledges that the same may not describe completely the subject matter of the applicable paragraph, and the same shall not be used in any manner to construe, limit, define or interpret any term or provision hereof. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed, and interpreted in accordance with the internal laws (and not conflict of laws rules) of the State of California. Pledgor hereby agrees that all actions or proceedings relating directly or indirectly hereto may, at the option of Secured Party, be litigated in courts located within said State, and Pledgor hereby expressly consents to the jurisdiction of any such court and consents to the service of process in any such action or proceeding by personal delivery or by certified or registered mailing directed to Pledgor at its last address known to Secured Party. 12. MUTUAL WAIVER OF RIGHT TO JURY TRIAL AND OTHER WAIVERS. SECURED PARTY AND PLEDGOR EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY 6 ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SECURED PARTY AND PLEDGOR; OR (III) ANY CONDUCT, ACTS OR OMISSIONS OF SECURED PARTY OR PLEDGOR OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SECURED PARTY OR PLEDGOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. Pledgor hereby waives: presentment for payment, demand, protest, and notice thereof as to any instrument, and all other notices and demands to which Pledgor might be entitled. Pledgor further waives the benefit of all statutes of limitations. IN WITNESS WHEREOF, the undersigned have executed this Pledge Agreement on the date first above written. Pledgor: Secured Party: XIT Corporation Congress Financial Corporation (Western) By By ------------------------- ------------------------- Title Title ---------------------- ---------------------- 7 EX-10.49 4 EXHIBIT 10.49 THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE "OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE. THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING. SUBSCRIPTION AGREEMENT MICROTEL INTERNATIONAL, INC. CONVERTIBLE PREFERRED STOCK - SERIES A - ------------------------------------------------------------------------------- THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed by the undersigned (collectively the "Buyer") in connection with the sale of certain Securities designated as Series A Convertible Preferred Stock (hereinafter the "Preferred Shares"), which are convertible into shares of common stock (hereinafter the "Conversion Shares") of MicroTel International, Inc. (the "Company"). 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE 1.1 Each Buyer hereby subscribes for the number of Preferred Shares set forth below on the signature page of this Agreement which Preferred Shares shall be convertible into Conversion Shares of the Company in accordance with the terms set forth in the Certificate of Designations, Rights and Preferences of Preferred Stock attached as Exhibit A to this Agreement (the "Conversion Shares"), at a purchase price of $10,000 per Preferred Share payable in United States Dollars. 1.2 Buyer shall pay the purchase price by delivering same day funds in United States Dollars to the Company upon delivery of the Preferred Shares by the Company to Buyer. 2. REPRESENTATIONS AND WARRANTIES. 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants that as of the date of this Agreement: (a) EXISTENCE. The Company is a corporation duly organized and in good standing under the laws of the State of Delaware and is duly qualified to do business and is in good standing in all states where such qualification is necessary, except for those jurisdictions in which the failure to qualify would not, in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or business. (b) AUTHORITY. The execution and delivery by the Company of this Agreement and the Preferred Stock (i) are within the Company's corporate powers; (ii) are duly authorized by the Company's board of directors; (iii) are not in contravention of the terms of the Company's certificate of incorporation or bylaws; (iv) are not in contravention of any law or laws; (v) except for the filing of a Form D Notice with the Securities and Exchange Commission and any exemption filing related thereto which may be required pursuant to applicable state securities or "blue sky" laws, do not require any governmental consent, registration or approval; (vi) do not contravene any contractual or governmental restriction binding upon the Company; and (vii) will not result in the imposition of any lien, charge, security interest or encumbrance upon any property of the Company under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which the Company is a party or by which the Company or any of the Company's property may be bound or affected. (c) BINDING EFFECT. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) CAPITALIZATION. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, par value $.0033 per share, 11,927,793 shares of which are issued and outstanding and 10,000,000 shares of Preferred Stock, par value $.01 per share, of which none are outstanding. The shares of common stock issuable upon conversion of the Preferred Stock (the "Conversion Shares") have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non-assessable. (e) SEC DOCUMENTS. The Company has furnished each Buyer with a true and complete copy of the Company's Report on Form 10-K for the fiscal year ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998 (the "Disclosure Documents"). Except as disclosed in the Disclosure Documents, since December 31, 1997 the Company has not incurred any material liability except in the 2 ordinary course of its business consistent with past practice and there has not been any change in the business, financial condition or results of operations of the Company which has had a material adverse effect on the Company. Since January 1, 1997, the Company has filed with the Securities and Exchange Commission (the "SEC") all documents required to be filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. As of their respective dates, the Disclosure Documents complied in all material respects with the requirements of the Exchange Act, and the rules and regulations of the SEC thereunder applicable to such Disclosure Documents, and the Disclosure Documents did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Disclosure Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements are accurate, complete and have been prepared in accordance with the books and records of the Company and in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments that are not material) the consolidated financial position of the Company as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. (f) LITIGATION. Except as set forth in the Disclosure Documents, there is neither pending nor, to the Company's knowledge and belief, threatened any action, suit, proceeding or claim, or any basis therefor, to which the Company is or may be named as a party or its property is or may be subject or which calls into question any of the transactions contemplated by this Agreement. (g) SECURITIES MATTERS. Subject to the accuracy of the representations of the Buyers set forth in Section 2.2 hereof, the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933 as amended (the "Securities Act"). The Company has complied and will comply with all applicable state "blue sky" or securities laws in connection with the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement. (h) CERTIFICATES. The Company will issue one or more Certificates representing the Preferred Shares in the name of Buyer with the following restrictive legend set forth below (the "Restrictive Legend") in such denominations to be specified by the Buyer: "The Securities represented by this Certificate have not been registered under the United States Securities Act of 1933 (the "Act") and may not be sold, transferred, pledged or otherwise 3 hypothecated unless (a) they are covered by a registration statement or a post-effective amendment thereto under the Act, or (b) in the opinion of counsel for Buyer, which opinion shall be reasonably acceptable to the Company, such sale, transfer, pledge or hypothecation is otherwise exempt from the provisions of Section 5 of the Act." (i) CONVERSION. Within two full business days of receipt by the Company of a properly executed request for conversion in the form annexed as Exhibit B hereto accompanied by the Preferred Shares to be converted, the Company will deliver to its transfer agent its directive and authorization to execute the conversion and to issue to Buyer the common stock shares so authorized. The Company acknowledges that a delay in issuance of its authorization and directive for the conversion could result in economic loss to the Buyer. Therefore, as compensation to the Buyer for such loss, in the event that the Company fails to deliver said authorization and directive within two full business days, the Company agrees to pay liquidated damages to the Buyer for late issuance of said authorization and directive in the amount of $500 per day for each day of delay after three days, up to a maximum of $10,000 per conversion request. Nothing herein shall create a liability to the Company for actions or delays of the transfer agent once the authorization and directive have been delivered to it by the Company. Any liquidated damages due Buyer will be paid within seven (7) days of issuance of the shares resulting from the conversion. (j) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares, the Company will issue one or more certificates representing the Conversion Shares in the name of the Buyer without restrictive legend, except as may otherwise be required by applicable law, rule or regulation, and in DTC eligible form, in such denominations to be specified by the Buyer prior to conversion provided Buyer represents to the Company that resale of the Conversion Shares will be made only in compliance with applicable securities laws. Company further warrants that no instructions other than these instructions, and instructions for a "stop transfer" for any sale of Conversion Shares in excess of those permitted to be sold under Section 2.2(c), have been given to the transfer agent and also warrants that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company subject to compliance with Federal and State securities laws. 2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer represents and warrants that as of the date of the execution of this Agreement: (a) AUTHORIZATION. This Agreement constitutes a valid and legally binding obligation of such Buyer. (b) INVESTMENT REPRESENTATIONS (i) The Buyer has received and reviewed the Company's Disclosure Documents and the Buyer or the Buyer's designated 4 representatives have concluded a satisfactory due diligence investigation of the Company and have had an opportunity to have all their questions regarding the Company satisfactorily answered. (ii) The Buyer acknowledges that the Preferred Stock and the Conversion Shares are speculative and involve a high degree of risk and the Buyer represents that it is able to sustain the loss of the entire amount of its investment. (iii) The Buyer (or its members and/or officers) has previously invested in unregistered securities and has sufficient financial and investing expertise to evaluate and understand the risks of the Preferred Stock and the Conversion Shares. (iv) The Buyer has received from the Company, and is relying on, no representations (except as set forth in this Agreement) or projections with respect to the Company's business and prospects. (v) The Buyer is an "accredited investor" within the meaning of Regulation D under the Securities Act. (vi) The Buyer is acquiring the Preferred Stock and the Conversion Shares for investment purposes only without intent to distribute the same, and acknowledges that the Preferred Stock and the Conversion Shares have not been registered under the Securities Act and applicable state securities laws, and accordingly, constitute "restricted securities" for purposes of the Securities Act and such state securities laws. (vii) The Buyer acknowledges that it will not be able to transfer the Preferred Stock and the Conversion Shares except upon compliance with the registration requirements of the Securities Act and applicable state securities laws or exemptions therefrom. (viii) The certificates and/or instruments evidencing the Preferred Stock and the Conversion Shares will contain a legend to the foregoing effect. (c) LOCK-UP. The Buyer will not transfer any Preferred Shares or Conversion Shares for a period of ninety (90) days after the date of the Closing. No more than 20% of the aggregate number of Series A Preferred Shares originally purchased and owned by the Buyer may be converted in any thirty (30) day period, on a cumulative basis, after the ninetieth (90th) day of issuance. Further, the Buyer will not, after conversion, sell more than 20% of the Conversion Shares owned by it in any thirty day period, on a cumulative basis, commencing with the ninety-first (91st) day after the Closing. 3. CLOSING 3.1 The Buyer understands that the Company's obligation to sell the Preferred Shares 5 is conditioned upon delivery by the Buyer to the Company of the purchase price set forth in Section 1 herein. 3.2 The Company understands that Buyer's obligation to purchase the Preferred Shares is conditioned upon delivery of certificate(s) representing the Preferred Shares as described herein, and provision of an opinion of counsel as provided in Subsection D (ii) herein below. 3.3 For this transaction to close, the Buyer must: (i) Wire funds to the Pacific Continental Securities Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of Five Hundred Thousand U.S. dollars ($500,000) (the "Purchase Price") no later than 72 hours after receipt by the Company of the Subscription Agreement executed by the Buyer and the Company. Wire transfer instructions for the Escrow Agent are annexed as Exhibit C hereto. (ii) Deliver a signed Subscription Agreement. 3.4 For this transaction to close, the Company must: (i) Deliver to the Buyer Certificate(s) for the Preferred Shares. (ii) Deliver to the Buyer the Company's Certificate of Designation set forth in Exhibit A hereto. (iii) Deliver to the Buyer an opinion letter from the Company's counsel stating that (a) the Company is duly incorporated and validly existing; (b) this Agreement, the issuance of the Preferred Shares, and the issuance of the Common Stock upon conversion of the Preferred Shares up to the number of shares of common stock authorized in the Company's Certificate of Incorporation, have been duly approved by all required corporate action, and that all such securities upon due issuance, shall be validly issued and outstanding, fully paid and nonassessable, and in each case, having the rights, preferences and privileges set forth in the Certificate of Incorporation; and (c) this Agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability of any indemnification provisions may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of laws governing specific performance and other equitable remedies; and (iv) Deliver to the Buyer a signed Subscription Agreement which shall be signed after execution of such Subscription Agreement by Buyer; and (v) Deliver to the Buyer executed warrants to purchase common stock 6 of the Company in the form attached hereto as Exhibit D (the "Warrants"). 7 3.5 Upon confirmation by Buyer that it has received each of the items set forth in 3.4(i)-(v), and by the Company that it has received a signed Subscription Agreement, Escrow Agent shall, after deducting any amounts due to it from the Company, release the balance of the purchase price to the Company or as directed by the Company. E. Pacific Continental Securities Corporation shall serve as agent (the "Agent") in the transaction contemplated by this Agreement. Agent's fee is solely the responsibility of the Company and Company expressly agrees to pay Agent said fee as such is agreed upon between the Company and the Agent. Neither the Company nor the Agent has any recourse of any kind whatsoever against the Buyer for any monies owed the Agent by the Company or for any monies paid by the Company to the Agent. Company expressly indemnifies Buyer against any monies owed the Agent. 4. REGISTRATION OF CONVERSION SHARES 4.1 The Company shall prepare and file with the SEC a registration statement as soon as practical, which registration statement shall include the Conversion Shares and shares of Common Stock issuable pursuant to the Warrants ("Warrant Shares") and shall thereafter use its best efforts to have such registration statement declared effective within 90 days after the Closing Date (the "Target Date") and remain effective until the earlier of the date on which all the Conversion Shares are sold or two years after the Closing Date (the "Effective Period"). The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective throughout the Effective Period and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Conversion Shares or Warrant Shares covered by such registration statement whenever the Buyer shall desire to sell or otherwise dispose of the same. 4.2 If a registration statement covering all Shares is not effective by the Target Date, the Company shall pay to the Buyers as liquidated damages an aggregate amount equal to one percent ( 1%) of the total purchase price of the Preferred Stock for each thirty (30) day period following the Target Date until such time as the registration statement is declared effective. The payment set forth above shall be pro-rated daily as to any period of less than thirty (30) days. Such payment shall be made to each Buyer by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Buyer and shall be paid irrespective of the amount of Preferred Stock, Conversion Shares and Warrant Shares held by Buyer on the Target Date and thereafter. 4.3 Any amount payable pursuant to the foregoing provisions shall be delivered on or before the fifth (5th) day following the end of the calendar month in which such payment or delivery obligation arose. 4.4 The Company shall file a request for acceleration of effectiveness of the registration statement within five days after it has received a no review/no further comment determination from the SEC. 8 4.5 It shall be a condition precedent to the obligation of the Company to register any Conversion Shares and Warrant Shares pursuant to this Section 4 that Buyer shall furnish to the Company such information regarding the Conversion Shares and Warrant Shares held and the intended method of disposition thereof and other information concerning the Buyer as the Company shall reasonably request and as shall be required in connection with the registration statement to be filed by the Company. If after a registration statement becomes effective the Company advises the Buyer that the Company considers it appropriate to amend or supplement the applicable registration statement, the Buyer shall suspend further sales of the Conversion Shares and Warrant Shares until the Company advises the Buyer that such registration statement has been amended or supplemented. 4.6 Whenever the Company is required by the provisions of this Section 4 to effect the registration of the Conversion Shares and Warrant Shares under the Securities Act, the Company shall: (i) Prepare and file with the SEC a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective; (ii) Prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective; (iii) Furnish to the Buyer and to the underwriters (if any) of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as the Buyer may reasonably request in order to facilitate the public offering of such securities; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or Blue Sky Laws of such jurisdictions as the Buyer may reasonably request within twenty (20) days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) Notify the Buyer, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) Notify the Buyer promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; and 9 (vii) Prepare and promptly file with the SEC and promptly notify the Buyer of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 4.7 With respect to the inclusion of the Conversion Shares and Warrant Shares in a registration statement pursuant to this Section 4, all registration expenses, fees, costs and expenses of and incidental to such registration, inclusion and public offering in connection therewith shall be borne by the Company; provided, however, that the Buyer shall bear its own professional fees and pro rata share of the underwriting discount and commissions, if any. The fees, costs and expenses of registration to be borne by the Company shall include, without limitation, all registration, filing, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if any and if the Company and/or selling security holders are required to bear such fees and disbursements), and all legal fees and disbursements and other expenses of complying with state securities or Blue Sky Laws of any jurisdiction in which the securities to be offered are to be registered or qualified. 4.8 Subject to the conditions set forth below, in connection with any registration of the Shares pursuant to this Section 4, the Company agrees to indemnify and hold harmless the Buyer, any underwriter for the Company or acting on behalf of the Buyer and each person, if any, who controls the Buyer, within the meaning of Section 15 of the Securities Act, as follows: (i) Against any and all loss, claim, damage and expense whatsoever arising out of or based upon (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending any litigation, commenced or threatened, or any claim whatsoever based upon) any untrue or alleged untrue statement of a material fact contained in any preliminary prospectus (if used prior to the effective date of the registration statement), the registration statement or the prospectus (as from time to time amended and supplemented), or in any application or other document executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Company's securities under the securities laws thereof, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other violation of applicable federal or state statutory or regulatory requirements or limitations relating to action or inaction by the Company in the course of preparing, filing, or implementing such registered offering; provided, however, that the indemnity agreement contained in this section shall not apply to 10 any loss, claim, damage, liability or action arising out of or based upon any untrue or alleged untrue statement or omission made in reliance upon and in conformity with any information furnished in writing to the Company by or on behalf of the Buyer expressly for use in connection therewith or arising out of any action or inaction of the Buyer; (ii) Subject to the proviso contained in Subsection (i) above, against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, commenced or threatened, or of any claim whatsoever based upon any untrue statement or omission (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any such litigation or claim) if such settlement is effected with the written consent of the Company; and (iii) In no case shall the Company be liable under this indemnity agreement with respect to any claim made against such Company, underwriter or any such controlling person unless the Company shall be notified, by letter or by facsimile confirmed by letter, of any action commenced against such persons, promptly after such person shall have been served with the summons or other legal process giving information as to the nature and basis of the claim. The failure to so notify the Company, if prejudicial in any material respect to the Company's ability to defend such claim, shall relieve the Company from its liability to the indemnified person under this Section 4, but only to the extent that the Company was prejudiced. The failure to so notify the Company shall not relieve the Company from any liability which it may have otherwise than on account of this indemnity agreement. The Company shall be entitled to participate at its own expense in the defense of any suit brought to enforce any such claim, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it, provided such counsel is reasonably satisfactory to the Company or controlling persons, defendants in any suit so brought. In the event the Company elects to assume the defense of any such suit and retain such counsel, the Company, underwriter or controlling persons, defendants in the suit, shall, after the date they are notified of such election, bear the fees and expenses of any counsel thereafter retained by them, as well as any other expenses thereafter incurred by them in connection with the defense thereof; provided, however, that if the Company, underwriter or controlling persons reasonably believe that there may be available to them any defense or counterclaim different than those available to the Company or that representation of such Company, underwriters or controlling persons by counsel for the Company presents a conflict of interest for such counsel, then such Company, underwriter and controlling person shall be entitled to defend such suit with counsel of their own choosing and the Company shall bear the fees, expenses and other costs of such separate counsel. 11 4.9 Each Buyer agrees to indemnify and hold harmless the Company, each underwriter for the offering, (if any), and each of their officers and directors and agents and each other person, if any, who controls the Company and underwriter within the meaning of Section 15 of the Securities Act against any and all such losses, liabilities, claims, damages and expenses as are indemnified against by the Company under Section 4.6 above; provided, however, that such indemnification by Buyer hereunder shall be limited to any losses, liabilities, claims, damages, or expenses to the extent caused by any untrue statement of a material fact or omission of a material fact (required to be stated therein or necessary to make statements therein not misleading), if any made (or in settlement of any litigation effected with the written consent of such Company, alleged to have been made) in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any application or other document in reliance upon, and in conformity with, written information furnished in respect of such Company by or on behalf of such Company expressly for use in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any such application or other document or arising out of any action or inaction of such Company in implementing such registered offering. Notwithstanding the foregoing, the indemnification obligation of each Buyer shall not exceed the purchase price of the Notes paid by such Buyer. In case any action shall be brought against the Company, or any other person so indemnified, in respect of which indemnity may be sought against any Company, such Company shall have the rights and duties given to the Company, and each other person so indemnified shall have the rights and duties given to the Buyer, by the provisions of Section 4.6. The person indemnified agrees to notify the Company promptly after the assertion of any claim against the person indemnified in connection with the sale of securities. 4.10 If the indemnification provided for in Sections 4.8 and 4.9 above are unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnified party, on one hand, and such indemnifying party, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities (or actions in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnified party, on one hand, or such indemnifying party, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person who has committed fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. 5. CLOSING DATE 12 The Preferred Share certificate shall be delivered to Buyer and the funds therefore shall be delivered to Company on or before May 22, 1998 (the "Closing Date") or at such other time mutually agreed to by the parties. 6. GOVERNING LAW; INTERPRETATION This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware. Facsimile signatures of this Agreement shall be binding on all parties hereto. 7. ENTIRE AGREEMENT; AMENDMENT This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 8. NOTICES; ETC. Any notice, demand or request required or permitted to be given by either the Company or the Buyer pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or by facsimile, with a hard copy to follow by two day courier addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 9. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 10. SEVERABILITY In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, enforceable or void, this Agreement shall continue in full force and effect without said provision, provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 11. TITLES AND SUBTITLES The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 13 IN WITNESS WHEREOF, this Agreement was duly executed on the date first written above, as confirmed by signatory below. Facsimile signatures of this agreement shall be binding on all parties hereto. Official Signatory of Company: MICROTEL INTERNATIONAL, INC. 4290 East Brickell Street Ontario, California 91761 By: ---------------------------------------- Carmine T. Oliva President and Chief Executive Officer FORTUNE FUND LIMITED SEEKER III By: ---------------------------------------- Number of Shares of Series A Preferred: 50 EX-10.50 5 EXHIBIT 10.50 THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE "OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE. THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING. SUBSCRIPTION AGREEMENT MICROTEL INTERNATIONAL, INC. CONVERTIBLE PREFERRED STOCK - SERIES A - ------------------------------------------------------------------------------- THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed by the undersigned (collectively the "Buyer") in connection with the sale of certain Securities designated as Series A Convertible Preferred Stock (hereinafter the "Preferred Shares"), which are convertible into shares of common stock (hereinafter the "Conversion Shares") of MicroTel International, Inc. (the "Company"). 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE 1.1 Each Buyer hereby subscribes for the number of Preferred Shares set forth below on the signature page of this Agreement which Preferred Shares shall be convertible into Conversion Shares of the Company in accordance with the terms set forth in the Certificate of Designations, Rights and Preferences of Preferred Stock attached as Exhibit A to this Agreement (the "Conversion Shares"), at a purchase price of $10,000 per Preferred Share payable in United States Dollars. 1.2 Buyer shall pay the purchase price by delivering same day funds in United States Dollars to the Company upon delivery of the Preferred Shares by the Company to Buyer. 2. REPRESENTATIONS AND WARRANTIES. 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants that as of the date of this Agreement: (a) EXISTENCE. The Company is a corporation duly organized and in good standing under the laws of the State of Delaware and is duly qualified to do business and is in good standing in all states where such qualification is necessary, except for those jurisdictions in which the failure to qualify would not, in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or business. (b) AUTHORITY. The execution and delivery by the Company of this Agreement and the Preferred Stock (i) are within the Company's corporate powers; (ii) are duly authorized by the Company's board of directors; (iii) are not in contravention of the terms of the Company's certificate of incorporation or bylaws; (iv) are not in contravention of any law or laws; (v) except for the filing of a Form D Notice with the Securities and Exchange Commission and any exemption filing related thereto which may be required pursuant to applicable state securities or "blue sky" laws, do not require any governmental consent, registration or approval; (vi) do not contravene any contractual or governmental restriction binding upon the Company; and (vii) will not result in the imposition of any lien, charge, security interest or encumbrance upon any property of the Company under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which the Company is a party or by which the Company or any of the Company's property may be bound or affected. (c) BINDING EFFECT. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) CAPITALIZATION. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, par value $.0033 per share, 11,927,793 shares of which are issued and outstanding and 10,000,000 shares of Preferred Stock, par value $.01 per share, of which none are outstanding. The shares of common stock issuable upon conversion of the Preferred Stock (the "Conversion Shares") have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non-assessable. (e) SEC DOCUMENTS. The Company has furnished each Buyer with a true and complete copy of the Company's Report on Form 10-K for the fiscal year ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998 (the "Disclosure Documents"). Except as disclosed in the Disclosure Documents, since December 31, 1997 the Company has not incurred any material liability except in the 2 ordinary course of its business consistent with past practice and there has not been any change in the business, financial condition or results of operations of the Company which has had a material adverse effect on the Company. Since January 1, 1997, the Company has filed with the Securities and Exchange Commission (the "SEC") all documents required to be filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. As of their respective dates, the Disclosure Documents complied in all material respects with the requirements of the Exchange Act, and the rules and regulations of the SEC thereunder applicable to such Disclosure Documents, and the Disclosure Documents did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Disclosure Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements are accurate, complete and have been prepared in accordance with the books and records of the Company and in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments that are not material) the consolidated financial position of the Company as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. (f) LITIGATION. Except as set forth in the Disclosure Documents, there is neither pending nor, to the Company's knowledge and belief, threatened any action, suit, proceeding or claim, or any basis therefor, to which the Company is or may be named as a party or its property is or may be subject or which calls into question any of the transactions contemplated by this Agreement. (g) SECURITIES MATTERS. Subject to the accuracy of the representations of the Buyers set forth in Section 2.2 hereof, the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933 as amended (the "Securities Act"). The Company has complied and will comply with all applicable state "blue sky" or securities laws in connection with the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement. (h) CERTIFICATES. The Company will issue one or more Certificates representing the Preferred Shares in the name of Buyer with the following restrictive legend set forth below (the "Restrictive Legend") in such denominations to be specified by the Buyer: "The Securities represented by this Certificate have not been registered under the United States Securities Act of 1933 (the "Act") and may not be sold, transferred, pledged or otherwise 3 hypothecated unless (a) they are covered by a registration statement or a post-effective amendment thereto under the Act, or (b) in the opinion of counsel for Buyer, which opinion shall be reasonably acceptable to the Company, such sale, transfer, pledge or hypothecation is otherwise exempt from the provisions of Section 5 of the Act." (i) CONVERSION. Within two full business days of receipt by the Company of a properly executed request for conversion in the form annexed as Exhibit B hereto accompanied by the Preferred Shares to be converted, the Company will deliver to its transfer agent its directive and authorization to execute the conversion and to issue to Buyer the common stock shares so authorized. The Company acknowledges that a delay in issuance of its authorization and directive for the conversion could result in economic loss to the Buyer. Therefore, as compensation to the Buyer for such loss, in the event that the Company fails to deliver said authorization and directive within two full business days, the Company agrees to pay liquidated damages to the Buyer for late issuance of said authorization and directive in the amount of $500 per day for each day of delay after three days, up to a maximum of $10,000 per conversion request. Nothing herein shall create a liability to the Company for actions or delays of the transfer agent once the authorization and directive have been delivered to it by the Company. Any liquidated damages due Buyer will be paid within seven (7) days of issuance of the shares resulting from the conversion. (j) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares, the Company will issue one or more certificates representing the Conversion Shares in the name of the Buyer without restrictive legend, except as may otherwise be required by applicable law, rule or regulation, and in DTC eligible form, in such denominations to be specified by the Buyer prior to conversion provided Buyer represents to the Company that resale of the Conversion Shares will be made only in compliance with applicable securities laws. Company further warrants that no instructions other than these instructions, and instructions for a "stop transfer" for any sale of Conversion Shares in excess of those permitted to be sold under Section 2.2(c), have been given to the transfer agent and also warrants that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company subject to compliance with Federal and State securities laws. 2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer represents and warrants that as of the date of the execution of this Agreement: (a) AUTHORIZATION. This Agreement constitutes a valid and legally binding obligation of such Buyer. (b) INVESTMENT REPRESENTATIONS (i) The Buyer has received and reviewed the Company's Disclosure Documents and the Buyer or the Buyer's designated 4 representatives have concluded a satisfactory due diligence investigation of the Company and have had an opportunity to have all their questions regarding the Company satisfactorily answered. (ii) The Buyer acknowledges that the Preferred Stock and the Conversion Shares are speculative and involve a high degree of risk and the Buyer represents that it is able to sustain the loss of the entire amount of its investment. (iii) The Buyer (or its members and/or officers) has previously invested in unregistered securities and has sufficient financial and investing expertise to evaluate and understand the risks of the Preferred Stock and the Conversion Shares. (iv) The Buyer has received from the Company, and is relying on, no representations (except as set forth in this Agreement) or projections with respect to the Company's business and prospects. (v) The Buyer is an "accredited investor" within the meaning of Regulation D under the Securities Act. (vi) The Buyer is acquiring the Preferred Stock and the Conversion Shares for investment purposes only without intent to distribute the same, and acknowledges that the Preferred Stock and the Conversion Shares have not been registered under the Securities Act and applicable state securities laws, and accordingly, constitute "restricted securities" for purposes of the Securities Act and such state securities laws. (vii) The Buyer acknowledges that it will not be able to transfer the Preferred Stock and the Conversion Shares except upon compliance with the registration requirements of the Securities Act and applicable state securities laws or exemptions therefrom. (viii) The certificates and/or instruments evidencing the Preferred Stock and the Conversion Shares will contain a legend to the foregoing effect. (c) LOCK-UP. The Buyer will not transfer any Preferred Shares or Conversion Shares for a period of ninety (90) days after the date of the Closing. No more than 20% of the aggregate number of Series A Preferred Shares originally purchased and owned by the Buyer may be converted in any thirty (30) day period, on a cumulative basis, after the ninetieth (90th) day of issuance. Further, the Buyer will not, after conversion, sell more than 20% of the Conversion Shares owned by it in any thirty day period, on a cumulative basis, commencing with the ninety-first (91st) day after the Closing. 3. CLOSING 3.1 The Buyer understands that the Company's obligation to sell the Preferred Shares 5 is conditioned upon delivery by the Buyer to the Company of the purchase price set forth in Section 1 herein. 3.2 The Company understands that Buyer's obligation to purchase the Preferred Shares is conditioned upon delivery of certificate(s) representing the Preferred Shares as described herein, and provision of an opinion of counsel as provided in Subsection D (ii) herein below. 3.3 For this transaction to close, the Buyer must: (i) Wire funds to the Pacific Continental Securities Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of Five Hundred Thousand U.S. dollars ($500,000) (the "Purchase Price") no later than 72 hours after receipt by the Company of the Subscription Agreement executed by the Buyer and the Company. Wire transfer instructions for the Escrow Agent are annexed as Exhibit C hereto. (ii) Deliver a signed Subscription Agreement. 3.4 For this transaction to close, the Company must: (i) Deliver to the Buyer Certificate(s) for the Preferred Shares. (ii) Deliver to the Buyer the Company's Certificate of Designation set forth in Exhibit A hereto. (iii) Deliver to the Buyer an opinion letter from the Company's counsel stating that (a) the Company is duly incorporated and validly existing; (b) this Agreement, the issuance of the Preferred Shares, and the issuance of the Common Stock upon conversion of the Preferred Shares up to the number of shares of common stock authorized in the Company's Certificate of Incorporation, have been duly approved by all required corporate action, and that all such securities upon due issuance, shall be validly issued and outstanding, fully paid and nonassessable, and in each case, having the rights, preferences and privileges set forth in the Certificate of Incorporation; and (c) this Agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability of any indemnification provisions may be limited by principles of public policy, and subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of laws governing specific performance and other equitable remedies; and (iv) Deliver to the Buyer a signed Subscription Agreement which shall be signed after execution of such Subscription Agreement by Buyer; and (v) Deliver to the Buyer executed warrants to purchase common stock 6 of the Company in the form attached hereto as Exhibit D (the "Warrants"). 7 3.5 Upon confirmation by Buyer that it has received each of the items set forth in 3.4(i)-(v), and by the Company that it has received a signed Subscription Agreement, Escrow Agent shall, after deducting any amounts due to it from the Company, release the balance of the purchase price to the Company or as directed by the Company. E. Pacific Continental Securities Corporation shall serve as agent (the "Agent") in the transaction contemplated by this Agreement. Agent's fee is solely the responsibility of the Company and Company expressly agrees to pay Agent said fee as such is agreed upon between the Company and the Agent. Neither the Company nor the Agent has any recourse of any kind whatsoever against the Buyer for any monies owed the Agent by the Company or for any monies paid by the Company to the Agent. Company expressly indemnifies Buyer against any monies owed the Agent. 4. REGISTRATION OF CONVERSION SHARES 4.1 The Company shall prepare and file with the SEC a registration statement as soon as practical, which registration statement shall include the Conversion Shares and shares of Common Stock issuable pursuant to the Warrants ("Warrant Shares") and shall thereafter use its best efforts to have such registration statement declared effective within 90 days after the Closing Date (the "Target Date") and remain effective until the earlier of the date on which all the Conversion Shares are sold or two years after the Closing Date (the "Effective Period"). The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective throughout the Effective Period and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Conversion Shares or Warrant Shares covered by such registration statement whenever the Buyer shall desire to sell or otherwise dispose of the same. 4.2 If a registration statement covering all Shares is not effective by the Target Date, the Company shall pay to the Buyers as liquidated damages an aggregate amount equal to one percent ( 1%) of the total purchase price of the Preferred Stock for each thirty (30) day period following the Target Date until such time as the registration statement is declared effective. The payment set forth above shall be pro-rated daily as to any period of less than thirty (30) days. Such payment shall be made to each Buyer by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Buyer and shall be paid irrespective of the amount of Preferred Stock, Conversion Shares and Warrant Shares held by Buyer on the Target Date and thereafter. 4.3 Any amount payable pursuant to the foregoing provisions shall be delivered on or before the fifth (5th) day following the end of the calendar month in which such payment or delivery obligation arose. 4.4 The Company shall file a request for acceleration of effectiveness of the registration statement within five days after it has received a no review/no further comment determination from the SEC. 8 4.5 It shall be a condition precedent to the obligation of the Company to register any Conversion Shares and Warrant Shares pursuant to this Section 4 that Buyer shall furnish to the Company such information regarding the Conversion Shares and Warrant Shares held and the intended method of disposition thereof and other information concerning the Buyer as the Company shall reasonably request and as shall be required in connection with the registration statement to be filed by the Company. If after a registration statement becomes effective the Company advises the Buyer that the Company considers it appropriate to amend or supplement the applicable registration statement, the Buyer shall suspend further sales of the Conversion Shares and Warrant Shares until the Company advises the Buyer that such registration statement has been amended or supplemented. 4.6 Whenever the Company is required by the provisions of this Section 4 to effect the registration of the Conversion Shares and Warrant Shares under the Securities Act, the Company shall: (i) Prepare and file with the SEC a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective; (ii) Prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective; (iii) Furnish to the Buyer and to the underwriters (if any) of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as the Buyer may reasonably request in order to facilitate the public offering of such securities; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or Blue Sky Laws of such jurisdictions as the Buyer may reasonably request within twenty (20) days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) Notify the Buyer, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) Notify the Buyer promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; and 9 (vii) Prepare and promptly file with the SEC and promptly notify the Buyer of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 4.7 With respect to the inclusion of the Conversion Shares and Warrant Shares in a registration statement pursuant to this Section 4, all registration expenses, fees, costs and expenses of and incidental to such registration, inclusion and public offering in connection therewith shall be borne by the Company; provided, however, that the Buyer shall bear its own professional fees and pro rata share of the underwriting discount and commissions, if any. The fees, costs and expenses of registration to be borne by the Company shall include, without limitation, all registration, filing, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if any and if the Company and/or selling security holders are required to bear such fees and disbursements), and all legal fees and disbursements and other expenses of complying with state securities or Blue Sky Laws of any jurisdiction in which the securities to be offered are to be registered or qualified. 4.8 Subject to the conditions set forth below, in connection with any registration of the Shares pursuant to this Section 4, the Company agrees to indemnify and hold harmless the Buyer, any underwriter for the Company or acting on behalf of the Buyer and each person, if any, who controls the Buyer, within the meaning of Section 15 of the Securities Act, as follows: (i) Against any and all loss, claim, damage and expense whatsoever arising out of or based upon (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending any litigation, commenced or threatened, or any claim whatsoever based upon) any untrue or alleged untrue statement of a material fact contained in any preliminary prospectus (if used prior to the effective date of the registration statement), the registration statement or the prospectus (as from time to time amended and supplemented), or in any application or other document executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Company's securities under the securities laws thereof, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other violation of applicable federal or state statutory or regulatory requirements or limitations relating to action or inaction by the Company in the course of preparing, filing, or implementing such registered offering; provided, however, that the indemnity agreement contained in this section shall not apply to 10 any loss, claim, damage, liability or action arising out of or based upon any untrue or alleged untrue statement or omission made in reliance upon and in conformity with any information furnished in writing to the Company by or on behalf of the Buyer expressly for use in connection therewith or arising out of any action or inaction of the Buyer; (ii) Subject to the proviso contained in Subsection (i) above, against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, commenced or threatened, or of any claim whatsoever based upon any untrue statement or omission (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any such litigation or claim) if such settlement is effected with the written consent of the Company; and (iii) In no case shall the Company be liable under this indemnity agreement with respect to any claim made against such Company, underwriter or any such controlling person unless the Company shall be notified, by letter or by facsimile confirmed by letter, of any action commenced against such persons, promptly after such person shall have been served with the summons or other legal process giving information as to the nature and basis of the claim. The failure to so notify the Company, if prejudicial in any material respect to the Company's ability to defend such claim, shall relieve the Company from its liability to the indemnified person under this Section 4, but only to the extent that the Company was prejudiced. The failure to so notify the Company shall not relieve the Company from any liability which it may have otherwise than on account of this indemnity agreement. The Company shall be entitled to participate at its own expense in the defense of any suit brought to enforce any such claim, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it, provided such counsel is reasonably satisfactory to the Company or controlling persons, defendants in any suit so brought. In the event the Company elects to assume the defense of any such suit and retain such counsel, the Company, underwriter or controlling persons, defendants in the suit, shall, after the date they are notified of such election, bear the fees and expenses of any counsel thereafter retained by them, as well as any other expenses thereafter incurred by them in connection with the defense thereof; provided, however, that if the Company, underwriter or controlling persons reasonably believe that there may be available to them any defense or counterclaim different than those available to the Company or that representation of such Company, underwriters or controlling persons by counsel for the Company presents a conflict of interest for such counsel, then such Company, underwriter and controlling person shall be entitled to defend such suit with counsel of their own choosing and the Company shall bear the fees, expenses and other costs of such separate counsel. 11 4.9 Each Buyer agrees to indemnify and hold harmless the Company, each underwriter for the offering, (if any), and each of their officers and directors and agents and each other person, if any, who controls the Company and underwriter within the meaning of Section 15 of the Securities Act against any and all such losses, liabilities, claims, damages and expenses as are indemnified against by the Company under Section 4.6 above; provided, however, that such indemnification by Buyer hereunder shall be limited to any losses, liabilities, claims, damages, or expenses to the extent caused by any untrue statement of a material fact or omission of a material fact (required to be stated therein or necessary to make statements therein not misleading), if any made (or in settlement of any litigation effected with the written consent of such Company, alleged to have been made) in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any application or other document in reliance upon, and in conformity with, written information furnished in respect of such Company by or on behalf of such Company expressly for use in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any such application or other document or arising out of any action or inaction of such Company in implementing such registered offering. Notwithstanding the foregoing, the indemnification obligation of each Buyer shall not exceed the purchase price of the Notes paid by such Buyer. In case any action shall be brought against the Company, or any other person so indemnified, in respect of which indemnity may be sought against any Company, such Company shall have the rights and duties given to the Company, and each other person so indemnified shall have the rights and duties given to the Buyer, by the provisions of Section 4.6. The person indemnified agrees to notify the Company promptly after the assertion of any claim against the person indemnified in connection with the sale of securities. 4.10 If the indemnification provided for in Sections 4.8 and 4.9 above are unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnified party, on one hand, and such indemnifying party, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities (or actions in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnified party, on one hand, or such indemnifying party, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person who has committed fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. 5. CLOSING DATE 12 The Preferred Share certificate shall be delivered to Buyer and the funds therefore shall be delivered to Company on or before May 22, 1998 (the "Closing Date") or at such other time mutually agreed to by the parties. 6. GOVERNING LAW; INTERPRETATION This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware. Facsimile signatures of this Agreement shall be binding on all parties hereto. 7. ENTIRE AGREEMENT; AMENDMENT This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 8. NOTICES; ETC. Any notice, demand or request required or permitted to be given by either the Company or the Buyer pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or by facsimile, with a hard copy to follow by two day courier addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 9. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 10. SEVERABILITY In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, enforceable or void, this Agreement shall continue in full force and effect without said provision, provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 11. TITLES AND SUBTITLES The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 13 IN WITNESS WHEREOF, this Agreement was duly executed on the date first written above, as confirmed by signatory below. Facsimile signatures of this agreement shall be binding on all parties hereto. Official Signatory of Company: MICROTEL INTERNATIONAL, INC. 4290 East Brickell Street Ontario, California 91761 By:________________________________ Carmine T. Oliva President and Chief Executive Officer RANA GENERAL HOLDING, LTD. By:________________________________ Number of Shares of Series A Preferred: 50 EX-10.51 6 EXHIBIT 10.51 THE OFFER AND SALE OF THE SECURITIES REFERRED TO IN THIS AGREEMENT (THE "OFFERING") HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND SUCH SHARES ARE BEING OFFERED AND SOLD IN RELIANCE ON THE EXEMPTION FROM THE SECURITIES REGISTRATION AND QUALIFICATION REQUIREMENTS OF THE ACT AND SUCH LAWS OFFERED BY SECTION 4(2) OF THE ACT. ACCORDINGLY, THE SECURITIES MAY NOT BE TRANSFERRED OR RESOLD WITHOUT REGISTRATION AND QUALIFICATION UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM SUCH REGISTRATION AND QUALIFICATION UNDER THE ACT AND SUCH LAWS IS THEN AVAILABLE. THE OFFER AND SALE OF THE SECURITIES EFFECTED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING. SUBSCRIPTION AGREEMENT MICROTEL INTERNATIONAL, INC. CONVERTIBLE PREFERRED STOCK - SERIES A _______________________________________________________________________________ THIS SUBSCRIPTION AGREEMENT (hereinafter the "Agreement") has been executed by the undersigned (collectively the "Buyer") in connection with the sale of certain Securities designated as Series A Convertible Preferred Stock (hereinafter the "Preferred Shares"), which are convertible into shares of common stock (hereinafter the "Conversion Shares") of MicroTel International, Inc. (the "Company"). 1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE 1.1 Each Buyer hereby subscribes for the number of Preferred Shares set forth below on the signature page of this Agreement which Preferred Shares shall be convertible into Conversion Shares of the Company in accordance with the terms set forth in the Certificate of Designations, Rights and Preferences of Preferred Stock attached as Exhibit A to this Agreement (the "Conversion Shares"), at a purchase price of $10,000 per Preferred Share payable in United States Dollars. 1.2 Buyer shall pay the purchase price by delivering same day funds in United States Dollars to the Company upon delivery of the Preferred Shares by the Company to Buyer. 2. REPRESENTATIONS AND WARRANTIES. 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants that as of the date of this Agreement: (a) EXISTENCE. The Company is a corporation duly organized and in good standing under the laws of the State of Delaware and is duly qualified to do business and is in good standing in all states where such qualification is necessary, except for those jurisdictions in which the failure to qualify would not, in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or business. (b) AUTHORITY. The execution and delivery by the Company of this Agreement and the Preferred Stock (i) are within the Company's corporate powers; (ii) are duly authorized by the Company's board of directors; (iii) are not in contravention of the terms of the Company's certificate of incorporation or bylaws; (iv) are not in contravention of any law or laws; (v) except for the filing of a Form D Notice with the Securities and Exchange Commission and any exemption filing related thereto which may be required pursuant to applicable state securities or "blue sky" laws, do not require any governmental consent, registration or approval; (vi) do not contravene any contractual or governmental restriction binding upon the Company; and (vii) will not result in the imposition of any lien, charge, security interest or encumbrance upon any property of the Company under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which the Company is a party or by which the Company or any of the Company's property may be bound or affected. (c) BINDING EFFECT. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) CAPITALIZATION. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, par value $.0033 per share, 11,927,793 shares of which are issued and outstanding and 10,000,000 shares of Preferred Stock, par value $.01 per share, of which none are outstanding. The shares of common stock issuable upon conversion of the Preferred Stock (the "Conversion Shares") have been duly and validly authorized and reserved for issuance and, when issued and delivered in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non-assessable. (e) SEC DOCUMENTS. The Company has furnished each Buyer with a true and complete copy of the Company's Report on Form 10-K for the fiscal year ended December 31, 1997 and Form 10-Q for the quarter ended March 31, 1998 (the "Disclosure Documents"). Except as disclosed in the Disclosure Documents, since December 31, 1997 the Company has not incurred any material liability except in the 2 ordinary course of its business consistent with past practice and there has not been any change in the business, financial condition or results of operations of the Company which has had a material adverse effect on the Company. Since January 1, 1997, the Company has filed with the Securities and Exchange Commission (the "SEC") all documents required to be filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. As of their respective dates, the Disclosure Documents complied in all material respects with the requirements of the Exchange Act, and the rules and regulations of the SEC thereunder applicable to such Disclosure Documents, and the Disclosure Documents did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Disclosure Documents (the "Financial Statements") comply as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto. The Financial Statements are accurate, complete and have been prepared in accordance with the books and records of the Company and in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto and fairly present (subject, in the case of the unaudited statements, to normal, recurring audit adjustments that are not material) the consolidated financial position of the Company as at the dates thereof and the consolidated results of its operations and cash flows for the periods then ended. (f) For a period of ninety (90) days commencing with the Effective Date of the Registration Statement, the Company covenants that it shall not issue any issued additional common stock or securities convertible into common stock or preferred stock unless such securities are issued at the then current Market Price. If the Company desires to issue securities during such ninety (90) day period at less than current Market Price, then: (a) the Buyer's conversion discount will be adjusted to equal the conversion discount given to the Buyer of such additional securities; and (b) the restrictions contained in Section 2.2(c) hereof shall be lifted upon the issuance of such additional securities. For purposes of this Section(e), the Market Price means the average closing sale price for the ten trading days immediately preceding the date of issuance. Notwithstanding the above, the Company shall not be precluded from issuing (i) Common Stock issued pursuant to Rule 144, provided the holder thereof holds such Common Stock for at least one year from the date of issuance; or (ii) the issuance of securities (other than for cash) in connection with a merger, consolidation, sale of assets, disposition or the exchange of the capital stock for assets, stock or other joint venture interests; provided, such securities would not be included in the Registration Statement relating to the Shares and a registration 3 statement in respect of such stock shall not be filed prior to sixty (60) days after the Effective Date of the Registration Statement. (g) LITIGATION. Except as set forth in the Disclosure Documents, there is neither pending nor, to the Company's knowledge and belief, threatened any action, suit, proceeding or claim, or any basis therefor, to which the Company is or may be named as a party or its property is or may be subject or which calls into question any of the transactions contemplated by this Agreement. (h) SECURITIES MATTERS. Subject to the accuracy of the representations of the Buyers set forth in Section 2.2 hereof, the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933 as amended (the "Securities Act"). The Company has complied and will comply with all applicable state "blue sky" or securities laws in connection with the offer, sale and issuance of the Preferred Stock and the Conversion Shares as contemplated by this Agreement. (i) CERTIFICATES. The Company will issue one or more Certificates representing the Preferred Shares in the name of Buyer with the following restrictive legend set forth below (the "Restrictive Legend") in such denominations to be specified by the Buyer: "The Securities represented by this Certificate have not been registered under the United States Securities Act of 1933 (the "Act") and may not be sold, transferred, pledged or otherwise hypothecated unless (a) they are covered by a registration statement or a post-effective amendment thereto under the Act, or (b) in the opinion of counsel for Buyer, which opinion shall be reasonably acceptable to the Company, such sale, transfer, pledge or hypothecation is otherwise exempt from the provisions of Section 5 of the Act." (j) CONVERSION. Within two full business days of receipt by the Company of a properly executed request for conversion in the form annexed as Exhibit B hereto accompanied by the Preferred Shares to be converted, the Company will deliver to its transfer agent its directive and authorization to execute the conversion and to issue to Buyer the common stock shares so authorized. The Company acknowledges that a delay in issuance of its authorization and directive for the conversion could result in economic loss to the Buyer. Therefore, as compensation to the Buyer for such loss, in the event that the Company fails to deliver said authorization and directive within two full business days, the Company agrees to pay liquidated damages to the Buyer for late issuance of said authorization and directive in the amount of $500 per day for each day of delay after three days. Nothing herein shall create a liability to the Company for actions or delays of the transfer agent once the authorization and directive have been delivered to it by the Company. Any liquidated 4 damages due Buyer will be paid within five (5) days of demand therefore. (k) ISSUANCE OF SHARES. Upon conversion of the Preferred Shares, the Company will issue one or more certificates representing the Conversion Shares in the name of the Buyer without restrictive legend, except as may otherwise be required by applicable law, rule or regulation, and in DTC eligible form, in such denominations to be specified by the Buyer prior to conversion provided Buyer represents to the Company that resale of the Conversion Shares will be made only in compliance with applicable securities laws. Company further warrants that no instructions other than these instructions, and instructions for a "stop transfer" for any sale of Conversion Shares in excess of those permitted to be sold under Section 2.2(c), have been given to the transfer agent and also warrants that the Conversion Shares shall otherwise be freely transferable on the books and records of the Company subject to compliance with Federal and State securities laws. (l) The Company may be limited in the number of shares of Common Stock it may issue by NASDAQ Rule 4310(c)(25)(H)(i)(a)(2) (the "Cap Regulations"). The Company agrees that (i) the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock on conversion of the Preferred Stock and/or exercise of the Warrants without violating the Cap Regulations and (ii) if, despite taking such steps, the Company still cannot issue such shares of Common Stock without violating the Cap Regulations, the Buyer, to the extent it holds Preferred Stock and Warrants which cannot be converted as a result of the Cap Regulations (each such share, an "Unconverted Preferred Stock") shall have the option, exercisable in Buyer's sole and absolute discretion, to elect either of the following remedies: (x) require the Company to issue shares of Common Stock in accordance with Buyer's notice of conversion at a conversion purchase price equal to the average of the closing bid price per share of Common Stock for the five (5) consecutive trading days (subject to certain equitable adjustments for certain events occurring during such period) preceding the date of notice of conversion; or (y) require the Company to redeem each Unconverted Preferred Stock for an amount in cash (the "Redemption Amount") equal to: V x M C "V" means the stated value of the Unconverted Preferred Stock plus any accrued but unpaid interest thereof; "C" means the conversion price in effect on the date of redemption (the "Redemption Date") specified in the notice from the Buyer; and 5 "M" means the highest closing bid price per share of the Common Stock during the period beginning on the Redemption Date and ending on the date of payment of the Redemption Amount. 2.2 REPRESENTATIONS AND WARRANTIES OF THE BUYER. Each Buyer represents and warrants that as of the date of the execution of this Agreement: (a) AUTHORIZATION. This Agreement constitutes a valid and legally binding obligation of such Buyer. (b) INVESTMENT REPRESENTATIONS. Except as provided in the registration provisions hereof: (i) The Buyer has received and reviewed the Company's Disclosure Documents and the Buyer or the Buyer's designated representatives have concluded a satisfactory due diligence investigation of the Company and have had an opportunity to have all their questions regarding the Company satisfactorily answered. (ii) The Buyer acknowledges that the Preferred Stock and the Conversion Shares are speculative and involve a high degree of risk and the Buyer represents that it is able to sustain the loss of the entire amount of its investment. (iii) The Buyer (or its members and/or officers) has previously invested in unregistered securities and has sufficient financial and investing expertise to evaluate and understand the risks of the Preferred Stock and the Conversion Shares. (iv) The Buyer has received from the Company, and is relying on, no representations (except as set forth in this Agreement) or projections with respect to the Company's business and prospects. (v) The Buyer is an "accredited investor" within the meaning of Regulation D under the Securities Act. (vi) The Buyer is acquiring the Preferred Stock and the Conversion Shares for investment purposes only without intent to distribute the same, and acknowledges that the Preferred Stock and the Conversion Shares have not been registered under the Securities Act and applicable state securities laws, and accordingly, constitute "restricted securities" for purposes of the Securities Act and such state securities laws. 6 (vii) The Buyer acknowledges that it will not be able to transfer the Preferred Stock and the Conversion Shares except upon compliance with the registration requirements of the Securities Act and applicable state securities laws or exemptions therefrom. (viii) The certificates and/or instruments evidencing the Preferred Stock and the Conversion Shares will contain a legend to the foregoing effect. (c) LOCK-UP. The Buyer will not transfer any Preferred Shares or Conversion Shares until the earlier of (i) ninety (90) days after the date of the Closing or (ii) the Effective Date of the Registration Statement to be filed pursuant to Section 4 hereof (the earlier of (i) or (ii), the "Conversion Start Date"). No more than 20% of the aggregate number of Series A Preferred Shares originally purchased and owned by the Buyer may be converted in any thirty (30) day period, on a cumulative basis, after the Conversion Start Date. Further, the Buyer will not, after conversion, sell more than 20% of the Conversion Shares owned by it in any thirty day period, on a cumulative basis, commencing with the Conversion Start Date. 3. CLOSING 3.1 The Buyer understands that the Company's obligation to sell the Preferred Shares is conditioned upon delivery by the Buyer to the Company of the purchase price set forth in Section 1 herein. 3.2 The Company understands that Buyer's obligation to purchase the Preferred Shares is conditioned upon delivery of certificate(s) representing the Preferred Shares as described herein, and provision of an opinion of counsel as provided in Subsection D (ii) herein below. 3.3 For this transaction to close, the Buyer must: (i) Wire funds to the Pacific Continental Securities Corporation, as Escrow Agent (the "Escrow Agent"), in the amount of One Million U.S. dollars ($1,000,000) (the "Purchase Price") no later than 72 hours after receipt by the Company of the Subscription Agreement executed by the Buyer and the Company. Wire transfer instructions for the Escrow Agent are annexed as Exhibit C hereto. (ii) Deliver a signed Subscription Agreement. 3.4 For this transaction to close, the Company must: (i) Deliver to the Buyer Certificate(s) for the Preferred Shares. (ii) Deliver to the Buyer the Company's Certificate of Designation set 7 forth in Exhibit A hereto. (iii) Deliver to the Buyer an opinion letter from the Company's counsel in substantially the form annexed as Exhibit 3.4(iii) hereto; and (iv) Deliver to the Buyer a signed Subscription Agreement which shall be signed after execution of such Subscription Agreement by Buyer; and (v) Deliver to the Buyer executed warrants to purchase common stock of the Company in the form attached hereto as Exhibit D (the "Warrants"). 3.5 Upon confirmation by Buyer that it has received each of the items set forth in 3.4(i)-(v), and by the Company that it has received a signed Subscription Agreement, Escrow Agent shall, after deducting any amounts due to it from the Company, release the balance of the purchase price to the Company or as directed by the Company. E. Pacific Continental Securities Corporation shall serve as agent (the "Agent") in the transaction contemplated by this Agreement. Agent's fee is solely the responsibility of the Company and Company expressly agrees to pay Agent said fee as such is agreed upon between the Company and the Agent. Neither the Company nor the Agent has any recourse of any kind whatsoever against the Buyer for any monies owed the Agent by the Company or for any monies paid by the Company to the Agent. Company expressly indemnifies Buyer against any monies owed the Agent. 4. REGISTRATION OF CONVERSION SHARES 4.1 The Company shall prepare and file with the SEC a registration statement as soon as practical, which registration statement shall include the Conversion Shares and shares of Common Stock issuable pursuant to the Warrants ("Warrant Shares") and shall thereafter use its best efforts to have such registration statement declared effective the earlier of (i) five (5) days after the SEC indicates the Registration Statement may be declared effective or (ii) ninety (90) days after the Closing Date (the "Target Date") and remain effective until the earlier of the date on which all the Conversion Shares are sold or two years after the Closing Date (the "Effective Period"). The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective throughout the Effective Period and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Conversion Shares or Warrant Shares covered by such registration statement whenever the Buyer shall desire to sell or otherwise dispose of the same. 4.2 If a registration statement covering all Shares is not effective by the Target Date, the Company shall pay to the Buyers as liquidated damages an aggregate amount equal to one percent (1%) of the total purchase price of the Preferred Stock for each thirty (30) day period following the Target Date until such time as the registration statement is declared effective. The payment set forth above shall be pro-rated daily as to any period of less than thirty (30) days. Such payment shall be made to each Buyer by cashier's check or wire transfer in immediately 8 available funds to such account as shall be designated in writing by the Buyer and shall be paid irrespective of the amount of Preferred Stock, Conversion Shares and Warrant Shares held by Buyer on the Target Date and thereafter. After the expiration of the first thirty (30) day period, the Company shall pay to the Buyer as liquidated damages 2% of the total purchase price of the Preferred Stock for each additional thirty (30) day period until such time as the Registration Statement is declared effective, which shall be pro-rated daily for any period of less than thirty (30) days. 4.3 Any amount payable pursuant to the foregoing provisions shall be delivered on or before the fifth (5th) day following the end of the calendar month in which such payment or delivery obligation arose. 4.4 The Company shall file a request for acceleration of effectiveness of the registration statement within five days after it has received a no review/no further comment determination from the SEC. 4.5 The Registration Statement shall include only the common stock to be issued to the Buyer and other purchasers of the Preferred Shares (except such Registration Statement may include additional shares of common stock not to exceed 100,000 in the aggregate). 4.6 It shall be a condition precedent to the obligation of the Company to register any Conversion Shares and Warrant Shares pursuant to this Section 4 that Buyer shall furnish to the Company such information regarding the Conversion Shares and Warrant Shares held and the intended method of disposition thereof and other information concerning the Buyer as the Company shall reasonably request and as shall be required in connection with the registration statement to be filed by the Company. If after a registration statement becomes effective the Company advises the Buyer that the Company considers it appropriate to amend or supplement the applicable registration statement, the Buyer shall suspend further sales of the Conversion Shares and Warrant Shares until the Company advises the Buyer that such registration statement has been amended or supplemented. 4.7 Whenever the Company is required by the provisions of this Section 4 to effect the registration of the Conversion Shares and Warrant Shares under the Securities Act, the Company shall: (i) Prepare and file with the SEC a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective; (ii) Prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective; (iii) Furnish to the Buyer and to the underwriters (if any) of the securities being registered such reasonable number of copies of the registration 9 statement, preliminary prospectus, final prospectus and such other documents as the Buyer may reasonably request in order to facilitate the public offering of such securities; (iv) Use its best efforts to register or qualify the securities covered by such registration statement under such state securities or Blue Sky Laws of such jurisdictions as the Buyer may reasonably request within twenty (20) days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (v) Notify the Buyer, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (vi) Notify the Buyer promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; and (vii) Prepare and promptly file with the SEC and promptly notify the Buyer of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the Securities Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 4.8 With respect to the inclusion of the Conversion Shares and Warrant Shares in a registration statement pursuant to this Section 4, all registration expenses, fees, costs and expenses of and incidental to such registration, inclusion and public offering in connection therewith shall be borne by the Company; provided, however, that the Buyer shall bear its own professional fees and pro rata share of the underwriting discount and commissions, if any. The fees, costs and expenses of registration to be borne by the Company shall include, without limitation, all registration, filing, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or underwriters of such securities (if any and if the Company and/or selling security holders are required to bear such fees and disbursements), and all legal fees and disbursements and other expenses of complying with state securities or Blue Sky Laws of any jurisdiction in which the securities to be offered are to be registered or qualified. 4.9 Subject to the conditions set forth below, in connection with any registration of the Shares pursuant to this Section 4, the Company agrees to indemnify and hold harmless the Buyer, any underwriter for the Company or acting on behalf of the Buyer and each person, if any, 10 who controls the Buyer, within the meaning of Section 15 of the Securities Act, as follows: 11 (i) Against any and all loss, claim, damage and expense whatsoever arising out of or based upon (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending any litigation, commenced or threatened, or any claim whatsoever based upon) any untrue or alleged untrue statement of a material fact contained in any preliminary prospectus (if used prior to the effective date of the registration statement), the registration statement or the prospectus (as from time to time amended and supplemented), or in any application or other document executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Company's securities under the securities laws thereof, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or any other violation of applicable federal or state statutory or regulatory requirements or limitations relating to action or inaction by the Company in the course of preparing, filing, or implementing such registered offering; provided, however, that the indemnity agreement contained in this section shall not apply to any loss, claim, damage, liability or action arising out of or based upon any untrue or alleged untrue statement or omission made in reliance upon and in conformity with any information furnished in writing to the Company by or on behalf of the Buyer expressly for use in connection therewith or arising out of any action or inaction of the Buyer; (ii) Subject to the proviso contained in Subsection (i) above, against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, commenced or threatened, or of any claim whatsoever based upon any untrue statement or omission (including, but not limited to, any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any such litigation or claim) if such settlement is effected with the written consent of the Company; and (iii) In no case shall the Company be liable under this indemnity agreement with respect to any claim made against such Company, underwriter or any such controlling person unless the Company shall be notified, by letter or by facsimile confirmed by letter, of any action commenced against such persons, promptly after such person shall have been served with the summons or other legal process giving information as to the nature and basis of the claim. The failure to so notify the Company, if prejudicial in any material respect to the Company's ability to defend such claim, shall relieve the Company from its liability to the indemnified person under this Section 4, but only to the extent that the Company was prejudiced. The failure to so notify the Company shall not relieve the Company from any liability which it may have otherwise than on account of this indemnity agreement. The Company shall be entitled to participate at its own expense in the defense of any suit brought to enforce any such claim, but if the Company elects to assume the defense, such defense shall be 12 conducted by counsel chosen by it, provided such counsel is reasonably satisfactory to the Company or controlling persons, defendants in any suit so brought. In the event the Company elects to assume the defense of any such suit and retain such counsel, the Company, underwriter or controlling persons, defendants in the suit, shall, after the date they are notified of such election, bear the fees and expenses of any counsel thereafter retained by them, as well as any other expenses thereafter incurred by them in connection with the defense thereof; provided, however, that if the Company, underwriter or controlling persons reasonably believe that there may be available to them any defense or counterclaim different than those available to the Company or that representation of such Company, underwriters or controlling persons by counsel for the Company presents a conflict of interest for such counsel, then such Company, underwriter and controlling person shall be entitled to defend such suit with counsel of their own choosing and the Company shall bear the fees, expenses and other costs of such separate counsel. 4.10 Each Buyer agrees to indemnify and hold harmless the Company, each underwriter for the offering, (if any), and each of their officers and directors and agents and each other person, if any, who controls the Company and underwriter within the meaning of Section 15 of the Securities Act against any and all such losses, liabilities, claims, damages and expenses as are indemnified against by the Company under Section 4.6 above; provided, however, that such indemnification by Buyer hereunder shall be limited to any losses, liabilities, claims, damages, or expenses to the extent caused by any untrue statement of a material fact or omission of a material fact (required to be stated therein or necessary to make statements therein not misleading), if any made (or in settlement of any litigation effected with the written consent of such Company, alleged to have been made) in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any application or other document in reliance upon, and in conformity with, written information furnished in respect of such Company by or on behalf of such Company expressly for use in any preliminary prospectus, the registration statement or prospectus or any amendment or supplement thereof or in any such application or other document or arising out of any action or inaction of such Company in implementing such registered offering. Notwithstanding the foregoing, the indemnification obligation of each Buyer shall not exceed the purchase price of the Notes paid by such Buyer. In case any action shall be brought against the Company, or any other person so indemnified, in respect of which indemnity may be sought against any Company, such Company shall have the rights and duties given to the Company, and each other person so indemnified shall have the rights and duties given to the Buyer, by the provisions of Section 4.6. The person indemnified agrees to notify the Company promptly after the assertion of any claim against the person indemnified in connection with the sale of securities. 4.11 If the indemnification provided for in Sections 4.8 and 4.9 above are unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, 13 claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the indemnified party, on one hand, and such indemnifying party, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, or liabilities (or actions in respect thereof). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnified party, on one hand, or such indemnifying party, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. No person who has committed fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. 5. CLOSING DATE The Preferred Share certificate shall be delivered to Buyer and the funds therefore shall be delivered to Company on or before June 12, 1998 (the "Closing Date") or at such other time mutually agreed to by the parties. 6. GOVERNING LAW; INTERPRETATION This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware. The Company and the Buyer hereby irrevocably consent to the exclusive jurisdiction and venue of the state and federal courts of the State of Delaware and agree that any action or proceeding arising out of or relating to this Agreement shall be brought in the state or federal courts located in Delaware. The Company and the Buyer waive any defense of forum nonconveniens and any other objections or defenses which the Buyer or Company may have to venue in connection with any such action or proceeding. The Company and the Buyer hereby waive any right to trial by jury in such proceeding. 7. ENTIRE AGREEMENT; AMENDMENT This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof, and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought. 8. NOTICES; ETC. Any notice, demand or request required or permitted to be given by either the Company 14 or the Buyer pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or by facsimile, with a hard copy to follow by two day courier addressed to the parties at the addresses of the parties set forth at the end of this Agreement or such other address as a party may request by notifying the other in writing. 9. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument. 10. SEVERABILITY In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, enforceable or void, this Agreement shall continue in full force and effect without said provision, provided that no such severability shall be effective if it materially changes the economic benefit of this Agreement to any party. 11. TITLES AND SUBTITLES The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. IN WITNESS WHEREOF, this Agreement was duly executed on the date first written above, as confirmed by signatory below. Facsimile signatures of this agreement shall be binding on all parties hereto. Official Signatory of Company: MICROTEL INTERNATIONAL, INC. 4290 East Brickell Street Ontario, California 91761 By: ----------------------------------- Carmine T. Oliva President and Chief Executive Officer RESONACE LTD. By: ----------------------------------- Number of Shares of Series A Preferred: 100 15 EX-10.52 7 EXHIBIT 10.52 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED OFFERED OR SOLD UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED AND ENCUMBERED NOT EXCEPT PURSUANT TO THE PROVISIONS CONTAINED HEREIN. WARRANTS TO PURCHASE COMMON STOCK MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to __________________________ (the "Holder") _________________________ (___________) transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on May 22, 2001 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $1.25 per share (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 9. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter. It shall be a condition to the exercise of the Warrants that the Holder or any transferee hereof provide an opinion of counsel reasonably satisfactory to the Company that the Warrants and the Warrant Shares to be delivered upon exercise thereof have been registered under the Securities Act or that an exemption from the registration requirements of the Securities Act is available. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrants Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by signing this certificate that, as of the date of this Warrant and at the time of exercise that: (a) the Holder has acquired the Warrant or the Warrant Shares, as the case may be, for the Holder's own account; (b) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and (c) either the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 7, or until an exemption from registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Rule 144 or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNLESS IN THE WRITTEN LEGAL OPINION (APPROVED BY THE COMPANY) OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION IS NOT REQUIRED. 7. REGISTRATION RIGHTS. The shares of Common Stock underlying the Warrants shall be accorded the same registration rights as the Conversion Shares issuable pursuant to the Subscription Agreement for Series A Convertible Preferred Stock executed by the Company and the Holder dated of even date herewith. 8. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares. 9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 11. ASSIGNMENT. The Warrants may be transferred subject to the provisions of Section 6. 12. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. IN WITNESS WHEREOF, the undersigned have executed this Agreement on May __ , 1998. MICROTEL INTERNATIONAL, INC. Dated:_____________ By:__________________________________ (Authorized Signature) ___________________________________ (Name and Title) HOLDER Dated:_____________ By:__________________________________ (Authorized Signature) _________________________________ (Name and Title) NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ___________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that: (a) the Warrant Shares are being acquired solely for the account of the undersigned for investment and not with a view to or for sale in connection with any distribution; (b) the undersigned has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the undersigned's business or financial experience the undersigned has the capacity to protect the undersigned's own interests in connection with the exercise of the Warrants; and (c) the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available. 4. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 5. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: _____________ _________________________________ (Name) _________________________________ (Authorized Signature) Address for Delivery: _________________________________ _________________________________ _________________________________ _________________________________ EX-10.53 8 EXHIBIT 10.53 AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF PREFERRED STOCK OF MICROTEL INTERNATIONAL INC., A DELAWARE CORPORATION The undersigned, Carmine T. Oliva, hereby certifies that: A. He is the duly elected and acting President of MicroTel International Inc., a Delaware corporation (the "Corporation"). B. Pursuant to authority given by the corporation's Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation seeks to provide the Shareholders of misstatements has duly adopted the following amended and restated recitals and resolutions: WHEREAS, the Certificate of Incorporation of this corporation provides for two classes of shares known as Common Stock and Preferred Stock; WHEREAS, on May 19, 1998, the Board of Directors adopted a Certificate of Designations, Preferences and Rights of Series A Preferred Stock of MicroTel International Inc. (the "Certificate of Designation"), which was filed with the Secretary of State of the State of Delaware on May 20, 1998; and WHEREAS, certain purchasers of the Corporation's Series A Preferred Stock have requested the Corporation to clarify certain provisions of the Series A Certificate, and to provide certain protections to the Shareholders of Series A Preferred Stock of the Corporation (the "Series A Shareholders"); and WHEREAS, the Board of Directors of the Corporation desires to clarify the Certificate of Designation and to provide the Series A Shareholders with certain protections; NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors deems it advisable to adopt, and hereby does adopt, the Corporation's Amended Certificate of Designations, Preferences and Rights of Series A Preferred Stock of MicroTel International Inc., a Delaware corporation as follows: A. DESIGNATION. One series of Preferred Stock, designated Series A Preferred Stock, is hereby provided for, which shares shall have the rights, privileges and preferences set forth below. B. AUTHORIZED NUMBER. The number of shares constituting the Series A Preferred Stock shall be 200, par value .01 per share. C. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred Stock shall not be entitled to receive dividends. D. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership, an amount per share equal to $10,000 (the "Stated Value") for each outstanding share of Series A Preferred Stock. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock on a share-by-share basis in proportion to the aggregate preferential amounts of each such series of Preferred Stock. (b) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section D but shall instead be treated pursuant to Section E hereto. E. CONVERSION. The holders of the Series A Preferred Shares shall have conversion rights as follows (the "Conversion Rights"): (1) CONVERSION RIGHTS. (i) All Series A Preferred Share shall be convertible, at the option of the holders of such shares, at any time after the ninetieth (90th) day of issuance of such shares, at the office of the Corporation or any transfer agent for the Series A Preferred Shares, into the number of fully paid and nonassessable unrestricted and nonlegended Common Shares of the Corporation at the conversion price per Series A Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices (not necessarily consecutive) over the forty (40) trading days prior to the exercise date of any such conversion. (ii) In the event of a call for redemption of any Series A Preferred Shares pursuant to Section F hereof, each holder of any Series A Preferred Shares shall have the right to exercise the conversion rights set forth in this Section E and the right to convert each share shall cease as to the shares designated for redemption as of the close of business on the business day immediately prior to the redemption date, unless default is made in payment of the redemption price. If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2). (2) MECHANICS OF CONVERSION. (i) No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Shares. In lieu of any fractional share to which the holder would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. In order to convert Series A Preferred Shares into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the office of the Corporation for the Series A Preferred Shares, and shall give written notice to the Corporation at such office that the holder elects to convert the same, the number of shares of Series A Preferred Shares so converted and a calculation of the Conversion Rate (with an advance copy of the certificate(s) and the notice by facsimile); provided, however, that the Corporation shall not be obligated to deliver certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such Series A Preferred Shares are delivered to the Corporation as provided above, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. (ii) The Corporation shall use reasonable efforts to cause to be issued and delivered within two (2) business days after delivery to the Corporation of such Series A Preferred Shares, or after such agreement and indemnification, to such holder of Series A Preferred Shares at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date set forth in such notice of conversion provided the original Series A Preferred Shares to be converted are received by the Corporation within five (5) business days thereafter and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Series A Preferred Shares to be converted are not received by the Corporation within five (5) business days after the Conversion, the notice of conversion shall become null and void. (3) CONVERSION PRICE ADJUSTMENTS. The closing bid price used to determine the Conversion Price shall be appropriately adjusted to reflect, as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series A Preferred Shares shall be convertible into such class and type of securities as the Holder would have received had the Holder converted the Series A Preferred Shares immediately prior to such Corporate Change, as appropriately adjusted to equitably reflect the conversion price and any stock dividend, stock split or share combination of the common stock after such corporate event. (4) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Shares solely for the purpose of effecting the conversion of the Series A Preferred Shares such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Shares; and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the conversion of all then outstanding Series A Preferred Shares, in addition to such other remedies as shall be available to the holder of such Series A Preferred Shares, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purposes. F. REDEMPTION OF SERIES A PREFERRED SHARES. (1) OPTIONAL REDEMPTION. The Corporation may redeem all outstanding and unconverted Series A Preferred Shares for cash at a per share price equal to $11,500 (115% of the Stated Value) for each Series A Preferred Share by giving written notice to the Holders at least twenty (20) days in advance of such redemption. If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares, the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2) during the notice period prior to the redemption date as set forth in F(3)(ii) below. If the Corporation fails to redeem after giving written notice, it shall pay to the Holders pro-rata a total of five (5%) percent of the amount to be redeemed as liquidated damages. (2) MANDATORY REDEMPTION. On May 22, 2003, the Corporation shall redeem all Series A Preferred Shares then outstanding, by the payment therefor of the redemption price of $11,500 per share. (3) MANNER OF REDEMPTION OF SERIES A PREFERRED SHARES. (i) If less than all of the outstanding Series A Preferred Shares shall be called for redemption, the particular shares of such series to be redeemed shall be selected by lot or by such other equitable manner as may be prescribed by resolution of the Board of Directors. (ii) Notice of redemption of any Series A Preferred Shares shall be given by the Corporation by fax or other written communication, at least twenty (20) days prior to the date fixed by the Board of Directors of the Corporation for redemption (herein called the "redemption date"), to the holders of record of the shares to be redeemed at their respective addresses then appearing on the records of the Corporation. The notice of the redemption shall state: (A) the redemption date, (B) the redemption price (which must be paid within five (5) business days after the date of redemption), (C) whether the redemption is an optional redemption or a mandatory redemption, (D) if less than all outstanding Series A Preferred Shares are to be redeemed, the identification of the Series A Preferred Shares to be redeemed, (E) the conversion rate on the date of the notice, (F) that on the redemption date the redemption price will become due and payable upon each Series A Preferred Shares to be redeemed and the right to convert each share of Series A Preferred Share shall cease as of the close of business on the business day prior to the redemption date, unless default shall be made in the payment of the redemption price, and (G) the place or places where such Series A Preferred Shares to be redeemed are to be surrendered for payment of the redemption price. (4) FAILURE TO REDEEM. If the Corporation fails to pay the redemption price after calling any Series A Preferred Shares for optional redemption under Section F(1), the Corporation shall have no further right to redeem Series A Preferred Shares under Section F(1). (5) REACQUIRED SHARES. Any shares of the Series A Preferred Stock converted, redeemed or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series A Preferred Stock and may be reissued at the direction of the Corporation subject to the conditions or restrictions on issuance set forth herein. G. CORPORATE EVENTS. In the event of (i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividend) or other distribution or (ii) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other Corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred Shares at least twenty (20) days prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (C) the time, if any, that is to be fixed, as to when the holders of record of Common Stock (or other securities) will receive for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution or winding up. H. VOTING RIGHTS. (1) The Holders of the Series A Preferred Shares shall not have any voting rights except as set forth below or as otherwise from time to time required by law. (2) To the extent that under California law the vote of the holders of the Series A Preferred Shares, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding Series A Preferred Shares shall constitute the approval of such action by the class. To the extent that under California law the holders of the Series A Preferred Shares are entitled to vote on a matter with holders of Common Stock voting together as one class, each Series A Preferred Shares shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders as the date as of which the Conversion Price is calculated. Holders of the Series A Preferred Shares shall be entitled to notice of all shareholder meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws and applicable statutes. I. PROTECTIVE PROVISIONS. So long as the Series A Preferred Shares are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series A Preferred Shares set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority in aggregate principal amount of the Series A Preferred Shares then outstanding: (1) Alter or change the rights, preferences or privileges of the Series A Preferred Shares so as to affect adversely the Series A Preferred Shares. (2) For a period of eight (8) months from the issuance of the Series A Preferred Shares, create any new class or series of stock which ranks prior to or PARI PASSU to the Series A Preferred Shares with respect to liquidation preference, other than any additional series of Preferred Shares issued for a purchase price not to exceed $2 million, which may rank PARI PASSU. (3) Do any act or thing which would result in taxation of the holders of Series A Preferred Shares under Section 305 of the Internal Revenue Code of 1985, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its authorized officer as of June____ , 1998. MICROTEL INTERNATIONAL INC. By: ------------------------------------------ Carmine T. Oliva President and Chief Executive Officer EX-10.54 9 EXHIBIT 10.54 EMPLOYMENT AGREEMENT This agreement is made as of this 1st day of May, 1998, by and between Microtel International, Inc., a Delaware corporation with offices at 4290 E. Brickell Street, Ontario, California, 91761-1511 (the "Employer" or the "Company"), and James P. Butler, who resides at 7716 East Fieldcrest Lane, Orange, California, 92869, (the "Employee"). WITNESSETH WHEREAS, the Employee desires to be employed by the Employer, and the Employer desires to employ the Employee upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements hereinafter contained the parties hereto agree as follows: I. EMPLOYMENT 1.1 EMPLOYMENT. Subject to the provisions for termination as hereinafter provided, the terms of this agreement shall begin on the date first written above and shall terminate on May 1, 2001 (the "Employment Period"). 1.2 RENEWAL. Subject to the provisions for termination as hereinafter provided, this agreement shall be automatically renewed for two (2) successive one (1) year terms commencing on May 1, 2001, (the"Renewal Periods") unless, during the following periods, either party to this Agreement shall notify the other party in writing of its desire not to renew this Agreement; provided, however, any action required to be taken with respect to this Employment Agreement by the Employer shall only be taken after the Executive Compensation and Management Development Committee of the Board of Directors of the Employer approves such action. The required notice periods in order to prevent an automatic renewal of this Agreement shall be as follows:
Period During Which Notice Of Non-Renewal Must Be Given Renewal Period - ------------------------- -------------- 3/1/99 to 5/1/00 5/1/01 to 5/1/02 3/1/00 to 5/1/00 5/1/01 to 5/1/02
- 2 - 1.3 DUTIES. Subject to Section 1.4, the Employee hereby promises to perform and discharge well and favorably the duties of Senior Vice President and Chief Financial Officer and to perform services in such additional capacities as may be directed by the Chairman and Chief Executive Officer, and concurred in by the Company's Board of Directors (the "Board") in accordance herewith. As Chief Financial Officer, the Employee's duties shall consist of the usual and customary duties of his position and he shall be subject to the direction and control of the Chairman and Chief Executive Officer and shall at all times have the authority as shall reasonably be required to enable him to discharge such duties in an efficient manner. 1.4 REDESIGNATION. The Chairman and Chief Executive Officer may, in his discretion, with the concurrence of the Board, elect or appoint the Employee to offices or positions other than, or in addition to, Chief Financial Officer (hereinafter the "Redesignation") by providing the Employee with prompt written notice of the Redesignation. If any Redesignation and related addition to and/or reduction of Employee's duties results in a substantial net change in the scope of the Employee's responsibilities, the Employee may elect, in his sole discretion, not to accept such Redesignation and to resign upon providing written notice of his resignation to the Employer not less than thirty (30) days after the Employee has been provided with written notice of the Redesignation. In such event, if such Redesignation occurs during the Employment Period, the Employer shall pay the Employee his annual salary, as provided herein, for one (1) year following the effective date of such resignation or until January 1, 2001, whichever is the longer period. In the event that the Redesignation shall occur at any time after the Employment Period, and during one of the Renewal Periods, the Employer shall pay the Employee his annual salary, as provided herein, for one (1) year following the effective date of such resignation. All sums owing hereunder in the event of a Redesignation and a subsequent resignation by the Employee shall be due and payable within thirty (30) days of the effective date of such resignation. 1.5 OTHER BUSINESS ACTIVITIES. The Employee shall devote his full time, attention and energies to the business of the Company and shall not, so long as he remains in the employ of the Company, be engaged in any other employment or business of substantial nature, whether or not such business activity is pursued for gain and profit, without the written consent of the Company. Nothing contained herein, however, shall be construed as preventing the Employee from (i) making passive investments of his assets in such form or manner as he desires, providing such investments: (a) do not require the Employee to render services in the operations or affairs of the firms, corporations or other entities in which such investments are made, and (b) are not made in any business directly or indirectly competing with the Employer or its subsidiaries or affiliated corporations, if any, - 3 - unless the stock of such company is listed on a national stock exchange and the Employee owns less than three percent (3%) of the outstanding voting securities, or (ii) becoming a member of the Board of Directors of any other corporation that the Employee desires, provided that the corporation upon whose Board the Employee is a member of is not, in the sole discretion of the Employer's Board of Directors, in competition with the business of the Employer. The Company shall provide the Employee with adequate office and support staff to accomplish the objectives for which he is employed and in order to perform the duties as set forth herein. II. COMPENSATION 2.1 ANNUAL SALARY. The Employer shall pay to the Employee in compensation for Employee's services hereunder, a base salary at an annual rate of $125,000, payable in equal periodic installments in accordance with the customary payroll policy of the Employer. The Employee shall also be eligible to receive merit or promotional increases in accordance with the Employer's annual review, or other general review of its officer compensation. 2.2 EXPENSES. The Employer agrees to reimburse the Employee against his receipts for all reasonable business expenses incurred by him during the Employment Period or Renewal Periods in connection with the performances of his services hereunder. 2.3 BONUSES. The Employer agrees that the Employee will be entitled to participate in any bonus or similar plan approved by the Employer's Board of Directors. 2.4 STOCK OPTIONS AND OTHER INCENTIVE PLANS. The Employee shall continue to be eligible to participate in any Incentive Stock Option or Non-Qualified Stock Option Plan or other incentive plans duly approved by the Board of Directors for implementation within the Company. 2.5 ADDITIONAL BENEFITS. The Employee shall be entitled to the customary and usual medical, insurance, fringe and other benefits made available to the Employer's employees generally. III. TERMINATION 3.1 TERMINATION DUE TO DEATH. If during the Employment Period or Renewals thereof, Employee shall die, this Agreement shall terminate, except that the compensation or other amounts payable hereunder, to or for the benefit of Employee shall be paid for one (1) year following the death of the Employee to such person or persons as Employee - 4 - may designate by notice to the Employer from time to time or, in the absence of such designation, to his legal representatives. 3.2 TERMINATION DUE TO DISABILITY. If during the Employment Period, or Renewals thereof, Employee shall become physically or mentally disabled, whether totally or partially, so that he is unable substantially to perform his services hereunder (i) for a period of 180 consecutive days, or (ii) for shorter periods aggregating 180 days during any period of eighteen consecutive months , the Employer may at any time after the last day of the 180 consecutive days of disability or the day on which the shorter periods of disability shall have equalled an aggregate of 180 days, by 10 days written notice to Employee (but before Employee has recovered from such disability), terminate this Agreement. Notwithstanding such disability, the Employer shall continue to pay Employee compensation or other amounts payable hereunder, to or for the benefit of Employee up to and including the date one (1) year after the effective date of such termination. 3.3 TERMINATION FOR CAUSE. The Employer may at any time during the Employment Period and any Renewals thereof, by notice, terminate this Agreement and discharge the Employee for cause, whereupon the Employer's obligation to pay any compensation, severance allowance, or other amounts payable hereunder to or for the benefit of Employee shall terminate on the date of such discharge, notwithstanding anything herein contained to the contrary. As used herein, the term "for cause" shall be deemed to mean and include chronic alcoholism; drug addiction; misappropriation of any money or other assets or properties of the Employer or its subsidiaries; wilful violation of specific and lawful written directions from his supereior or from the Board of Directors of the Employer; failure or refusal to perform the services required of Employee under this Agreement; wilful disclosure of trade secrets or other confidential information resulting in substantial detriment to the Company as documented by the Employer under oath or affirmation; conviction in a court of competent jurisdiction of any crime involving the funds or assets of the Company including, but not limited to, embezzlement and larceny; any civil or criminal conduct or personal misbehavior which is detrimental to the image, reputation, welfare or security of the Employer where such misconduct or misbehavior and judgment have been documented by the Employer under oath or affirmation; and any other acts or omissions that constitute grounds for cause under the laws of the States of Delaware, California, Massachusetts or Illinois, or such other States wherein the Company may have operations. 3.4 TERMINATION WITHOUT CAUSE. The Employer may terminate this Agreement without cause at any time upon sixty (60) days written notice to the Employee. In the event the Employer does terminate this Agreement without it being "for cause", the Employee, if requested in writing by the Employer, shall continue to render services at full compensation until the effective date of such termination. Thereafter, during the Employment Period, Employee shall be paid his annual salary for one (1) year following the effective date of such termination, or until May 1, 2000, whichever is the longer - 5 - period. In the event such termination pursuant to this Section 3.4 occurs during any of the Renewal Periods, the Employee shall be paid his Annual Salary through the expiration of the particular Renewal Term to which the Company is obligated under Section 1.2, as well as all other amounts payable hereunder. Termination "without cause" shall include the ceasing of operations due to bankrupcy and/or the general inability of the Employer to meet the Employer's obligations as they become due. 3.5 TERMINATION WITHOUT CAUSE FOLLOWING A CHANGE IN CONTROL. This Agreement may be terminated by Employer, or successor to Employer, upon thirty (30) days written notice to Employee upon the happening of any of the following events: a. Sale by Employer of substantially all of its assets; b. Sale, exchange or other disposition of two-thirds or more of the outstanding capital stock of the Employer; c. Merger or reorganization in which shareholders of the Employer immediately prior to such merger or reorganization receive less than fifty percent(50%) of the outstanding voting shares of the successor corporation. In the event that the Employee's employment is terminated without cause within two years following a change of control, the Employer or successor to Employer shall: a. Pay to Employee, in a lump sum within thirty (30) days from date of termination, or, at Employee's election, in installments, the Employee's Annual Salary and all other amounts payable hereunder for one and one-half (1 1/2) years following the effective date of such termination or untilMay 1, 2000, whichever is the longer period. b. In the event such termination occurs during any of the Renewal Periods, pay to Employee his Annual Salary to the expiration of that particular Renewal Period, his Annual Salary for a period of one year following the end of such Renewal Period, plus all other amounts payable hereunder c. Pay to Employee the average of the Annual Executive Bonuses awarded to him in the three years preceding his termination over the same time span and under the same conditions as Annual Salary. d. Pay to Employee any Executive Bonus awarded but not yet paid. e. Continue Employee's coverage in all benefit programs in which he was participating on the date of his termination of employment until the earlier of (1) the end of the Employment Period or Renewal Period, - 6 - or (2) the date he receives equivalent coverage and benefits under a subquent employer. IV. COVENANTS NOT TO COMPETE 4.1 The Employee agrees that (i) during the Employment Period and any Renewals thereof, or in the event of a termination pursuant to Section 3.3 and, thereafter for a period of one (1) year or (ii) in the event of a termination pursuant to Sections 3.4 or 3.5 and for the period from the effective date of such termination until the expiration of a period of twelve months following his resignation upon Redesignation for the Interim Period as defined in Section 1.4, he will not act as a principal, agent, employee, employer, consultant, control person, stockholder, director or co-partner of any person, firm, business entity other than the Employer, or in any individual representative capacity whatsoever, directly or indirectly, without the express consent of the Employer: (a) engage or participate or be employed in any business whose products or services are competitive with those of the Employer in the world; provided, however, that the ownership by the Employee of not more than three percent (3%) of a corporation or similar business venture shall not be deemed to be a violation of this covenant as long as the Employee does not become a controlling person or actively involved in the management of such corporation or business venture; (b) approach, solicit business from, or otherwise do business or deal with any customer of the Employer in connection with any product or service competitive with any provided by the Employer; provided, however, the Employee may approach, solicit business from, or otherwise do business or deal with any subsidiary or division of any customer of the Employer provided that such customer's division or subsidiary does not provide a product or service competitive with any provided by the Employer. (c) approach, counsel, solicit, assist to solicit or attempt to induce any person who is then in the employ of the Employer, its affiliates or subsidiaries to leave the employ of the Employer, or employ, or attempt to employ on behalf of any person or entity any such person or persons who at any time during the preceding six months was in the employ of the Employer; (d) aid or counsel any other person, firm, corporation or business entity to do any of the above. For purposes of this Section 4.1, the term "customer" shall mean (I) any person or entity who was a customer of the Employer at any time during the last two months of the Employee's employment by the Employer; (ii) any prospective customer to - 7 - whom the Employer had made a presentation, or similar offering of product(s) during the last year of the Employee's employment by the Employer. The Employee acknowledges (I) that his position with the Employer requires performance of services which are special, unique, extraordinary and intellectual in character and places him in a position of confidence and trust with the customers and employees of the Employer, through which, among other things, he shall obtain knowledge of such organization's "technical information" and "know how" and become acquainted with their customers, in which matters such organizations have substantial proprietary interests, (ii) that the restrictive covenants set forth above are necessary in order to protect and maintain such proprietary interests and other legitimate business interests of the Company, and (iii) that the Employer would not have entered into this agreement unless such covenants were included herein. The Employee also acknowledges that the business of the Employer presently extends throughout the world, that he has personally supervised or engaged in such business on behalf of the Employer, or will do so pursuant to the terms of this Agreement, and, accordingly, it is reasonable that the restrictive covenants set forth above are not more limited as to geographic area than is set forth therein. The Employee also represents to the Employer that the enforcement of such covenants will not prevent the Employee from earning a livelihood. If any of the provisions of this Section, or any part thereof, is hereinafter construed to be invalid or unenforceable, the same shall not affect the remainder of such provision or provisions, which shall be given full effect, without regard to the invalid portions. If any of the provisions of this Section, or any part thereof, is held to be unenforceable because of the duration of such provision, the area covered thereby or the type of conduct restricted therein, the parties agree that the court making such determination shall have the power to modify the duration, geographic area and/or other terms of such provision and, as so modified, said provision shall then be enforceable. In the event that the courts of any one or more jurisdictions shall hold such provisions wholly or partially unenforceable by reason of the scope thereof or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Employer's right to the relief provided for herein in the courts of any other jurisdictions as to breaches or threatened breaches of such provisions in such other jurisdictions, the above provisions as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. V. CONFIDENTIAL INFORMATION 5.1 DISCLOSURE OF INFORMATION. The Employee recognizes and acknowledges that the financial information, trade secrets, technical information, and confidential or proprietary information of the Employer, including such information as may exist from - 8 - time to time, and information as to the identity of customers or prospective customers of the Employer and other similar items, are valuable, special and unique assets of the Employer's business, access to and knowledge of which are essential to the performance of the duties of the Employee hereunder. The Employee will not, during or after the term hereof, in whole or in part, disclose such secrets or confidential, technical or proprietary information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Employee make use of any such property or information for his own purpose or for the benefit of any person, firm, corporation or other entity (except the Employer) under any circumstances, during or after the term hereof, provided that after the term hereof these restrictions shall not apply to such secrets or information which are then in the public domain (provided that the Employee was not responsible, directly or indirectly, for such secrets or information entering the public domain without the consent of the Employer). 5.2 OWNERSHIP OF INVENTIONS. All of the Employee's right, title and interest in all developments or improvements devised or conceived by the Employee, alone or with others, during his working hours, as well as in all developments or improvements devised or conceived by the Employee, alone or with others, which relate to any business in which the Employer is then engaged or contemplating engaging in, regardless of when devised or conceived, is the exclusive property of the Employer. The Employee shall promptly disclose all such developments and improvements to the Employer. The Employee shall not use or disclose any such developments or improvements, other than in furtherance of the Employer's business, without the Employer's prior written consent 5.3 RETURN MEMORANDA. Employee hereby agrees to deliver promptly to the Employer on termination of his employment, or at any other time the Employer may so request, all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof) relating to the Employer's business and all property associated therewith, which he may then possess or have under his control. VI. INJUNCTIVE RELIEF 6.1 The Employee acknowledges that the remedy at law for any breach or threatened breach of Articles IVand V hereof by the Employee will be inadequate, and that, accordingly, the Employer shall, in addition to all other available remedies (including without limitation , seeking such damages as it can be shown it has sustained by reason of such breach), be entitled to injunctive relief without being required to post bond or other security, and without having to prove the inadequacy of the available remedies at law. The Employee agrees not to plead or defend on grounds of adequate remedy at law or any similar defense in any action by the Employer against him, or injunctive relief, or for specific performance of any of his obligations pursuant to Articles IV and V hereof. Nothing herein shall be construed as prohibiting the Employer from pursuing any other remedies for such breach or threatened breach. - 9 - VII. MISCELLANEOUS PROVISIONS 7.1 NOTICES AND COMMUNICATIONS. All notices and communications hereunder shall be in writing and shall be hand-delivered or sent postage prepaid by registered or certified mail, return receipt requested, to the address first above written or to such other address of which notice shall have been given in the manner herein provided. 7.2 ENTIRE AGREEMENT. All prior or contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement, and this Agreement constitutes the entire understanding between the parties. This Agreement may not be modified, amended, changed or discharged except by a writing signed by both parties hereto, and then only to the extent therein set forth. 7.3 ASSIGNMENT. This Agreement may be assigned by the Employer and shall be binding upon and inure to the benefit of the Employer's assigns and successors. The services to be performed by the Employee pursuant to this Agreement may not be assigned by the Employee. 7.4 WAIVER. No waiver of any breach of this Agreement or of any objection to any act or omission connected herewith shall be implied or claimed by any party, or be deemed to constitute a consent to any continuation of such breach, act or omission, unless in a writing signed by the party against whom enforcement of such waiver or consent is sought, and then only to the extent therein set forth. 7.5 INDEMNIFICATION. The Employer will indemnify Employee, to the maximum extent permitted by applicable law and the By-laws of the Company, against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or other reason of his being an officer, director or employee of the Employer or any subsidiary or affiliate thereof. 7.6 SECTION HEADINGS. The Section headings of this Agreement are solely for the purpose of convenience and shall neither be deemed a part of this Agreement nor used in any interpretation thereof. 7.7 GOVERNING LAW. This Agreement and the relationship of the parties shall be governed by, and construed in accordance with, the laws of the state of Delaware, or until such time as the Company's state of incorporation may be changed to another state within the United States, at which point the relationship of the parties would then be governed by, and construed in accordance with, the laws of the new state of incorporation. - 10 - IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the day and year first above written. MICROTEL INTERNATIONAL, INC. Dated: ___________ By:__________________________ Carmine T. Oliva, Chairman, President and Chief Executive Officer Dated: ___________ By:__________________________ Robert B. Runyon, Chairman, Executive Compensation and Management Development Committee, Board of Directors Dated: ___________ By:__________________________ James P. Butler, Employee EX-27 10 EXHIBIT 27
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 923 0 7,091 242 6,288 14,775 5,337 3,305 21,106 13,282 2,545 459 0 39 4,848 21,106 18,713 18,713 13,061 13,061 0 26 344 (1,128) 37 (1,165) 0 0 0 (1,165) (0.10) (0.10)
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