<PAGE> 1
As filed with the Securities and Exchange Commission on June 24, 1997
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
MICROTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
3679
(Primary Standard Industrial
Classification Code Number)
77-0226211
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4290 E. BRICKELL STREET
ONTARIO, CALIFORNIA 91761
(909) 391-4321
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CARMINE T. OLIVA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROTEL INTERNATIONAL, INC.
4290 E. BRICKELL STREET
ONTARIO, CALIFORNIA 91761
(909) 391-4321
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
THOMAS P. GALLAGHER, ESQ.
MARTIN J. CONROY, ESQ.
RICHARD K. DAVIS, ESQ.
GALLAGHER, BRIODY & BUTLER
212 CARNEGIE CENTER
SUITE 402
PRINCETON, NEW JERSEY 08540
(609) 452-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
==========================================================================================================
Proposed Proposed
Amount Maximum Maximum
Title of each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share (1) Offering Price Registration
Fee
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<S> <C> <C> <C> <C>
Common Stock, $.0033 par value...... 12,507,260 shares $2.00 $25,014,520 $7,580.16
=========================================================================================================
</TABLE>
(1) Based upon the average of the bid and asked prices reported by the
National Association of Securities Dealers Automated Quotation System on June
20, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
MICROTEL INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING THE
LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
Item
Number Caption Prospectus Caption or Location
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Outside Front Cover Page
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Selling Security Holders
8. Plan of Distribution.......................... Plan of Distribution
9. Description of Securities to be Registered.... Securities to be Registered
10. Interests of Named Experts and Counsel........ Experts
11. Information with Respect to the Registrant.... Business; Description of Property; Legal
Proceedings; Market Information; Financial
Statements; Selected Financial Data;
Management Discussion and Analysis of
Financial Condition and Results of
Operations; Directors and Executive
Officers; Executive Compensation; Security
Ownership of Certain Beneficial Owners
and Management; Certain Relationships and
Related Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE> 3
PROSPECTUS
12,507,260 SHARES OF COMMON STOCK
OF
MICROTEL INTERNATIONAL, INC.
This Prospectus is being used in connection with the offering, from time
to time, by certain stockholders of MicroTel International, Inc. (the "Company")
of shares of Common Stock, $0.0033, par value per share ("Common Stock") which
have been issued by the Company, or which are issuable by the Company upon the
exercise of certain warrants and options. The shares of Common Stock registered
hereby consist of: (i) 2,000,000 outstanding shares held by certain persons who
purchased shares of Common Stock in a transaction exempt from the registration
requirements of the Securities Act (the "Yorkton Shares"); (ii) 6,119,130 shares
of Common Stock issued in connection with a merger between a wholly-owned
subsidiary of the Company and XIT Corporation ("XIT" or "XIT Corporation")
pursuant to which XIT became a wholly-owned subsidiary of the Company (the
"Merger Shares"); (iii) 1,504,783 shares of Common Stock issuable upon the
exercise of Common Stock purchase options (the "Option Shares"); (iv)
2,137,879 shares of Common Stock issuable upon the exercise of Common Stock
purchase warrants (the "Warrant Shares"); and (v) 745,468 shares of Common Stock
held by certain shareholders who have agreements with the Company for the
registration of such shares (the "Other Shares") (the Yorkton Shares, Merger
Shares, Option Shares, Warrant Shares and Other Shares are collectively referred
to herein as the "Shares").
The Shares may be offered from time to time by the Selling Shareholders
identified herein. See "Selling Shareholders." Except for the cash proceeds, if
any, that the Company will receive upon issuance of the Option Shares and the
Warrant Shares, the Company will not receive any of the proceeds from the sale
of the Shares. All expenses of the offering, other than commissions or discounts
of broker-dealers, will be borne by the Company. See "Plan of Distribution"
herein for a description of the manner in which the securities covered by this
Prospectus may be sold.
-----------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
The date of this Prospectus is _____, 1997
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<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Commission by mail at prescribed rates.
Requests should be directed to the Commission's Public Reference Section, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site (http://www.sec.gov) that contains certain of
the Company's reports which were filed after the Company became an electronic
filer.
The Company's Common Stock is quoted on the Nasdaq SmallCap Market and
material filed by the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc. 1735 K Street N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Securities being offered by this Prospectus (including
all exhibits and amendments hereto, the "Registration Statement"). This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to summarize the material provisions
of such documents, but are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved. Copies of the Registration Statement and the
exhibits thereto may be inspected, without charge, at the offices of the
Commission, at the addresses set forth above.
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<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective purchasers of the Securities should carefully read the entire
Prospectus and should consider, among other things, the matters set forth in
"Risk Factors."
As used in this Prospectus, the term "Company" refers to MicroTel
International, Inc. and, unless the context otherwise requires, its direct and
indirect subsidiaries. As used in this Prospectus, "CXR" shall refer to the
Company as it existed prior to the Merger. Because XIT is treated as the
acquiror in the Merger for financial accounting purposes, the historical
financial information of the Company presented herein is that of XIT
Corporation.
When used anywhere in this Prospectus, 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 and Section 21E of the
Exchange 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 from those included
within the forward-looking statements as a result of various factors.
THE COMPANY
The Company, through its various direct and indirect operating
subsidiaries, designs, manufactures and distributes a wide range of electronics
hardware products and provides related services.
Prior to March 26, 1997, the Company designed, manufactured and marketed
electronic telecommunication test equipment and data communication equipment
(modems) primarily to the major long distance companies, the regional Bell
operating companies ("RBOCs"), international telephone companies and private
communications networks. On March 26, 1997, the Company was acquired by XIT
Corporation, a New Jersey corporation, in a reverse acquisition pursuant to
which XIT became a wholly-owned subsidiary of the Company and the holders of XIT
common stock became the owners of approximately 65% of the Company's common
stock (the "Merger"). XIT designs, manufactures and markets information
technology products, including displays and input components, subsystem
assemblies, printed circuits, and hybrid microelectronic circuits for the
international telecommunications, medical, industrial, and military/aerospace
markets. Following the Merger, the Company has been organized along three
product line sectors --Instrumentation and Test Equipment, Circuits, and
Components and Subsystem Assemblies. In connection with the Merger, the Company
has agreed to register under the Securities Act the Common Stock issued to the
XIT shareholders, as well as the Common Stock underlying certain options and
warrants held by the XIT shareholders which were converted into warrants and
options to acquire the Company's Common Stock effective as of the Merger, in
order to permit the public resale of the Common Stock by the XIT shareholders.
On April 14, 1997, the Company sold Investment Units consisting of one
share of its common stock and one-quarter of a warrant to purchase its common
stock (the "Units") pursuant to an exemption from registration under Regulation
S of the Securities Act (the "Yorkton Offering"). Yorkton Securities, Inc.
("Yorkton") acted as Placement Agent. The Company sold 2,000,000 Units,
resulting in net proceeds to the Company of $4.4 million. In connection with the
Yorkton Offering, the Company has agreed to register under the Securities Act
the Common Stock issued to the purchasers, the Common Stock underlying the
warrants issued to the purchasers, and the Common Stock and Common Stock
underlying warrants granted to Yorkton and an unaffiliated third party
intermediary in order to permit the public resale of the Common Stock held or to
be acquired pursuant to the exercise of such warrants.
The Company has also included in this Prospectus certain shares of Common
Stock and shares of Common Stock underlying warrants and options pursuant to
various registration rights agreements between the Company and third parties.
The Company's principal executive offices are located at 4290 E. Brickell
Street, Ontario, California 91761, and its telephone number is (909) 391-4321.
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<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Securities Offered 12,507,260 Shares of Common Stock, comprised of
2,000,000 Yorkton Shares, 6,119,130 Merger Shares,
1,504,783 Option Shares, 2,137,879 Warrant Shares,
and 745,468 Other Shares.
Use of Proceeds There will be no proceeds to the Company from the
sale of the Shares by the Selling Shareholders. The
Company will use the proceeds from the exercise of the
warrants and Options for working capital, business
development and general corporate purposes.
</TABLE>
NASDAQ Symbol MCTL
RISK FACTORS
In addition to the other information contained elsewhere in this Prospectus,
prospective investors should consider carefully the factors set forth below
prior to purchasing any of the Shares offered hereby.
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<PAGE> 7
RISK FACTORS
WHEN USED ANYWHERE IN THE DISCUSSION OF RISK FACTORS BELOW, 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
CONTINUING LOSSES; WRITE-DOWNS; DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING
OF THE INDUSTRY; DEPENDENCE ON PROPRIETARY TECHNOLOGY. 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 FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
INTEGRATION OF OPERATIONS. On March 26, 1997, CXR merged with XIT
Corporation. The success of the Merger will be determined by various factors,
including management's ability to integrate effectively the operations of the
Company and CXR and the financial performance of the companies' operations
after the Merger. Factors which will affect management's ability to integrate
successfully the operations of the Company and CXR include the ability to
implement management systems that take advantage of marketing and cost saving
opportunities and to minimize the financial impact of expenses associated with
such integration. There can be no assurance that management will be able to
successfully integrate the operations of the Company and CXR or that the
anticipated benefits of the Merger will be realized. See "Business."
COMPETITION; TECHNOLOGICAL OBSOLESCENCE. Competition in the electronics
hardware industry is intense with a large number of companies developing
technology and products similar to the Company's products and technology. The
industry consists of development stage companies and major domestic and
international companies, many of which have financial, technical, marketing,
sales, manufacturing, distribution and other resources significantly greater
than those of the Company. There can be no assurance that the Company will be
successful in competing with such entities. Furthermore, there can be no
assurance that competitors will not succeed in developing products or
technologies that would render the Company's products and technologies obsolete
or in obtaining market acceptance of products more rapidly than the Company. See
"Business-Competition."
DEPENDENCE UPON MAJOR CUSTOMER. The Company has one customer, Motorola,
to which it sells printed circuit boards, which accounted for 41% of XIT's sales
for the year ended September 30, 1996 and 25% of XIT's sales for the three
months ended March 31, 1997. The loss of Motorola as a customer would have a
material adverse effect on the Company.
In fiscal 1996 and in the first quarter of 1997, the Company's product
orders from Motorola declined significantly. Moreover, during the first quarter
of 1997 the Company was unable to timely ship the lower level of orders
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<PAGE> 8
received as a result of material sourcing problems caused by cash flow
constraints. Sales demand from Motorola has increased in the second quarter of
1997 and the Company's delivery performance has improved. There can be no
assurance, however, that sales to Motorola will not decline in the future. Any
such decline could have a material adverse affect on the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will to a large
degree be dependent upon the skills of its existing management and other key
personnel. The failure to attract and maintain key personnel could have a
material adverse effect on the Company.
CONTINUING LOSSES; WRITE-DOWNS. For the fiscal years ended September 30,
1996 and 1995, the Company reported net income of $1,082,912 and $336,879,
respectively. However, for the three months ended March 31, 1997, the Company
incurred a net loss of $(603,000), and, on a pro forma basis, (including the
results of both the Company and CXR as if they had combined at the beginning of
the respective periods), the Company incurred net losses of $(2,694,000) and
$(3,841,000) for the three months ended March 31, 1997 and the year ended
September 30, 1996, respectively. The actual net loss for the three months ended
March 31, 1997 was principally caused by the deterioration of the Company's
Circuits Sector business as discussed above under "Dependence on Major
Customer."
During 1996 and continuing in the first quarter of 1997, domestic sales
of the Instrumentation and Test Equipment Sector (CXR's operating subsidiaries,
CXR Telcom Corporation and CXR S.A.) were negatively impacted by delays in
buying by its principal customers, as a result of the consolidation and/or
restructuring of these companies in the wake of the passage of the
Telecommunications Bill of 1996, and the Sector's European sales were
negatively impacted by a decline in sales to France Telecom during its
pre-privatization reorganization and a generally weak French economy.
Additionally, sales for both operating subsidiaries have been negatively
impacted by the rapid obsolescence of the analog-based components of their
product lines, particularly older transmission products; and further, both sales
and margins have been impacted by extreme price competition for transmission
products in general.
In the fourth quarter of 1996 and in the first quarter of 1997 prior to
the Merger, CXR reduced the carrying value of certain inventory and capitalized
software by $1,006,000 and $209,000, respectively. These write-downs resulted
from its reassessments of the anticipated continuing near-term impact of the
industry and economic factors noted above on asset realizability. The Company
believes based on its current assessment that the write-downs are adequate.
The Company anticipates that it will become profitable in 1997 as CXR's
markets stabilize and demand for printed circuit boards returns to historical
levels. However, there can be no assurance that these events will occur, that
further write-downs of operating assets, as well as write-downs of the goodwill
originating in the Merger, will not be necessary should actual business
conditions deteriorate, or that the Company will return to profitability in 1997
or thereafter.
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<PAGE> 9
NEED FOR ADDITIONAL FINANCING. The continued operation of the Company's
business may be and its ability to expand its operations will be dependent upon
its ability to obtain additional financing. The need for and timing of any
additional financing will depend upon results of operations, acquisition
opportunities, and other unforeseen factors which cannot be predicted. There can
be no assurance that such financing will be available, or that it will be
available on terms and conditions acceptable to the Company. If available, any
additional equity financings may be dilutive to the Company's stockholders and
any debt financing may contain restrictive covenants and additional debt service
requirements which could adversely affect the Company's operating results. See
also, "Exercise of Outstanding Options and Warrants; Additional Dilution."
CYCLICAL NATURE OF ELECTRONICS INDUSTRY. The segments of the electronics
industry in which the Company operates have, in many instances, historically
been cyclical and subject to significant economic changes and downturns. Such
changes, including in recent years the contraction of military, and commercial
and governmental aerospace spending, have in certain instances been
characterized by diminished product demand, accelerated erosion of average
selling prices, and overcapacity. In addition, the electronics industry is
subject to rapid technological change and product obsolescence. Discontinuance
or modification of products containing printed circuit boards or other
components manufactured by the Company could have a material adverse affect on
the Company. As a result, the Company may experience substantial
period-to-period fluctuations in future operating results due to general
electronic industry conditions, overall economic conditions or other factors.
DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING OF THE INDUSTRY. The
Company's CXR subsidiaries are largely dependent upon sales to their principal
customers in the telephone industry. CXR Telcom's customers include AT&T,
Sprint, MCI, and the RBOCs. As a result of the consolidation and/or
restructuring of these companies in the wake of the passage of the 1996
Telecommunications Bill, certain anticipated sales to these companies have been
canceled or delayed. Moreover, sales of CXR S.A. have been negatively impacted
by the pre-privatization reorganization of France Telecom, its major customer,
as well as a generally weak French economy. Although the Company believes that
demand for CXR's products will increase in, as well as a generally weak French
economy 1997 now that a significant portion of the consolidation and
restructuring is completed, there can be no assurance that the Company will
experience this increased demand.
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<PAGE> 10
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE AND EXTENT OF CUSTOMER
COMMITMENTS ON ORDERS. The level and timing of orders placed by the Company's
customers vary due to customer attempts to manage inventory, changes in the
customers' manufacturing strategies and variation in demand for customer
products due to, among other things, technological change, introduction of new
product life cycles, competitive conditions or general economic conditions. The
Company generally does not obtain long-term purchase orders or commitments. A
certain portion of the Company's backlog may be subject to cancellation or
postponement without a significant penalty or without any penalty.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during its manufacturing process. A failure by the
Company to comply with present and future regulations could subject it to future
liabilities or the suspension of production. Such regulations could also
restrict the Company's ability to expand its facilities or could require the
Company to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. The Company may also from time to time be
subject to lawsuits with respect to environmental matters. The extent of the
Company's liability under any such suit is indeterminable and may, in certain
circumstances, have a material adverse affect on the Company.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of
the Common Stock is subject to significant fluctuations in response to
variations in quarterly operating results, general conditions in the electronics
industry and other factors. In addition, the stock market is subject to price
and volume fluctuations which affect the market price for many high technology
companies in particular, and which can be unrelated to operating performance.
INCREASED PUBLIC FLOAT. Upon the effectiveness of the Registration
Statement of which this Prospectus is a part, and upon expiration of certain
lock-up agreements applicable to certain shares of the Company's Common Stock
(see "Securities to be Registered; Lock-up Provision"), the number of freely
tradeable shares of the Company's Common Stock held by non-affiliates will
substantially increase. If a significant number of these freely tradeable
shares are sold in the open market in the near term, the price of the Company's
Common Stock may be negatively impacted.
ACQUISITIONS. The Company may from time to time pursue the acquisition of
other companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of key
employees. No assurance can be given that any acquisition by the Company will
not materially and adversely affect the Company or that any such acquisition
will enhance the Company's business.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will
be highly dependent on proprietary technology, particularly in the areas of
instrumentation and test equipment, multilayer high density circuit boards and
microelectronic circuits. The Company presently holds certain limited numbers of
patents but more generally relies upon copyright, trademark and trade secret
laws to establish its proprietary rights in its products. There can be no
assurance that the Company's reliance on these laws will be adequate to protect
its proprietary rights or that its competitors will not independently develop
technologies that are substantially equivalent or superior to its technology. In
the future, the Company may file additional patent applications covering its
products or subsystems. There can be no assurance that any
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<PAGE> 11
patents will issue from any such applications or, if patents do issue, that any
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents that may be issued to
the Company will not be challenged, consolidated or circumvented, or that any
rights granted thereunder would provide proprietary protection to the Company.
Although the Company will continue to implement protective measures and intends
to defend its proprietary rights, policing unauthorized use of its technology,
systems and products will be difficult and there can be no assurance that these
measures will be successful. In addition, the laws of certain foreign countries
in which the Company is active may not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of 10,000,000 shares of
"blank check" Preferred Stock, with designations, rights and preferences that
may be determined from time to time by the Board of Directors. None of the
shares of Preferred Stock are issued or outstanding as of the date hereof.
However, the Board of Directors is empowered, without further stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In addition, such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock and may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for distribution
to the holders of Common Stock. Although the Company has no plans to issue any
shares of Preferred Stock, there can be no assurance that the Company will not
issue Preferred Stock at some time in the future.
LACK OF DIVIDENDS. The Company has never paid a cash dividend on any
class of its capital stock and does not anticipate paying any dividends in the
foreseeable future. It is anticipated that future earnings, if any, will be
retained to finance the development and expansion of the Company's business.
EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS; ADDITIONAL DILUTION; SHARES
AVAILABLE FOR SALE. At June 1, 1997, there were outstanding exercisable stock
options to purchase an aggregate of 2,121,339 shares of Common Stock at exercise
prices ranging from $1.89 to $5.00 per share. Additionally, at June 1, 1997,
there were outstanding and exercisable warrants to purchase 2,169,879 shares of
Common Stock at exercise prices ranging from $1.21 to $3.79 per share. To the
extent that the outstanding stock options and warrants are exercised,
substantial additional dilution to the interests of MicroTel's stockholders will
occur. See "Description of Securities to be Registered."
RISKS OF TECHNOLOGICAL CHANGE. The markets for the Company's products and
services are generally characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and service
introductions. There
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<PAGE> 12
can be no assurance that the Company can successfully identify new product
opportunities and develop and bring new products and services to market in a
timely manner. The Company's pursuit of necessary technological advances will
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its businesses to changing technology standards
and customer requirements. The introduction of new products and services could
render the Company's existing products and services obsolete and unmarketable.
There can be no assurance that the announcement or introduction of new products
or services by the Company or its competitors or any change in industry
standards will not cause a decline in existing sales levels of existing products
or services, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF SECURITIES FROM
THE NASDAQ STOCK MARKET; RISKS OF LOW-PRICED STOCKS. The Company's Common Stock
is currently quoted on the Nasdaq. For continued listing, a company, among other
things, must have $2,000,000 in assets, $1,000,000 in equity and a minimum bid
price of $1.00 per share (absent a net worth of $2,000,000). The Commission is
currently deciding whether to approve stricter listing requirements which have
been approved by the National Association of Securities Dealers, Inc. ("NASD").
The proposed listing requirements include a stricter asset test and a required
$1.00 minimum bid price regardless of net worth. If the Company is unable to
satisfy Nasdaq's maintenance criteria in the future, its securities may be
delisted from Nasdaq. In such event, trading in the Company's securities would
thereafter be conducted in the over-the-counter market in the "pink sheets" or
on the NASD's "Electronic Bulletin Board." As a consequence of such delisting,
an investor would likely find it more difficult to dispose of, or to obtain
quotations as to, the price of the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. The Commission's regulations
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on the Nasdaq or a national securities
exchange and any equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
annual revenue of at least $6,000,000, if such issuer has been in continuous
operation for less than three years. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.
In addition, if the Company's securities are not quoted on the Nasdaq, or
the Company does not meet the other exceptions to the penny stock regulations
cited above, trading in the Company's securities would be covered by Rule 15g-9
promulgated under the Exchange
- 12 -
<PAGE> 13
Act for non-Nasdaq and non-exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities, in general, also are exempt from this
rule if the market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and thus
the ability of purchasers of the Company's securities to sell their securities
in the secondary market.
EFFECT OF ISSUANCE OF SHARES ON NET OPERATING LOSS CARRYFORWARDS. The
Company and CXR have substantial net operating loss carryforwards for Federal
and state tax purposes. For a summary of the NOL's and Expiration dates, see
notes to the Consolidated Financial Statements of the Company and CXR included
herein. However, because of the ownership changes to both entities for tax
purposes resulting from the Merger, the use of these NOL carryforwards to offset
future taxable income will be limited. The Company believes that it will only be
able to use approximately $825,000 of the current NOL carryforwards for Federal
and state tax purposes per year. This limitation of the use of the Company's NOL
carryforwards may have a material adverse effect on the Company's net income
and cash flow, should the Company have taxable income in future years.
USE OF PROCEEDS
Because the Shares offered hereby are being sold by the Selling
Shareholders, the Company will not receive any of the proceeds from any sale of
the Shares by the Selling Shareholders. The Company will receive the proceeds
from the issuance of the Option Shares and Warrant Shares upon the exercise of
the stock options and warrants relating to such shares by the holders thereof.
In the event that all of the stock options and warrants are exercised, the
proceeds to be received by the Company upon such exercise will be $9,855,801,
exclusive of the expenses of this Offering. The Company will use these proceeds,
if any, for working capital, business development and general corporate
purposes.
SELLING SECURITY HOLDERS
The following table sets forth as of June 9, 1997, the following
information regarding each Selling Shareholder who is offering Shares pursuant
to this Prospectus: the name of each Selling Shareholder; any position, office,
or other material relationship which the Selling Shareholder has had within the
past three years with the Company or any of its predecessors or affiliates; the
number of shares of Common Stock owned by each Selling Shareholder before the
offering pursuant to this Prospectus, the amount of shares to be offered for
each Selling
- 13 -
<PAGE> 14
Shareholder's account, and the amount and percentage of the Common Stock to be
owned by each Selling Shareholder (assuming the sale of all shares registered
hereby) after the offering pursuant to this Prospectus
is complete.
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas G. Abramson 105 105 0 *
- ----------------------------------------------------------------------------------------
Howard Baldwin 12,822 12,822 0 *
- ----------------------------------------------------------------------------------------
Michael Baldwin 12,822 12,822 0 *
- ----------------------------------------------------------------------------------------
Bank Sal Oppeneheim Jr. & 75,000(4) 75,000 0 *
(i.e.)
- ----------------------------------------------------------------------------------------
Bank of Scotland Nominees 25,000(5) 25,000 0 *
(Unit Trusts/Limited)
- ----------------------------------------------------------------------------------------
Banque Hervet 50,000(6) 50,000 0 *
- ----------------------------------------------------------------------------------------
David A. Barrett(7) 220,237(8) 220,237 0 *
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for Jennifer P
Barrett Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for David A
Barrett, Jr. Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for Elizabeth C
Barrett Trust
- ----------------------------------------------------------------------------------------
Laurie Barrett 4,595 4,595 0 *
- ----------------------------------------------------------------------------------------
Andrew Bellak 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
John Billington 4,197 4,197 0 *
- ----------------------------------------------------------------------------------------
Louis Bernat 48,237 48,237 0 *
- ----------------------------------------------------------------------------------------
Bruce J. Bertrand 14,515 14,515 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 14 -
<PAGE> 15
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bertrand Family Trust 595,106 595,106 0 *
- ----------------------------------------------------------------------------------------
Jason Bender 585 585 0 *
- ----------------------------------------------------------------------------------------
Brewin Nominees Ltd. 37,500(9) 37,500 0 *
- ----------------------------------------------------------------------------------------
Kevin M. Briody 32,755(10) 32,755 0 *
- ----------------------------------------------------------------------------------------
Marshall Butler 15,966 15,966 0 *
- ----------------------------------------------------------------------------------------
Caisse Centrale des Banques 50,000(11) 50,000 0 *
Populaires
- ----------------------------------------------------------------------------------------
Timothy W. Cameron 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Mark C. Carson 2,902 2,902 0 *
- ----------------------------------------------------------------------------------------
Kristen L. Cavallaro 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr 27,578 27,578 0 *
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr., 17,417 17,417 0 *
Trustee f/b/o Arnold B
Chace, III
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr., 2,902 2,902 0 *
Trustee f/b/o Arnold B
Chace, III
- ----------------------------------------------------------------------------------------
Malcolm G. Chace, 2,902 2,902 0 *
Trustee
f/b/o Arnold B. Chace,
III
- ----------------------------------------------------------------------------------------
Malcolm G. Chace, 2,902 2,902 0 *
Trustee
f/b/o Sarah E. Chace
- ----------------------------------------------------------------------------------------
Richard Childs 43,359 43,359 0 *
- ----------------------------------------------------------------------------------------
Christiania Markets 50,000(12) 50,000 0 *
- ----------------------------------------------------------------------------------------
Dominic Ciccone 7,257(13) 7,257 0 *
- ----------------------------------------------------------------------------------------
Philip M. Colicchio 5,734 5,734 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 15 -
<PAGE> 16
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John & Virginia 8,189 8,189 0 *
Connolly
- ----------------------------------------------------------------------------------------
Cleveland Cool 6,495 6,495 0 *
- ----------------------------------------------------------------------------------------
John K. Crosby 3,955 3,955 0 *
- ----------------------------------------------------------------------------------------
Frank D. Curley 388 388 0 *
- ----------------------------------------------------------------------------------------
Timothy R. Curtin 627 627 0 *
- ----------------------------------------------------------------------------------------
Bernard S. Davis 280 280 0 *
- ----------------------------------------------------------------------------------------
Aldo DeFrancesco 2,902 2,902 0 *
- ----------------------------------------------------------------------------------------
Den Norske Bank 125,000(14) 125,000 0 *
- ----------------------------------------------------------------------------------------
Salvatore J 29,029 29,029 0 *
Dimicelli, Sr
- ----------------------------------------------------------------------------------------
Dina Partners 81,889 81,889 0 *
- ----------------------------------------------------------------------------------------
Dreadnought Limited 187,500(15) 187,500 0 *
- ----------------------------------------------------------------------------------------
Craig A. Drill 4,839 4,839 0 *
- ----------------------------------------------------------------------------------------
Shermane B. Drill 4,837 4,837 0 *
- ----------------------------------------------------------------------------------------
Daniel Dror(16) 15,000(17) 15,000 0
- ----------------------------------------------------------------------------------------
Robert Dubofsky 5,805 5,805 0 *
- ----------------------------------------------------------------------------------------
Richard B. DuBusc 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Bruce S. Edington 943 943 0 *
- ----------------------------------------------------------------------------------------
Elk International 1,380,000(18) 1,380,000 0 *
- ----------------------------------------------------------------------------------------
entrenet Group, LLC 60,000(19) 60,000 0 *
- ----------------------------------------------------------------------------------------
George and Sandra 79,928(20) 79,928 0 *
Farndell
- ----------------------------------------------------------------------------------------
Sandra Farndell 103,181 103,181 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE> 17
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William D. Fertig 3,628 3,628 0 *
- ----------------------------------------------------------------------------------------
Findenas International
Bank 38,706 38,706 0 *
- ----------------------------------------------------------------------------------------
Laurence P. Finnegan, 127,560(22) 127,560 0 *
Jr.(21)
- ----------------------------------------------------------------------------------------
Laurence P. Finnegan, 4,789 4,789 0 *
Jr. and
Geraldine Finnegan
- ----------------------------------------------------------------------------------------
Finter Bank Zurich 75,000(23) 75,000 0 *
- ----------------------------------------------------------------------------------------
Robert A. Fish IRA 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Fish Family Trust 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Aaron H. Fleck 8,710 8,710 0 *
- ----------------------------------------------------------------------------------------
Albert F. Ford, II 9,675 9,675 0 *
- ----------------------------------------------------------------------------------------
Albert F. Ford, III, 86,803 86,803 0 *
Trustee for
Albert F. Ford II Trust
- ----------------------------------------------------------------------------------------
Albert Ford, II, Trustee 1,451 1,451 0 *
for
Albert Ford, III Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 6,551 6,551 0 *
Trustee for
Albert F. Ford, III
Trust
- ----------------------------------------------------------------------------------------
Andrew A. Ford 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Andrew A. Ford, Trust 1,638 1,638 0 *
David A. Barrett,
Trustee
- ----------------------------------------------------------------------------------------
Emily O. Ford 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 17 -
<PAGE> 18
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David A. Barrett, 6,551 6,551 0 *
Trustee for William A. Ford Trust
- ----------------------------------------------------------------------------------------
Albert Ford, II,
Trustee for William A. Ford Trust 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Russell E. Froelich 122,693(24) 122,693 0 *
- ----------------------------------------------------------------------------------------
S. Fujii 52,664(25) 20,006 32,658 *
- ----------------------------------------------------------------------------------------
Gallagher, Briody &
Butler(26) 16,377 16,377 0 *
- ----------------------------------------------------------------------------------------
Thomas P. Gallagher(27) 83,497(28) 83,497 0 *
- ----------------------------------------------------------------------------------------
Dorothy R. Garfield 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
Generio T. Gargiulo 250,278(29) 250,278 0 *
- ----------------------------------------------------------------------------------------
Barbara Gargiulo 4,644 4,644 0 *
- ----------------------------------------------------------------------------------------
Gilbert Gertner 10,000(30) 10,000 0 *
- ----------------------------------------------------------------------------------------
Richard Gesoff 29,405 29,405 0 *
- ----------------------------------------------------------------------------------------
Hugh Gillespie 29,029 29,029 0 *
- ----------------------------------------------------------------------------------------
Mary L. & Hugh 40,944 40,944 0 *
Gillespie
- ----------------------------------------------------------------------------------------
Govett American Smaller 677,500(31) 677,500 0 *
Companies Trust PLC
- ----------------------------------------------------------------------------------------
Govett American Strategy Fund 160,000(32) 160,000 0 *
- ----------------------------------------------------------------------------------------
Govett Global Smaller 200,000(33) 200,000 0 *
Companies Investment Trust PLC
- ----------------------------------------------------------------------------------------
William W. Gridley 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Harriet Gurski 31,682 31,682 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 18 -
<PAGE> 19
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Hall 2,221 2,221 0 *
- ----------------------------------------------------------------------------------------
Paul Hickey 56,150(34) 56,150 0 *
- ----------------------------------------------------------------------------------------
P.K. Hickey and Co. 75,000(35) 75,000 0 *
- ----------------------------------------------------------------------------------------
P. Randolph Hill 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Donald L. Horton 67,180(36) 16,378 50,802 *
- ----------------------------------------------------------------------------------------
Darby E. Ford Hughes 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Frank A. Hutson 1,552 1,552 0 *
- ----------------------------------------------------------------------------------------
Mark F. Hughes, Jr 1,226 1,226 0 *
- ----------------------------------------------------------------------------------------
Ikans Kapital Forualting AB 25,000(37) 25,000 0 *
- ----------------------------------------------------------------------------------------
Stephen P. Jacobus 50,801 50,801 0 *
- ----------------------------------------------------------------------------------------
Rona Javitch, 6,821 6,821 0 *
Cust. for David Javitch
- ----------------------------------------------------------------------------------------
Jonathan Javitch 6,821 6,821 0 *
- ----------------------------------------------------------------------------------------
Lee Javitch 67,870(38) 67,870 0 *
- ----------------------------------------------------------------------------------------
Lisa Javitch 6,821 6,821 0 *
- ----------------------------------------------------------------------------------------
Graham Jeffries 39,563(39) 3,276 36,287 *
- ----------------------------------------------------------------------------------------
William C. Johnson 14,515(40) 14,515 0 *
- ----------------------------------------------------------------------------------------
Andrea L. Kahn 504 504 0 *
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 3,628 3,628 0 *
Arnold B. Chace, Jr.,
Trustees f/b/o Henry
A.P. Kent
- ----------------------------------------------------------------------------------------
</TABLE>
- 19 -
<PAGE> 20
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Malcolm G. Chace and 2,177 2,177 0 *
Arnold B. Chace, Jr.,
Trustees
f/b/o John D.P. Kent
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 1,451 1,451 0 *
Arnold B. Chace, Jr.,
Trustees
f/b/o Malcolm Parks
Kent
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 4,354 4,354 0 *
Arnold B. Chace, Jr.,
Trustees f/b/o Patricia
Kent
- ----------------------------------------------------------------------------------------
Laurence Keen 75,000(41) 75,000 0 *
- ----------------------------------------------------------------------------------------
Stanley Knapp 8,708 8,708 0 *
- ----------------------------------------------------------------------------------------
John L. Kraft 3,348 3,348 0 *
- ----------------------------------------------------------------------------------------
Leigh Fibers Co. 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Leigh Textiles, Inc. 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Robert Lenington 991 991 0 *
- ----------------------------------------------------------------------------------------
Leslie Group, Inc. 97,890 97,890 0 *
- ----------------------------------------------------------------------------------------
Charlotte P. Levine 55,459 55,459 0 *
- ----------------------------------------------------------------------------------------
William Lewisham 26,000 26,000 0 *
- ----------------------------------------------------------------------------------------
Norman B. Lipsett 12,885 12,885 0 *
- ----------------------------------------------------------------------------------------
Lee Javitch 26,433 26,433 0 *
Trustee for the
Indenture of
Trust of Norman B
Lipsett, Trust
- ----------------------------------------------------------------------------------------
</TABLE>
- 20 -
<PAGE> 21
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Madden 3,090 3,090 0 *
- ----------------------------------------------------------------------------------------
George V. Malone 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
James G. Marquez 5,805 5,805 0 *
- ----------------------------------------------------------------------------------------
Karen L. Martin 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Ralph S. Mason, III 8,189 8,189 0 *
- ----------------------------------------------------------------------------------------
Ralph S. Mason, 8,189 8,189 0 *
Unified Credit Trust
- ----------------------------------------------------------------------------------------
Thomas McCann 18,651(42) 18,651 0 *
- ----------------------------------------------------------------------------------------
Edward J. McManimon, 2,221 2,221 0 *
III
- ----------------------------------------------------------------------------------------
Louis S. Mendez and 14,514 14,514 0 *
Heidi M. Mendez
- ----------------------------------------------------------------------------------------
Metraplex Corp. 208,481 208,481 0 *
- ----------------------------------------------------------------------------------------
H. Scott Miller 966 966 0 *
- ----------------------------------------------------------------------------------------
William J. and Beverly 58,991(43) 8,189 50,802 *
J. Miller
- ----------------------------------------------------------------------------------------
Alvin Mirman, 725 725 0 *
Custodian for
Danny Mirman
- ----------------------------------------------------------------------------------------
Ilene Mirman 4,839 4,839 0 *
- ----------------------------------------------------------------------------------------
Felice Mischel 20,000(44) 20,000 0
- ----------------------------------------------------------------------------------------
Jacques Moisset 62,000(45) 48,000 14,000
- ----------------------------------------------------------------------------------------
Jacques J. Moore 12,090 12,090 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 21 -
<PAGE> 22
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ted Morgan 8,392 8,392 0 *
- ----------------------------------------------------------------------------------------
Morningstar Associates 81,889 81,889 0 *
II
- ----------------------------------------------------------------------------------------
Henry Mourad(43) 309,368(47) 220,368 89,000
- ----------------------------------------------------------------------------------------
Robert C. Neff 1,019 1,019 0 *
- ----------------------------------------------------------------------------------------
NCL (Nominees) Limited 368,750(48) 368,750 0 *
- ----------------------------------------------------------------------------------------
John J. Oberdorf 562 562 0 *
- ----------------------------------------------------------------------------------------
Maureen M. Oberdorf 36,266 36,266 0 *
- ----------------------------------------------------------------------------------------
William P. Oberdorf 4,079 4,079 0 *
- ----------------------------------------------------------------------------------------
Carmine T. Oliva(46) 1,284,232(50) 1,284,232 0 *
- ----------------------------------------------------------------------------------------
Carmine T. and Georgeann Oliva 497,031(51) 497,031 0 *
- ----------------------------------------------------------------------------------------
Georgeann Oliva 81,889 81,889 0 *
- ----------------------------------------------------------------------------------------
Jason A. Oliva 38,150 38,150 0 *
- ----------------------------------------------------------------------------------------
Ronald P. and Betty J. 166,728(52) 166,728 0 *
Oliva
- ----------------------------------------------------------------------------------------
Rose Oliva 4,354(53) 4,354 0 *
- ----------------------------------------------------------------------------------------
Samuel G. and T. 118,163 118,163 0 *
Michelle Morrison
Oliva
- ----------------------------------------------------------------------------------------
Samuel J. Oliva 705,284(54) 705,284 0 *
- ----------------------------------------------------------------------------------------
Ronald D. Ordway 178,029 178,029 0 *
- ----------------------------------------------------------------------------------------
Henry C. Oskman 49,060(55) 49,060 0 *
- ----------------------------------------------------------------------------------------
Norman S. Palazini 3,842 3,842 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 22 -
<PAGE> 23
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William S. Papazian 5,734 5,734 0 *
- ----------------------------------------------------------------------------------------
James B. Raphalian 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
Barry Reifler(56) 40,000(57) 40,000 0 *
- ----------------------------------------------------------------------------------------
George Riley 20,071 20,071 0 *
- ----------------------------------------------------------------------------------------
Martin Romm 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Romofin AG 200,000(58) 200,000 0 *
- ----------------------------------------------------------------------------------------
The Royal Bank of 118,750(59) 118,750 0 *
Scotland Trust Company
(Jersey) Ltd.
- ----------------------------------------------------------------------------------------
Robert B. Runyon(60) 327,303(61) 327,303 0 *
- ----------------------------------------------------------------------------------------
Catherine Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
George R. Rusk 200,105 200,105 0 *
- ----------------------------------------------------------------------------------------
Terrance Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Samantha Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Jerome M. St. John 4,079 4,079 0 *
- ----------------------------------------------------------------------------------------
St. John & Wayne 5,806(62) 5,806 0 *
- ----------------------------------------------------------------------------------------
Harvey Sandler 14,029 14,029 0 *
- ----------------------------------------------------------------------------------------
M. Alden Siegel 10,160 10,160 0 *
- ----------------------------------------------------------------------------------------
Kathryn A. Silva 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Graham Smith 7,257(63) 7,257 0 *
- ----------------------------------------------------------------------------------------
David B. Solomon 43,544 43,544 0 *
- ----------------------------------------------------------------------------------------
David & Sylvia Sorin 3,869 3,869 0 *
- ----------------------------------------------------------------------------------------
David Sorin 5,321 5,321 0 *
- ----------------------------------------------------------------------------------------
Neil Sussman 75,000(64) 75,000 0 *
- ----------------------------------------------------------------------------------------
Mark Suvall 20,320 20,320 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 23 -
<PAGE> 24
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Talan(65) 166,000(66) 155,000 11,000 *
- ----------------------------------------------------------------------------------------
Gallant Thein 41,779(67) 16,378 25,401 *
- ----------------------------------------------------------------------------------------
John A. Trott 52,324 52,324 0 *
- ----------------------------------------------------------------------------------------
Gerald Unterman 154,258 154,258 0 *
- ----------------------------------------------------------------------------------------
C. Michael Vaughn, Jr. and 7,257 7,257 0 *
Carol Vaughn
- ----------------------------------------------------------------------------------------
Andrew M. Wallerstein 8,189 8,189 0 *
- ----------------------------------------------------------------------------------------
Michael F. Walsh 7,808 7,808 0 *
- ----------------------------------------------------------------------------------------
Hillel Weinberger 96,472(68) 96,472 0 *
- ----------------------------------------------------------------------------------------
Steven Weis 93,548(69) 93,548 0 *
- ----------------------------------------------------------------------------------------
Thomas Wiegand 21,772 21,772 0 *
- ----------------------------------------------------------------------------------------
E. Kenneth Williams, 562 562 0 *
Jr
- ----------------------------------------------------------------------------------------
Bill Y. Wong 37,571(70) 37,571 0 *
- ----------------------------------------------------------------------------------------
Gary Woolley 6,294 6,294 0 *
- ----------------------------------------------------------------------------------------
Word-Tronics 32,756 32,756 0 *
Corporation
- ----------------------------------------------------------------------------------------
Bennett Yanowitz 51,286 51,286 0 *
- ----------------------------------------------------------------------------------------
Yorkton Securities, Inc. 140,000(71) 140,000 0 *
========================================================================================
</TABLE>
- 24 -
<PAGE> 25
(1) Includes shares of Common Stock underlying warrants or stock options
exercisable as of June 9, 1997 or exercisable within 60 days after June
9, 1997, unless otherwise indicated.
(2) Asterisk indicates less that 1%.
(3) Although the Selling Shareholder table assumes the sale of all shares and
all shares underlying warrants and options by each Selling Shareholder,
certain of the Shares being registered hereby are subject to a lock-up
which permits such Shares to be sold gradually until September 26, 1998,
when all such restrictions expire. All of the 6,119,130 Merger Shares,
406,415 of the Option Shares and 1,197,879 of the Warrant Shares are
subject to this lock-up. See "Securities to be Registered; Lock-up
Provision."
(4) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(5) Includes 5,000 shares issuable upon the exercise of outstanding warrants.
(6) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(7) Mr. Barrett is a director of the Company.
(8) Includes 58,060 shares issuable upon the exercise of outstanding options
and 33,747 shares issuable upon the exercise of outstanding warrants.
(9) Includes 7,500 shares issuable upon the exercise of outstanding warrants.
(10) Mr. Briody is a partner of Gallagher, Briody & Butler, the Company's
outside general counsel.
(11) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(12) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(13) Represents 7,257 shares issuable upon the exercise of outstanding
options.
(14) Includes 25,000 shares issuable upon the exercise of outstanding
warrants.
(15) Includes 37,500 shares issuable upon the exercise of outstanding
warrants.
(16) Mr. Dror is the former Chairman and Chief Executive Officer of the
Company; he resigned on November 15, 1996.
(17) Represents 15,000 shares issuable upon the exercise of outstanding stock
options.
(18) Includes 750,000 shares issuable upon the exercise of outstanding stock
options and 90,000 shares issuable upon the exercise of outstanding
warrants. In addition, the exercisability of 250,000 options held by Elk
is subject to certain conditions. Elk may be deemed to have been part of
a "control group" prior to Mr. Dror's resignation as Chairman and Chief
Executive Officer on November 15, 1996. See "Certain Relationships and
Related Transactions."
(19) Represents 60,000 shares issuable upon the exercise of outstanding
warrants.
(20) Includes 3,629 shares issuable upon the exercise of outstanding options
and 14,732 shares issuable upon exercise of outstanding warrants.
(21) Mr. Finnegan is a director of the Company.
(22) Includes 58,060 shares issuable upon the exercise of outstanding options
and 30,118 shares exercisable upon the exercise of outstanding warrants.
(23) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(24) Includes 40,804 shares issuable upon the exercise of outstanding
warrants.
- 25 -
<PAGE> 26
(25) Includes 32,658 shares issuable upon the exercise of outstanding stock
options.
(26) Gallagher, Briody & Butler is the Company's outside counsel.
(27) Mr. Gallagher is a partner of Gallagher, Briody & Butler, the Company's
outside general counsel.
(28) Includes 9,797 shares issuable upon the exercise of outstanding warrants.
(29) Includes 68,510 shares issuable upon the exercise of outstanding
warrants.
(30) Represents 10,000 shares issuable upon the exercise of outstanding
options.
(31) Includes 135,500 shares issuable upon the exercise of outstanding
warrants.
(32) Includes 32,000 shares issuable upon the exercise of outstanding
warrants.
(33) Includes 40,000 shares issuable upon the exercise of outstanding
warrants.
(34) Includes 34,110 shares issuable upon the exercise of outstanding warrants
and 7,257 shares issuable upon the exercise of outstanding options.
(35) Represents 75,000 shares issuable upon the exercise of outstanding
warrants.
(36) Includes 50,802 shares issuable upon the exercise of outstanding options.
(37) Includes 5,000 shares issuable upon the exercise of outstanding warrants.
(38) Includes 19,353 shares issuable upon the exercise of outstanding
warrants.
(39) Includes 36,287 shares issuable upon the exercise of outstanding options.
(40) Represents 14,515 shares issuable upon the exercise of outstanding
warrants.
(41) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(42) Includes 5,806 shares issuable upon the exercise of outstanding warrants
and 10,886 shares issuable upon the exercise of outstanding options.
(43) Includes 50,802 shares issuable upon the exercise of outstanding stock
options.
(44) Represents 20,000 shares issuable upon the exercise of outstanding stock
options.
(45) Represents 62,000 shares issuable upon the exercise of outstanding stock
options, 14,000 of which are covered by a separate Registration Statement
filed on Form S-8.
(46) Mr. Mourad is a former director and executive officer of the Company;
he resigned from these positions on March 26, 1997.
(47) Represents 232,368 shares issuable upon the exercise of outstanding stock
options, 12,000 shares of which are covered by a separate Registration
Statement filed on Form S-8.
(48) Includes 73,750 shares issuable upon the exercise of outstanding
warrants.
(49) Mr. Oliva is Chairman, Chief Executive Officer and President of the
Company.
(50) Includes 130,633 shares issuable upon the exercise of outstanding options
and 615,384 shares issuable upon the exercise of outstanding warrants.
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<PAGE> 27
(51) Includes 3,629 shares issuable upon the exercise of outstanding options
and 14,732 shares issuable upon the exercise of outstanding warrants.
(52) Includes 3,628 shares issuable upon the exercise of outstanding options,
and 14,730 shares issuable upon the exercise of outstanding warrants.
(53) Represents 4,354 shares issuable upon the exercise of outstanding
warrants.
(54) Includes 25,401 shares issuable upon the exercise of outstanding options,
and 68,655 shares issuable upon the exercise of outstanding warrants.
(55) Includes 11,322 shares issuable upon the exercise of outstanding
warrants.
(56) Mr. Reifler is the Chief Financial Officer of the Company.
(57) Includes 30,000 shares issuable upon the exercise of outstanding
options.
(58) Includes 40,000 shares issuable upon the exercise of outstanding
warrants.
(59) Includes 23,750 shares issuable upon the exercise of outstanding
warrants.
(60) Mr. Runyon is a director of the Company.
(61) Includes 88,664 shares issuable upon the exercise of outstanding warrants
and 58,060 shares issuable upon the exercise of outstanding stock
options.
(62) Represents 5,806 shares issuable upon the exercise of outstanding
warrants.
(63) Represents 7,257 shares issuable upon the exercise of outstanding
options.
(64) Represents 75,000 shares issuable upon the exercise of outstanding
warrants.
(65) Mr. Talan is a director of the Company.
(66) Includes 5,000 shares issuable upon the exercise of outstanding options.
(67) Includes 25,401 shares issuable upon the exercise of outstanding options.
(68) Includes 8,709 shares issuable upon the exercise of outstanding warrants.
(69) Represents 93,548 shares issuable upon the exercise of outstanding
warrants.
(70) Includes 32,658 shares issuable upon the exercise of outstanding stock
options.
(71) Represents 140,000 shares issuable upon the exercise of outstanding
warrants.
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<PAGE> 28
PLAN OF DISTRIBUTION
The Shares held by the Selling Shareholders (or to be acquired by the
Selling Shareholders upon exercise of options or warrants) may be sold from time
to time by the Selling Shareholders, subject to a current and effective
prospectus.
The Shares may be sold by the Selling Shareholders from time to time in
one or more transactions (which may involve block transactions) in the
over-the-counter market, in negotiated transactions, or in a combination of such
methods of sale, at fixed prices, at market prices prevailing at the time of
sale, at prices related to the prevailing market prices or at negotiated prices.
The Shares may be sold by one or more of the following methods: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
in order to consummate the transaction; (b) a purchase by a broker or dealer as
principal, and the resale by such broker or dealer for its account pursuant to
this Prospectus, including resale to another broker or dealer; or (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers or dealers engaged by a Selling Shareholder may
arrange for other brokers or dealers to participate. Any such brokers or dealers
will receive commissions or discounts from a Selling Shareholder in amounts to
be negotiated immediately prior to the sale. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be "underwriters" within
the meaning of the Securities Act. Any gain realized by such a broker or dealer
on the sale of shares which it purchases as a principal may be deemed to be
compensation to the broker or dealer in addition to any commission paid to the
broker by a Selling Shareholder.
Some of the Shares covered by the Registration Statement may be sold
under Rule 144 instead of by the Registration Statement. The Company will not
receive any portion of the proceeds of the Shares sold by the Selling
Shareholders. The Selling Shareholders are not required to actually sell any of
the Shares held by the Selling Shareholders.
The Selling Shareholders have been advised that during the time each is
engaged in sales of the Shares covered by this Prospectus, each must comply
with, among other things, Regulation M, promulgated under the Exchange Act, as
amended, and pursuant thereto: (i) shall not engage in any improper
stabilization activity in connection with the Company's securities; (ii) shall
furnish each broker through which securities covered by this Prospectus may be
offered the number of copies of this Prospectus which are required by each
broker; and (iii) shall not bid for or purchase any securities of the Company or
attempt to induce any person to purchase any of the Company's securities other
than as permitted under the Exchange Act.
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<PAGE> 29
SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $0.0033 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). At June 9, 1997, there were
11,296,726 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all matters
that are required or otherwise come before a vote of the stockholders of the
Company. The Common Stock carries no preemptive, conversion, redemption or
similar rights. The shares of Common Stock outstanding are fully paid and non-
assessable. The holders of shares of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of shares of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Company has never paid any dividends.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock from time to time in one or more series as may be designated by the Board
of Directors from time to time. In the event of liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock will be entitled
to a liquidation preference over the Common Stock. Any Preferred Stock issued in
the future will be entitled to such dividends, redemption rights, liquidation
rights, conversion rights and voting rights as the Board of Directors, in its
discretion, may determine, in a resolution or resolutions providing for the
issuance of any such stock. Preferred Stock can thus be issued without the vote
of the holders of Common Stock. Preferred Stock can be issued in the future with
rights which could reduce the attractiveness of the Company as a potential
takeover target, make the removal of management more difficult, or adversely
impact the rights of holders of Common Stock. Under certain circumstances the
issuance of Preferred Stock containing such rights could have the effect of
decreasing the market price of the Common Stock. The Company has no present
plans to issue Preferred Stock.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Certificate of Incorporation provides for three classes of
directors, with the number of members in each as nearly equal in number as the
then total number of directors constituting the entire Board. Each class of
directors have terms which expire in consecutive years. The Company's by-laws
require the Board to consist of four (4) or more directors, and require an
eighty (80%) percent affirmative vote of the holders of shares of
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<PAGE> 30
Common Stock to reduce the number of directors. Presently, there are five
Directors with terms expiring as follows: David Barrett, 1997; Jack Talan and
Laurence P. Finnegan, Jr., 1998; and Carmine T. Oliva and Robert Runyon, 1999.
Any vacancies in the Board for any reason, or any increase in the number of
directors, may be filled only by an affirmative vote of the majority of
directors then in office, even if less than a quorum, and such incoming director
shall hold office until the expiration date of the class for which such director
has been chosen. In addition, the Certificate of Incorporation provides that
Directors may be removed only for cause. These provisions of the Certificate of
Incorporation concerning the Board members may not be repealed or amended unless
such action is approved by the affirmative vote of the holders of not less than
sixty-seven (67%) percent of the Company's outstanding shares of Common Stock.
STOCKHOLDERS' WRITTEN CONSENTS AND SPECIAL MEETINGS
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company must be
effected by a duly called annual or special meeting, and may not be effected by
the written consent of stockholders. This provision of the Certificate of
Incorporation may not be repealed or amended unless such action is approved by
the affirmative vote of the holders of not less than sixty-seven (67%) percent
of the Company's outstanding shares of Common Stock. The Company's by-laws
provide that special meetings may be called only by the President, the Board of
Directors or the holders of shares of Common Stock entitled to cast not less
than 10% of the votes at any such meeting.
SECTION 203 OF THE DELAWARE CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless the transaction is approved in a
prescribed manner. An "interested stockholder" is defined as any person who is
(i) the owner of 15% or more of the outstanding voting stock of the corporation
or (ii) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder. This statute could
prohibit or delay a merger, takeover, or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
LIMITATION OF LIABILITY
As permitted by the Delaware General Corporate Law, the Company's
Certificate of Incorporation, as amended, provides that directors of the Company
shall not be personally
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<PAGE> 31
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporate Law,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock, or (iv) for any transaction from which the director derives
an improper personal benefit.
WARRANTS AND RIGHTS
Of the 12,507,260 Shares being registered hereby, 2,137,879 shares are
Warrant Shares, and can be sold by the Selling Shareholders only after such
Selling Shareholder has exercised such Common Stock purchase warrant. All of the
warrants are immediately exercisable.
Of the Warrant Shares, 1,637,879 are issuable upon the exercise of
warrants at exercise prices ranging from $1.21 to $3.79, and expire during the
year 2000. The remaining 500,000 Warrant Shares underly warrants issued
in connection with the Yorkton Offering. Pursuant to the terms of these
warrants, if the price of a share of the Company's Common Stock equals or
exceeds 150% of the exercise price ($3.45) for ten consecutive trading days,
then the Company can demand that the warrants be exercised. If such warrants are
not exercised within thirty days of the demand, the warrants can be redeemed by
the Company for $0.50 per warrant. The warrants do not contain provisions for
adjustments to the exercise price, except for stock splits. As of June 1, 1997,
there were outstanding warrants to purchase an additional 32,000 shares of
Common Stock, exercisable at $2.50 per share. The shares underlying these
warrants have not been registered by the Registration Statement of which this
Prospectus is a part.
Another 1,504,783 shares of the 12,507,260 shares being registered hereby
are Option Shares, and can be sold by the Selling Shareholder only after such
Selling Shareholder has exercised the Common Stock purchase option (the
"Option") held by such Selling Shareholder. The Option Shares underlying the
Options are exercisable at prices ranging from $1.89 to $5.00. Substantially all
of the Options are currently exercisable. The Options do not contain provisions
for adjustments to the exercise price, except for stock splits. As of June 1,
1997, there were outstanding options to purchase an additional 616,556 shares of
Common Stock at exercise prices ranging from $1.89 to $5.00. The shares
underlying these options have not been registered by the Registration Statement
of which this Prospectus is a part.
LOCK-UP PROVISION
In connection with the merger by and between a wholly-owned subsidiary of
the Company and XIT, the Company issued the Merger Shares to the former XIT
shareholders. The Company also assumed all outstanding XIT warrants and all
outstanding XIT options. The Merger Shares, the shares underlying the
outstanding XIT warrants and the shares underlying the outstanding XIT options
are subject to certain lock-up agreements preventing the transfer of such shares
until the termination of such lock-up agreements. The lock-up agreements will
terminate with respect to 25% of such shares on each of the following dates: the
later of September 26, 1997 or the date on which the Registration Statement of
which this Prospectus is a part is declared effective; March 26, 1998; June 26,
1998; and September 26, 1998. Of the 12,507,260 shares being registered hereby,
7,723,424 are subject to the aforementioned lock-up agreement. These shares
consist of the 6,119,130 Merger Shares, 1,197,879 of the Warrant Shares, and
406,415 Option Shares.
EXPERTS
The consolidated financial statements and schedule of MicroTel
International, Inc. and subsidiaries (formerly known as XCEL Corporation and
subsidiaries) as of September 30, 1996 and 1995 and for each of the years in
the three-year period ended September 30, 1996, have been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements for the six month period ended December 31,
1994, and for the years ended December 31, 1995 and December 31, 1996 for CXR
Corporation (MicroTel International, Inc. pre-Merger) included
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<PAGE> 32
in this Prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants, and have been so included in reliance upon the reports given
upon the authority of that firm as experts in auditing and accounting.
The financial statements for the year ended June 30, 1994 for CXR
Corporation included in this Prospectus have been audited by Deloitte & Touche,
LLP, independent certified accountants, and have been so included in reliance
upon the reports given upon the authority of that firm as experts in auditing
and accounting.
BUSINESS
WHEN USED ANYWHERE IN THE DISCUSSION OF "BUSINESS" BELOW, 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 THE FOLLOWING SECTIONS
BELOW: "OVERVIEW"; "INSTRUMENTATION AND TEST EQUIPMENT"; "CIRCUITS"; "COMPONENTS
AND SYBSYSTEM ASSEMBLIES"; PRODUCT DEVELOPMENT AND ENGINEERING; "COMPETITION";
"REGULATION"; "EMPLOYEES"; AND "LEGAL PROCEEDINGS." 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 FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS.
OVERVIEW
The Company, through its various direct and indirect operating
subsidiaries, designs, manufactures and distributes a wide range of electronics
hardware products and provides related services. Approximately 60% of the
Company's hardware sales are to customers in the telecommunications and
information services industries, including AT&T, the Regional Bell Operating
Companies ("RBOCs"), and Motorola. The remainder of the sales are for various
industrial, medical, military and aerospace applications.
The Company's objective is to become a leader in quality, cost effective
solutions to meet the global requirements of telecommunications and information
technology customers. The Company believes that it can achieve this objective
through customer-oriented product development, superior product solutions, and
excellence in local market service and support.
In 1984, the Company began operations as CXR Telcom Corporation. In 1989,
a holding company, CXR Corporation, a Delaware corporation, was formed with two
operating subsidiaries, CXR Telcom Corporation, based in the United States, and
CXR S.A.,
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based in France (collectively, "CXR"). CXR manufactures and distributes
telecommunications testing and transmission equipment. In 1995, CXR Corporation
changed its name to MicroTel International, Inc.
On March 26, 1997, the Company consummated the Merger pursuant to which
XIT became a wholly-owned subsidiary of the Company. Because the Merger was
accounted for as a reverse acquisition, historical financial information
referred to herein as that of the Company shall refer to the historical
financial information of XIT.
Prior to 1991, XIT produced video display products, bare printed circuit
boards, digital switches, keyboards, keypads and other components primarily for
military applications. In 1991, XIT began a fundamental transition of its
business operations by divesting $1.5 million in unprofitable bare printed
circuit board volume and $3.5 million in low margin standard keyboards. During
that year, XIT relocated its corporate headquarters, its Digitran Division's
input and display component business, and its circuit division to California and
focused its manufacturing on low volume, high margin double-sided and
multi-layer circuit boards. Commencing in that year, XIT also began investing
heavily in research and development in order to diversify its product line and
reduce its dependence on military sales.
Commencing in 1994, XIT began to implement a business strategy of
acquiring strategically complementary businesses and product lines. In July
1994, XIT acquired approximately 84% of HyComp, Inc. through a share exchange
with the majority shareholders. HyComp, formed in 1969, designs and manufacture
hybrid circuits, resistor networks, and thin film components. HyComp's products
are for high-reliability applications where they must withstand extremes of
temperature, humidity, or environment. These products have a variety of uses in
military, aerospace, medical, computer, industrial control and communications
electronics. In December 1995 and January 1996, XIT acquired an additional
approximate 7% of HyComp Common Stock through an exchange of XIT Common Stock
for HyComp common shares.
In May of 1995, XIT acquired certain work in process from a bankrupt
printed circuit board operation, XCMD, located in Philadelphia, Pennsylvania.
The Company continues to service certain of the XCMD customers from its Ontario
facility.
In July 1995, XIT sold its Computron Display Systems Division
("Computron") based in Forest Park, Illinois, a manufacturer of higher cost
custom color and monochrome display monitors, for $1.8 million. Computron was
sold based on XIT management's determination that the demand for its product
lines was declining. Further, XIT's growth in the monitor product area is
expected to be derived from its low cost standard color cathode ray tube ("CRT")
product line, branded XCEL-Lite, as well as a full range of flat panel products
manufactured at its Digitran Division.
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<PAGE> 34
In September 1995, through a newly established wholly-owned subsidiary
XCEL Arnold Circuits, Inc. ("XCEL Arnold"), XIT completed the acquisition of
Arnold Circuits, Inc., a LaHabra, California manufacturer of complex
multi-layer, surface mount circuit boards used in sophisticated electronic
equipment for the computer, communications, instrumentation and industrial
controls industries. XCEL Arnold's circuit boards are currently used principally
in cellular telephone infrastructure, but can also be used in workstations,
desktop and notebook computers, computer networking products, storage devices
and medical equipment.
In April 1996, XCEL Arnold completed the acquisition of Etch-Tek, Inc.
("Etch-Tek"), a manufacturer of quick turn and prototype quantities of double
sided and high layer count multilayer printed circuit boards. Etch-Tek has been
established as a division of XCEL Arnold, and operates as XCEL Etch Tek.
Etch-Tek is located in Concord, California and maintains a direct sales office
in San Jose, California.
In September 1996, XCEL Corporation, Ltd. ("XCEL UK"), the Company's
United Kingdom subsidiary, acquired Abbott Electronics, Ltd. ("Abbott"). XCEL UK
operates Abbott as a wholly-owned subsidiary of XCEL UK trading as XCEL Power
Supplies, Ltd. Abbott designs and manufactures high and low voltage, high
specification, compact and micro-electronic power supplies to meet rugged
environmental and high tolerance electrical requirements.
In the fall of 1996, XIT began negotiations with respect to the Merger
which was consummated on March 26, 1997. Management believes that the Merger
will enhance the Company's ability to service its telecommunications and
information technology customers, create additional marketing opportunities both
geographically and across product lines, and provide some cost savings by the
internal sourcing of components formerly purchased from third party vendors.
Within the electronics industry, the Company manufactures and distributes
three product lines which are discussed as follows below.
INSTRUMENTATION AND TEST EQUIPMENT
The Company's Instrumentation and Test Equipment products are
manufactured by CXR. In addition, CXR S.A. performs network integration
services. Their customers include AT&T, the RBOCS, interconnect carriers,
independent telephone operating companies, private communications networks,
banks, brokerage firms and Government agencies.
TELECOM TEST INSTRUMENTS. The CXR line of test instruments measure the
transmission characteristics of telephone circuits. The market for this test
equipment has expanded as a result of the AT&T divestiture of the RBOCS and the
trend towards user ownership of equipment. As a result of the AT&T divestiture,
local telephone operating
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<PAGE> 35
companies have been forced to develop their own internal capacity to identify
and isolate troubles in the network transmission facilities in both telephone
company owned or subscriber owned equipment.
The current line of test equipment manufactured and sold by CXR is as
follows:
The Model 100 Series Responders allow telephone companies and end users
to remotely and automatically monitor, and actively test, the quality of
transmission facilities. These products are compatible with the AT&T Centralized
Automatic Reporting on Trunk (CAROT) testing system and are used by common
carriers and private network operators to test their circuit interfaces to the
AT&T toll network.
The basic components of the Model 100 Series testing systems are a Near
End responder (NER), a Far End responder (FER) and an access Switch. An NER is a
device that acts as the master in a master slave concept. An NER initiates a
test by transmitting a test message to the FER at the other end of the circuit.
A series of tests are coordinated through a routine sequence controlled by a PC
based "Autoroutining System" software program usually located at the master site
or the control center. The system program generates reports for all the test
data, exception reports, trouble tickets, and marginal performance lines.
The 700 Series of Transmission test sets are used principally by
telephone companies to perform analog measurements on voice grade and wide band
circuits applications involving Digital Data Service (DDS) and High Capacity
Digital Subscriber Loops (HDSL). The primary use of this product line is in
metallic telephone loop qualification testing.
The Model 5200 Universal Transmission Analyzer incorporates Digital
Signal Processing (DSP) measurement technology and has replaced the LES 8000
Test Set formerly marketed by the Company. This product is marketed to the
maintenance organizations of telephone companies and private network operators
and performs all the functions of a Data Transmission Impairment Analyzer, a DS1
BERT Tester, a VF Signaling Network Access Unit, a T-1 Channel access Test Unit,
and a DDS private line and switched digital service test product.
The Model 5200 is designed for qualifying, commissioning and maintaining
digital baseband leased lines, mono and stereo radio channels and basic and
primary rate voice, and soon will be enhanced to service Integrated Services
for the Digital Network (ISDN) subscriber loops. It is capable of making
at very high transmission speeds all of the necessary measurements according to
the international CCITT recommendations.
The Model 5200 covers the specialized installation and maintenance of all
circuits involving voice, signalling transmission, 64Kb/s data, and 1.5Mb/s
data, and shortly will cover ISDN circuits. The Model 5200 is the first product
of its kind to offer all these testing capabilities within one package. An added
feature is the use
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of an internal battery power source in order to accommodate special
hard-to-reach environments. The Model 5200 constituted approximately 70% of
CXR's instrument sales for the year ended December 31, 1996.
DATACOM TEST INSTRUMENTS. Datacom test instruments are used to test and
monitor the performance of computers and communications equipment to insure
proper function in receiving or transmitting data over wide area or local area
networks. Datacom instruments monitor, emulate and perform digital tests on
protocol, code and transmission functions of computers, terminals, modems,
multiplexers, front-end processors and other computer and communications
equipment.
The Datacom instruments manufactured and sold by CXR for testing wide
area networks are the CXR Telcom 840A and 841A Network Signalling Analyzers. The
804A is a hand-held field service instrument having limited emulation capability
and full monitor capability. The 841A is an easy-to-use field service tool used
primarily by telecommunications carriers for installation and maintenance of the
new ISDN. The 841A also tests and monitors the Common Channel Signalling System
7 (CCSS7) which is a worldwide standard protocol developed for the purpose of
transmitting information between digital central office switches.
TRANSMISSION PRODUCTS. CXR develops, manufactures, and sells a broad
line of Anderson Jacobson ("AJ") modem products. These include modem models
operating at data rates from 2400 bits per second (bps) through 33,600 bps.
These are sold as rackmount modems for use at central communication/computer
sites, stand-alone modems at central communication/computer sites, or as
stand-alone modems for use at remote sites. All of the AJ models are "feature
rich" modems that generally offer more capabilities and flexibility than
competing products.
The ability to transmit digital data to and from computers is an
important element in the computer industry. Communications and data interconnect
capabilities are fundamental requirements for maximization of computer systems
uses. The large volume of information to be exchanged between computer networks
in geographically disperse locations require rapid, accurate and economical
communications capabilities and the AJ product line is designed to meet and
satisfy such needs.
The market for V.34 bis dialup 33,600 bps products is believed to be a
major growth area and much of CXR's modem development effort is being
concentrated on the V.34 bis, V.32ter and V.34 protocol, which include a 33,600
bps product line of modems with integral time division channels multiplexer
ports.
The AJ 14,400/19,200 series is a true V.32 bis/V.32ter compatible
product line, with full duplex operation on standard dial-up lines or on 2-wire
or 4-wire leased lines. The series features trellis coded modulation and local
and remote echo cancellation, with
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capabilities to cope with satellite delay of multiple hops in long distance
transmission. Also, the series is equipped with multiple number storage capacity
via a V.25 bis synchronous dialer for computer controlled application. In leased
line operation the series features unattended automatic dial backup using the
dial-up network in the event of lease line failures. The series is also
available in either stand alone desktop applications or as a card for chassis
rackmount configuration.
The AJ Smart Rack is a modem management enclosure that accommodates 16
modular card modems that allow the data center managers to keep track of
configurations, diagnostics, alarms and system status at all times through a
menu driven user interface. The main advantage of the Smart Rack is the
simplicity of keeping track of all activities with real time monitoring and
reporting using simple easy to read display screens. Also an on-board modem
allows access from remote locations and the ability to dial a predefined
sequence of numbers for alarm reporting.
The AJ 5900 series offers intelligent T-1 Channel Service Units which
provide access to D4 and Extended Super Frame (ESF) on High Capacity Digital
Service (HCDS), in either a single line or rack mount configuration. The AJ 5900
series offers a single termination interface to the Data Terminal Equipment
(DTE), providing continuous monitoring for bipolar violations and multiple error
events. The user can select thresholds for error rates, with separate levels for
the network and the equipment. The series provide complete access to both the
network side and the user side, along with the appropriate diagnostic tests in
order to maintain network integrity.
In March 1997, CXR introduced a new product line, the AJ 6900 series
for T1 and fractional T1 CSU-DSU application. These newly introduced products
provide for the direct interface between the customer's equipment and the T1
facilities. The AJ 6900 series operates at any multiple 56K or 64K b/s,
including current Frame Relay data rates. Built-in multiplexer ports allow
simultaneous connections to a PBX or channel bank which shares the same T1
facility. The AJ 6900 series has an integrated Simple Network Management
Protocol (SNMP) and therefore can easily be used by any network management
system using SNMP.
NETWORKING SYSTEMS. In 1996, CXR S.A. formed a new business unit to
market several lines of products used to build data and voice networks. All of
these products are sourced from third-party vendors under distributorship or OEM
arrangements. The "product" marketed to its customers is a turn-key solution
using these products and includes network design, installation and maintenance.
The product lines marketed consist of four primary types as follows: a)
multiplexing equipment used to transport data, voice and local area network
traffic over point-to-point leased lines and frame relay networks; b)
statistical multiplexers, terminal servers and routers for local area network
interconnections; c) data compression equipment used to
- 37 -
<PAGE> 38
compress and encrypt data streams prior to network access to maximize
transmission speed and secure the transmission and to decompress and decipher
upon transmission receipt; and d) ISDN routers used to link remote offices to
corporate office local area networks.
CXR ANDERSON JACOBSON LTD. Following the Merger, the Company has
established a new United Kingdom subsidiary, CXR Anderson Jacobson, Ltd., for
the purpose of marketing the products and services offered by CXR S.A. in the
United Kingdom.
CIRCUITS
The Company's printed circuit boards are produced by XCEL Arnold
Circuits, Inc. ("XCEL Arnold"), a wholly-owned subsidiary of XIT based in
LaHabra, California and Concord, California, XCEL Circuits, a division of XIT
based in Monrovia, California and HyComp, Inc. ("HyComp"), an approximately 91%
owned subsidiary based in Marlborough, Massachusetts.
Printed circuit boards are essential components in virtually all
sophisticated electronic products. The circuit board is the basic platform used
to interconnect and mount electronic components such as microprocessors,
resistor networks and capacitors. Circuit boards consist of copper traces on an
insulating (dielectric) base, which provide electrical interconnections for
electronic components. The development of more sophisticated electronic
equipment by OEMs combining higher performance and reliability with reduced size
and cost has created a demand for increased complexity, miniaturization and
density in the circuit traces. In response to this demand, multi-layer boards
have been developed in which several layers of circuitry are laminated together
to form a single board with both horizontal and vertical electrical
interconnections.
The technology required to manufacture electronic products is becoming
increasingly costly and complex. Traditionally, manufacturers used the so-called
"through-hole" technology in assembling printed circuit boards. However, a newer
technology, known as "surface-mount" technology ("SMT") has gained acceptance in
the manufacture of these products.
The Company has invested in new manufacturing equipment to accommodate
the increased business for SMT equipment. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT will continue to constitute
an increasing percentage of printed circuit board production and assembly.
According to The Institute for Interconnecting and Packaging Electronic
Circuits ("IPC"), the United States printed circuit board market was
approximately $7.9 billion in 1996, of which approximately $6 billion was
attributable to independent manufacturers like XIT. IPC's data also shows that
approximately 80% of this market was multilayer, high
- 38 -
<PAGE> 39
density printed circuit boards. IPC estimates that the percentage of the printed
circuit board market available to independent printed circuit board
manufacturers, such as XIT, has increased from 66% to 85% since 1991. The
circuit boards produced at XIT's La Habra, California facility (known as "Arnold
Circuits") are high density, multi-layer printed circuit boards of up to 12
layers. The majority of the Arnold Circuits' multi-layer rigid circuit boards
are manufactured on a standard base laminate material. Arnold Circuits also
produces high performance circuit boards constructed from speciality materials.
Arnold Circuits gained ISO 9002 certification in 1995.
XCEL Etch-Tek is a division of XCEL Arnold located in Concord,
California. Etch-Tek is a manufacturer of sophisticated high multi-layer, quick
turn, and prototype printed circuit boards.
HyComp manufactures hybrid circuit products which must, because of the
applications in which they are used, endure extreme environmental conditions.
HyComp's hybrid circuits combine components, such as resistors, capacitors and
integrated circuit chips, into one functional unit in a single sealed package.
HyComp also has a line of thick film hybrid circuits which are
manufactured by HyComp's strategic partner SIMESA in its automated cassette to
cassette production facility located in Vitoria, Spain.
COMPONENTS AND SUBSYSTEM ASSEMBLIES
The Components and Subsystem Assemblies products are produced and/or
sold by XIT's Digitran Division, based in Ontario, California, XCEL Corp. Ltd.
and XCEL Power Supplies Ltd., wholly-owned subsidiaries of XIT based in England,
and XCEL Japan, Ltd.
Components
XIT's Digitran Division manufactures and sells digital switch products
serving aerospace, communications, industrial and commercial applications.
Thumbwheel, push button, and lever modules, together with assemblies, are
manufactured in 16 different model families. The Digitran Division also offers a
wide variety of custom keypads and keyboards.
The Digitran Division also produces the XCEL-Lite display color monitor
product. Each monitor is customized to meet the needs of OEMs or sold "off the
shelf" as lower cost color standard XCEL-Lite models. The monitors also come
with a range of options, including: a wide range of phosphors, customer headers,
video to all standard formats or customized, front access controls for
brightness, contrast, and power, ruggedized exteriors, EMI/RFI shielding, low
energy power and universal power supplies. The predominant
- 39 -
<PAGE> 40
market segments for these displays are medical, test instruments and rugged
continuous use ATMs. Color and monochrome monitors (including XCEL-Lite) are
sold in Europe through XCEL UK, Ltd.
Subsystems
According to IPC, the United States value added contract manufacturing
market was approximately $14 billion in 1996 and is growing about 20% per year.
Based on industry data, the Company believes that OEMs are increasingly relying
upon independent manufacturers of complex electronic interconnect products
rather than on in-house production. The Company believes that the current trend
towards increased reliance by OEMs on independent manufacturers reflects the
OEMs' recognition that, for complex electronic interconnect products,
independent manufacturers can provide greater specialization, expertise,
responsiveness and flexibility and can offer shorter delivery cycles than can be
achieved by internal production.
In addition, the use of independent manufacturers allows OEMs to focus
their efforts and resources on other areas such as product research and
development and marketing. Other factors which lead OEMs to utilize contract
manufacturers include:
Reduced Time-to-Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and therefore have a growing need to reduce the time required to
bring a product to market. OEMs can reduce their time-to-market by using a
contract manufacturer's established manufacturing expertise and infrastructure.
Reduced Capital Investment Requirements. As electronic products have
become more technologically advanced, the manufacturing process has become
increasingly sophisticated and automated, requiring a greater level of
investment in capital equipment. By using contract manufacturers, OEMs can
reduce their overall capital equipment requirements while maintaining access to
advanced manufacturing facilities.
Focused Resources. Because the electronics industry is experiencing
greater levels of competition and rapid technological change, many OEMs
increasingly are seeking to focus their resources on activities and technologies
in which they add the greatest value. By offering comprehensive electronic
assembly and turnkey manufacturing services, contract manufacturers allow OEMs
to focus on core technologies and activities such as product development,
marketing and distribution.
Access to Leading Manufacturing Technology. Electronic interconnect
products and electronic interconnect product manufacturing technology have
become increasingly sophisticated and complex, making it difficult for OEMs to
maintain the necessary technological expertise in process development and
control. OEMs are motivated to work
- 40 -
<PAGE> 41
with a contract manufacturer in order to gain access to the contract
manufacturer's process expertise and manufacturing know-how.
Improves Inventory management and Purchasing Power. Electronics
industry OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes, short
product life-cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using a contract manufacturer's
volume procurement capabilities. By utilizing a contract manufacturer's
expertise in inventory management, OEMs can better manage inventory costs and
increase their return on assets.
The Company offers complete manufacturing solutions to OEMs, including
concurrent engineering, assembly of printed circuit boards incorporating its
input and display components, assembly of subsystems, test engineering, software
development and accessory packaging. The Company believes that its ability to
manufacture various electronic components, combined with its engineering
integration capability, provides it with a number of competitive advantages in
providing custom subsystem assemblies that can enable it to capture a
significant portion of this growing market. In addition, the Company's
manufacturing technologies and processes now include, in addition to SMT, tape
automated binding full grid arrays, and chip on board chip in flux.
By integrating the Company's printed circuit boards and components, the
Company is able to engineer and manufacture communications equipment, medical
testing equipment, industrial machine controllers, and military weapons
subsystems. Medical equipment, gasoline service point of sales terminals, and
machine tools use the Company's proprietary PF-Shield, a thin, tough PolyFilm
which provides environmental protection from dust and most fuels, solvents and
petroleum based products without detracting from the equipment's cosmetic
appearance or performance. Furthermore, the shield is highly resistant to
puncture, is flame retardant and remains flexible from -75 degrees Celsius to
150 degrees Celsius. XIT's industrial machine controller products eliminate
interference and cross-talk between adjacent monitors, utilize high grade
plastics (Digidome) that will not deteriorate when exposed to petrochemicals,
and offer custom panels and keycaps that withstand the abusive industrial
environment. XIT's military products utilize the highest quality materials to
withstand nuclear, biological, and chemical contamination and extreme
environmental conditions encountered in worldwide military deployment including
rigorous shock and vibration.
CUSTOMERS AND MARKETING
Customers for the Company's Instrumentation and Test product line
include AT&T, the RBOCS, international telephone companies (including France
Telecom), and private communications networks. Datacom test equipment and modem
equipment are purchased
- 41 -
<PAGE> 42
by telecommunications equipment manufacturers and used in the design,
manufacture, installation and maintenance of the electronic equipment they
provide. Telecom test instruments are purchased by the major long distance
carriers.
The principal customer for the Circuits Sector is the Cellular
Infrastructure Group of Motorola. Substantially all manufacturing for Motorola
is done at Arnold Circuits. During the year ended September 30, 1996, and the
quarter ended March 31, 1997, sales to Motorola accounted for 41% and %,
respectively, of the Company's sales. The Company has commenced efforts to
market its products to other customers to reduce its reliance on Motorola and
has commenced sales to other customers who it believes will become significant
customers. The loss of Motorola as a customer, or a significant reduction in
the dollar amount of orders from Motorola, would have a material adverse
affect on the Company. See "Risk Factors; Dependence on Major Customer."
The principal customers for Components and Subsystems are OEMs in the
electronics industry, including manufacturers of communications equipment,
industrial and business computers, automatic teller machines, medical devices,
industrial instruments and test equipment, and aerospace and military products.
The Company markets its products through a combination of direct sales
engineers, distributors and independent sales representatives primarily in the
United States, Europe and Japan.
BACKLOG
The Company's business is not generally seasonal, with the exception
that the printed circuit board industry generally slows in the last calendar
quarter of each year. The Company's backlog of firm, unshipped orders was as
follows by business sector at March 31, 1997 and September 30, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
( in thousands )
March 31, 1997 Sept 30, 1996 Sept 30, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Circuits $ 5,721 $ 11,019 $ 14,087
Components and Subsystem
Assemblies 7,631 9,187 2,937
Instrumentation and Test
Equipment 3,551 - 0 - - 0 -
--------------- --------------- ---------------
$ 16,903 $ 20,206 $ 17,024
=============== =============== ===============
</TABLE>
The decline in backlog for the Circuits Sector is principally the
result of Arnold Circuit's major customer, Motorola, changing its ordering
pattern, compounded in 1997 by a deferral of orders by the customer pending
correction of late delivery problems. Motorola as
- 42 -
<PAGE> 43
a matter of policy has reduced its order quantities from a 12 month supply in
the September 30, 1995 time frame to a 3 to 6 month supply beginning in the
September 30, 1996 time frame and forward. The increase in backlog for the
Components and Subsystem Assemblies Sector beginning at September 30, 1996 is
due to the backlog of Abbott, acquired in September 1996, of $5,080,000 and
$5,992,000 at March 31, 1997 and September 30, 1996, respectively. Order backlog
for Abbott is volatile and the decline from September 30, 1996 to March 31, 1997
is not indicative of an adverse trend. The backlog for the Instrumentation and
Test Equipment Sector at March 31, 1997 is that of CXR, acquired on March 26,
1997. Backlog for CXR is not deemed a significant measure of its business, as
its customers generally order on a just-in-time basis; however, at March 31,
1997, CXR had one significant order which had been placed on an extended
contract basis. The order backlog at March 31, 1997 is expected to be shipped
during the year ended December 31, 1997, with the exception of approximately
$2,600,000 of Abbott orders whose fulfillment extends beyond that date.
MANUFACTURING
The Company purchases the electronic components required for the
manufacture of its various product lines from a number of vendors and has
experienced no significant difficulties in obtaining timely delivery of
components. In addition, the Company has begun internal sourcing of certain
electronic components following the Merger. Management has determined that there
would be little, if any, cost savings from outside manufacturing.
PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering is critical in view
of rapid technological innovation in the electronics hardware industry. Current
research and development efforts are concentrated in the Instrumentation and
Test Equipment Sector (CXR) and at HyComp. For the years ended September 30,
1996, September 30, 1995, and September 30, 1994, product development costs of
XIT were approximately $309,000, $328,000 and $639,000, respectively.
The product development costs of CXR were $2,612,000 and $2,373,000
during the years ended December 31, 1996 and December 31, 1995, respectively.
These product development costs were related primarily to development of new
telecommunications test equipment, trunk testing system products and data
communications equipment. Current research expenditures are directed principally
towards enhancements to the current test instrument product line and development
of increased band width (faster speed) transmission products. These expenditures
are intended to improve market share and gross margins, although no assurances
may be given that such improvements will be achieved.
CXR also makes use of the latest CAD (Computer Aided Design) equipment
to design and package its products. This puts CXR in the position to take full
advantage of the latest CAE (Computer Aided Engineering), and EDA workstation
tools (Engineering Design Automation) to design, simulate and test its advanced
product features or product enhancements
- 43 -
<PAGE> 44
for custom circuits and miniaturization purposes. With the above mentioned
tools, product developments are turned around very quickly, keeping the highest
quality and reliability integrated as part of the overall development process.
This kind of capability also allows CXR to offer custom featured designs for the
potentially expanding Original Equipment Manufacturers (OEM) customers, whose
needs require the integration of CXR's products with their own.
In 1992, HyComp began investigating the feasibility of a lower cost
alternative flip chip assembly process than that developed by IBM in the 1980s.
The HyComp process called "adhesive flip chip" uses conductive adhesives as
interconnections, instead of deposited metals. The adhesive flip chip process
promises all the benefits of the flip chip, but with substantially lower capital
investment and manufacturing costs. In 1995, HyComp received a contract from the
Advanced Research Projects Agency of the Department of Defense ("ARPA") to study
the feasibility of commercializing flip chip technology. In 1996, HyComp
received a contract continuation in the amount of $750,000 from the ARPA to set
up and operate an adhesive flip chip assembly line.
In microelectronic applications, packaging has become a primary focus.
As chips approach the limits of on-chip densities, packaging which spaces chips
closely becomes key to increasing performance while decreasing size. Flip chip
technology gives the highest chip density of any packaging method. Instead of
placing chips in space wasting individual packages, they are assembled face down
onto matching connections on a substrate or board. Since the connections are
under the chip, no additional space is required for bonded wires or leads.
Company management believes that adhesive flip-chip has significant
potential size, performance and cost advantages for hybrid circuit manufacture.
It is expected that the two year ARPA program will make HyComp the only hybrid
company experienced in adhesive flip chip assembly, a significant market
advantage. Management believes that over the next five years, flip chip will be
the microelectronic packaging of choice for high performance circuits. As of
June 1997, a prototype production process has been implemented and initial
commercial samples have been produced for potential customers.
PATENTS AND TRADEMARKS
The Company regards its software, hardware and manufacturing processes
as proprietary and relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions,
including employee and third-party nondisclosure agreements, to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford some
limited protection. The laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The
- 44 -
<PAGE> 45
Company requires that its employees enter into confidentiality agreements as a
condition of employment.
COMPETITION
The Instrumentation and Test Equipment Sector has numerous competitors
with greater technological, financial and marketing resources than those
possessed by the Company. The ability of the Company to compete in the
Instrumentation and Test product lines is dependent on several factors including
price, technology, product performance, service and its ability to attract and
retain qualified management and technical personnel.
The market for printed circuit boards in the United States is
fragmented and very competitive. The Company believes there are over 700
companies producing circuit boards in the United States. XIT competes primarily
against other independent manufacturers. There are no dominant manufacturers in
the segment of the industry served by XIT. XIT believes that relatively few
producers in the United States have the technological competence, manufacturing
processes, and facilities to produce complex multi-layer surface mount circuit
boards in commercial volumes.
The Company also faces competition in this sector from certain captive
circuit board manufacturers. These manufacturers may seek orders in the open
market to fill excess capacity, thereby increasing price competition. A number
of the Company's competitors are larger than the Company and have greater
financial, marketing and other resources. The Company believes that competition
in circuits manufacturing is based on product quality, technological capability,
responsiveness to customers in delivery and service, and price.
The Company's Components and Subsystem Assemblies Sector competes in a
highly fragmented market composed of a diverse group of U.S. based
manufacturers. The Company believes that the primary bases of competition in
this market segment are capability, price, manufacturing quality, advanced
manufacturing technology, and reliable delivery. The Company believes that by
focusing on low to medium-volume production, and by manufacturing subsystems
using its inhouse manufactured components, the Company can compete effectively.
Additionally, by taking on a wider range of systems than its larger competitors
and by having access to a diversified customer base, the Company believes it is
able to diversify its workload and is not as dependent as some of its
competitors on individual contracts, customers or industries.
REGULATION
The Federal Communication Commission ("FCC") has adopted regulations
with respect to the interconnection of communications equipment with telephone
lines and radiation emanations of certain equipment. CXR has complied with these
regulations and received all necessary FCC approvals for its line of trunk
testing equipment. As additional products require certification, CXR believes it
will be able to satisfy all such future requirements. CXR believes it complies
with environmental regulations since it assembles, rather than manufactures,
- 45 -
<PAGE> 46
electronic components and therefore discharges into the environment are believed
to be negligible.
XIT's product lines are subject to certain federal and state statutes
governing safety and environmental protection. XIT believes that it is in
substantial compliance with all such regulations and XIT is not aware of any
proposed or pending safety or environmental rule or regulation which, if
adopted, would have a material impact on its business or financial condition.
EMPLOYEES
As of May 31, 1997, the Company employed approximately 447 persons. Of
these employees, 326 employees are employed in the United States and 121 are
employed in Europe and Japan.
None of the Company's employees are represented by unions and there
have not been any work stoppages at any of the Company's facilities. The Company
believes that its relationship with its employees is good.
DESCRIPTION OF PROPERTY
The Company leases or owns approximately 250,000 square feet
of administrative, production, storage and shipping space. All of these
facilities are leased other than the Melbourne, UK and Abondant, France
facilities. The Ontario facility is owned by Capital Source Partners, a
California real estate partnership in which XIT holds a 50% ownership interest.
<TABLE>
<CAPTION>
Business Unit Location Function
------------- -------- --------
<S> <C> <C>
Digitran Division (Components and Ontario, Corporate
Subsystem Assemblies) California headquarters/
Manufacturing
XCEL Circuit Division (Circuits) Monrovia, Administrative/
California Manufacturing
XCEL Corp. Ltd. Melbourne, Administrative
(Components and Subsystem Assemblies) United
Kingdom
XCEL Power Supplies Ashford, Administrative/
(Components and subsystem United Manufacturing
assemblies) Kingdom
</TABLE>
- 46 -
<PAGE> 47
<TABLE>
<S> <C> <C>
XCEL Japan, Ltd. (Components and Higashi- Administrative/
Subsystem Assemblies) Gotanda, Assembly
Tokyo, Japan
Arnold Circuits (Circuits) La Habra, Administrative/
California Manufacturing
HyComp, Inc. (Circuits) Marlborough, Administration/
Massachusetts Manufacturing
CXR S.A. (Instrumentation and test Paris, France Administrative
equipment)
CXR San Jose, Administrative/
(Instrumentation and California Manufacturing
test equipment)
CXR, S.A. Abondant, Manufacturing
(Instrumentation France
and Test Equipment)
</TABLE>
The lease for the San Jose, California facility expires July 1997 and
it is anticipated that it will be renewed. The lease for the Paris, France
facility expires in May 1998. The Ontario facility is covered by a lease that
expires in September 2000, with options to extend until September 2010. The
Monrovia facility is covered by a lease that expires on October 31, 1997,
with an option to renew until October 31, 1998. The LaHabra facility is leased
from four separate property owners pursuant to leases, each of which terminates
in March 2000. Each of these leases may be extended for five years subject to
agreement on a minimum monthly rental. The Concord facility is subject to a
lease that expires in September 2001, with options to renew until April 2016.
The Marlborough facility is subject to a lease which expires in October 2000,
and the Tokyo facility is subject to a lease which expires in March 1998. The
Ashford facility is subject to a fifteen year lease which expires on September
6, 2011, subject to the right of the Company to terminate the lease after five
years, and the rights of the Company or the landlord to terminate the lease
after ten years.
The Company believes that these facilities are adequate for the
current business operations.
- 47 -
<PAGE> 48
LEGAL PROCEEDINGS
In September 1994, Raymond Jacobson, a former officer and director of
the Company and a participant in the Company's deferred compensation plan,
brought an action against the Company in the California Superior Court, Santa
Clara County, alleging that the Company had breached its contract to pay Mr.
Jacobson $3,495 bi-weekly for life under his deferred compensation agreement
dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August
1994. The 1993 Agreement superseded a previous deferred compensation agreement
dated April 1, 1977 (the "1977 Agreement") which had provided for twice the
level of payments. Mr. Jacobson was claiming damages of approximately
$1,200,000, which he purported to be the present value of all payments to be
made under the 1993 Agreement. In June 1995, the Company paid Mr. Jacobson all
amounts past due under the contract plus interest and reinstated the bi-weekly
payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit
against Mr. Jacobson in the District Court for Galveston County, Texas alleging
damages arising from DDC's investment of more than $2,000,000 for the purchase
of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr.
Jacobson, through his attorney, demanded that the Company indemnify him, hold
him harmless and pay for the cost of defense, including reasonable attorney's
fees and costs in connection with the litigation instituted against him by DDC.
This suit was subsequently dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice
to the Company that he believed that the litigation instituted against him by
DDC provided a basis for him to rescind the 1993 Agreement and assert his rights
to full payment under the 1977 Agreement.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company believes that
an enforceable settlement was reached on January 22, 1997. Mr. Jacobson
apparently disclaims this agreement based on the actions noted above. On
February 28, 1997 the Company filed a motion for leave to file a cross-claim
asserting that the January 22, 1997 agreement supersedes all previous agreements
with Mr. Jacobson.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the settlement was
subject to fulfillment of a number of conditions subsequent which did not occur
and therefore was not binding on either party. Subsequent thereto, several
settlement offers have been proposed by Mr. Jacobson's counsel, none of which
are acceptable to the Company.
Currently, the Company's motion for leave to cross-claim has been
granted and a trial setting conference has been scheduled for July 1, 1997.
- 48 -
<PAGE> 49
The Company does not believe that the cost of settling this matter, or
alternatively, a monetary judgement against the Company, would be materially in
excess of amounts already recorded by the Company for the deferred compensation
arrangement.
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 has answered Mr.
Scheinfeld's motion and is seeking to compel him to serve a complaint upon the
defendants.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material adverse
affect on the consolidated results of operations or financial position.
MARKET INFORMATION
Since September 11, 1996, the Company's Common Stock has been trading on the
NASDAQ SmallCap Market under the symbol MCTL. Prior to that date, the shares of
the Company's Common Stock had been listed on the American Stock Exchange under
the symbol MOL. Accordingly, the tables below reflect the high and low sales
prices for a share of the Company's Common Stock during the period they were
listed on the AMEX, and the high and low bid information for the period during
which they were listed on the NASDAQ SmallCap Market. The quotations below for
dates commencing September 11, 1996 reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
- 49 -
<PAGE> 50
On August 15, 1996, the shareholders of the Company ratified a one-for-five
reverse stock split effective for holders of record on August 29, 1996. The
sales prices below have been restated to give effect to the reverse split.
<TABLE>
<CAPTION>
1997 High Low
- ---- ---- ---
<S> <C> <C>
June 19, 1997 $ 2.0625 $ 1.8125
First Quarter 3.4375 1.4375
1996
- ----
Fourth Quarter $ 3.25 $ 1.0625
Third Quarter 5.625 3.125
Second Quarter 8.75 4.6875
First Quarter 9.375 5.3125
1995
- ----
Fourth Quarter $ 6.5625 $ 4.0625
Third Quarter 7.50 5.3125
Second Quarter 6.25 3.75
First Quarter 4.375 3.125
</TABLE>
(b) Shareholders:
As of June 19, 1997, the Company had approximately 3,847 shareholders of
record.
(c) Dividends:
The Company has not declared or paid any cash dividend since its inception. It
has been the general policy of the Board of Directors to retain all earnings in
the Company to support the expansion and development of new products.
SELECTED FINANCIAL DATA
The following tables summarize selected historical and pro forma
consolidated financial data for the Company for the five years ended September
30, 1996 and the three month periods ended March 31, 1997 and March 31, 1996,
which have been derived from and should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The financial data as of and for the three months ended March 31,
1997 and March 31, 1996 are unaudited, but have been prepared on the same basis
as the audited Consolidated Financial Statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary
- 50 -
<PAGE> 51
for the fair presentation of the data presented. Results of operations for the
three months ended March 31, 1997 are not necessarily indicative of results that
may be expected for the full year. All amounts are in thousands, except per
share data.
<TABLE>
<CAPTION>
Three Months
Ended
March 31 Year Ended September 30
------------------------ ---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 7,707 $ 7,336 $ 31,249 $ 19,602 $ 14,237 $ 13,766 $ 15,993
Net income (Loss) $ (603) $ 282 $ 1,083 $ 337 $ (672) $ 1,430 $ 382
Net income (Loss) $ (.10) $ .05 $ .17 $ .07 $ (.14) $ .33 $ .13
per share
Total Assets $ 31,968 $ 15,239 $ 19,613 $ 15,955 $ 11,137 $ 10,716 $ 10,631
Long Term $ 4,822 $ 2,962 $ 3,453 $ 2,358 $ 740 $ 762 $ 4,027
Obligations
Stockholders' $ 9,913 $ 4,784 $ 5,846 $ 4,464 $ 3,263 $ 3,769 $ 1,245
Equity
Shares 9,311 5,814 6,063 5,814 4,886 4,659 3,004
Outstanding at
Period End
</TABLE>
No cash dividends were declared during any of the periods presented.
Shares outstanding and net income (loss) per share have been restated to give
effect to the recapitalization of the Company as a result of the Merger whereby
XIT (the accounting acquiror) acquired CXR in a "reverse acquisition."
- 51 -
<PAGE> 52
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. SPECIFICALLY,
FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW: RESULTS
OF OPERATIONS-EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED MARCH 31, 1997,
LIQUIDITY AND CAPITAL RESOURCES, OUTLOOK, AND NEW ACCOUNTING PRONOUNCEMENTS.
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 previously and in the notes to the accompanying
consolidated financial statements, the consolidated financial statements
presented are those of XIT Corporation because of the reverse acquisition by XIT
of MicroTel International, Inc. and its subsidiaries in the Merger. The
pre-Merger company and "accounting acquiree" is described as CXR in the
discussion below. XIT is referred to as the "Company."
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- Circuits, Components and Subsystem Assemblies, and Instrumentation and
Test Equipment. The Circuits Sector operates principally in the Company's U.S.
market, the Components Sector operates in its U.S., European and Asian markets,
and the Instrumentation and Test Equipment Sector operates principally in its
U.S. and European markets. The Components and Subsystems Assembly Sector is
referred to as "the Components Sector" in the discussion below for brevity.
The Company's Instrumentation and Test Equipment Sector business is
conducted solely by CXR and therefore its results of operations are not included
in the results of operations for the years ended September 30, 1996, 1995 and
1994.
- 52 -
<PAGE> 53
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1996 VERSUS YEAR ENDED SEPTEMBER 30, 1995 AND YEAR
ENDED SEPTEMBER 30, 1995 VERSUS YEAR ENDED SEPTEMBER 30, 1994
SALES
Consolidated net sales grew by $11,647,000 or 59.4% in 1996 over 1995
and by $5,365,000 or 37.7% in 1995 over 1994. The growth in sales was due in
large part to the net effects of acquisition and disposition activity during the
respective periods. The table below depicts the composition of consolidated net
sales by business sector, separately identifying operations which were acquired
or disposed of during the three year period ended September 30, 1996.
<TABLE>
<CAPTION>
( in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Circuits Sector
HyComp (acquired 7/6/94) $ 3,027 $ 2,696 $ 752
Arnold Circuits(acquired 8/1/95) 13,586 2,827
Etch-Tek (acquired 5/1/96) 1,648
Other 605 469 318
------- ------- -------
18,866 5,992 1,070
------- ------- -------
Components Sector
Computron (disposed of 5/31/95) 2,905 4,273
XCMD (established 5/95) 365 343
Abbott (acquired 9/1/96) 328
Other 11,690 10,362 8,894
------- ------- -------
12,383 13,610 13,167
------- ------- -------
Total Net Sales $31,249 $19,602 $14,237
======= ======= =======
</TABLE>
Net sales in 1996 for the Circuits Sector increased by $12,874,000 or
214.9% and net sales for the Components Sector declined by $1,227,000 or 9% from
the respective sales levels in 1995. The growth in Circuits Sector sales was
comprised principally of the incremental sales of $12,407,000 from the inclusion
in 1996 of Arnold Circuits' full year results, versus two months in 1995, and
five months of operations for Etch-Tek. The remaining growth of $467,000 was
comprised of market share gains by HyComp and XCEL Circuits. The sales volume
for Arnold Circuits for 1996 of $13,586,000 is lower than that expected by
analyzing the two months' sales of $2,827,000 in 1995, due not only to normal
seasonal softness in the circuits industry in the last calendar quarter of each
year, but also to a significant decline in product demand from its major
customer, Motorola. Sales for Arnold Circuits in 1996 declined
- 53 -
<PAGE> 54
by approximately $1,008,000 from its sales for the entire year ended September
30, 1995, including the two months its operations were included in the Company's
consolidated results.
The decline in net sales in 1996 for the Components Sector was the net
result of the loss of revenues from Computron, which had sales of $2,905,000 in
1995 prior to its disposal, being partially offset by the incremental sales from
the acquisition of Abbott in 1996 of $328,000 and sales gains by the other
Sector operations of $1,350,000. The sales gains for the other Sector operations
in 1996 were comprised of a) an increase in sales of XCEL-Lite display monitors
of approximately $1,177,000, principally to the Sector's one major account for
this product line, and b) a net improvement in sales for other Sector products
of $173,000. The latter improvement was also the combined result of several
factors, with a general decline in sales in the Sector's Asian markets due to
price competition being more than offset by an increase in sales in the Sector's
U.S. and European markets due principally to a favorable product mix shift to
higher priced digital switches than those sold in 1995.
Net sales in 1995 for the Circuits Sector increased by $4,922,000 or
460% over those in 1994. This growth resulted principally from the incremental
sales of $4,771,000 from the inclusion in 1995 of a full year's operations for
HyComp, versus three months in 1994, and two months of Arnold Circuits'
operations subsequent to its acquisition. Net sales in 1995 for the Components
Sector improved by $443,000 or 3.4% over those in 1994, with a decline in
revenues from Computron of $1,368,000, which was sold on May 31, 1995, being
more than offset by the incremental revenues of the start-up operations of XCMD
of $343,000 and gains of $1,468,000 for the remainder of the Sector's operations
in all of its geographic markets. The latter gains were comprised principally of
an increase in sales of XCEL-Lite display monitors of $1,123,000, as a result of
a major new account, and to both improved pricing and market share gains for the
Sector's subsystem manufacturing businesses.
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales (in parentheses) are as follows for the three
years ended September 30, 1996, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
( dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Circuits Sector $ 3,570 (18.9%) $ 1,445 (24.1%) $ 163 (15.2%)
Components Sector 4,622 (37.3%) 3,825 (28.1%) 4,051 (30.8%)
------- ------- -------
Total Gross Profit $ 8,192 (26.2%) $ 5,270 (26.9%) $ 4,214 (29.6%)
======= ======= =======
</TABLE>
Consolidated gross profit as a percentage of sales declined by .7% from
26.9% in 1995 to 26.2% in 1996, as the effects of a 9.2% improvement in gross
profit percentage for the Components Sector was more than offset by the effects
of a 5.2% decline for the Circuits Sector due to the Circuits Sector's greater
weighing in the consolidated sales mix. The improvement for the Components
Sector was the combined result of a) the favorable product
- 54 -
<PAGE> 55
mix shift to higher priced (and higher margin) switches noted above under SALES,
b) improved absorption of fixed manufacturing costs and material pricing
resulting from the increase in sales and production of XCEL-Lite monitors, c)
relatively higher margins for products sold by Abbott (acquired in 1996), than
those historically achieved for Sector products, and d) the inclusion in 1995 of
product sales by Computron, prior to its disposition, at lower margins than the
average for the Sector. The decline in gross profit for the Circuits Sector was
caused by a) higher costs for Arnold Circuits' product sales due to the
underabsorption of fixed manufacturing costs related to declining sales levels
and manufacturing inefficiencies from a product mix change to higher technical
content circuit boards, and b) relatively lower margins on 1996 Etch-Tek product
sales, after its acquisition, than historically achieved by the Sector.
Consolidated gross profit as a percentage of sales declined by 2.7%
from 29.6% in 1994 to 26.9% in 1995, as an increase of 8.9% for the Circuits
Sector was outweighed by a 2.7% decline for the Components Sector due to the
Components Sector's greater weighing in the consolidated sales mix. The
improvement for the Circuits Sector in 1995 versus 1994 was due principally to
the inclusion in 1995 of a full year of HyComp's sales and two months of Arnold
Circuits' operations, as both of these unit's sales have higher margins than the
average achieved by the Sector in 1994. The decline in the Components Sector was
due principally to the replacement of lost Computron sales with lower margin
XCEL-Lite product sales.
OPERATING EXPENSES
Operating expenses for the years ended September 30, 1996, 1995 and
1994 were comprised of the following:
<TABLE>
<CAPTION>
( in thousands)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Commissions $1,438 $ 517 $ 149
Other Selling 971 974 1,106
------
Total Selling Expense 2,409 1,491 1,255
General & Administrative Expense 3,970 3,379 2,831
------
Total Selling, General & Administrative $6,379 $4,870 $4,086
====== ====== ======
Engineering, research & development $ 309 $ 328 $ 639
====== ====== ======
</TABLE>
Total selling expense as a percentage of net sales was 7.7%, 7.6% and
8.8% for the years ended September 30, 1996, 1995 and 1994, respectively.
Commissions as a percentage of sales increased from 1.1% in 1994 to 2.6% in 1995
and to 4.6% in 1996, as a result of and in direct relation to the increase in
Circuits Sector sales during these periods. In contrast to Components Sector
sales which are primarily achieved through direct selling, substantially all
Circuits Sector sales are made through manufacturer representatives. Other
selling expense, which consists of sales and marketing departmental costs, was
comparable between 1996 and 1995, with the incremental costs of acquired
operations being offset by the elimination of Computron's costs after its
disposal in May 1995. The reduction in other selling expense of
- 55 -
<PAGE> 56
$132,000 from 1994 to 1995 was the combined result of a) a $104,000 increase in
costs representing the net effects of acquired operations and the disposal of
Computron on the periods, and b) a $236,000 reduction in costs due to cutbacks
in sales administration and direct sales personnel.
General and administrative expense increased by $591,000 in 1996 versus
1995, and by $548,000 in 1995 versus 1994. Excluding the incremental effects of
acquired operations net of the disposal of Computron of $836,000 and $439,000 in
1996 and 1995, respectively, general and administrative expense declined by
$245,000 in 1996 versus 1995, and increased by $109,000 in 1995 versus 1994. The
decline in 1996 was the combined result of reversals of accruals of $399,000
related to the favorable disposition in 1996 of certain long-disputed
administrative costs, offset by a general increase of $154,000 in administrative
expense levels, principally in personnel costs. The increase in 1995 was due to
incremental legal fees related to acquisition and disposition activities.
Engineering, research and development costs originated solely from the
research and product development activities of HyComp in 1996 and 1995 and were
relatively comparable between the periods. Such costs in 1994 included the
activities of a Components Sector project engineering group which was
discontinued in that year and product development activities at Computron to
develop a lower cost monitor, which were also discontinued in 1994. The costs of
these latter activities of $541,000, less the effects of only a partial year of
HyComp's research and development activities being included in 1994, resulted in
a $311,000 decline in engineering, research and development costs in 1995 versus
1994.
OTHER INCOME AND EXPENSE
The increase in interest expense of approximately $102,000 in 1996
compared to 1995, and of approximately $67,000 in 1995 compared to 1994,
resulted principally from increased average borrowings during the respective
periods.
Fluctuations in other income (expense), net resulted principally from
differences in foreign currency exchange gains and losses incurred during the
respective periods. Other income in 1995 also includes as a separate line item
the gain on the sale of the Computron Division of $479,783.
INCOME TAXES
Income taxes are nominal in the respective periods as the Company is in
a loss carryforward position for U.S. Federal tax purposes, as well as in most
foreign jurisdictions.
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED MARCH 31, 1997
- 56 -
<PAGE> 57
The consolidated results of operations for the three months ended March
31, 1997 include the full or partial results of operations of three companies
acquired since March 31, 1996. They include the full quarterly results of both
Etch-Tek acquired on May 1, 1996, and Abbott acquired on September 1, 1996. They
also include the results of operations of CXR for the five days ended March 31,
1997. The table below separates the results of the acquired entities from the
consolidated totals for the three months ended March 31, 1997 in order to
provide a more meaningful basis for a comparative discussion of these results
versus the three months ended March 31, 1996.
<TABLE>
<CAPTION>
(in thousands)
Three Months Ended March 31
------------------------------------------------------------
1997 1996
------------------------------------------- ------------
Consolidated Acquisitions Comparative
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 7,707 $ 2,540 $ 5,167 $ 7,336
Cost of sales 6,234 1,856 4,378 5,372
------------ ------------ ------------ ------------
Gross profit 1,473 684 789 1,964
Selling expense (613) (161) (452) (659)
General & administrative (1,162) (418) (744) (808)
Engineering & product
development (98) (31) (67) (106)
Interest (198) (71) (127) (128)
Other income (expense) (1) (1) 22
Income taxes (4) (4) (3)
------------ ------------ ------------ ------------
Net Income (loss) $ (603) $ 3 $ (606) $ 282
============ ============ ============ ============
</TABLE>
As can be seen from the table, the consolidated results of operations
for the three months ended March 31, 1997 were significantly impacted by the
results of the acquired companies. Net sales, gross profit, and operating
expenses (selling, general and administrative, and engineering and product
development) of these companies represented 32.9%, 46.4%, and 32.6%,
respectively, of the consolidated totals.
- 57 -
<PAGE> 58
The table following summarizes by company the incremental results
related to the acquired companies for the three months ended March 31, 1997:
<TABLE>
<CAPTION>
(in thousands)
Etch-Tek Abbott CXR Total
-------- ------ --- -----
<S> <C> <C> <C> <C>
Net sales $ 947 $ 1,093 $ 500 $ 2,540
======= ======= ======= =======
Gross profit $ 44 $ 428 $ 212 684
======= ======= ======= =======
Operating expenses (177) (326) (107) (610)
Interest expense (66) (55) (71)
------- ------- ------- -------
Net income (loss) $ (149) $ 47 $ 105 $ 3
======= ======= ======= =======
</TABLE>
The level of business volume for CXR for the five days ended March 31,
1997 is not indicative of its pro rata sales per period, as its revenues have
historically been higher towards the end of each quarter due to the buying
pattern of its principal customers. For the entire three months ended March 31,
1997, CXR incurred a net loss of $(1,904,000) on net sales of $3,496,000.
Included in these quarterly results prior to March 26, 1997, CXR incurred
certain significant charges as follows: i) $462,000 of compensation expense
related to certain officers and directors whose corporate capacities would
terminate or change at the date of the merger with the Company and ii) $287,000
of asset write-downs and severance costs related to the reassessment of the
impact on asset realizable values and certain cutbacks in personnel,
respectively, necessitated by the continuing sluggishness of its business
volume. These charges directly impacted the net loss of CXR for the quarter, as
there are no tax effects because CXR is in a net operating loss carryforward
position. Additionally, the consolidated results of operations for the three
months ended March 31, 1997 included amortization of the goodwill originating in
the acquisition of CXR of $5,000 for the five days subsequent to the merger,
whereas annual amortization is estimated to approximate $327,000.
Although not necessarily indicative of the results that would have
occurred or of results which may occur in the future, Note 2 to the consolidated
condensed financial statements for the three months ended March 31, 1997 and
1996 presents summary pro forma results as if the merger had taken place at the
beginning of the first quarter of 1997.
COMPARATIVE RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 VERSUS
THREE MONTHS ENDED MARCH 31, 1996
The following discussion relates to the comparison of the results of
operations for the three months ended March 31, 1997, excluding the results of
the acquired companies, to the results for the same period of the prior year
(see the first table above under Effects of Acquisitions on the Three Months
Ended March 31, 1997).
- 58 -
<PAGE> 59
Net sales for the first quarter of 1997 declined by $2,169,000 or 29.6%
from those in the same period of the prior year. This decline was comprised of
lower net sales for the Company's Circuits and Components Sectors of $1,636,000
and $533,000, respectively. The decrease in the Circuits Sector was due
principally to lower demand from the major customer of the group, Motorola,
compounded by an inability to ship the lower level of orders received as a
result of material sourcing problems caused by cash flow constraints. The
decrease in the Components Sector was due principally to the loss of a major
account for display monitors.
Gross profit, as a percentage of sales, declined from 26.8% in the
first quarter of 1996 to 15.3% for the first quarter of 1997. This decline was
the direct result of the lower sales volume noted above and the consequential
decline in absorption of the Company's fixed manufacturing costs, particularly
in the capital intensive Circuits Sector.
Operating expenses (selling, general and administrative, and
engineering and product development) declined by $310,000 in total from
$1,573,000 in the first quarter of 1996 to $1,263,000 in the first quarter of
1997. Selling expenses, which include a significant commissions component and
are therefore largely variable, were comparable as a percentage of sales at 8.8%
in 1997 versus 9% in 1996. General and administrative expenses in 1997 declined
by $64,000 or 7.9% from 1996 as a combined result of the streamlining of the
administrative structure in the Circuits Sector, offset in part by higher
corporate administrative costs. The latter corporate cost increases relate
principally to higher personnel costs and the implementation of a new computer
system. Engineering and product development expenses declined by $39,000 from
1996 to 1997 due principally to an increase in the amount of such costs billable
to specific contracts.
Interest expense was approximately the same between the two periods
reflecting comparable average borrowings during the periods. Other income
(expense) is principally comprised of foreign currency exchange gains and losses
incurred during the respective periods.
Income taxes are nominal in the respective periods as the Company is in
a loss carryforward position for Federal income tax purposes, as well as in most
foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $706,000, $292,000 and
$919,000 for the years ended September 30, 1996, 1995 and 1994, respectively.
The principal non-cash item contributing to these cash flows is depreciation and
amortization which was approximately $589,000, $278,000 and $212,000 in 1996,
1995 and 1994, respectively, with the increasing trend due principally to
acquired operations. The increase in cash provided by operations of $414,000 in
1996 versus 1995 was due principally to the positive effects of the improvement
in results of operations, the increase in depreciation and amortization, and the
inclusion in 1995 of the non-cash gain on the sale of Computron, offset by a
decrease in accrued expenses in 1996 related principally to the accrual
reversals discussed above under "Results of Operations."
- 59 -
<PAGE> 60
Cash provided by operations in 1995 decreased by $627,000 from 1994, although
results of operations improved. This was due to the non-cash gain on Computron
in 1995, and to a greater extent, a decline in 1994 of the level of accounts
receivable at year-end caused by a significant decline in sales by Computron and
XCEL Japan in the fourth quarter of that year versus the comparable period of
the prior year.
Cash of $58,000 was used in operations in the first quarter of 1997
versus cash of $116,000 being provided by operations in the first quarter of
1996. The increase in cash use was caused by the decline in results of
operations, coupled with changes in working capital management during the
respective periods. In the first quarter of 1996, the Company had refinanced its
bank borrowings on more favorable terms and used much of the incremental cash to
pay down older accounts payable. In 1997, the Company reduced its inventory
levels and elongated its payables cycle due to lack of available borrowings.
Cash used for the acquisitions of Arnold Circuits in 1995 and Etch-Tek
in 1996 was obtained from additional bank borrowings, collateralized by their
assets, and the acquisition of Abbott in 1996 was financed by cash from
operations. Proceeds from the sale of Computron were used principally to retire
bank debt.
Capital expenditures were approximately $786,000, $94,000 and $165,000
in 1996, 1995 and 1994, respectively, with the substantial increase in 1996 due
principally to purchases by the capital intensive Circuits Sector. There are
currently no formal commitments for 1997 capital expenditures, however, planned
expenditures, again principally for the Circuits Sector, approximate $800,000.
All of the Company's banking facilities are asset-based borrowing
arrangements, with substantially all availability borrowed at any given time.
Further, as discussed in Note 4 to the consolidated condensed financial
statements for the three months ended March 31, 1997 and 1996, the bank lines of
credit for both the Company and one of its subsidiaries expire under current
extension arrangements on June 30, 1997. Based on discussions with the bank,
management believes that the lines will be renewed with more favorable advance
rates and less restrictive financial covenants. However, there can be no
assurances that this will occur.
On February 20, 1997, the Company accepted a commitment from Yorkton
pursuant to which Yorkton would use its best efforts to raise a minimum of
$5,000,000 and a maximum of $10,000,000 through a private placement of
investment units consisting of one share of restricted common stock and one
quarter of a warrant to purchase one share of restricted common stock. On April
14, 1997, a first closing occurred on 2,000,000 investment units, for gross
proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The Units
were issued to European institutional investors pursuant to the exemption
afforded by Regulation S under the Securities Act of 1933, as amended. The
offering, which was structured to accommodate multiple closings, would terminate
on the earlier of i) the date the maximum offering of $10,000,000 was contracted
or ii) the extended termination date of May 31, 1997. The offering expired on
May 31, 1997 with no additional closings.
- 60 -
<PAGE> 61
The proceeds of the closing of the Yorkton private placement have
alleviated the immediate cash flow problems of the Company. However, management
believes that future cash flows from operations will need to be supplemented to
support its working capital and business development needs for the next twelve
months. Management will actively seek additional funds through an additional
private placement of debt or equity securities. There can be no assurance,
however, that alternative financing will be available, or if available, that it
will be on terms favorable to the Company.
There are two significant legal proceedings pending against the Company
(see Note 5 to the consolidated condensed financial statements for the three
months ended March 31, 1997 and 1996). Management believes that the outcome of
these pending litigations will not have a material adverse effect on the results
of operations or financial position of the Company.
OUTLOOK
In the Circuits Sector, sales demand for product from Motorola has
increased in the subsequent period and the Company's delivery performance has
improved. Further, sales efforts for the Sector have been intensified, with
initial success, to both increase sales volume and to dilute the Sector's
concentration in and consequential dependence on Motorola. The Company has also
implemented yield improvement measures, reductions in overtime and outsourcing,
and improved cost controls in the Sector's operations, and further, expects
higher pricing for digital products sold to Motorola as the current contracts
are renewed. The combination of the above factors and the positive effects of
increased volume on absorption of fixed manufacturing costs should improve gross
profit margins in the future.
In the Components Sector, the Company is in the process of qualifying
itself and its products with a new prospective customer. If obtained, revenues
from such customer should replace the loss in revenue which resulted from the
loss of the major display monitor account in 1996.
During 1996 and continuing in the first quarter of 1997, domestic sales
of the Instrumentation and Test Equipment Sector (CXR Telcom and CXR S.A.) were
negatively impacted by delays in buying by its principal customers, as a result
of the consolidation and/or restructuring of these companies in the wake of the
passage of the Telecommunications Bill of 1996, and European sales were
negatively impacted by a decline in sales to France Telecom during its
pre-privatization reorganization and a generally weak French economy.
Additionally, sales for both operating subsidiaries have been negatively
impacted by the rapid obsolescence of the analog-based components of their
product lines, particularly older transmission products; and further, both sales
and margins have been impacted by extreme price competition for transmission
products in general.
In the fourth quarter of 1996 and in the first quarter of 1997 prior to
the merger, CXR reduced the carrying value of certain inventory and capitalized
software by $1,006,000 and $209,000, respectively. These write-downs resulted
from its reassessment of the anticipated
- 61 -
<PAGE> 62
continuing near-term impact of the industry and economic factors noted above on
asset realizability. Although the Company believes based on its current
assessment that the write-downs are adequate, there can be no assurance that
further write-downs of operating assets, as well as write-downs of the goodwill
originating in the merger, will not be necessary should actual business
conditions deteriorate.
Although the negative impact of the reorganizations of the Sector's
domestic customers continues, it is believed to be a temporary phenomenon. The
industry repositioning is expected to result in growth as the changed entities
emerge and the long distance carriers vie for the local loop business of the
RBOC's and as the RBOC's compete for long distance services. Final
implementation guidance on the deregulation provided for in the
Telecommunications Bill of 1996 was released in late August 1996 by the federal
government, allowing the local and long distance telephone companies to begin
entering each others' markets. CXR Telcom has been working with its customers to
prepare for their future needs in the expansion of their markets. The first
major order received in support of such expansion was a $2,340,000 order from
AT&T in April 1997 for equipment to support AT&T's expansion into the local
markets.
To overcome the negative factors impacting the Sector's European
operation, CXR S.A. has implemented several changes to its business strategy. It
has introduced a new line of ISDN Terminal Adapters to its transmission product
line, has begun a new business unit which provides networking solutions to the
business user utilizing O.E.M. products, and has refocused its marketing to
expand its markets outside of France, including the establishment of a
subsidiary in England. Revenue improvements have begun to be realized as a
result of these efforts.
At September 30, 1996, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $7,800,000 available to reduce
future taxable income. Additionally, at December 31, 1996, CXR had net operating
loss carryforwards for Federal and state tax purposes of approximately
$19,900,000 and $4,800,000, respectively. The expiration of these net operating
loss carryforwards is detailed in the notes to the applicable financial
statements included elsewhere herein. As a result of the merger, both entities
have undergone a change in control for tax purposes, which will limit the use of
these domestic net operating loss carryforwards to approximately $825,000 per
year until their expiration.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 is effective for fiscal years beginning
after December 15, 1995 and encourages, but does not require, a fair market
based method of accounting for employee stock options or similar equity
instruments. SFAS No. 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures
of net earnings and earnings per share as if the fair value based method of
accounting had been
- 62 -
<PAGE> 63
applied. The Company has adopted SFAS No. 123 in fiscal 1997, electing to
continue to measure compensation costs under APBO No. 25 and to comply with the
pro forma disclosure requirements. Consequently, the implementation of SFAS No.
123 had no effect on the Company's financial position or results of operations.
In February 1997 the FASB issued SFAS No. 128 "Earnings per Share,"
which will become effective for the Company for its year end December 31, 1997,
requiring restatement of quarterly and prior year financial information, if
applicable. This pronouncement provides a different method of presenting and
calculating earnings per share (EPS) than is currently used in accordance with
APB No. 15 "Earnings per Share" and modifies existing disclosure requirements.
The principal difference is that SFAS No. 128 provides for the calculation and
presentation of Basic and Diluted EPS. Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share of APB No. 15. As common
stock equivalents have historically been antidilutive, implementation is
expected to have no effect on previously reported EPS. However, based on the
current trading value of the Company's common stock and assuming the Company is
profitable, it is expected that future presentations of EPS will include
differing values for Basic and Diluted EPS due to the effects of common stock
equivalents.
- 63 -
<PAGE> 64
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of MicroTel are as
follows:
<TABLE>
<CAPTION>
Name Age Titles
- ---- --- ------
<S> <C> <C>
Carmine T. Oliva 54 Chairman of the Board of
Directors, President and
Chief Executive Officer
David Barrett 45 Director
Laurence P. Finnegan, Jr. 59 Director
Barry E. Reifler 46 Chief Financial Officer
Robert Runyon 71 Secretary and Director
Jack Talan 72 Director
</TABLE>
CARMINE T. OLIVA was appointed Chairman of the Board, President and
Chief Executive Officer of MicroTel upon consummation of the Merger on March 26,
1997. He has been the Chairman, President and Chief Executive Officer of XIT
since its founding in 1983. From 1980 to 1983, he was Senior Vice President and
General Manager, ITT Asia Pacific Inc. Prior to that position, Mr. Oliva held a
number of executive positions with ITT Corporation and its subsidiaries over an
eleven-year period. Mr. Oliva is the founder of XIT. Mr. Oliva attained the rank
of Captain in the United States Army and is a veteran of the Vietnam War.
DAVID BARRETT was appointed as a Director of MicroTel upon consummation
of the Merger on March 26, 1997. He has been a partner at Baldwin Brothers,
Inc., of Marion, Massachusetts, an investment advisory firm, since January 1982.
He also serves as Chairman of the Finance Committee of Tobey Health Systems,
Inc., as a member of the Board of Advisors of Pell Rodman Venture Partners LP of
Boston, Massachusetts; as Trustee and Treasurer of Friends Academy and on the
Investment Committee of Tabor Academy.
LAURENCE P. FINNEGAN, JR. was appointed as a Director of MicroTel
upon consummation of the Merger on March 26, 1997. In addition to being a
director of XIT since 1985, Mr. Finnegan joined XIT as its Chief Financial
Officer on a part-time basis in 1994. Mr. Finnegan has held positions with ITT
(1970-74) as controller of several divisions, Narco Scientific (1974-1983) as
Vice President Finance, Chief Financial Officer and Executive Vice President,
and Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial
Officer and Treasurer. Since 1994, he has been a principal of Gwyn Allen
Partners, Bethlehem, Pennsylvania, an executive management consulting firm, and
President of GA Pipe, Inc., a manufacturing company based in Langhorne,
Pennsylvania.
- 64 -
<PAGE> 65
BARRY E. REIFLER has been the Chief Financial Officer of MicroTel since
February 9, 1996. From 1989 to 1995, Mr. Reifler was the Chief Financial Officer
of Kleer-Vu Industries, a publicly-traded manufacturer of photo storage
products, and was thereafter a consultant to Kleer-Vu until his appointment as
Vice-President and Chief Financial Officer of MicroTel. From 1978 to 1989, Mr.
Reifler, a Certified Public Accountant, was with the international public
accounting firm of Deloitte and Touche.
ROBERT RUNYON was appointed as a Director and Secretary of MicroTel
upon consummation of the Merger on March 26, 1997. He is the owner and principal
of Runyon and Associates, a human resources and business advisor firm since
1990. Prior to the Merger, Mr. Runyon served XIT both as a director and as
consultant in the areas of strategic development and business planning,
organization, human resources, and administrative systems. He also consults for
companies in environmental products, marine propulsion systems and architectural
services sectors in these same areas. From 1970 to 1978, Mr. Runyon held various
executive positions with ITT Corporation including Vice President,
Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to
1970, Mr. Runyon held executive positions at BP Oil including Vice President,
Corporate Planning and Administration of BP Oil Corporation, and director,
organization and personnel for its predecessor, Sinclair Oil Corporation. Mr.
Runyon was Senior Vice President, Human Resources at the Great Atlantic &
Pacific Tea Company from 1978 to 1980.
JACK TALAN has been a director of MicroTel since 1995 and was the
interim Chairman and Chief Executive Officer of MicroTel from November 15, 1996
until the appointment of Mr. Oliva as Chairman, President and Chief Executive
Officer on March 26, 1997. Since March 1993, Mr. Talan has been a Director of
World Wide Collectibles, a public company which markets a system designed to
assure and protect the integrity of limited edition collectibles, and was the
President of that company until his resignation in December 1996. Since 1990,
Mr. Talan has been the Principal and President of Jack Talan, Inc., a sales and
marketing consulting company. Additionally, Mr. Talan was the co-founder, major
shareholder, director and Senior Vice President of Arista Corp., a publisher and
distributor of educational materials until it was sold in 1985.
- 65 -
<PAGE> 66
EXECUTIVE COMPENSATION
The cash compensation paid by the Company during the year ended December 31,
1996 to its Chief Executive Officers and other executive officers earning salary
and bonus exceeding $100,000 is presented in the Summary Compensation Table
below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Other Restricted Options/SARs All Other
Position Annual Stock Shares Compensation
Compensation Awards $
$ $(5)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack Talan, Ended 12/31/96 (1) -0- 10,000 155,000
CEO, from 11/15/96
to 3/26/97
--------------------------------------------------------------------------------------------
Ended 12/31/95 -0- 10,000 15,625 5,000
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Daniel Dror, CEO, Ended 12/31/96 -0- (2)
Until 11/15/96
--------------------------------------------------------------------------------------------
Ended 12/31/95 174,417 78,125 25,000 966,846
(3)
--------------------------------------------------------------------------------------------
Six Months Ended 11,077 (2)
12/31/94
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Henry Mourad, Ended 12/31/96 150,000 82,000
President
until 3/26/97
--------------------------------------------------------------------------------------------
Ended 12/31/95 150,000 15,625 5,000
--------------------------------------------------------------------------------------------
Six Months Ended 72,263 40,000
12/31/94
--------------------------------------------------------------------------------------------
Ended 6/30/94 150,000 20,000
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Jacques Moisset, VP Ended 12/31/96 173,106 12,000
(4)
--------------------------------------------------------------------------------------------
Ended 12/31/95 181,132 48,000
--------------------------------------------------------------------------------------------
Six Months Ended 76,478
12/31/94
--------------------------------------------------------------------------------------------
Ended 6/30/94 139,132
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Jack Talan became Chairman and Chief Executive Officer on 11/15/96, upon
Daniel Dror's resignation. At that time, Mr. Talan was authorized $3,000
in fees for previous Board service and $2,500 per month in compensation to
serve as Chairman and Chief
-66-
<PAGE> 67
Executive. Mr. Talan received both the back fees of $3,000 and two months
of compensation totaling $5,000 in restricted stock issued at a 20%
discount to the market on the date of issuance (for a value of $10,000).
(2) The Board of Directors awarded Daniel Dror $144,000 per year beginning
July 1, 1994. In 1994, Mr. Dror received four weeks payment of $11,077 and
waived the remaining payments. In 1996, Mr. Dror waived all salary
payments.
(3) Upon his resignation on November 15, 1996, Mr. Dror was awarded a
severance package which included a) 50,000 shares of restricted stock with
a market value of $118,750, (b) options to acquire 250,000 shares of
common stock at an exercise price of $2.375 per share, and (c) options to
acquire 300,000 shares of common stock at $.01 per share. The fair market
value of the two option grants is estimated at $848,096 using the
Black-Scholes Model as a computation methodology.
(4) Jacques Moisset is paid in French Francs, which are translated hereon at
annual average exchange rates.
(5) At 12/31/96, the number and value of the aggregate restricted stock awards
for the above named executives was Mr. Talan-5,000 shares valued at
$7,500; Mr. Dror-75,000 shares (including those noted in footnote 3 above)
valued at $112,500; and Mr. Mourad-5,000 shares valued at $7,500. The
shares of Messrs. Talan and Mourad vest ratably over three years beginning
March 16, 1995, and Mr. Dror's shares all vested immediately upon his
resignation on 11/15/96.
The following two tables depict stock option grants and exercises by
named executives for the year ended December 31, 1996 and the status of
outstanding stock options to them at December 31, 1996.
OPTIONS/SAR GRANTS GRANTED DURING THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
===================================================================================================
(a) (b) (c) (d) (e) (f)
- ---------------------------------------------------------------------------------------------------
Name Options/SARs % of Total Exercise or Expiration Date Grant Date
Granted (#) Options/SARs Base Price Present Value
Granted to ($/Sh) ($) (3)
Employees in
Fiscal Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack Talan CEO 5,000 .3% 3.125 3-16-98 4,512
50,000 3.4% 2.00 12-31-96 23,474
100,000 6.7% 1.80 12-31-96 47,440
- ---------------------------------------------------------------------------------------------------
Daniel Dror, 25,000(1) 1.7% 3.125 11-14-99 18,878
Former CEO 250,000(2) 16.8% 2.375 11-14-01 288,236
300,000(1) 20.1% .01 12-3-99 559,860
- ---------------------------------------------------------------------------------------------------
Henry Mourad 4,000 .3% 3.125 5-14-01 4,993
President 8,000 .5% 3.125 5-2-02 10,843
20,000 1.3% 3.125 7-1-98 16,216
50,000 3.4% 1.80 12-31-96 23,798
- ---------------------------------------------------------------------------------------------------
Jacques Moisset, 2,000 .1% 3.125 8-23-00 2,439
VP 4,000 .3% 3.125 5-14-01 5,214
6,000 .4% 3.125 5-2-02 1,895
===================================================================================================
</TABLE>
(1) 10,000 options of the 25,000 option repricing and all of the 300,000
option grant were assigned to others by Mr. Dror.
(2) This option is exercisable only after Mr. Dror repays a certain
indebtedness to the Company approximating $211,000, which amount is due in
5 annual installments and which may be repaid by surrendering the options
for value equivalent to the lesser of the future appreciation of the
underlying stock over the exercise price or $.50 per share.
(3) Grant date value was determined using a modified Black-Scholes pricing
model assuming no dividend yield, expected volatility of approximately
56%, risk-free rate of return 6.6%, and time of exercise generally at 2/3
of the remaining exercise period.
-67-
<PAGE> 68
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND OPTION/SAR VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
==================================================================================================================
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------
Name Shares Acquired on Value Realized ($) Number of Securities Value of Unexercised
Exercise (#) Underlying Unexercised In-the-money
Options/SARs at 12/31/96 Options/SARs at
(#) 12/31/96 ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Talan CEO 105,556 43,750 5000/0 0/0
- ------------------------------------------------------------------------------------------------------------------
Daniel Dror Former 265,000/0 0/0
CEO (1)
- ------------------------------------------------------------------------------------------------------------------
Henry Mourad 50,000 22,500 72,000/0 0/0
President
- ------------------------------------------------------------------------------------------------------------------
Jacques Moisset VP 60,000/38,400 0/0
==================================================================================================================
</TABLE>
(1) Does not include options assigned by Mr. Dror to others; of the options
assigned to others, 300,000 options were exercised in 1996 for value
realized of $484,500.
COMPENSATION OF DIRECTORS.
During the year ended December 31, 1996, there were no standard arrangements for
compensation of directors. However, on November 15, 1996, the Board authorized
the payment of $3,000 in fees for past service on the Board of Directors to Mr.
Talan and $2,500 per month to serve as Chairman and Chief Executive Officer.
Additionally, on that date the Board authorized the payment of $15,000 to Mr.
Lewisham for past Board service and $4,000 in expense reimbursement. Mr. Talan
received his total fees for 1996 of $8,000 in restricted stock of the Company
issued at a 20% discount to market (4,445 shares), and Mr. Lewisham received his
in cash. Since the Merger, the Compensation Committee has been considering the
issue of non-employee director compensation but no policy has yet been adopted.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Pursuant to the employment agreement dated April 12, 1994, as amended
between the Company and Henry A. Mourad (the "Mourad Agreement"), Mr. Mourad is
employed as President of CXR Telcom. The Mourad Agreement provides for an annual
salary of $150,000. The Mourad Agreement is for a rolling term of two years,
such that on April 1 of each year it shall have an unexpired term of two years.
In the event of the termination of Mr. Mourad's employment by the Company
without cause, or by Mr. Mourad for cause (which does not include a change of
control), Mr. Mourad shall be entitled, until the expiration date of the
employment agreement (or up to two years), to receive his salary, at an annual
amount equal to the average of the three highest annual incentive compensation
payments made to Mr. Mourad by the company prior to such termination, medical
care, pension and similar benefits.
-68-
<PAGE> 69
In the event of a termination for cause, Mr. Mourad is entitled to salary and
benefits only through the date of termination.
Pursuant to the employment agreement dated July 1, 1995 between the
Company and Jacques Moisset, Mr. Moisset is employed as President of CXR S.A.
for a term of three years at an annual salary of 885,000 French Francs. There
are no provisions in Mr. Moisset's employment agreement for payments upon
termination of employment or upon a change in control.
Pursuant to the employment agreement between the Company and Barry E.
Reifler, dated February 9, 1996, as amended (the "Reifler Agreement"), Mr.
Reifler is employed as Chief Financial Officer at an annual salary of $150,000.
The Reifler Agreement contains a change-in-control arrangement such that within
three months of a change-in-control, Mr. Reifler can elect to terminate the
Reifler Agreement and receive the following benefits: (i) payments based on an
annual salary of $125,000 plus current employee benefits payable for a period of
two years; (ii) the issuance of 30,000 shares of common stock pursuant to a
stock option Mr. Reifler holds, the Company deeming such exercise price paid;
(iii) the issuance of 10,000 shares of common stock pursuant to a restricted
stock award and (iv) the payment by the Company to Mr. Reifler of all income tax
liabilities associated with such stock issuance. The merger between a
wholly-owned subsidiary of the Company and XIT Corporation constituted a
change-in-control as defined in the Reifler Agreement.
Mr. Reifler has given notice to the Company that he has exercised
his right to terminate the Reifler Agreement. The Company has begun the
process of identifying a successor to Mr. Reifler.
Pursuant to the employment agreement dated January 1, 1996 between the
Company and XIT Corporation (the "Oliva Agreement"), Carmine T. Oliva is
employed as Chairman, President and Chief Executive Officer of XIT Corporation
for a term of five years at an annual salary of $250,000. On May 6, 1997, the
Board of Directors of the Company voted to assume the obligations of XIT under
this Agreement in light of the appointment of Mr. Oliva to the positions of
Chairman of the Board, President and Chief Executive Officer of the Company. The
Agreement is subject to automatic renewal for three successive two year terms
commencing on January 1, 2001, unless, during the required notice periods as
provided therein, either party gives written notice of its desire not to renew.
Mr. Oliva had deferred $104,000 in salary prior to the effective date of the
Oliva Agreement. This and any other Deferred Salary shall be due and payable
upon any Redesignation, as defined in the Oliva Agreement, of Mr. Oliva by the
Board, to offices or positions other than, or in addition to, Chairman,
President and Chief Executive Officer and a subsequent resignation by Mr. Oliva
due to such Redesignation. If any such Redesignation occurs during the initial
term of the Oliva Agreement, XIT shall pay Mr. Oliva his annual salary for three
years following the effective date of such resignation or until January 1, 2001,
whichever is longer. In the event of Mr. Oliva's termination for cause, the
Company's obligation to pay any compensation, severance allowance, or other
amounts payable under the Agreement terminates on the date of such termination.
In the event of a termination without cause, Mr. Oliva shall be paid his annual
salary for two and one-half years following the effective date of such
termination or until January 1, 2001, whichever is longer. If such termination
occurs during a renewal period, Mr.
-69-
<PAGE> 70
Oliva shall be paid his annual salary through the expiration of that particular
renewal period as well as any and all other amounts payable pursuant to the
Agreement, including deferred salary. XIT may terminate the Agreement upon
thirty days written notice in the event of a merger or reorganization of XIT in
which the shareholders of XIT immediately prior to such reorganization receive
less than fifty percent of the outstanding voting shares of the successor
corporation. The Merger did not trigger the application of that termination
provision, since, pursuant to the Merger, the former shareholders of XIT were
issued approximately 6,119,130 shares of common stock of the Company or
approximately 65% of the issued and outstanding common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
During the fiscal year ended December 31, 1996, the Compensation Committee
of the Board of Directors consisted of William Lewisham and Jack Talan. From
November 15, 1996 through the end of the fiscal year, Mr. Talan also served as
President and Chief Executive Officer of the Company. See "Compensation of
Directors" and Item 13,"Certain Relationships and Related Transactions" for a
description of certain transactions between the Company and Messrs. Talan and
Lewisham.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of June 9, 1997 by the
following: (i) each person who is beneficial owner of more than five percent
(5%) of the Company's outstanding common stock; (ii) each Director; (iii) each
of the named executive officers of the Company; and (iv) all Directors and
executive officers as a group.
<TABLE>
<CAPTION>
==================================================================================
Name and Address Number of Shares
of Beneficial Owner Beneficially Percent of Class(1)
Owned(1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
The Bertrand Family Trust 595,106 5.27%
c/o Robert J. Bertrand and
Docas L. Bertrand, Trustees
851 Arbolando Drive
Fullerton, CA 92835
- ----------------------------------------------------------------------------------
Carmine T. Oliva 1,863,422(2) 15.45%
c/o MicroTel International,
Inc.
4290 East Brickell Street
Ontario, CA 91761
- ----------------------------------------------------------------------------------
Samuel J. Oliva 705,284(3) 6.19%
80 Brandywyne Drive
Florham Park, NJ 07932
- ----------------------------------------------------------------------------------
</TABLE>
-70-
<PAGE> 71
<TABLE>
<CAPTION>
==================================================================================
Name and Address Number of Shares
of Beneficial Owner Beneficially Percent of Class(1)
Owned(1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Laurence P. Finnegan, Jr. 132,349(4) 1.16%
3 Woods Lane
Ambler, PA 19002
- ----------------------------------------------------------------------------------
Robert Runyon 327,302(5) 2.86%
10 Eagle Claw Drive
Hilton Head, SC
29926
- ----------------------------------------------------------------------------------
David A. Barrett 268,471(6) 2.36%
7 Barnabas Road
Marion, MA 02738
- ----------------------------------------------------------------------------------
Jack E. Talan 166,000(7) 1.47%
26 E. 63rd, #11E
New York, NY 10021
- ----------------------------------------------------------------------------------
Barry Reifler 40,000(8) *
3071 Green Fairway
Cove So.
Collierville, TN
38017
- ----------------------------------------------------------------------------------
Elk International 1,395,000(9) 11.48%
Corporation Limited
Post Office Box No.
3247
Nassau, Bahamas
- ----------------------------------------------------------------------------------
Daniel Dror 1,395,000(10) 11.48%
1412 North Blvd.
Houston, TX 77006
- ----------------------------------------------------------------------------------
All executive 2,797,544 22.49%
officers and
directors as a group
(6 persons)
==================================================================================
</TABLE>
*(less than 1%)
(1) Includes shares of MicroTel Common Stock underlying the warrants, options
and convertible securities outstanding and held by the beneficial owner
with respect to whom the calculation is made, but does not include shares
of Common Stock that may be acquired within more than 60 days after April
1, 1997 upon the exercise or conversion of such warrants, options or
convertible securities.
-71-
<PAGE> 72
(2) Includes 478,670 shares held jointly by Mr. Oliva and his wife, as well as
81,889 shares held individually by Mr. Oliva's wife. Also includes
764,378 shares, which will be issuable to Mr. Oliva upon the exercise of
MicroTel options and warrants.
(3) Includes 94,056 shares which will be issuable to Mr. Oliva upon the
exercise of MicroTel options and warrants.
(4) Includes 4,789 shares held jointly by Mr. Finnegan and his wife, and
88,178 shares which will be issuable to Mr. Finnegan upon the exercise of
MicroTel options and warrants.
(5) Includes 147,217 shares which will be issuable to Mr. Runyon upon the
exercise of MicroTel options and warrants.
(6) Includes 91,807 shares which will be issuable to Mr. Barrett upon the
exercise of MicroTel options and warrants; 43,639 shares held by various
trusts of which Mr. Barrett is the trustee, and members of Mr. Barrett's
immediate family are beneficiaries; and 4,595 shares held by Mr. Barrett's
wife.
(7) Includes 5,000 shares issuable to Mr. Talan upon the exercise of MicroTel
options and warrants, 5,000 shares authorized on March 16, 1995 to Mr.
Talan as an incentive award to be earned for continuing services over a
three-year period.
(8) Includes 30,000 shares to be issued in connection with the termination of
Mr. Reifler's employment.
(9) Includes 540,000 shares owned by Elk International Corporation Limited,
and 750,000 shares issuable upon the exercise of MicroTel warrants. Also
includes 15,000 shares issuable upon the exercise of MicroTel stock
options owned by Mr. Dror and 90,000 shares issuable to Elk upon the
exercise of warrants owned by Elk. See footnote 10 below.
(10) Includes 15,000 shares issuable upon the exercise of MicroTel stock
options, and the shares and shares underlying options and warrants of Elk
International Corporation Limited as set forth in footnote (9) above.
Elkana Faiwuszeiwicz, the President and control person of Elk
International Corporation Ltd. ("Elk"), is the brother of Mr. Dror. Based
upon information contained in Elk's Schedule 13D filed with the Securities
and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a
"control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC")
and Elk may be deemed to constitute a "group" as those terms are defined
under the Securities Act and Exchange Act and the rules and regulations
promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial
ownership in Elk and in stock of the Company owned by Elk.
-72-
<PAGE> 73
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Daniel Dror was the Company's Chairman and Chief Executive Officer from
1994 until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the
President and control person of Elk, is the brother of Mr. Dror. Based upon
information contained in Elk's Schedule 13D filed with the Securities and
Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control"
person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be
deemed to constitute a "group" as those terms are defined under the Securities
Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim
any beneficial ownership in Elk and in stock of the Company owned by Elk.
Pursuant to an agreement dated January 5, 1994, the Company issued 300,000
shares of the Company's common stock to the designees of DDC for $600,000 (or
$2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the
agreement, the Company issued to Elk warrants to purchase 100,000 shares for
$2.50 per share, exercisable at any time prior to December 25, 1995. The Company
also entered into a common stock purchase agreement with DDC on March 10, 1994
whereby DDC, or its designee, was to acquire 1,260,000 shares of the Company's
common stock for an aggregate of $2,520,000 (or $2.00 per share), payable in
cash, or at the option of the Company, in cash, cash equivalents, or marketable
securities or any combination thereof. The stockholders of the Company approved
the common stock purchase agreement (the Agreement) on April 16, 1994. The
Agreement provided for a closing by June 30, 1994 contingent upon all conditions
to closing being fulfilled.
As permitted under the terms of the Agreement, the Board of Directors on
July 27, 1994 amended the Agreement, following claims by DDC and its designee
raised prior to June 30, 1994 that certain closing conditions had not been
satisfied. The amended Agreement required the Company to issue and sell 911,484
shares to Elk as designee of DDC, for an aggregate purchase price of $1,882,967
(based on the previously agreed price of $2.00 per share), in cash, cash
equivalents or marketable securities. In September 1994, Elk tendered the
assignment of an interest-free promissory note in the amount of $805,555 secured
by shares of another public company and transferred a brokerage account to the
Company consisting of cash and common stock of $1,077,412 amounting to an
aggregate of $1,882,967 (the Company assumed the liability for certain financial
instruments amounting to $506,250 which were secured by the cash and common
stock investments in the brokerage account). Subsequent to this transfer, a loan
of $226,000 was made from the brokerage account to another entity controlled by
DDC which loan was payable with 15% interest on December 31, 1995. Although no
formal agreements were signed, DDC indicated its intent to reimburse the Company
for any loss resulting from the settlement of the financial instruments and
indebtedness from the related party. The acceptance of the consideration
received and subsequent loan were authorized by Daniel Dror in his capacity as
Chairman of the Company's investment committee prior to formal review by the
Board of Directors.
The Board of Directors subsequently reviewed the consideration tendered
under the amended Agreement and determined that it would be in the best
interests of the Company to accept payment from Elk with securities less likely
to experience significant fluctuations in value. On November 8, 1994 the Company
executed a second amendment to the Agreement dated October 16, 1994 with DDC
whereby the transactions under the previous amendment
-73-
<PAGE> 74
were effectively rescinded and the Company agreed to issue and sell 668,725
shares to Elk as designees of DDC, for the aggregate purchase price of
$1,337,449 (or $2.00 per share) on or before December 31, 1994.
In payment of the purchase price under the second amendment to the
Agreement, the Company accepted assignment of a promissory note payable to Elk
from a limited partnership in the aggregate amount of $1,444,444 payable on
December 31, 1995. The face amount of the promissory note includes the purchase
price of $1,337,449 plus $106,995, representing interest on the purchase price
at an interest rate of 8% per annum for the period commencing on December 31,
1994, through December 31, 1995. At a board meeting held in December 1995 the
Company agreed to accept $250,000 to extend the note to December 15, 1996 and
$100,000 as prepaid interest for the extension period. The $350,000 was
recognized as income in 1996 over the extension period of the note. As a result
of this agreement the Board extended the option period of the remaining 90,000
Elk warrants for two years. Payment of the promissory note was secured by
escrowed shares of another public company and the shares issued to Elk were
being held in escrow and were to be delivered to Elk when the promissory note
had been fully satisfied.
In June 1996, Elk was given the right to make alternative cash payment to
the Company for the stock subscription through December 15, 1996 releasing
shares from escrow at the price of $2.00 per share, and to receive a
corresponding assignment of proceeds from the promissory note when collected.
Elk made payments against the stock subscription aggregating $380,000 through
November 14, 1996, releasing 190,000 shares of common stock from the escrow.
On November 15, 1996, the Company and Elk entered into an agreement
pursuant to which Elk received (i) an option exercisable for a period of three
years to purchase 500,000 shares of Common Stock at an exercise price of $2.375
per share, (ii) the extension of an outstanding warrant to purchase 90,000
shares of Common Stock for three years, and (iii) the return to Elk of the
$1,444,444 promissory note. In exchange for the foregoing, the remaining shares
held in escrow by the Company and the subscription right were cancelled. The
costs of this settlement totalling $807,000, including the valuation of the
option grant of $700,000, was recorded in the fourth quarter of 1996.
Also on November 15, 1996, Mr. Daniel Dror resigned as Chairman and Chief
Executive Officer of the Company in anticipation of the pending merger with XIT.
Mr. Jack Talan, a director of the Company, was appointed interim Chairman and
Chief Executive Officer until consummation of the transaction.
Upon his resignation, Mr. Dror (or his designee) received as a severance
award for past service: (a) 350,000 shares of the Company's common stock; (b) an
extension of the exercise period to November 14, 1999 on options he currently
holds to purchase 25,000 shares of the Company's common stock; and (c) options
to purchase 250,000 shares of the Company's common stock at a price of $2.375
per share. The latter options are exercisable for a period of 5 years, but only
after Mr. Dror repays a certain indebtedness to the Company of approximately
$211,000, which amount is due in 5 annual installments and which may be repaid
by surrendering the options for value equivalent to the lesser of the future
appreciation of the Company's common stock over the exercise price or $.50 per
option. On December 3,
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<PAGE> 75
1996, it was mutually agreed between the Company and Mr. Dror to substitute an
option to acquire 300,000 shares of the Company's Common stock at an exercise
price of $.01 per share for 300,000 shares of the previous award and on December
23, 1996 these options were exercised. The compensation expense associated with
this grant of $560,000, as well as the value of the 50,000 shares awarded of
$119,000 and other costs totaling $82,000 related to the immediate vesting of
previous stock based deferred compensation to Mr. Dror and the settlement of
certain amounts due the Company by Mr. Dror, were recognized in the fourth
quarter of 1996.
Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000
shares, respectively, as incentive stock awards principally to certain directors
and officers, which vest generally over a three-year period. The total value of
these shares based on the market price of the Company's common stock on the date
of grant totalled $192,000. Compensation expense recognized by the Company for
the awards totalled $106,000 and $46,000 for 1996 and 1995, including
amortization of related deferred compensation.
In October and November of 1996, the Company granted non-qualified stock
options to acquire approximately 156,000 shares of the Company's Common Stock to
certain officers at an exercise price equal to 80% of the market value on the
date of the grant. Compensation expense associated with these grants
approximated $48,000.
On February 19, 1997, in recognition of past and future services to the
Company, Mr. Talan was granted 150,000 restricted shares of the Company's common
stock with a market value as of that date of $337,500 ($2.25 per share).
On February 25, 1997 through March 5, 1997, Mr. Talan loaned the Company
an aggregate of $500,000. Such loans bear interest at the rate of 6% per annum
and were repaid in full in April 1997.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
There are no indemnification provisions for directors, officers or
controlling persons of the Company against liability under the Securities Act.
However, as permitted by Section 145 of the Delaware General Corporation Law
(the "DGCL"), Article XI of the Company's By-laws provides for the
indemnification of officers, directors and certain other persons acting on
behalf of the Company (a) against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person by reason of the fact
that such person was or is and authorized representative of the company, in
connection with a threatened, pending or completed third-party proceeding,
whether civil or criminal, administrative or investigative, if such individual
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Company, and, if the action was a
criminal proceeding, if such person had no reasonable cause to believe that such
person's conduct was unlawful; and (b) against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of a
threatened, pending or completed corporate proceeding, by reason of the fact
such person was or is an authorized representative of the
-75-
<PAGE> 76
Company, if such person acted under the standards set forth in section (a) above
and if such person was not found liable for negligence or misconduct in the
performance of a duty to the Company (or if so found liable, if a proper court
found such person to be fairly and reasonably entitled to indemnification). The
Company's By-laws further provide for mandatory indemnification of authorized
representatives of the Company who have been successful in defense of any
third-party or corporate proceeding or in defense of any claim, issue or matter
therein, against expenses actually and reasonably incurred in connection with
such defense.
In addition, Article Fifth of the Company's Certificate of Incorporation
provides that, to the fullest extent permitted by the DGCL, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duties. Section 102(b)(7) of the DGCL allows for
the elimination or limiting of the personal liability of a director for monetary
damages for breaches of fiduciary duties as a director except for situations
involving: (i) breach of the duty of loyalty; (ii) bad faith or misconduct;
(iii) unlawful dividends; or (iv) transactions were directors received an
improper personal benefit. As a result of this provision, the Company and its
stockholders may be unable to obtain monetary damages from a director for breach
of his duty of care. Although stockholders may continue to seek injunctive or
other equitable relief for any alleged breach of fiduciary duty by a director,
stockholders may not have any effective remedy against the challenged conduct if
equitable remedies are unavailable.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted against the
Company by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
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<PAGE> 77
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of MicroTel International, Inc.
(Registrant)
Independent Auditors' Report (KPMG Peat Marwick LLP) .................. F-2
Consolidated Balance Sheets at September 30, 1996 and 1995 ............ F-3
Consolidated Statements of Operations for the Years ended
September 30, 1996, 1995 and 1994 .................................. F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994 ............................ F-5
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 .................................. F-6
Notes to Consolidated Financial Statements for the Years
Ended September 30, 1996, 1995 and 1994 ............................ F-7
Consolidated Financial Statement Schedule II-
Valuation and Qualifying Accounts for the Years Ended
September 30, 1996, 1995 and 1994 .................................. F-25
Consolidated Condensed Balance Sheets at March 31, 1997
And December 31, 1996 (Unaudited) .................................. F-26
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1997 and 1996 (Unaudited) ............. F-27
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996 (Unaudited) ............. F-28
Notes to Consolidated Condensed Financial Statements (Unaudited) ...... F-29
Consolidated Financial Statements of MicroTel International, Inc.
(Pre-merger)
Report of Independent Certified Public Accountants (BDO Seidman, LLP).. F-34
Independent Auditors' Report (Deloitte & Touche LLP)................... F-35
Consolidated Balance Sheets at December 31, 1996 and 1995.............. F-36
Consolidated Statements of Operations for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994.................. F-37
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994.................. F-38
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994.................. F-39
Notes to Consolidated Financial Statements for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994.................. F-40
Consolidated Financial Statement Schedule II-
Valuation and Qualifying Accounts for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994.................. F-60
Unaudited Pro Forma Combined Condensed Financial Statements
Explanatory Description................................................ F-61
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended September 30, 1996............................... F-62
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Three Months Ended March 31, 1997........................... F-63
Notes to Unaudited Pro Forma Combined Condensed Financial Statements... F-64
</TABLE>
F-1
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MicroTel International, Inc.:
We have audited the accompanying consolidated balance sheets of MicroTel
International, Inc. and subsidiaries (formerly known as XCEL Corporation and
subsidiaries) as of September 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated financial
statements of XCEL Corporation Ltd. and subsidiaries, which statements reflect
total assets constituting 20% and 7% in 1996 and 1995, respectively, and total
revenues constituting 7%, 8% and 10% in 1996, 1995 and 1994, respectively, of
the related consolidated totals. Those consolidated financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for XCEL Corporation Ltd.
and subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MicroTel International, Inc. and
subsidiaries (formerly known as XCEL Corporation and subsidiaries) as of
September 30, 1996 and 1995 and the results of their operations and their cash
flows for each of the years in the three-year period then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
December 13, 1996, except as to
Note 13, which is as
of June 18, 1997
F-2
<PAGE> 79
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Balance Sheets
September 30, 1996 and 1995
ASSETS (NOTES 5 AND 7) 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 785,149 978,112
Accounts receivable, net of allowance for doubtful accounts of $46,585 in 1996
and $57,091 in 1995 4,568,308 3,448,215
Inventories (note 2) 6,504,736 4,620,682
Prepaids and other current assets 555,979 688,826
------------ -----------
Total current assets 12,414,172 9,735,835
Goodwill, net of accumulated amortization of $2,330,485 in 1996 and $2,120,066 in
1995 1,903,130 2,113,543
Property, plant and equipment, net (note 3) 5,059,920 3,868,773
Other assets 236,244 236,543
------------ -----------
$ 19,613,466 15,954,694
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,143,445 3,923,386
Accrued expenses 1,331,720 1,756,733
Notes payable to institutional lenders (note 5) 2,837,220 1,750,200
Notes payable to officers, directors and stockholders (note 6) 27,000 287,181
Current portion of long-term debt (note 7) 911,875 1,003,315
------------ -----------
Total current liabilities 10,251,260 8,720,815
Long-term debt, less current portion (note 7) 2,677,617 1,523,392
Minority interest (note 2) 63,839 411,937
------------ -----------
Total liabilities 12,992,716 10,656,144
Series A redeemable preferred stock, no par value. Authorized, issued and
outstanding 1,000 shares (aggregate liquidation preference of $390,000 in
1996)(notes 4 and 9) 332,185 357,688
Series B redeemable preferred stock, no par value. Authorized, issued and
outstanding 1,000 shares (aggregate liquidation preference of $520,000 in 1996)
(notes 4 and 9) 442,914 476,917
Stockholders' equity:
Common stock, no par value. Authorized 10,000,000 shares; issued and
outstanding 4,177,417 and 4,005,591 shares in 1996 and 1995, respectively
(note 9) 9,018,077 8,551,264
Accumulated deficit (3,200,679) (4,203,097)
Equity adjustment from foreign currency translation 28,253 115,778
------------ -----------
Total stockholders' equity 5,845,651 4,463,945
Commitments and contingencies (note 11)
------------ -----------
$ 19,613,466 15,954,694
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 80
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Operations
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $31,248,596 19,602,271 14,237,032
Cost of sales 23,056,559 14,332,550 10,023,203
----------- ---------- ----------
Gross profit 8,192,037 5,269,721 4,213,829
----------- ---------- ----------
Operating expenses:
Selling, general and administrative 6,378,797 4,870,245 4,085,633
Engineering, research and development 309,151 327,844 639,319
----------- ---------- ----------
Operating income (loss) 1,504,089 71,632 (511,123)
Other income (expense):
Interest expense (506,591) (404,554) (337,282)
Gain from sale of asset (note 8) -- 479,783 --
Minority interest in net income of
consolidated subsidiary (4,072) (2,857) (4,005)
Other, net 111,623 202,126 180,628
----------- ---------- ----------
Income (loss) before income taxes 1,105,049 346,130 (671,782)
Income taxes (note 10) 22,137 9,251 --
----------- ---------- ----------
Net income (loss) $ 1,082,912 336,879 (671,782)
=========== ========== ==========
Net income (loss) per common share $ .17 .07 (.14)
=========== ========== ==========
Weighted-average common shares 5,841,394 4,995,374 4,713,501
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 81
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996, 1995 and 1994
FOREIGN
COMMON STOCK CURRENCY
------------------------- ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENTS TOTAL
--------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 3,210,131 $ 7,531,125 (3,858,399) 95,860 3,768,586
Stock issued in connection with HyComp
acquisition 156,275 156,111 -- -- 156,111
Foreign currency translation adjustment -- -- -- 10,429 10,429
Net loss -- -- (671,782) -- (671,782)
--------- ------------ ---------- ------- ---------
Balance at September 30, 1994 3,366,406 7,687,236 (4,530,181) 106,289 3,263,344
Stock issued in connection with
Arnold Circuits, Inc. acquisition 440,000 656,281 -- -- 656,281
Stock issued for debt conversion (note 9) 199,185 207,747 -- -- 207,747
Accretion of preferred stock -- -- (9,795) -- (9,795)
Foreign currency translation adjustment -- -- -- 9,489 9,489
Net income -- -- 336,879 -- 336,879
--------- ------------ ---------- -------- ---------
Balance at September 30, 1995 4,005,591 8,551,264 (4,203,097) 115,778 4,463,945
Stock issued in connection with acquisition
of minority interest 48,760 343,747 -- -- 343,747
Stock issued for debt conversion (note 9) 123,066 123,066 -- -- 123,066
Accretion of preferred stock -- -- (80,494) -- (80,494)
Foreign currency translation adjustment -- -- -- (87,525) (87,525)
Net income -- -- 1,082,912 -- 1,082,912
--------- ------------ ---------- ------- ---------
Balance at September 30, 1996 4,177,417 $ 9,018,077 (3,200,679) 28,253 5,845,651
========= ============ ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 82
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,082,912 336,879 (671,782)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 589,681 277,969 211,603
Amortization of goodwill 210,413 210,413 204,233
Foreign currency translation adjustments (87,525) 9,489 10,429
Gain on sale of Computron -- (479,783) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 11,898 (140,629) 772,443
(Increase) decrease in inventory (210,217) 217,293 (2,826)
(Increase) decrease in prepaids and other assets 145,772 (85,231) 156,785
Increase (decrease) in accounts payable (296,166) 118,307 234,278
Increase (decrease) in accrued expenses (740,046) (172,816) 3,582
----------- ---------- --------
Net cash provided by operating activities 705,722 291,891 918,745
----------- ---------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (785,810) (94,260) (165,485)
Cash paid for purchase of Arnold Circuits, Inc. -- (1,026,720) --
Cash paid for purchase of Etch-Tek (428,493) -- --
Cash paid for purchase of Abbott Electronics (734,429) -- --
Cash paid for purchase of HyComp, Inc. -- -- (90,745)
Proceeds from sale of Computron -- 1,157,210 --
Minority interest (4,072) 27,857 4,005
----------- ---------- --------
Net cash provided by (used in) investing
activities (1,952,804) 64,087 (252,225)
----------- ---------- --------
Cash flows from financing activities:
Net increase (decrease) in notes payable to institutional
lenders 248,735 (216,481) (218,797)
Proceeds from other borrowings 2,000,000 1,333,693 606,646
Payments on other borrowings (1,054,616) (710,811) (980,140)
Redemption of preferred stock (140,000) -- --
----------- ---------- --------
Net cash provided by financing activities 1,054,119 406,401 (592,291)
----------- ---------- --------
Net increase (decrease) in cash (192,963) 762,379 74,229
Cash at beginning of year 978,112 215,733 141,504
----------- ---------- --------
Cash at end of year $ 785,149 978,112 215,733
=========== ========== ========
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Interest $ 490,091 410,839 337,282
Income taxes 12,097 4,579 3,763
=========== ========== ========
Supplemental disclosures of noncash investing and financing
activities:
Issuance of common stock, preferred stock and notes in
connection with acquisitions $ 195,095 1,681,091 429,078
Issuance of common stock in conversion of debt to equity
123,066 207,747 --
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 83
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements
September 30, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 26, 1997, as more fully discussed in note 13, publicly-traded
MicroTel International, Inc. (MicroTel) merged with privately-held XIT
Corporation (XIT), formerly XCEL Corporation prior to its name change
on November 25, 1996. The merger was accounted for as a purchase of
MicroTel by XIT in a "reverse acquisition" because the existing
shareholders of MicroTel prior to the merger do not have voting control
of the combined entity after the merger. In a reverse acquisition, the
accounting treatment differs from the legal form of the transaction, as
the continuing legal parent company, MicroTel, is not assumed to be the
acquiror and the financial statements of the combined entity are those
of the accounting acquiror (XIT), including any comparative prior year
financial statements presented by the combined entity after the
business combination. Consequently, the accompanying consolidated
financial statements include the accounts of XIT and its wholly and
majority-owned subsidiaries, collectively referred to herein as the
Company. Significant intercompany accounts and transactions have been
eliminated in consolidation.
In conjunction with this first issuance of the accompanying
consolidated financial statements as the historical financial
statements of a publicly-traded company, the Company is presenting
earnings per share information and has retroactively revised the period
over which previously recorded goodwill is amortized from 30 years to
20 years. The revision in amortization period is based on the Company's
current assessment of the estimated useful life of the goodwill and all
prior periods have been restated to reflect the revised amortization
period to be consistent with the amortization policy to be used in
future periods. Certain reclassifications and disclosures have also
been made in the accompanying consolidated financial statements to
conform the statements to expected future presentations, including
conformance to the requirements of Regulation S-X of the Securities and
Exchange Commission, with no effect on previously reported results of
operations.
In accord with the reverse acquisition accounting treatment, the
capital accounts of XIT are recapitalized as of the acquisition date to
give effect to the merger exchange ratio (1.451478 common shares of
MicroTel for each common share of XIT) and to convert XIT's no par
value common stock to $.0033 par value common stock of MicroTel. Net
income (loss) per share computations give retroactive effect to the
recapitalization.
BUSINESS
The Company is a manufacturer of discrete components for data input and
displays, including digital switches, keyboards and keypads, color and
monochrome video displays, and flat panel displays. The Company also
produces subsystem engineered and manufactured products (SEM) which are
assembled in custom configurations from two or more of the Company's
discrete data input and display components, and micro-electronic power
supplies. Additionally, the Company manufactures bare printed circuit
boards for its own use and for outside customer applications, and
hybrid microelectronic circuits for outside customer applications.
F-7
<PAGE> 84
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed over the estimated useful lives of the assets (or lease term,
if shorter) using the double-declining-balance method for used
equipment and the straight-line method for all other assets.
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired through business combinations accounted for as
purchases. Goodwill is amortized on a straight-line basis over 20
years.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," during fiscal
1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position, results of operations or liquidity.
NET INCOME (LOSS) PER SHARE
Net income (loss) per common share for the years ended September 30,
1996, 1995 and 1994 was computed based on the weighted-average number
of common shares outstanding. Common stock equivalents (shares assumed
issued based on outstanding stock options and warrants) were
anti-dilutive and therefore not included in the computations for all
periods presented. The accretion of the excess of the redemption value
over the carrying value of redeemable preferred stock (see note 9) of
$80,494 and $9,795 have been deducted from net income for 1996 and
1995, respectively, in arriving at net income applicable to common
stockholders used in the calculations of net income per share in those
years.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
is effective for fiscal years beginning after December 15, 1995 and
encourages, but does not require, a fair market based method of
accounting for employee stock options or similar equity instruments.
SFAS No. 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25
(APBO No. 25), "Accounting for Stock Issued to Employees," but requires
pro forma disclosures of net earnings and earnings per share as if the
fair value based method of accounting had been applied. The Company
will adopt SFAS No. 123 in fiscal 1997. While the
F-8
<PAGE> 85
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Company is still evaluating SFAS No. 123, the Company currently expects
to elect to continue to measure compensation costs under APBO No. 25,
and comply with the pro forma disclosure requirements. If the Company
makes this election, SFAS No. 123 will have no impact on the Company's
financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 specifies new standards designed to improve the earnings
per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on
an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being
that common stock equivalents are not considered in computing basic
EPS, (b) eliminating the modified treasury stock method and the 3%
materiality provision and (c) revising the contingent share provisions
and the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company does not
believe the implementation of SFAS No. 128 will have a material effect
on net income (loss) per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 requires all entities to
disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. As of September 30, 1996, the fair value of all financial
instruments approximated carrying value.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 (Statement No. 109),
"Accounting for Income Taxes." Under the asset and liability method of
Statement No. 109, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured, using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The Company records a valuation allowance for
certain temporary differences for which it cannot make the
F-9
<PAGE> 86
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
determination that realization of the related benefits is more likely
than not. Under Statement No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
Foreign assets and liabilities in the consolidated balance sheets have
been translated at the current rate of exchange on the balance sheet
date. Sales and expenses are translated at the average exchange rate
for the year presented. Unrealized translation adjustments do not
affect the results of operations and are reported as a separate
component of stockholders' equity. The transaction gains and losses
included in operations are not material.
MAJOR CUSTOMERS
In 1996, there were sales to one customer which accounted for
approximately 41% of net sales during the year and 24% of accounts
receivable at September 30, 1996. In 1995, there were sales to one
customer which accounted for approximately 13% of net sales during the
year and 15% of accounts receivable at September 30, 1995. In 1994,
there were no sales to any individual customers which accounted for 10%
or more of net sales.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods
of generally one year. Estimated warranty costs are recognized at the
time of the sale.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Raw materials $3,071,931 2,604,511
Work-in-process 2,950,217 1,647,966
Finished goods 482,588 368,205
---------- ---------
$6,504,736 4,620,682
========== =========
</TABLE>
F-10
<PAGE> 87
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Land and buildings $ 224,439 227,931
Machinery, equipment and fixtures 7,172,176 5,416,694
Leasehold improvements 575,716 547,877
---------- ---------
7,972,331 6,192,502
Less accumulated depreciation and amortization 2,912,411 2,323,729
---------- ---------
$5,059,920 3,868,773
========== =========
</TABLE>
(4) ACQUISITIONS
On May 1, 1996, the Company acquired all of the assets and assumed all of
the liabilities of Etch-Tek, Inc. (Etch-Tek) for $460,000 in cash and a
$195,095 promissory note. Etch-Tek is a manufacturer of quick turn
prototype quantity and medium production printed circuit boards. The
acquisition of Etch-Tek has been accounted for as a purchase, and
accordingly, the results of operations of Etch-Tek for the five months
ended September 30, 1996 are included in the Company's consolidated
statement of income for the year ended September 30, 1996. Supplementary
information related to the acquisition of Etch-Tek for the September 30,
1996 consolidated statement of cash flows is as follows:
<TABLE>
<S> <C>
Assets acquired $1,400,879
Liabilities assumed (745,784)
Promissory note (195,095)
----------
Cash paid to sellers 460,000
Cash acquired (31,507)
----------
Net cash paid $ 428,493
==========
</TABLE>
On September 1, 1996, the Company acquired all of the common stock of
Abbott Electronics Ltd. (Abbott), a British manufacturer of power
supplies, for approximately $734,429, including transaction expenses.
On August 1, 1995, the Company acquired all of the assets and assumed
all of the liabilities of Arnold Circuits, Inc. (Arnold Circuits) for
$1.2 million in cash, a $200,000 promissory note, 440,000 shares of
XCEL common stock and 1,000 shares each of Series A and B redeemable
preferred stock (note 9). Arnold Circuits is a manufacturer of printed
circuit boards. The acquisition of Arnold Circuits has been accounted
for as a purchase, and accordingly, the results of operations of Arnold
Circuits for the two months ended September 30, 1995 are included in
the
F-11
<PAGE> 88
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Company's consolidated statements of income for the year ended
September 30, 1995. The 440,000 shares of XCEL common stock were valued
at $656,281 based on the net book value of the assets acquired, which
approximated fair value, less the preferred stock and the promissory
note.
Supplementary information related to the acquisition of Arnold Circuits
for the September 30, 1995 consolidated statement of cash flows is as
follows:
<TABLE>
<S> <C>
Assets acquired $ 5,665,346
Liabilities assumed (2,784,255)
Promissory note (200,000)
Series A preferred stock (353,490)
Series B preferred stock (471,320)
Common stock (656,281)
----------
Cash paid to sellers 1,200,000
Cash acquired (173,280)
----------
Net cash paid $ 1,026,720
===========
</TABLE>
Summarized below are the unaudited pro forma results of operations of
the Company as though Arnold Circuits had been acquired at the
beginning of the years ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales $31,369,303 25,718,863
=========== ==========
Net income $ 585,291 (417,196)
============ ==========
</TABLE>
On July 6, 1994, the Company acquired 84.6% of the common shares
outstanding of HyComp, Inc. (HyComp), a public company, by means of an
exchange of the Company's common stock for HyComp common stock held by
Metraplex Corporation and various other officers and directors of
HyComp. HyComp is a manufacturer of thin film hybrid circuits for
industrial, medical and military customers. The total purchase price
was $306,521 (including acquisition costs of $150,410). The Company
financed the acquisition through cash of $150,410, and 156,275 shares
of the Company's common stock valued at $156,111 based on the net book
value of assets acquired, which approximated fair value. In May 1996,
the Company acquired an additional percentage of the common shares
outstanding of HyComp, which increased the Company's ownership
percentage to 90.7%. Also in May 1996, the Company acquired 96.1% of
the preferred shares outstanding of HyComp. Each of these transactions
was an exchange of the Company's common stock for the respective HyComp
stock at recorded amounts that approximate fair value.
F-12
<PAGE> 89
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The acquisition of HyComp has been accounted for as a purchase and
accordingly, the results of operations of HyComp for the three months
ended September 30, 1994 are included in the Company's consolidated
statements of operations for the year ended September 30, 1994.
For financial reporting purposes, HyComp's assets, liabilities and
earnings are consolidated with those of the Company. Ownership interest
in HyComp, other than that of the Company's, is included in the
Company's financial statements as minority interest, and includes
amounts applicable to HyComp's preferred stock of $6,123 and $157,000
at September 30, 1996 and 1995, respectively. Dividends on the
preferred stock are cumulative at 8% per year, and minority interest at
September 30, 1996 and 1995 includes cumulative dividends in arrears of
$7,715 and $185,260, respectively.
Supplementary information related to the acquisition of HyComp for the
September 30, 1994 consolidated statement of cash flows is as follows:
<TABLE>
<S> <C>
Assets acquired $ 1,582,912
Liabilities assumed (1,276,391)
Acquisition costs (150,410)
Common stock issued (156,111)
-----------
Cash paid to sellers --
Acquisition costs 150,410
Less cash acquired (59,665)
-----------
Net cash paid $ 90,745
===========
</TABLE>
(5) NOTES PAYABLE TO INSTITUTIONAL LENDERS
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Line of credit with Foothill Capital Corporation, with interest payable
monthly at prime plus 4%, collateralized $ -- 1,444,700
Line of credit with Imperial Bank, with interest payable
monthly at prime plus 1%, collateralized 1,998,935 305,500
Foreign subsidiary line of credit with bank, with interest at
6%, collateralized 784,230 --
Foreign subsidiary line of credit with bank, with interest at
2%, collateralized 54,055 --
---------- ---------
$2,837,220 1,750,200
========== =========
</TABLE>
F-13
<PAGE> 90
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Company has a line of credit with Imperial Bank which provides for
maximum borrowings of $4,750,000. The line of credit was to expire
January 15, 1997, was extended to June 30, 1997, and is collateralized
by certain assets of the Company. Borrowings of a domestic subsidiary
are also guaranteed by an officer of the Company. The Imperial Bank
line of credit bears interest at the bank's prime (8.25% at September
30, 1996) plus 1% and is payable on demand.
The line of credit agreement requires maintenance of certain financial
ratios and contains other restrictive covenants. The Company was in
compliance with, or had obtained waivers for, all debt covenants at
September 30, 1996. However, subsequent to September 30, 1996, the
Company remained in violation of certain covenants. The Company intends
to renew the line of credit under terms similar to the existing
agreement with covenants with which they will be in compliance.
(6) OBLIGATIONS TO OFFICERS, DIRECTORS AND STOCKHOLDERS
The Company has obligations to various officers and stockholders which
totaled $27,000 and $287,181 as of September 30, 1996 and 1995,
respectively. The obligations are established as promissory notes with
interest rates of 8% to 13.5% and are payable on demand. Included in
the obligations are short-term, non-interest bearing advances from a
related entity. Also, included in accrued expenses are obligations
which total $35,000 as of September 30, 1995. The obligations were the
result of consulting services performed by various officers and
stockholders relating to the acquisition of Arnold Circuits, Inc.
(7) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Term note payable to Imperial Bank (a) $ 700,000 --
Term note payable to Imperial Bank (a) 1,125,000 --
Term note payable to Imperial Bank (b) 816,663 1,000,000
Term note payable to Foothill Capital Corporation (c) -- 510,333
Term notes payable (d) 193,823 367,977
Promissory notes 238,702 199,607
Capitalized lease obligations (e) (note 11) 515,304 448,790
----------- ----------
3,589,492 2,526,707
Less current portion (911,875) (1,003,315)
----------- ----------
$ 2,677,617 1,523,392
=========== ==========
</TABLE>
(a) The term note to Imperial Bank bears interest at the bank's prime
(8.25% at September 30, 1996) plus 1.25%. The note matures
serially through fiscal 2001.
(b) The term note to Imperial Bank is collateralized by all the assets
of XCEL Arnold Circuits, Inc. This note bears interest at the
bank's prime (8.25% at September 30, 1996) plus 1.25%. The note
matures serially through fiscal 2001.
F-14
<PAGE> 91
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(c) The term note to Foothill Capital Corporation was collateralized
by all the assets of the Company and was repaid in fiscal 1996.
(d) The Company has agreements with several foreign banks which
include term borrowings which mature serially through fiscal 2001.
Interest rates on the borrowings range from 2.7% to 11.25% and is
payable monthly. Included in the other term notes is a $72,072
note, which is guaranteed by Tokyo Credit Guarantee Corporation on
behalf of the Company's Japanese subsidiary. The term borrowings
are collateralized by the assets of the subsidiary. Borrowings are
also guaranteed by an officer of the subsidiary.
(e) Capital lease agreements are calculated using interest rates
appropriate at the inception of the lease and range from 10.53% to
12.31%. Lease liabilities are amortized over the lease term using
the effective interest method. The leases all contain bargain
purchase options and expire through 2001.
(8) SALE OF COMPUTRON
On May 31, 1995, XCEL sold its Computron Display System Division of
Mount Prospect, Illinois to LPI Acquisition Corp. of Forest Park,
Illinois. The principal terms of the sale include a cash purchase price
of approximately $1.2 million, and the assumption of approximately
$694,000 of the Computron Division's liabilities. The sale resulted in
a gain of $479,783.
(9) STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
In connection with the Arnold Circuits, Inc. acquisition, XCEL Arnold
Circuits, Inc. issued 1,000 shares each of Series A redeemable
preferred stock (Series A) and Series B redeemable preferred stock
(Series B). In preference to common shares of stock, each Series A and
Series B share is entitled to a cumulative cash dividend of $120 and
$160 per year, respectively. The Series A and B shares have a
liquidation preference of and are subject to mandatory redemption by
the Company on December 15, 1999 at a value of $30 and $40 per share,
respectively, plus all accrued and unpaid dividends, whether or not
declared, to the date of redemption. As of September 30, 1996, the
accumulated dividends in arrears were $197,820. The redeemable
preferred stock was recorded at fair value on the date of issuance
using an imputed market rate dividend of 9.5%. The excess of the
redemption value over the carrying value is being accreted by periodic
charges to retained earnings over the original life of the issue.
F-15
<PAGE> 92
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The following table reflects the redeemable preferred stock activity
since August 1, 1995:
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
---------------------------------- ----------------------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 -- $ -- -- $ --
Preferred stock issued in connection
with Arnold Circuits, Inc. 1,000 353,490 1,000 471,320
Accretion of preferred stock -- 4,198 -- 5,597
------- -------- -------- --------
Balance at September 30, 1995 1,000 357,688 1,000 476,917
Accretion of preferred stock -- 34,497 -- 45,997
Redemption of preferred stock -- (60,000) -- (80,000)
------- -------- -------- --------
Balance at September 30, 1996 1,000 $332,185 1,000 $442,914
====== ======== ======== ========
</TABLE>
STOCK OPTIONS AND WARRANTS
Options granted under the 1987 Employee Stock Option Plan (the Plan)
may be either qualified or nonqualified stock options and are required
to be granted at fair market value at the date of grant (depending upon
the number of voting shares owned). Subject to termination of
employment, options expire either five or ten years from the date of
grant (depending upon the number of voting shares owned) and are
nontransferable other than in the event of death. The Board of
Directors adopted a resolution increasing the number of shares of the
Company's common stock that may be granted pursuant to the Plan to a
maximum of 750,000 shares.
F-16
<PAGE> 93
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Plan's qualified stock options consist of the following:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance outstanding, September 30, 1994 and
1993 198,000 $5.00 to 6.05 1,069,750
Options canceled (198,000) 5.00 to 6.05 (1,069,750)
Options granted 412,500 2.75 1,134,375
--------- ------------- ----------
Balance outstanding, September 30, 1995 412,500 2.75 1,134,375
Options canceled -- -- --
Options granted -- -- --
--------- ------------- ----------
Balance outstanding, September 30, 1996 412,500 $ 2.75 1,134,375
========= ============= ==========
</TABLE>
The Plan's nonqualified stock options consist of the following:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- -------------- --------
<S> <C> <C> <C>
Balance outstanding, September 30, 1994 and
1993 77,500 $5.00 to 5.50 402,500
Options canceled (77,500) 5.00 to 5.50 (402,500)
Options granted 190,000 2.75 522,500
--------- ------------- --------
Balance outstanding, September 30, 1995 190,000 2.75 522,500
Options canceled -- -- --
Options granted -- -- --
--------- ------------- --------
Balance outstanding, September 30, 1996 190,000 $ 2.75 522,500
========= ============= ========
</TABLE>
At September 30, 1996, all of the above stock options were exercisable
and options for 147,500 were available for future grant.
F-17
<PAGE> 94
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Board of Directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key
employees and other parties as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance outstanding, September 30, 1993 450,281 $2.00 to 5.50 1,991,321
Warrants issued 185,000 2.75 to 5.00 621,250
-------- ----------
Balance outstanding, September 30, 1994 635,281 2.00 to 5.50 2,612,571
Warrants issued 17,700 1.75 to 2.75 45,975
-------- ----------
Balance outstanding, September 30, 1995 652,981 1.75 to 5.50 2,658,546
Warrants issued 250,000 5.00 1,250,000
Warrants canceled (50,333) 5.00 to 5.50 (251,832)
-------- ----------
Balance outstanding, September 30, 1996 852,648 1.75 to 5.50 $3,656,714
======== ==========
</TABLE>
At September 30, 1996, the total number of shares reserved for issuance
upon exercise of stock options and warrants or direct grants was
1,402,981 shares.
DEBT TO EQUITY CONVERSION
On September 30, 1996, the Company converted $123,066 in various
promissory notes to 123,066 shares of common stock. On September 28,
1995, the Company converted $207,747 in various promissory notes to a
current stockholder to 199,185 shares of common stock.
(10) INCOME TAXES
Income (loss) before income taxes for the years ended September 30,
1996, 1995 and 1994 were taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------- --------
<S> <C> <C> <C>
Domestic $ 869,906 398,461 (228,310)
Foreign 235,143 (52,331) (443,472)
---------- ------- --------
Total $1,105,049 346,130 (671,782)
========== ======= ========
</TABLE>
F-18
<PAGE> 95
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Income tax expense consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- ------
<S> <C> <C> <C>
1996:
Federal $ 6,000 -- 6,000
State 10,843 -- 10,843
Foreign 5,294 -- 5,294
------- -------- ------
$22,137 -- 22,137
======= ======== ======
1995:
Federal $ -- -- --
State 5,000 -- 5,000
Foreign 4,251 -- 4,251
------- -------- ------
$ 9,251 -- 9,251
======= ======== ======
</TABLE>
Actual income tax expense differs from the amount obtained by applying
the statutory Federal income tax rate of 34% to income (loss) before
income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Computed provision for taxes based on
income at the statutory rate $ 295,768 135,477 (77,625)
State taxes, net of Federal income tax
benefit 7,156 5,000 --
Foreign income taxes 5,294 4,251 --
Net operating losses utilized (62,293) (191,081) --
Current benefit of deferred tax assets (307,129) -- --
Permanent differences 53,920 53,142 55,900
Other 29,421 2,462 21,725
--------- -------- -------
$ 22,137 9,251 --
========= ======== =======
</TABLE>
As of September 30, 1996, the Company had net operating loss
carryforwards of approximately $7,839,468 for Federal income tax
purposes expiring at various dates between 2002 and 2008.
F-19
<PAGE> 96
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 20,172 13,879
Inventory reserves and uniform capitalization 237,706 290,542
Depreciation -- 82,888
Accrued vacation 136,878 128,986
Warranty reserve 3,102 6,928
Other accrued liabilities 8,142 62,940
Net operating loss carryforwards 2,788,599 2,838,567
----------- ----------
Total deferred tax assets 3,194,599 3,424,730
Valuation allowance for deferred tax assets (2,985,753) (3,424,730)
----------- ----------
208,846 --
Deferred tax liabilities - depreciation (208,846) --
----------- ----------
Net deferred taxes $ -- --
=========== ==========
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through September
30, 2001. The leases generally require the Company to pay all
maintenance, insurance and property tax costs and contain provisions
for rent increases. Total rent expense for the years ended September
30, 1996 and 1995 was $1,134,548 and $643,313, respectively.
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one
year as of September 30, 1996 are listed below.
F-20
<PAGE> 97
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Company leases production equipment under long-term leases and has
the option to purchase the equipment for a nominal cost at the
termination of the lease. Capitalized lease agreements are calculated
using interest rates appropriate at the inception of the lease and
range from 10% to 12%.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1997 $271,286 1,152,149
1998 181,408 1,084,070
1999 74,606 989,985
2000 74,606 844,673
2001 54,275 93,643
-------- ----------
Total minimum lease payments 656,181 $4,164,520
==========
Less amount representing interest 140,877
--------
Present value of minimum lease
payments 515,304
Less current installments of obligations
under capital leases 209,309
--------
Long-term obligations $305,995
========
</TABLE>
PENSION PLAN
The Company sponsors a defined contribution pension plan (401(k)
Savings Plan) covering substantially all of its U.S. domestic
employees. Participants may make voluntary pretax contributions to the
plan up to the limit as permitted by law. The annual contribution to
the plan by the Company is discretionary. No contribution by the
Company has been made to the plan to date.
F-21
<PAGE> 98
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(12) FOREIGN OPERATIONS
A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $27,853,736 1,210,979 2,183,881 -- 31,248,596
Transfers between
geographical areas
1,528,818 2,267 -- (1,531,085) --
----------- --------- --------- ----------- ------------
Net sales $29,382,554 1,213,246 2,183,881 (1,531,085) 31,248,596
=========== ========= ========= ========== ============
Operating income (loss)
$ 1,046,898 (53,717) 510,908 -- 1,504,089
=========== ========= ========= ========== ============
Identifiable assets $14,847,867 937,242 3,828,357 -- 19,613,466
=========== ========= ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1995
-------------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $16,118,474 1,858,935 1,624,862 -- 19,602,271
Transfers between
geographical areas
2,414,696 295,548 -- (2,710,244) --
----------- --------- --------- ---------- ------------
Net sales $18,533,170 2,154,483 1,624,862 (2,710,244) 19,602,271
=========== ========= ========= ========== ============
Operating income (loss)
$ (104,950) 47,662 128,920 -- 71,632
=========== ========= ========= ========== ============
Identifiable assets $14,035,754 1,062,032 856,908 -- 15,954,694
=========== ========= ========= ========== ============
</TABLE>
F-22
<PAGE> 99
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $11,498,175 1,371,678 1,367,179 -- 14,237,032
Transfers between
geographical areas
2,367,190 552,548 14,184 (2,933,922) --
----------- --------- --------- ------------ ------------
Net sales $13,865,365 1,924,226 1,381,363 (2,933,922) 14,237,032
=========== ========= ========= ============ ============
Operating loss $ (197,016) (155,907) (158,200) -- (511,123)
=========== ========= ========= ============ ============
Identifiable assets $ 9,399,968 1,008,809 728,041 -- 11,136,818
=========== ========= ========= ============ ============
</TABLE>
In determining operating income (loss) for each geographic area, sales
and purchases between geographic areas have been accounted for on the
basis of prices set between the geographic areas, generally at cost
plus 5%. Identifiable assets by geographic area are those assets that
are used in the Company's operations in each location.
Export sales included in the North America amounts shown in the summary
table by geographic area above were not significant.
(13) SUBSEQUENT EVENTS
On December 19, 1996, XIT Corporation formed an equal partnership with
P & S Development, a California general partnership. The partnership,
"Capital Source Partners, A Real Estate Partnership," obtained
ownership rights to a 93,000 square foot facility at 4290 East Brickell
Street, Ontario, California. XIT Corporation presently occupies 63,000
square feet of this facility as a corporate headquarters and as an
administrative and factory facility for its Digitran Division. Going
forward, XIT will lease the same 63,000 square feet from the
partnership under a long-term lease.
On March 26, 1997, privately-held XIT merged with a wholly owned, newly
formed subsidiary of MicroTel, a publicly-traded company, with XIT as
the surviving subsidiary. Pursuant to the transaction, the former
shareholders of XIT were issued approximately 6,119,000 shares of
common stock of MicroTel, or approximately 66% of the issued and
outstanding common stock. In addition, holders of XIT stock options and
warrants at the date of the merger collectively had the right to
acquire an additional 2,153,240 shares of common stock. Collectively,
then the former XIT shareholders owned, or had the right to acquire,
approximately 65% of the common stock of MicroTel on a fully-diluted
basis as of the date of the transaction.
F-23
<PAGE> 100
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
As described in note 1, the merger has been accounted for as a purchase
of MicroTel by the Company. Accordingly, the purchase price consists of
the value of the common stock outstanding of MicroTel at the date of
the merger of $5,011,000 plus estimated direct costs of the acquisition
of $636,000 and the acquired assets and liabilities of MicroTel will be
recorded at their estimated fair values at the date of the merger. The
excess of $4,904,000 of the purchase price over the preliminary
valuation of the net assets acquired will be recorded as goodwill and
will be amortized on a straight-line basis over 15 years. The
preliminary purchase price allocation is subject to change when
additional information concerning assets and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the periods indicated
and combines MicroTel's results of operations for the years ended
December 31, 1996 and 1995 with those of the Company's for its years
ended September 30, 1996 and 1995, respectively, with adjustments to
reflect amortization of the estimated excess purchase price over the
fair value of the net assets acquired.
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------------------
1996 1995
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Net sales $47,552 37,954
======= ======
Net loss $(3,841) (657)
======= ======
Net loss per common share $ (.42) (.08)
======= ======
</TABLE>
The pro forma results of operations above do not purport to be indicative
of the results that would have occurred had the merger taken place at the
beginning of the periods presented or of results which may occur in the
future.
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share
of restricted common stock and one quarter of a warrant to purchase one
share of restricted common stock. The pricing of the units is based on a
20% discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit
of $2.50 and maximum price of $3.50. The investors warrants have an
exercise price of 130% of the Average Reported Price. Additionally,
Yorkton and one other intermediary earn an aggregate commission of 10% of
the gross proceeds and warrants to acquire 10% of the shares purchased in
the offering at an exercise price of the lesser of the Average Reported
Price or $3.50 per share, and Yorkton further is reimbursed for
accountable expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment units
at $2.50 per unit, for gross proceeds of $5,000,000. Net proceeds to the
Company were $4,400,000. The offering, which was structured to
accommodate multiple closings, would terminate on the earlier of i) the
date the maximum offering of $10,000,000 is contracted or ii) the
extended termination date of May 31, 1997. The offering expired on May
31, 1997 with no additional closings.
F-24
<PAGE> 101
Schedule II
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Valuation and Qualifying Accounts
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS WRITE BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES OFFS OF ACCOUNTS OF PERIOD
----------- ------------ ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1996 $ 57,091 17,247 (27,753) 46,585
Year ended September 30, 1995 123,479 40,968 (107,356) 57,091
Year ended September 30, 1994 131,500 105,512 (113,533) 123,479
Allowance for inventory obsolescence:
Year ended September 30, 1996 419,060 210,905 (307,865) 322,100
Year ended September 30, 1995 677,234 265,000 (523,174) 419,060
Year ended September 30, 1994 812,250 81,233 (216,249) 677,234
======== ======= ======== =======
</TABLE>
F-25
<PAGE> 102
PART 1-FINANCIAL INFORMATION
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 998 $ 886
Accounts receivable 6,705 4,738
Inventories 8,836 6,297
Other current assets 1,044 724
-------- --------
Total current assets 17,583 12,645
Plant and equipment-net 5,292 5,006
Software development costs-net 829
Goodwill-net 6,697 1,836
Other assets 1,567 1,092
-------- --------
$ 31,968 $ 20,579
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 1,512 $ 352
Notes payable to institutional lenders 2,913 3,140
Current portion of long term debt 1,072 1,058
Accounts payable and accrued expenses 10,693 6,255
Deferred compensation 982
-------- --------
Total current liabilities 17,172 10,805
Long term debt 3,335 3,565
Deferred compensation liability 676
Minority interest 61 59
-------- --------
Total long-term liabilities 4,072 3,624
Redeemable preferred stock 811 794
Stockholders' equity:
Common stock 31 20
Additional paid-in capital and other 14,578 9,412
Accumulated deficit (4,696) (4,076)
-------- --------
Total stockholders' equity 9,913 5,356
-------- --------
$ 31,968 $ 20,579
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-26
<PAGE> 103
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
(in thousands except
per share amounts)
<S> <C> <C>
Net sales $ 7,707 $ 7,336
Cost of sales 6,234 5,372
------- -------
GROSS PROFIT 1,473 1,964
Operating expenses:
Selling, general and administrative 1,775 1,467
Engineering and product development 98 106
------- -------
INCOME (LOSS) FROM OPERATIONS (400) 391
Other income (expense)
Interest expense (198) (128)
Other (1) 22
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (599) 285
Income taxes 4 3
------- -------
NET INCOME (LOSS) $ (603) $ 282
======= =======
NET INCOME (LOSS) PER COMMON SHARE $ (0.10) $ 0.05
======= =======
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATING
NET INCOME (LOSS) PER SHARE 6,244 5,814
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE> 104
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1997 1996
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(603) $ 282
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 162 138
Amortization of intangible assets 48 38
Minority interest 2 12
Changes in operating assets and liabilities:
Accounts receivable (157) 72
Inventories 440 (99)
Other assets (43) 412
Accounts payable and accrued expenses 93 (739)
----- -----
Cash provided by (used in) operations (58) 116
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Net disposals (purchases) of
property, plant and equipment 13 (179)
Cash acquired in reverse acquisition 264
----- -----
Cash provided by (used) in investment activities 277 (179)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) related parties 660 27
Net borrowings (repayments) of other short-term debt (370) (271)
Net borrowings (repayments) of long-term debt (281) 679
----- -----
Cash provided by financing activities 9 435
----- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH (116) (48)
----- -----
NET INCREASE (DECREASE) IN CASH 112 324
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 886 392
----- -----
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 998 $ 716
===== =====
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE> 105
MICROTEL INTERNATIONAL, INC.
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 2,4, and 5
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 equipment and data communications equipment. XIT
designs, manufactures, and markets information technology products,
including displays and input components, subsystem assemblies, printed
circuits, and hybrid microelectronic 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-Circuits,
Components and Subsystem Assemblies, and Instrumentation and Test
Equipment.
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 financial
position as of March 31, 1997 and December 31, 1996 and results of
operations and cash flows for the three months ended March 31, 1997 and
1996. It is suggested that these interim consolidated financial
statements be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, l996.
As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by
XIT in a "reverse acquisition" because the existing shareholders of the
Company prior to the merger did not have voting control of the combined
entity after the merger. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the
continuing legal parent company, the Company, is not assumed to be the
acquiror and the financial statements of the combined entity are those
of the accounting acquiror (XIT), including any comparative prior year
F-29
<PAGE> 106
financial statements presented by the combined entity after the
business combination. Consequently,the consolidated condensed financial
statements include the accounts of XIT and its subsidiaries, and
beginning March 26, 1997, include the Company and its other
subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former Company).
Intercompany balances and transactions are eliminated in consolidation
and the currencies of the countries in which foreign subsidiaries are
located are considered their functional currencies. Cumulative
translation adjustments result from converting from these functional
currencies to U.S. dollars.
FISCAL YEAR END CHANGE
In connection with the reverse acquisition accounting treatment
described above, XIT changed its fiscal year end from September 30 to
December 31 to adopt the fiscal year end of the Former Company.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In accord with the reverse acquisition accounting treatment, the
capital accounts of XIT have been restated to give effect to the merger
exchange ratio (1.451478 common shares of the Company for each common
share of XIT) and to convert XIT's no par value common stock to $.0033
par value common stock of the Company.
Net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Common stock
equivalents were antidilutive and therefore not part of the shares used
in calculating net income (loss) per share for the three months ended
March 31, 1997 and 1996, respectively.
On March 3, 1997 the Financial Accounting Standards Board issued FAS
No. 128 "Earnings per Share" (FAS 128), which will become effective for
the Company for its year end December 31, 1997, requiring restatement
of quarterly and prior year financial information, if applicable. This
pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APB No. 15 "Earnings
per Share". FAS No. 128 provides for the calculation of Basic and
Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share of APB No. 15. The
potential effects of FAS 128 on the consolidated condensed financial
statements presented herein has yet to be determined.
(2)MERGER WITH XIT
On March 26, 1997, XIT of Ontario, California merged with a
wholly-owned, newly formed subsidiary of the Company, with XIT as the
surviving subsidiary. Pursuant to the transaction, the former
shareholders of XIT were issued approximately 6,115,000 shares of
common stock of the Company, or approximately 66% of the issued and
outstanding common stock. In addition, holders of XIT stock options and
warrants collectively have the right to acquire an additional 2,153,240
shares of common stock. Collectively, then the former XIT shareholders
own, or have the right to acquire,approximately 65% of the Common Stock
of the Company on a fully-diluted basis as of the date of the
transaction.
F-30
<PAGE> 107
As noted above, the merger is accounted for as a purchase of the Former
Company by XIT. Accordingly, the purchase price consists of the value
of the common stock outstanding of the Former Company at the date of
the merger of $5,011,000 plus estimated direct costs of the acquisition
of $636,000 and the acquired assets and liabilities of the Former
Company have been recorded at their estimated fair values at the date
of the merger. The excess of $4,904,000 of the purchase price over the
preliminary valuation of the net assets acquired was recorded as
goodwill and is being amortized on a straight-line basis over 15 years.
The preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the periods indicated
and combines the Former Company's results of operations for the year
ended December 31, 1996 and the three months ended March 31, 1997 with
those of XIT's for its year ended September 30, 1996 and the three
months ended March 31, 1997, respectively, with adjustments to reflect
amortization of the estimated excess price over the fair value of the
net assets acquired.
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
Quarter Year
Ended Ended
March 31, September 30,
1997 1996
---- ----
<S> <C> <C> <C>
Net sales $10,703 $47,552
======= =======
Net loss $(2,694) $(3,841)
======= =======
Net loss per common share $ (.29) $ (.42)
======= =======
</TABLE>
The pro forma results of operations above do not purport to be
indicative of the results that would have occurred had the merger taken
place at the beginning of the periods presented or of results which may
occur in the future.
(3)INVENTORIES
Inventories consist of the following at March 31, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials $4,118 $2,718
Work-in-process 3,146 2,642
Finished goods 3,578 1,289
Reserves (2,006) (352)
======= =======
$8,836 $6,297
======= =======
</TABLE>
(4)BANKING ARRANGEMENTS
Both XIT and a subsidiary have bank lines of credit which expired
originally on January 15, 1997, and which currently expire under
extension arrangements on June 30, 1997. Additionally, both XIT and the
subsidiary are in violation of certain covenants under the related loan
agreements. Although the bank has not waived these defaults, it has
agreed to forbear from taking any action with respect to same until the
extended expiration
F-31
<PAGE> 108
date. Based on discussion with the bank, management believes that these
lines will be renewed with more favorable advance rates against related
collateralized assets and with less restrictive financial covenants.
However, there can be no assurance that this will occur. Outstanding
borrowings under these lines of credit were $2,124,000 and $2,027,000
at March 31, 1997 and December 31, 1996, respectively.
(5)LITIGATION
In September, 1994 Raymond Jacobson, a former officer and director of
the Company and a participant in the Company's deferred compensation
plan, brought an action against the Company in the California Superior
Court, Santa Clara County, alleging that the Company has breached its
contract to pay Mr. Jacobson $3,495 bi-weekly for life under his
deferred compensation agreement dated May 11, 1993 (the "1993
Agreement"), by discontinuing payment in August 1994. The 1993
Agreement superseded a previous deferred compensation agreement dated
April 1, 1977 (the "1977 Agreement") which had provided for twice the
level of payments. Mr. Jacobson was claiming damages of approximately
$1,200,000, which he purported to be the present value of all payments
to be made under the 1993 Agreement. In June 1995 the Company paid Mr.
Jacobson all amounts past due under the contract plus interest and
reinstated the bi-weekly payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit
against Mr. Jacobson in the District Court for Galveston County, Texas
alleging damages arising from DDC's investment of more than $2,000,000
for the purchase of 1,072,000 shares of the Company's common stock. On
February 11, 1997, Mr. Jacobson, through his attorney, demanded that
the Company indemnify him, hold him harmless and pay for the cost of
defense, including reasonable attorney's fees and costs in connection
with the litigation instituted against him by DDC. This suit was
subsequently dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice
to the Company that he believed that the litigation instituted against
him by DDC provided a basis for him to rescind the 1993 Agreement and
assert his rights to full payment under the 1977 Agreement.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company
believes that an enforceable settlement was reached on January 22,
1997. Mr. Jacobson apparently disclaims this agreement based on the
actions noted above. On February 28, 1997 the Company filed a motion
for continuance to file a counterclaim asserting that the January 22,
1997 agreement supersedes all previous agreements with Mr. Jacobson.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the
settlement was subject to fulfillment of a number of conditions
subsequent which did not occur and therefore was not binding on either
party. Subsequent thereto, several settlement offers have been proposed
by plaintiff's counsel, none of which are acceptable to the Company. A
trial in the matter has been scheduled for August 25, 1997.
The Company does not believe that the value of a settlement of the
above matter or alternatively a trial judgement will be materially in
excess of amounts already recorded by the Company for the deferred
compensation arrangement.
F-32
<PAGE> 109
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 David 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 has answered Mr. Scheinfeld's
motion and is seeking to compel him to serve a complaint upon the
defendants.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material
adverse affect on the consolidated results of operations or financial
position.
(6) PRIVATE PLACEMENT
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its
best efforts to raise a minimum of $5,000,000 and a maximum of
$10,000,000 through a private placement of investment units consisting
of one share of restricted common stock and one quarter of a warrant to
purchase one share of restricted common stock. The pricing of the units
is based on a 20% discount from the ten day average closing bid price
of the Company's common stock preceding the date of contracting with
the institutional investors (the "Average Reported Price"), with a
minimum price per unit of $2.50 and maximum price of $3.50. The
investors warrants have an exercise price of 130% of the Average
Reported Price. Additionally, Yorkton and one other intermediary earn
an aggregate commission of 10% of the gross proceeds and warrants to
acquire 10% of the shares purchased in the offering at an exercise
price of the lesser of the Average Reported Price or $3.50 per share,
and Yorkton further is reimbursed for accountable expenses of the
offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment
units, for gross proceeds of $5,000,000. Net proceeds to the Company
were $4,400,000. The offering, which is structured to accommodate
multiple closings, would terminate on the earlier of i) the date the
maximum offering of $10,000,000 is contracted or ii) the currently
extended termination date of May 31, 1997.
F-33
<PAGE> 110
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MicroTel International, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of MicroTel
International, Inc. (formerly CXR Corporation) as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995, and the six months
ended December 31, 1994. We have also audited the schedule listed on the
accompanying Index at Item 8. These financial statements and the schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used as
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTel
International, Inc. at December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995,
and the six months ended December 31, 1994, in conformity with generally
accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
San Francisco, California
April 14, 1997
F-34
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
MicroTel International, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of MicroTel International, Inc. (formerly
CXR Corporation) and its subsidiaries for the year ended June 30, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of the operations and the cash flows of MicroTel
International, Inc. (formerly CXR Corporation) and its subsidiaries for the year
ended June 30, 1994 in conformity with generally accepted accounting.
The accompanying fiscal 1994 financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the 1994
financial statements included in the June 30, 1994 Annual Report to the
Securities and Exchange Commission on Form 10-K, the Company's declining
revenues and recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters were also described in Note 1 to such 1994 financial statements. The
fiscal 1994 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Subsequent to June 30, 1994, the Company agreed to amendments to the Common
Stock Purchase Agreement (the Agreement) with Daniel Dror & Co. ("DDC") or
designee, approved by the stockholders in April 1994. In September 1994, as
consideration under the first amendment to the Agreement, the Company was
assigned a promissory note and received title to a securities brokerage account
consisting of cash and common stock and the Company assumed the liability for
certain financial derivative instruments which were secured by the cash and
common stock investments in the securities brokerage account. Subsequent to the
acceptance of this consideration on behalf of the Company by Daniel Dror in his
capacity as Chairman of the Company's investment committee, the Board of
Directors reviewed the consideration received and determined that it would be in
the best interests of the Company to accept payment with securities which are
less likely to experience significant fluctuations in value. On November 8, 1994
the Company executed a second amendment to the Agreement dated October 16, 1994
whereby the transactions under the previous amended Agreement were effectively
rescinded, the Company agreed to sell a reduced number of shares to the designee
of DDC and the Company agreed to accept, subject to completion of its due
diligence on or before December 31, 1994, assignment of a promissory note
(payable on December 31, 1995 and secured by common stock of another public
company) as consideration under such second amendment to the Agreement. These
transactions are described more fully in Note 2 to the financial statements.
DELOITTE & TOUCHE LLP
San Jose, California
August 31, 1994
(November 18, 1994 as to paragraphs two through four in Note 2)
F-35
<PAGE> 112
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 1996 and December 1995
(in thousands)
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271 $ 432
Investments in marketable securities 152
Accounts receivable, less allowance
for doubtful accounts:
Dec. 1996, $186
Dec. 1995, $425 2,936 3,582
Inventories 3,004 4,148
Other current assets 487 283
-------- --------
Total current assets 6,698 8,597
-------- --------
Plant and equipment-net 526 709
Software development costs-net 1,027 1,209
Foreign tax receivable 830 790
Other assets 238 20
-------- --------
$ 9,319 $ 11,325
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 1,142 $ 759
Current portion long term debt 44 170
Accounts payable 2,580 2,184
Accrued payroll and related expenses 748 922
Other accrued liabilities 749 748
Current portion-deferred compensation 737 161
Deferred income 350
-------- --------
Total current liabilities 6,000 5,294
-------- --------
Long term debt 36 54
Deferred compensation liability 507 803
Other long-term liabilities 218
-------- --------
Total liabilities 6,543 6,369
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 10 45
Additional paid-in capital 23,560 22,293
Accumulated deficit (21,371) (16,774)
Stockholder's note receivable (1,337)
Deferred compensation (40) (88)
Cumulative translation adjustments 617 817
-------- --------
Stockholders' equity 2,776 4,956
-------- --------
$ 9,319 $ 11,325
======== ========
</TABLE>
See notes to consolidated financial statements.
F-36
<PAGE> 113
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
SIX MONTHS FOR THE
FOR THE YEARS ENDED ENDED YEAR ENDED
DEC 31, DEC 31, DEC 31, June 30,
1996 1995 1994 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 16,303 $ 18,352 $ 9,931 $ 21,648
-------- -------- -------- --------
Costs and expenses:
Cost of sales 10,819 11,322 6,174 12,647
Engineering and product
development 1,817 1,674 659 2,960
Marketing and selling 3,715 3,928 1,654 3,975
Administration 3,115 2,211 1,049 2,571
Severance and related settlement costs 1,567
-------- -------- -------- --------
21,033 19,135 9,536 22,153
-------- -------- -------- --------
Income (loss) from operations (4,730) (783) 395 (505)
Other income (expense):
Interest income 371 117 9 9
Interest expense (319) (164) (121) (258)
Other (4) 12 15 115
-------- -------- -------- --------
Income (loss) before
income tax benefit (4,682) (818) 298 (639)
Income tax benefit (85) (151)
-------- -------- -------- --------
Net income (loss) ($4,597) ($667) $ 298 ($639)
======== ======== ======== ========
Net income (loss) per share ($1.65) ($0.25) $ 0.15 ($0.39)
======== ======== ======== ========
Weighted average number of
shares used in calculating
net income (loss) per share 2,783 2,678 1,998 1,636
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE> 114
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
(A) Common Stock Additional Stockholder's Cumulative Total
Paid-in Accumulated Note Deferred Translation Stockholders'
Shares Amount Capital Deficit Receivable Compensation Adjustments Equity
------ ------ ------- ------- ---------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JUNE 30, 1993 7,730 $26 $19,824 $(15,766) $257 $4,341
Issuance of common stock
for cash net of issuance
cost of $94 thousand 1,965 6 710 716
Translation adjustments 196 196
Net loss (639) (639)
------ -- ------ ------- ------- ------- ---- ------
BALANCE JUNE 30, 1994 9,695 32 20,534 (16,405) 453 4,614
Issuance of common stock
for cash 1
Issuance of common stock
for notes receivable 3,343 11 1,326 (1,337)
Translation adjustments 66 66
Net income 298 298
------ -- ------ ------- ------- ------- ---- ------
BALANCE DECEMBER 31, 1994 13,039 43 21,860 (16,107) (1,337) 519 4,978
Issuance of common stock
for cash net of issuance
cost of $15 thousand 368 1 220 221
Issuance of common stock
in settlement of debt 130 1 79 80
Issuance of incentive stock
awards 215 134 (134)
Amortization 46 46
Translation adjustments 298 298
Net loss (667) (667)
------ -- ------ ------- ------- ------- ---- ------
BALANCE DECEMBER 31, 1995 13,752 45 22,293 (16,774) (1,337) (88) 817 4,956
Issuance of common stock for
cash 214 1 128 129
Issuance of common stock in
payment of expenses 80 69 69
Issuance of compensation awards 90 1 57 (31) 27
Five for one reverse split net
of costs of $43 thousand (11,309) (37) (6) (43)
Payments on shareholders' note
receivable 380 380
Recission of remaining stock
subscription (478) (2) (955) 957
Issuance of common stock for
cash 21 46 46
Issuance of common stock in
payment of expenses 59 182 182
Employee and officer awards and
option exercises, including
$1.45 million in non-cash
compensation 511 2 1,746 1,748
Amortization 79 79
Translation adjustments (200) (200)
Net loss (4,597) (4,597)
----- --- ------- -------- -- ---- ---- ------
BALANCE DECEMBER 31, 1996 2,940 $10 $23,560 ($21,371) $0 ($40) $617 $2,776
===== === ======= ======== == ==== ==== ======
</TABLE>
(A) $.0033 par value; 25,000 shares authorized (B) $.01 par value; 10,000
preferred shares authorized none issued
See notes to consolidated financial statements.
F-38
<PAGE> 115
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS SIX MONTHS
FOR THE YEARS ENDED ENDED ENDED
Dec. 31, Dec. 31, Dec. 31, June 30,
1996 1996 1994 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,597) ($ 667) $ 298 ($ 639)
Reconciliation to net cash provided
by (used in) operations:
Depreciation 221 274 153 387
Amortization of intangible assets 298 266 63 282
Deferred compensation 358 46
Stock-based compensation and expense 1,754
Write-down of assets 1,006
Changes in assets and liabilities net of
sale of NAMS and LAN product lines:
Investments in marketable securities (152)
Accounts receivable 646 1,316 (1,084) (1,061)
Inventories 768 (412) 463 766
Other current assets (52) 4 31 97
Other non-current assets (218)
Accounts payable 396 (361) (701) 1,097
Other current liabilities (523) (262) (74) (252)
Foreign taxes receivable (40) (144) 2
Other noncurrent liabilities (218) 237 31 (513)
------- ------- ------- -------
Net cash provided by (used in) operations (201) 145 (820) 166
------- ------- ------- -------
Cash flows from investing activities:
Certificate of deposit 650 (650)
Additions to plant and equipment (71) (148) (43) (171)
Capitalized software (795) (879) (490)
Collection of other receivables 1,025
------- ------- ------- -------
Net cash provided by (used in) investing
activities (866) (377) (158) (171)
------- ------- ------- -------
Cash flows from financing activities:
Notes payable-net 383 (184) 943 (737)
Term debt
Additions 91
Repayments (135) (95) (63) (174)
Fee for note receivable extension 250
Proceeds from common stock transactions 827 221 716
Costs relating to stock split (43)
------- ------- ------- -------
Net cash provided by (used in) financing
activities 1,032 192 880 (104)
------- ------- ------- -------
Effect of exchange rate changes on cash (126) 175 49 114
------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents (161) 135 (49) 5
Cash and cash equivalents
at beginning of period 432 297 346 341
------- ------- ------- -------
Cash and cash equivalents
at end of period $ 271 $ 432 $ 297 $ 346
======= ======= ======= =======
Non cash investing and financing activities:
Issuance of equity securities for
compensation and expenses $ 1,754
=======
Cancellation of stock subscription $ 957
=======
Issuance of common stock for debt settlement $ 80
=======
Sale of common stock for note receivable $ 1,337
=======
Sale of NAMS and LAN product lines for a
note receivable $ 1,025
=======
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE> 116
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the Company) is a holding company for its
wholly-owned subsidiaries CXR Telcom Corporation, a U.S. corporation, and CXR
S.A., its French subsidiary. The company designs, manufactures and markets
electronic telecommunication test equipment and data communications equipment at
its facilities in San Jose, California and in Abondant, France.
BASIS OF PRESENTATION
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, CXR Telcom Corporation and CXR S.A. Intercompany
balances and transactions are eliminated in consolidation. The French Franc is
considered to be the functional currency of the French subsidiary. Foreign
exchange transaction gains and (losses) were as follows:
Year ended December 31, 1996 $(4,000)
Year ended December 31, 1995 16,000
Six months ended Dec. 31, l994 423,000
Year ended June 30, 1994 75,000
Fiscal Year end Change
Effective December 31, 1994, the Company changed its fiscal year end from June
30 to December 31 to better align its financial reporting cycle with the
business cycle of its products. Accordingly, the audited financial statements
included in the annual report comprise the years ended December 31,1996 and
1995, the six months ended December 31, l994 and the year ended June 30, l994.
The condensed statement of operations for the twelve months ended December 31,
l994 presented below for comparative purposes has been derived from the
unaudited financial records of the Company. This condensed consolidated
statement of operations reflects all adjustments, consisting only of normal
recurring items, which in the opinion of management are necessary to fairly
state the Company's results of operations for the period presented.
F-40
<PAGE> 117
Consolidated statements of Operations data for the twelve months ended December
31, 1994 (unaudited):
<TABLE>
<CAPTION>
(in thousands except for
per share data)
<S> <C>
Sales $ 19,938
--------
Cost of Sales 11,932
Engineering and Product Development 2,157
Marketing and Selling 3,695
Administration 2,328
Other Expense - Net 29
--------
20,141
--------
Net Loss $ (203)
========
Net Loss per Share $ (.11)
========
Weighted Average Number of
Shares Outstanding 1,910
========
</TABLE>
New Accounting Pronouncements
Financial Accounting Standards Board Statement No 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121), became effective for the Company in l996. The new accounting
pronouncement requires, among other things, that impairment losses on assets to
be held, and gains or losses from assets that are expected to be disposed of, be
included as a component of income from continuing operations. Adoption of FAS
121 in 1996 had no material effect on the consolidated financial statements as
the Company's existing accounting policies were consistent with its provisions.
Financial Accounting Standards Board Statement No. 123, "Accounting for Stock
Based Compensation" (FAS 123), also became effective for the Company in l996.
The new accounting pronouncement provides an alternative "fair value" method of
accounting for stock options and other stock based compensation and also
provides for expanded disclosures. The Company has elected not to apply the
alternative accounting method for stock based compensation to employees, but was
required to apply the new method to stock based transactions with non-employees
and to expand its disclosures in l996 to comply with FAS 123, including
providing proforma effects as if it had elected the alternative accounting
method for stock based compensation. (See Note 11 to Consolidated Financial
Statements for expanded disclosures).
On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128
"Earnings per Share". (FAS 128), which will become effective for the Company for
its year end December 31, 1997. This pronouncement provides a different method
of calculating earnings per share than is currently used in accordance with APB
No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share
of APB No. 15. Potentially dilutive securities have
F-41
<PAGE> 118
an antidilutive effect in loss periods and are excluded from FAS 128
computations similar to current practice. Therefore, the required restatements
of prior period information upon adoption will have no effect on earnings per
share presented in the accompanying Consolidated Financial Statements. However,
as discussed in Note 13, comparative historical financial information of the
Company presented after the reverse acquisition by XIT Corporation on March 26,
1997 will be those of XIT Corporation, and the effects of FAS 128 on such
financial statements have yet to be determined.
Reverse Stock Split
On August 15, 1996 the shareholders of the Company ratified a one-for-five
reverse stock split effective for holders of record on August 29, 1996. Share
and per share amounts in the Consolidated Financial Statements and Notes thereto
have been restated to give effect to the reverse split.
Reclassifications
Certain 1995 amounts have been reclassified to conform to the 1996 presentation
with no impact on the net loss for that year.
CASH EQUIVALENTS
All highly liquid instruments purchased with an initial maturity of three months
or less are considered cash equivalents.
INVESTMENTS
The Company classifies its investments in common stock of publicly-traded
companies as trading securities and records the investments at market. Realized
or unrealized gains and losses are included in the statement of operations and
were minimal for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out cost) or
market.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation and amortization are
computed principally on the straight-line method for financial reporting
purposes and by accelerated methods for income tax purposes over the estimated
useful lives of the assets as follows:
Building 20 years
Machinery, Equipment,
Furniture and Fixtures 3-5 years
Leasehold Improvements Lesser of lease term or estimated useful life
F-42
<PAGE> 119
SOFTWARE DEVELOPMENT COSTS
Software development costs, which include purchased technology, are capitalized
beginning when technological feasibility has been established or when purchased
from third parties and continuing through the date of commercial release.
Amortization commences upon commercial release of the product and is calculated
using the greater of the straight line method over three years or the ratio of
the products' current revenues divided by the anticipated total product
revenues. During the year ended December 31, 1996, $795,000 of developed
software was capitalized, $298,000 was amortized and charged to cost of goods
sold, and the carrying value of certain capitalized software was reduced by
$630,000 to reflect revisions in estimated future net realizable value (See Note
12). During the year ended December 31, l995, $699,000 of developed software was
capitalized, $180,000 of software was purchased, and $188,000 of amortization
was charged to cost of goods sold. During the six months ended December 31,
1994, $490,000 of developed software was capitalized and no amortization was
recognized. At June 30, l994 all prior capitalized software costs were fully
amortized and written off. Writedowns of carrying value are charged to cost of
goods sold.
GOODWILL
Goodwill is amortized on a straight-line basis over its estimated useful life.
In 1993, the Company adjusted the expected life of the goodwill related to its
acquired LEA product line from ten years to five years to reflect the decline in
demand for analog instruments. The remaining goodwill was fully amortized in
l995. Related goodwill amortization for the year ended December 31, 1995, the
six months ended December 31, 1994 and the year ended June 30, 1994 was $78,000,
$63,000 and $124,000, respectively.
REVENUE RECOGNITION
The Company recognizes product revenues and related estimated warranty costs
upon shipment. License, maintenance and lease revenues are recognized when
earned.
INCOME TAXES
Deferred income taxes result from temporary differences between the financial
statement and income tax basis of assets and liabilities (See Note 7). The
Company adjusts the deferred tax asset valuation allowance based on judgments as
to future realization of the deferred benefits supported by demonstrated trends
in the Company's operating results.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common shares outstanding during the period. Common stock equivalents were
antidilutive and therefore not part of the shares used in calculating net loss
per share in l996 and l995 and fiscal l994. Common stock equivalent shares
(shares covered by the stock option and warrant plans) were 295,000 for the six
months ended December 3l, l994 and were considered as outstanding for net income
per share computations.
F-43
<PAGE> 120
MAJOR CUSTOMERS
No one customer accounted for 10% or more of sales during 1996 or l995. One
customer accounted for l0% and 11% of sales during the six months ended December
3l, l994 and for the fiscal year l994, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of approximately $261,000 in 1996, $164,000 in 1995,
$121,000 in the six months ended December 31, l994, and $258,000 in the fiscal
year ended June 30, l994. The Company paid income taxes of $9,000 in 1996,
$2,000 in l995, $7,000 in the six months ended December 31, l994, and $28,000,
in the fiscal year ended June 30, l994.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company extends unsecured credit to its customers primarily in the
telecommunications industry in the United States and Europe. Despite the
industry concentration, the Company believes credit risk is mitigated by the
large number of customers with which it does business and because these
customers are typically large well-established companies.
2. RELATED PARTY TRANSACTIONS
Daniel Dror was the Company's Chairman and Chief Executive Officer from 1994
until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the President
and control person of Elk International Corporation Ltd. ("Elk"), is the brother
of Mr. Dror. Based upon information contained in Elk's Schedule 13D filed with
the Securities and Exchange Commission dated January 25, 1994, Mr. Dror may be
deemed a "control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc.
("DDC") and Elk may be deemed to constitute a "group" as those terms are defined
under the Securities Act of 1933, as amended, and Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder. Mr. Dror
and DDC each disclaim any beneficial ownership in Elk and in stock of the
Company owned by Elk.
Pursuant to an agreement dated January 5, l994, the Company issued 300,000
shares of the Company's common stock to the designees of DDC for $600,000 (or
$2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the
agreement, the Company issued to Elk warrants to purchase 100,000 shares for
$2.50 per share, exercisable at any time prior to December 25, l995. The Company
also entered into a common stock purchase agreement with DDC on March l0, l994
whereby DDC, or its designee, was to acquire 1,260,000 shares of the
F-44
<PAGE> 121
Company's common stock for an aggregate of $2,520,000 (or $2.00 per share),
payable in cash, or at the option of the Company, in cash, cash equivalents, or
marketable securities or any combination thereof. The stockholders of the
Company approved the common stock purchase agreement (the Agreement) on April
16, l994. The Agreement provided for a closing by June 30, l994 contingent upon
all conditions to closing being fulfilled.
As permitted under the terms of the Agreement, the Board of Directors on July
27, l994 amended the Agreement, following claims by DDC and its designee raised
prior to June 30, l994 that certain closing conditions had not been satisfied.
The amended Agreement required the Company to issue and sell 911,484 shares to
Elk as designee of DDC, for an aggregate purchase price of $1l,882,967 (based on
the previously agreed price of $2.00 per share), in cash, cash equivalents or
marketable securities. In September l994, Elk tendered the assignment of an
interest-free promissory note in the amount of $805,555 secured by shares of
another public company and transferred a brokerage account to the Company
consisting of cash and common stock of $1,077,412 amounting to an aggregate of
$l,882,967 (the Company assumed the liability for certain financial instruments
amounting to $506,250 which were secured by the cash and common stock
investments in the brokerage account). Subsequent to this transfer, a loan of
$226,000 was made from the brokerage account to another entity controlled by DDC
which loan was payable with 15% interest on December 31, l995. Although no
formal agreements were signed, DDC indicated its intent to reimburse the Company
for any loss resulting from the settlement of the financial instruments and
indebtedness from the related party. The acceptance of the consideration
received and subsequent loan were authorized by Daniel Dror in his capacity as
Chairman of the Company's investment committee prior to formal review by the
Board of Directors.
The Board of Directors subsequently reviewed the consideration tendered under
the amended Agreement and determined that it would be in the best interests of
the Company to accept payment from Elk with securities less likely to experience
significant fluctuations in value. On November 8, l994 the Company executed a
second amendment to the Agreement dated October l6, l994 with DDC whereby the
transactions under the previous amendment were effectively rescinded and the
Company agreed to issue and sell 668,725 shares to Elk as designees of DDC, for
the aggregate purchase price of $1,337,449 (or $2.00 per share) on or before
December 3l, l994.
In payment of the purchase price under the second amendment to the Agreement,
the Company accepted assignment of a promissory note payable to Elk from a
limited partnership in the aggregate amount of $1,444,444 payable on December
3l, l995. The face amount of the promissory note includes the purchase price of
$1,337,449 plus $106,995, representing interest on the purchase price at an
interest rate of 8% per annum for the period commencing on December 3l, l994
through December 3l, l995. At a board meeting held in December 1995 the Company
agreed to accept $250,000 to extend the note to December 15, 1996 and $100,000
as prepaid interest for the extension period. The $350,000 was recognized as
income in l996 over the extension period of the note. As a result of this
agreement the Board extended the option period of the remaining 90,000 Elk
warrants for two years. Payment of the promissory note was secured by escrowed
shares of another public company and the shares issued to Elk were being held in
escrow and were to be delivered to Elk when the promissory note had been fully
satisfied.
F-45
<PAGE> 122
In June 1996, Elk was given the right to make alternative cash payment to the
Company for the stock subscription through December 15, 1996 releasing shares
from escrow at the price of $2.00 per share, and to receive a corresponding
assignment of proceeds from the promissory note when collected. Elk made
payments against the stock subscription aggregating $380,000 through November
14, 1996, releasing 190,000 shares of common stock from the escrow.
On November 15, 1996, the Company and Elk entered into an agreement pursuant to
which Elk received (i) an option exercisable for a period of three years to
purchase 500,000 shares of Common Stock at an exercise price of $2.375 per
share, (ii) the extension of an outstanding warrant to purchase 90,000 shares of
Common Stock for three years, and (iii) the return to Elk of the $1,444,444
promissory note. In exchange for the foregoing, the remaining shares held in
escrow by the Company and the subscription right were canceled. The costs of
this settlement totaling $807,000, including the valuation of the option grant
of $700,000, was recorded in the fourth quarter of 1996.
Also on November 15, 1996 Mr. Dror resigned as Chairman and Chief Executive
Officer of the Company in anticipation of the pending merger with XIT. Mr. Jack
Talan, a director of the Company, was appointed interim Chairman and Chief
Executive Officer until consummation of the transaction.
Upon his resignation, Mr. Dror (or his designee) received as a severance award
for past service: (a) 350,000 shares of the Company's common stock; (b) an
extension of the exercise period to November 14, 1999 on options he currently
holds to purchase 25,000 shares of the Company's common stock; and (c) options
to purchase 250,000 shares of the Company's common stock at a price of $2.375
per share. The latter options are excercisable for a period of 5 years, but only
after Mr. Dror repays a certain indebtedness to the Company of approximately
$211,000, which amount is due in 5 annual installments and which may be repaid
by surrendering the options for value equivalent to the lesser of the future
appreciation of the Company's common stock over the exercise price or $.50 per
option. On December 3, 1996, it was mutually agreed between the Company and Mr.
Dror to substitute an option to acquire 300,000 shares of common stock at an
exercise price of $.01 per share for 300,000 shares of the previous award and on
December 23, 1996, these options were exercised. The compensation expense
associated with this grant of $560,000, as well as the value of the 50,000
shares awarded of $119,000 and other costs totaling $82,000 related to the
immediate vesting of previous stock based deferred compensation to Mr. Dror and
the settlement of certain amounts due the Company by Mr. Dror, were recognized
in the fourth quarter of 1996.
Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000
shares, respectively, as incentive stock awards principally to certain directors
and officers, which vest generally over a three-year period. The total value of
these shares based on the market price of the Company's common stock on the date
of grant totaled $192,000. Compensation expense recognized by the Company for
the awards totaled $106,000 and $46,000 for 1996 and 1995, including
amortization of related deferred compensation.
In October and November of 1996, the Company granted non-qualified stock options
to acquire approximately 156,000 shares of the Company's Common Stock to certain
officers at an exercise
F-46
<PAGE> 123
price equal to 80% of the market value on the date of the grant. Compensation
expense associated with these grants approximated $48,000.
On February 19, 1997, in recognition of past and future services to the Company,
Mr. Talan was granted 150,000 restricted shares of the Company's common stock
with a market value as of that date of $337,500 ($2.25 per share).
On February 25, 1997 through March 5, 1997, Mr. Talan also loaned the Company an
aggregate of $500,000. Such loans bear interest at the rate of 6% per annum and
are payable on April 25, 1997.
3. DISPOSITIONS
At the end of the fourth quarter of the year ended June 30, l994 the Company
sold the net assets of its NAMS and LAN product lines to Numerex for $1,025,000
which is included in other receivables at June 30, l994. The price represented
the book value of the net assets sold, and there was no gain or loss on the
sale. These products accounted for sales of approximately $4,657,000 in fiscal
l994.
4. OPERATIONS BY GEOGRAPHIC AREA
The Company operates principally in the telecommunications industry. It
manufactures products in the United States and France and markets in North
America, Europe and other areas of the world. A summary of operations by
geographic area follows (in thousands):
<TABLE>
<CAPTION>
Six Months Year Ended
Year Ended Ended June 30,
12/31/96 12/31/95 12/31/94 1994
-------- -------- -------- ----
<S> <C> <C> <C> <C>
Sales to Unaffiliated
Customers from:
United States $ 6,825 $ 8,255 $ 4,071 $ 12,621
France 9,478 10,097 5,860 9,027
-------- -------- -------- --------
$ 16,303 $ 18,352 9,931 $ 21,648
======== ======== ======== ========
Transfers from
United States
to France $ 16 $ 118 $ $ 158
======== ======== ======== ========
Net Income (Loss):
United States (3,599) $ (766) (286) $ (698)
France (998) 99 584 59
-------- -------- -------- --------
$ (4,597) $ (667) $ 298 $ (639)
======== ======== ======== ========
</TABLE>
F-47
<PAGE> 124
<TABLE>
<CAPTION>
Six Year
Months Ended
Year Ended Ended June 30,
12/31/96 12/31/95 12/31/94 1994
------------------ -------- --------
<S> <C> <C> <C> <C>
Identifiable Assets at
Year End:
United States $ 3,794 $ 4,786 $ 5,174 $ 5,268
France 5,525 6,539 6,632 6,054
------- ------- ------- -------
$ 9,319 $11,325 $11,806 $11,322
======= ======= ======= =======
</TABLE>
Transfer prices are established to allow a reasonable profit to the selling
entity. Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area. Export sales to unaffiliated
customers from the United States were approximately $333,000 for 1996, $381,000
for l995, $149,000 for the six months ended December 31, l994, and $881,000 in
fiscal year l994.
5. INVENTORIES
Inventories consist of the following (in thousands) at December 31:
<TABLE>
<CAPTION>
1996 l995
------- -------
<S> <C> <C>
Finished Goods $ 2,369 $ 2,620
Work-in-Process 683 1,135
Parts 1,653 1,817
Reserves (1,701) (1,424)
------- -------
$ 3,004 $ 4,148
======= =======
</TABLE>
6. PLANT AND EQUIPMENT
Plant and equipment consist of the following (in thousands) at December 31:
<TABLE>
<CAPTION>
1996 l995
------- -------
<S> <C> <C>
Land and Buildings $ 374 $ 403
Machinery, Equipment,
Furniture and
Fixtures 2,413 2,431
------- -------
2,787 2,834
Accumulated Depreciation
and Amortization (2,261) (2,125)
------- -------
$ 526 $ 709
======= =======
</TABLE>
F-48
<PAGE> 125
Plant and equipment includes assets leased under capital leases of approximately
$92,000 at December 31, 1996 and 1995, respectively. Accumulated depreciation on
these items at December 31, 1996 and 1995 was $42,000 and $36,000.
7. INCOME TAXES
Effective July l, l993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("FAS l09"), "Accounting for Income Taxes." Under FAS l09, a
deferred tax asset or liability is determined based on the differences between
the financial statement and tax basis of assets and liabilities as measured by
the enacted tax rates which will be in effect when these differences reverse.
The adoption of FAS l09 had no material effect on the Company's financial
position or results of operations for the year ended June 30, l994.
Pre-tax income (loss) from operations for the following periods was taxed under
the following jurisdictions (in thousands):
<TABLE>
<CAPTION>
Six Months Year Ended
Year Ended Ended June 30,
12/31/96 2/31/95 12/31/94 1994
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Domestic $(3,599) $ (766) $ (286) $(1,105)
Foreign (1,083) (52) 584 466
------- ------- ------- -------
$(4,682) $ (818) $ 298 $ (639)
======= ======= ======= =======
</TABLE>
The income tax expense (benefit) differs from the amount of income tax expense
(benefit) determined by applying the statutory Federal rate to pre-tax income
(loss) as follows (in thousands):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Year Ended Dec 31, Dec 31, June 30,
1996 1995 l994 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Tax expense (benefit)
at the Statutory Federal Rate $(1,563) $ (278) $ 101 $ (217)
Net Operating Losses (75) (68)
Change in Valuation Allowance 1,478 127 (26) 285
------- ------- ------- -------
$ (85) $ (151) $ -- $ --
======= ======= ======= =======
</TABLE>
The tax benefits for the year ended December 31, 1996 and l995 are a result of
research and development credits allowed in France.
F-49
<PAGE> 126
During the six months ended December 31, l994, the Company utilized foreign net
operating loss carryforwards of approximately $225,000 to reduce foreign income
tax expense by approximately $75,000.
At December 3l, l996 the Company had net operating loss carryforwards for
Federal and state tax purposes totaling approximately $19,900,000 and
$4,800,000, respectively. These carryforwards are available to reduce Federal
and state taxable income through 2011 and 2001, respectively. The foreign net
operating loss carryforward for statutory tax reporting purposes at December 31,
1996 was approximately $2,200,000 and expires through 2001. In addition, the
Company has a Federal net operating loss carryforward of approximately
$4,300,000 arising from an acquired company. As discussed in Note 13, subsequent
to December 31, 1996, the Company entered into a merger transaction. This
transaction will limit the domestic net operating loss carryover to
approximately $265,000 per year.
At December 3l, l996 the Company has investment tax credits and research and
development credits totaling $682,000 and $385,000, which expire through 2005.
These tax credits are subject to certain limitations.
Deferred tax assets are comprised of the following (in thousands) at December
31:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred Tax Asset:
Net Operating Loss
Carryforwards $ 8,684 $ 7,116
Capitalized Software (175) (187)
Plant and Equipment (6) 25
Accruals and Reserves
Recognized in Different
Periods 1,338 1,063
Valuation Allowance (9,841) (8,017)
------- -------
Total $ -- $ --
======= =======
</TABLE>
A valuation allowance has been provided to reduce recorded total possible future
tax benefits to zero as the Company's recent history of operating losses does
not support a judgment that the deferred tax assets are more likely than not to
be realized in the future. Consequently, no tax benefits were recognized for the
Company's domestic and foreign operating losses during the periods presented.
Further, these tax benefits will be recognized the earlier of when realized in
future periods or when future profitability of the Company appears sufficiently
probable that it appears more likely than not that the benefits will be
realized. The changes in the valuation allowance for all periods presented are
due primarily to additional net operating losses incurred and expiration of
existing net operating loss carryforwards.
F-50
<PAGE> 127
8. BORROWING ARRANGEMENTS
The Company's borrowing arrangements consist of the following (in thousands) at
December 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Short-term Borrowings
Borrowing under U.S.
Factoring Line of Credit $ 589 $ 759
Borrowing under Working Capital
Lines of Credit for CXR S.A 553
------ ------
Notes Payable to Banks $1,142 $ 759
====== ======
Long-term Debt
Term Loan, Interest at
10.5% Due January 1997
Secured by Land and Building 30 168
Capital lease obligations
(see Note 9) 50 56
------ ------
80 224
Current Portion of Long-term Debt 44 170
------ ------
Long-term Debt $ 36 $ 54
====== ======
</TABLE>
During 1996, the Company's U.S. subsidiary renegotiated its bank credit
facility, which had matured in June, 1996. Under its prior revolving line of
credit, borrowings were based on eligible receivables and inventory with a
maximum borrowing limit of $1,000,000. The line of credit bore interest at prime
plus 4% (12 1/2% at December 31, 1995), was collateralized by accounts
receivable and inventories and was guaranteed by the Company.
The revolving line of credit was replaced by a factoring line of credit with the
same bank. Borrowings under the factoring line of credit are based on an advance
rate of 85% of eligible receivables with no maximum cap. The line bears interest
at prime plus 2% (10.25% at December 31, 1996) and an administrative fee of 1%
per month charged on the average factored invoiced balance for invoice
processing. At December 31, 1996, the U.S. subsidiary had additional available
borrowings of $158,000 under this line.
F-51
<PAGE> 128
The Company's French subsidiary has bank lines of credit approximating
$1,145,000 at December 31, 1996, with available borrowings based on eligible
accounts receivable. Borrowings under the related agreements bear interest at
5.0 - 8.6%, and at December 31, 1996, approximately $370,000 of additional
borrowings were available under the lines.
9. LEASES
The Company leases certain of its facilities under non-cancelable operating
leases expiring through May 1998. Rent expense for the years ended December 31,
1996 and 1995, the six months ended December 31, l994 and the year ended June
30, 1994 was approximately $363,000, $380,000, $168,000 and $869,000,
respectively. In May l994, the Company negotiated an early termination of its
lease on its 90,000 square foot U.S. facility, and leased 40,000 square feet for
39 months. The Company had previously been accruing rent on this facility on a
straight-line basis, resulting in a deferred liability for future rent payments.
The reversal of the remaining liability, net of lease termination costs,
resulted in a $108,000 gain, which is included in other income for the year
ended June 30, l994. Future minimum lease payments required under operating
lease agreements and future minimum lease payments under capital lease
obligations together with the present value of minimum payments are as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, Operating Capital
Leases Lease
------ -----
<S> <C> <C>
1997 $297 $14
1998 71 14
1999 - 14
2000 - 14
2001 - 7
---- ---
Total minimum payments $368 63
====
Less amount representing interest 13
---
Present value of minimum lease payments $50
===
</TABLE>
10. COMMITMENTS AND CONTINGENT LIABILITIES
Under the terms of its acquisition of Anderson Jacobson, Inc. in fiscal 1989,
the Company assumed the liability for certain deferred compensation arrangements
(the Plan). During l993 the beneficiaries of the Plan and the Company
renegotiated the future payments required under the Plan, and the annual
payments were reduced to $173,000. Payment to the individual recipients
generally were reduced 50% and the terms of the agreements range from five years
to 14 years, with one agreement covering the remaining life of the recipient. At
December 31, 1996, recorded obligations for deferred compensation related to
these arrangements totaled $1,244,000. The amounts recorded are generally based
on the estimated present value of the future required payments, discounted at
8.5%, and assuming annual CPI increases of 3.3%, and further include estimated
costs to settle the dispute with one Plan participant as described below. Based
on
F-52
<PAGE> 129
ongoing settlement discussions, the Company recorded additional costs of
$344,000 in the fourth quarter of 1996 with respect to this matter.
In September, 1994 Raymond Jacobson, a former officer and director of the
Company and one of the Plan participants, brought an action against the Company
in the California Superior Court, Santa Clara County, alleging that the Company
has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under
his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"),
by discontinuing payment in August 1994. The 1993 Agreement superseded a
previous deferred compensation agreement dated April 1, 1997 (the "1997
Agreement") which had provided for twice the level of payments. Mr. Jacobson was
claiming damages of approximately $1,200,000, which he purported to be the
present value of all payments to be made under the 1993 Agreement. In June 1995
the Company paid Mr. Jacobson all amounts past due under the contract plus
interest and reinstated the bi-weekly payments.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr.
Jacobson in the District Court for Galveston County, Texas alleging damages
arising from DDC's investment of more than $2,000,000 for the purchase of
1,072,000 shares of the Company's common stock. On February 11, 1997, Mr.
Jacobson, through his attorney, demanded that the Company indemnify him, hold
him harmless and pay for the cost of defense, including reasonable attorney's
fees and costs in connection with the litigation instituted against him by DDC.
The Company believes that it has a reasonable basis to deny Mr. Jacobson's claim
for indemnification in part or in whole.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the
Company that he believed that the litigation instituted against him by DDC
provided a basis for him to rescind the 1993 Agreement and assert his rights to
full payment under the 1977 Agreement. The Company's litigation counsel believes
that while Mr. Jacobson's allegations may be sufficient to withstand a summary
motion for dismissal of the claim, no conclusion can be drawn as to his
likelihood of success on the merits of the claim.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company believes that
an enforceable settlement was reached on January 22, 1997. Mr. Jacobson
apparently disclaims this agreement based on the actions noted above. On
February 28, 1997 the Company filed a motion for continuance to file a
counterclaim that the January 22, 1997 agreement supersedes all previous
agreements with Mr. Jacobson.
A court supervised settlement conference with Mr. Jacobson was held on March 26,
1997. Although a tentative settlement was reached, the settlement was subject to
fulfillment of a number of conditions subsequent. If one or more of these
conditions subsequent are not satisfied, the settlement will not be binding on
the parties. A trial in the matter has been scheduled for August 25, 1997. The
Company does not believe that the value of a settlement in the matter will be
materially in excess of amounts already recorded by the Company for the deferred
compensation arrangement.
F-53
<PAGE> 130
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 David
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 has answered Mr.
Scheinfeld's motion and is seeking to compel him to serve a complaint upon the
defendants.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of business. Although the ultimate outcome of these as
well as the matters noted above cannot be predicted with certainty, pending
actual resolution, in the opinion of management, the disposition of these
matters will not have a material adverse affect on the consolidated financial
statements.
11. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has outstanding options on its Common Stock issued under the
following arrangements:
o Employee Stock and Stock Option Plan, effective July 1, 1994, providing
for non-qualified stock options as well as restricted and non-restricted stock
awards to both employees and outside consultants. Up to 520,000 shares may be
granted or optioned under this plan. Terms of related grants under the plan are
at the discretion of the Board of Directors.
o Stock Option Plan adopted in 1993, providing for the granting of up to
300,000 incentive stock options to purchase stock at not less than the current
market value on the date of grant. Options granted under this plan vest ratably
over three years and expire 10 years after date of grant.
o A superseded Stock Option Plan adopted in 1986, under which no further
options may be granted.
In addition, during 1996 the Company granted certain non-qualified options and
restricted stock not pursuant to a formal plan (See Note 2).
The Company accounts for stock-based compensation under the "intrinsic value"
method. Under this method, no compensation expense is recorded for these plans
and arrangements for current employees whose grants provide for exercise prices
at or above the market price on the day of grant. Compensation or other expense
is recorded based on intrinsic value (excess of market price over exercise price
on date of grant) for employees, and fair value of the option awards for others.
F-54
<PAGE> 131
The following table shows activity in the outstanding options.
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended
December 31, Weighted December 31, December June 30,
1996 Average 1995 31, 1994 1994
-------- Exercise --------- --------- ----------
Shares Price Shares Shares Shares
--------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 401,510 $2.84 128,910 74,843 112,626
Granted 1,319,900 1.93 296,600 60,000 104,500
Exercised (507,896) 0.87 (3,300) -- (92,766)
Canceled (67,142) 2.59 (20,700) (5,933) (49,517)
--------- ------- ------- -------
Outstanding
at end of year
1,146,372 $2.68 401,510 128,910 74,843
========= ======= ======= ======
</TABLE>
Weighted average exercise prices for 1996 are calculated at prices effective as
of December 31, 1996, including the effect of repricing of certain options in
1996. The fair value of options granted during 1996 was $1,797,000, at a
weighted average value of $1.36 per share, including $767,000 attributable to
500,000 options granted at amounts less than market. The incremental fair value
of 170,000 options repriced or extended in 1996 over their fair values
immediately before modification was $102,000. Total amounts recorded for book
purposes for less-than-market awards and non-employee awards were $1,350,000 in
1996. Exercise prices for options outstanding as of December 31, 1996 generally
ranged from $2.38 to $3.44 per share.
The following table shows information for options outstanding or exercisable as
of December 31, 1996:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
----------- -----------
<S> <C> <C>
Number of Shares 1,146,372 1,088,072
Weighted Average Remaining Contractual Life 4.7 years 4.7 years
Weighted Average Exercise Price $2.68 $2.65
</TABLE>
If the Company had instead elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the estimated
fair value of all stock option grants over the service period, regardless of
later changes in stock prices and price volatility. The fair value at date of
grant for options granted in 1996 and 1995 has been estimated based on a
modified Black-Scholes pricing model with the following assumptions: no dividend
yield
F-55
<PAGE> 132
for any year; expected volatility for 1996 and 1995 grants of approximately 56%
and 61%, based on historical results; risk-free interest rates of 6.6% and 6.65%
for 1996 and 1995 grants; and average expected lives of approximately three
years for both 1996 and 1995. The following table shows net loss and loss per
share for 1995 and 1996 as if the Company had elected the fair value method of
accounting for stock options.
<TABLE>
<CAPTION>
(in thousands except per-share amounts)
1996 1995
---- ----
<S> <C> <C>
Net Loss, as Reported $ (4,597) $ (667)
Additional Incremental Compensation Expense (557) (336)
----- -----
Net Loss, as Adjusted $ (5,154) $ (1,003)
======= =======
Net Loss per Share, as Reported $ (1.65) $ (0.25)
Additional Incremental Compensation Expense (0.20) (0.13)
------ ------
Net Loss per Share, as Adjusted $ (1.85) $ (0.38)
====== ======
</TABLE>
Additional incremental compensation expense includes the excess of fair values
of options granted during the year over any compensation amounts recorded for
options whose exercise prices were less than the market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification
date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. The
above calculations include only the effects of 1995 and 1996 grants. Because
options often vest over several years and additional awards are made each year,
the results shown above may not be representative of the effects on net earnings
or losses in future years.
In addition, at December 31, 1996, the Company has outstanding 122,000 warrants
to purchase stock at $2.50 per share, expiring in varying amounts through 2003.
During 1996, 18,000 warrants were exercised at $2.50 per share.
The Company has an Employee Stock Purchase Plan allowing eligible employees to
purchase shares of the Company's common stock at 85% of market value. At
December 31, l995, 6,180 shares had been issued pursuant to the plan with 38,820
shares reserved for future issuance.
The Company has a 401(k) tax deferred saving plan whereby eligible employees may
elect to contribute a portion of their salaries. Company contributions are made
at the discretion of the Board of Directors. The Company's contributions to the
plan were $35,000, $41,000, $20,000, and $49,000 for 1996, 1995, the six months
ended December 3l, l994 and the fiscal year ended June 30, l994, respectively.
12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
For the three months ended December 31, 1996, the Company reported a net loss of
$(3,656,000) or $(1.32) per share. These results were impacted by the following
adjustments:
F-56
<PAGE> 133
<TABLE>
<S> <C>
Severance and related settlement costs $1,567,000
Write-down of assets 1,006,000
Estimated costs of litigation settlements 475,000
----------
$3,048,000
==========
</TABLE>
Severance and related settlement costs represent the aggregate value of $678,000
of the stock and stock options awarded to the Company's former Chairman, Daniel
Dror, upon his resignation in November 1996, costs of $807,000 related to the
settlement of the subscription receivable from Elk, and other costs totaling
$82,000 related to the immediate vesting of previous stock based deferred
compensation to Mr. Dror and the settlement of certain amounts due the Company
by Mr. Dror (see also Note 2).
The write-down of assets consists of reductions of $376,000 and $630,000 in the
carrying value of certain inventory and capitalized software development costs,
respectively, to their net realizable value. These write-downs charged to cost
of sales resulted from the Company's reassessment of the anticipated near-term
impact of current industry and economic factors on the Company's operations. CXR
Telcom's sales continue to be negatively impacted by delays in buying by its
principal customers, as a result of the consolidation and/or restructuring of
these companies in the wake of the passage of the Telecommunications Bill of
1996; and CXR SA's sales continue to be impacted by a decline in sales to France
Telecom during its pre-privatization reorganization and a generally weak French
economy. Additionally, sales for both operating subsidiaries have been
negatively impacted by the rapid obsolescence of the analog-based components of
their product lines, particularly older transmission products; and further, both
sales and margins have been impacted by extreme price competition for
transmission products in general.
Estimated costs of litigation settlements are comprised of the expected
incremental costs of $344,000 to settle the dispute regarding Mr. Jacobson's
deferred compensation agreement (see Note 10) and $131,000 for a contingent
payment related to a price guarantee in a stock based settlement of another
dispute reached in the fourth quarter of 1996. These estimated costs are
included in administrative expenses in the accompanying Consolidated Financial
Statements.
The aggregate effect of the above adjustments was to increase the net loss per
share for the fourth quarter of 1996 by $(1.10) per share.
13. OTHER SUBSEQUENT EVENTS
MERGER WITH XIT CORPORATION
On March 26, 1997, XIT Corporation ("XIT") of Ontario, California merged with a
wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving
subsidiary. Pursuant to the transaction, the former shareholders of XIT were
issued approximately 6,199,215 shares of common stock of the Company, or
approximately 65.8% of the issued and outstanding common stock. In addition,
holders of XIT stock options and warrants collectively have the right to acquire
an additional 2,153,240 shares of MicroTel Common Stock. Collectively, then the
former XIT shareholders own, or have the right to acquire,
F-57
<PAGE> 134
approximately 65% of the Common Stock of the Company on a fully-diluted basis as
of the date of the transaction
XIT, with vertically integrated operations in the U.S., England and Japan,
designs, manufactures and markets information display and input products and
printed circuit boards for the international telecommunications, medical,
industrial and military/aerospace markets.
The merger will be accounted for as a purchase of the Company by XIT in a
"reverse acquisition" because the existing shareholders of the Company prior to
the merger will not have voting control of the combined entity. In a reverse
acquisition, the accounting treatment differs from the legal form of the
transaction, as the continuing legal parent company, the Company, is not assumed
to be the acquiror and the financial statements of the combined entity are those
of the accounting acquiror (XIT), including any comparative prior year financial
statements presented by the combined entity after the business combination.
The following represents the unaudited pro forma results of operations as if the
merger had occurred at the beginning of the periods presented and combines the
Company's results of operations for the years ended December 31, 1996 and 1995
with those of XIT's for its years ended September 30, 1996 and 1995,
respectively, with adjustments to reflect amortization of the estimated excess
cost over the fair value of the net assets acquired.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
1996 1995
-------- --------
<S> <C> <C>
Net sales $ 47,551 $ 37,954
Net loss $ (3,617) $ (433)
======== ========
Net loss per common share $ (.40) $ (.05)
======== ========
</TABLE>
The proforma results of operations above does not purport to be indicative of
the results that would have occurred had the merger taken place at the beginning
of the periods presented or of results which may occur in the future.
PRIVATE PLACEMENT OF SECURITIES
On February 20, 1997, the Company accepted a commitment from Yorkton Securities
Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise
a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement
of investment units consisting of one share of restricted common stock and one
quarter of a warrant to purchase one share of restricted common stock. The
pricing of the units is based on a 20% discount from the ten day average closing
bid price of the Company's common stock preceding the date of contracting with
the institutional investors (the "Average Reported Price"), with a minimum price
per unit of $2.50 and maximum price of $3.50. The investors warrants have an
exercise price of 130% of the Average Reported Price. Additionally, Yorkton and
one other intermediary earn an aggregate commission of 10% of the gross proceeds
and warrants to acquire 10% of the shares purchased in the offering at an
exercise price of the lesser of the Average Reported Price or
F-58
<PAGE> 135
$3.50 per share, and Yorkton further is reimbursed for accountable expenses of
the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment units, for
gross proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The
offering, which is structured to accommodate multiple closings, would
terminate on the earlier of i) the date the maximum offering of $10,000,000 is
contracted or ii) April 18, 1997, unless extended by the mutual agreement of
the Company and Yorkton.
The Company anticipates that the net proceeds of the offering will be utilized
for working capital purposes, including product development and marketing, and
for the acquisition of companies and intellectual property rights which will
provide extensions of the Company's product lines.
F-59
<PAGE> 136
MICROTEL INTERNATIONAL, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions
Beginning Costs and Writeoffs of Balance End
of Period Expenses Accounts of Period
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 31, 1996 $ 425 ($175) ($64) 186
Year ended December 31, 1995 405 42 (22) 425
Six months ended December 31, 1994 548 (100) (43) 405
Year ended June 30, 1994 771 137 (360) 548
ALLOWANCE FOR INVENTORY OBSOLESCENCE
Year ended December 31, 1996 $1,424 $599 ($322) $1,701
Year ended December 31, 1995 1,598 288 (462) 1,424
Six months ended December 31, 1994 2,243 108 (753) 1,598
Year ended June 30, 1994 3,484 560 (1,801) 2,243
</TABLE>
F-60
<PAGE> 137
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying pro forma combined condensed financial statements assume
a business combination between MicroTel International, Inc. (MicroTel) and XIT
Corporation (XIT), which is accounted for as a purchase of MicroTel by XIT in a
"reverse acquisition". Treatment as a reverse acquisition is based on the fact
that the shareholders of MicroTel have less than a majority of voting control of
the combined entity. In a reverse acquisition, the accounting treatment differs
from the legal form of the transaction, as the continuing legal parent company
(MicroTel) is not assumed to be the acquiror and the financial statements of the
combined entity are those of the accounting acquiror (XIT), including any
comparative prior year financial statements presented by the combined entity
after the business combination.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
Year Ended September 30, 1996 combines XIT's results of operations for its
fiscal year ended September 30, 1996 with MicroTel's results of operations for
its fiscal years ended December 31, 1996. The Unaudited Pro Forma Combined
Condensed Statement of Operations for the three months ended March 31, 1997
combines XIT's results of operations for the three months ended March 31, 1997,
which includes 5 days of MicroTel's results after the merger on March 26, 1997,
and MicroTel's results of operations for the 2 month and 26 day period ended
March 26, 1997. The Unaudited Pro Forma Combined Condensed Statements of
Operations assume that the acquisition had occurred at the beginning of each of
the periods presented, respectively.
The Unaudited Combined Condensed Financial Statements are based on the
historical financial statements of MicroTel and XIT and notes thereto included
elsewhere herein and should be read in conjunction therewith. MicroTel's
historical financial statements are included as the Consolidated Financial
Statements of MicroTel International, Inc. (Pre-merger) for the years ended
December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the year
ended June 30, 1994. XIT's historical financial statements are included in the
Consolidated Financial Statements of MicroTel International, Inc. for the three
years ended September 30, 1996, 1995 and 1994 and the Consolidated Condensed
Statements of MicroTel International, Inc. for the three months ended March 31,
1997 and 1996.
The Unaudited Pro Forma Combined Condensed Financial Statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
acquisition had been in effect on the dates indicated, nor are they necessarily
indicative of future operating results or financial position of the combined
entity. The statements do not give effect to any cost savings or other
synergistic affects which may result from the combination of MicroTel and XIT.
F-61
<PAGE> 138
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
XIT MICROTEL ADJUSTMENTS COMBINED
------------ ------------ ----------- -----------
DR (CR)
<S> <C> <C> <C> <C>
Net sales $ 31,249 $ 16,303 $ 47,552
Cost of sales 23,057 10,819 33,876
------------ ------------ -----------
Gross profit 8,192 5,484 13,676
-----------
Operating expenses:
Selling, general and administrative 6,379 8,397 $ 327 15,103
Engineering, research and development 309 1,817 2,126
------------ ------------ ----------- -----------
Operating income 1,504 (4,730) $ (327) (3,553)
-----------
Other income (expense)
Interest expense (506) (319) (825)
Other 107 367 474
------------ ------------ ----------- -----------
Income before taxes 1,105 (4,682) (327) (3,904)
-----------
Income taxes 22 (85) (63)
------------ ------------ ----------- -----------
Income (loss) $ 1,083 $ (4,597) $ (327) $ (3,841)
============ ============ =========== ===========
Net income (loss) per common share $ 0.18 $ (0.42)
============ ===========
Weighted average number of common
shares outstanding 5,841 9,037
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
F-62
<PAGE> 139
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
XIT MICROTEL ADJUSTMENTS COMBINED
-------- -------- ----------- --------
DR (CR)
<S> <C> <C> <C> <C>
Net sales $ 7,707 $ 2,996 $ 10,703
Cost of sales 6,234 2,456 8,690
-------- -------- --------
Gross profit 1,473 540 2,013
--------
Operating expenses:
Selling, general and administrative 1,775 1,990 $ 77 3,842
Engineering, research and development 98 521 619
-------- -------- -------- --------
Operating income (400) (1,971) (77) (2,448)
--------
Other income (expense)
Interest expense (198) (47) (245)
Other (1) 10 9
-------- -------- -------- --------
Income before taxes (599) (2,008) (77) (2,684)
Income taxes 4 6 10
-------- -------- -------- --------
Income (loss) $ (603) $ (2,014) $ (77) $ (2,694)
======== ======== ======== ========
Net income (loss) per common share $ .10 $ (.29)
======== ========
Weighted average number of common
shares outstanding 6,244 9,263
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
F-63
<PAGE> 140
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(1) The pro forma financial statements are based on the reverse
acquisition of MicroTel by XIT In a purchase transaction and the pro forma
financial statements are therefore those of the accounting acquiror or
XIT. In accord with this accounting treatment, the purchase price is the
fair value of the shares of common stock of MicroTel outstanding
immediately prior to the effective date of the transaction plus
transaction costs.
The purchase price of MicroTel includes 3,186,027 shares of common
stock valued at $5,011,000 and estimated transaction costs of $636,000. A
portion of the broker's fees included in the transaction costs includes
10,000 shares of restricted common stock valued at $31,000 and warrants to
acquire 150,000 shares of common stock valued at $223,000. The number of
shares used is that outstanding on March 26, 1997, the date of
acquisition, and the value per share used of $1.5729 is based on the
average closing sale price of MicroTel common stock for the fifteen day
period preceding the announcement on January 7, 1997 of the execution of
the definitive merger agreement related to the acquisition.
The only adjustment in the purchase price allocation to the
historical values of the assets acquired and liabilities assumed was the
accrual of $430,000 for certain change-in-control payments to an executive
officer of MicroTel. Otherwise, the historical values are believed to
approximate estimated fair value. The excess of the purchase price over
the preliminary valuation of the net assets acquired of $4,904,000 is
recorded as goodwill. The preliminary purchase price allocation is subject
to change when additional information concerning asset and liability
valuations is obtained.
(2) The pro forma adjustments are to record amortization of the goodwill
originating from the acquisition as if the transaction had occurred at the
beginning of the periods presented. The goodwill is assumed amortized on a
straight line basis over fifteen years.
(3) Net income (loss) per common share computations are based on the
following:
a) Pro forma net income (loss) per common share is based on the
weighted average outstanding shares of XIT for the respective
period, plus the number of shares assumed to be issued to
MicroTel shareholders.
a) Common stock equivalents based on the assumed exercise of
options and warrants are not included in the computations of
net income(loss) per share as the effects would be
antidilutive.
a) The accretion of the excess of the redemption value over the
carrying value of redeemable preferred stock is deducted from
net income (loss) in arriving at income (loss) applicable to
common shareholders in the computations of income (loss) per
share.
F-64
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
registration of the Shares is as follows:
<TABLE>
<S> <C>
SEC Registration ........................ $ 7,580
-------------
NASD Fees ............................... $ 0
-------------
*Accounting Fees and Expenses ............ $
-------------
*Legal Fees and Expenses, Including
* Blue Sky Fees and Expenses ............ $
-------------
Printing Costs .......................... $
-------------
*Miscellaneous Expenses .................. $
-------------
TOTAL ............................. $
-------------
</TABLE>
*To be Filed by Amendment.
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
As the Company is a Delaware corporation, reference is made to the Delaware
General Corporation Law (the "DGCL"). Section 145 of the DGCL provides, in part,
that a Company may indemnify any person who was or is a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that such person is or was
a director, officer, employee or agent of the corporation against expenses
(including attorneys' fees), judgments, liens and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful. The DGCL further provides
that a corporation may indemnify such officer or director in an action by or in
the right of the corporation under the same conditions, except that in
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where such officer or
director is successful on the merits in the defense of any action referred to
above, the corporation must indemnify such officer or director against expenses
actually and reasonably incurred. Article IX of the Company's By-laws parallels
Section 145 of the DGCL and provides for indemnification of officers and
directors in similar circumstances.
-77-
<PAGE> 142
Section 102(b)(7) of the DGCL enables a corporation in its certificate of
incorporation to eliminate or limit the personal liability of a director for
monetary damages for violations of the director's fiduciary duty, except (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit. Article
Fifth of the Company's By-laws parallels this language and provides that to the
fullest extent permitted by the DGCL, no director shall be liable to the Company
or its stockholders for monetary damages for breach of fiduciary as a director.
(See "Disclosure of Commission position or Indemnification for Securities Act
Liabilities").
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
a) April 1997 Yorkton Placement
On April 14, 1997, the Company sold $5.0 million of investment units
consisting of one share of Common Stock and one-quarter of a warrant to purchase
one share of Common Stock. The number of investment units sold was 2,000,000 and
the Company realized net proceeds of $4,400,000 from the sale. Accordingly,
2,000,000 shares of Common Stock and 500,000 warrants to purchase Common Stock
were issued in connection with this sale. In connection with the Yorkton
Offering, warrants to purchase an additional 200,000 shares of the Company's
Common Stock were issued to certain placement agents. The shares, and the shares
underlying these warrants, are being registered hereby. No underwriter was used
in the sale of the investment units. The securities were sold to non-U.S.
investors who were primarily European institutional investors.
The investment units were sold pursuant to Rule 903 of Regulation S and
qualified for such exemption based upon the following: (i) the investment unit
purchasers were represented to the Company in the Subscription Agreements that
they were non-U.S. Persons; (ii) the Company is a Reporting Issuer (as defined
in Rule 902(l) of Regulation S); (iii) the Company has not made any Directed
Selling Efforts (as defined in Rule 902(b) of Regulation S); (iv) the Company
has implemented Offering restrictions (as defined in Rule 902(h) of Regulation
S); (v) the Company has not made any offer of sale to any U.S. person or the
account or benefit of any U.S. person; (vi) the offer and sale of the investment
units were made in Offshore Transactions (as defined in Rule 902(i) of
Regulation S).
b) The XIT Merger
On March 26, 1997, in a merger by and between a wholly-owned subsidiary of
the Company and XIT Corporation, the Company issued 6,119,130 shares of Common
Stock (previously defined herein as the Merger Shares) and agreed to assume all
of the outstanding XIT Warrants and XIT Options and convert them into options
and warrants to purchase the Company's Common Stock. The Company will be
required to issue an additional 2,032,478 shares of Common Stock if such
warrants and options are exercised. Of the total 8,151,608 shares and shares
underlying warrants and options, 7,723,424 shares are being registered hereby
consisting of: (i) the 6,119,130 Merger Shares; (ii) 1,197,879 shares underlying
XIT Warrants; and (iii) 406,415 shares underlying XIT options. The issuance of
the Merger Shares and assumption of
-78-
<PAGE> 143
the XIT options and warrants were in consideration for all of the outstanding
common stock of XIT Corporation. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act. No underwriter was
used in connection with the Merger.
c) Other Sales of Unregistered Securities
Since June 1994, the Company has issued certain other unregistered
securities in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act, relating to sales by an issuer not involving any
public offering. These transactions are summarized below. No Underwriter was
used for any of these sales. In addition, the issuance of securities in
connection with the Company's reverse stock split in August 1996, by which
shareholders received one share of common stock for every five shares held, was
exempt under the Securities Act because such issuance was not a "sale" as such
term is defined in Section 2(3) of the Securities Act. All numbers of shares of
Common Stock of the Company, and all exercise prices of Warrants and options to
purchase shares of Common Stock of the Company, have been adjusted to reflect
this reverse stock split.
i) Non-Qualified Stock Options
Since June 1994, the Company has granted 2,064,368 Non-qualified stock
options to various officers, directors and consultants in consideration for
past and/or future services rendered to the Company. The Company has also
repriced or extended 100,000 of such options. In addition, the Company has
assumed 834,599 Common Stock Options in connection with the Merger, and
shares underlying 406,415 of such options are being registered hereby.
ii) Common Stock Issuances
Since June 1994, the Company has issued 1,116,164 shares of restricted
Common Stock, 668,725 shares of which were issued in connection with an
investment in the Company by Elk in December 1994, and 447,439 shares of
which were issued principally to certain officers, directors and consultants
in consideration for services rendered to the Company.
iii) Warrants.
Since June 1994, the Company has granted 150,000 warrants to purchase
shares of the Company's common stock as a finders' fee in connection with
the Merger, and in addition extended certain warrants to purchase 90,000
shares of Common Stock twice. In addition, the Company has assumed an
additional 1,197,879 warrants in connection with the Merger all of which are
being registered hereby.
-79-
<PAGE> 144
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
Exhibit Description
Number -----------
-------
2. Merger Agreement dated December 31, 1996 between XIT
Corporation, XIT Acquisition, Inc. and MicroTel
International, Inc.(1)
3.1 Certificate of Incorporation of MicroTel
International, Inc. as amended to date.(2)
3.2 Bylaws of MicroTel International, Inc.(3)
3.3 Certificate of Amendment of Certificate of
Incorporation of MicroTel International, Inc.(7)
10.1 Lease for 2040 Fortune Dr., San Jose, CA 95131.(4)
10.2 1986 Incentive Stock Option Plan.(3)
10.3 Form of Officers Deferred Compensation Agreement by
and between Raymond E. Jacobson and CXR
Corporation.(5)
10.4 Agreement from San Jose National Bank for CXR Telcom
Corporation dated May 19, 1995.(2)
10.5 Qualified Employee Stock Purchase Plan.(3)
10.6 1993 Incentive Stock Option Plan.(6)
10.7 Stock Purchase Agreement with DDC.(4)
10.8 First Amendment to Stock Purchase Agreement with
DDC.(4)
10.9 Second Amendment to Stock Purchase Agreement with
DDC.(4)
10.10 Warrant to Purchase Common Stock of MicroTel
International, Inc. Issued to DDC.(4)
10.11 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Yorkton Securities,
Inc.(7)
10.12 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to entrenet Group,
L.L.C.(7)
-80-
<PAGE> 145
Exhibit
Number Description
------ -----------
10.13 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to various
subscribers.(7)
10.14 Agreement between MicroTel International, Inc. and
Elk International Corporation, Ltd. dated November
15, 1996 (without Exhibits).(8)
10.15 Settlement Agreement between MicroTel International,
Inc. and Daniel Dror dated December 3, 1996 (without
Exhibits).(8)
10.16 Agency Agreement between MicroTel International,
Inc. and Yorkton Securities, Inc.(7)
10.17 Form of Subscription Agreement between MicroTel
International, Inc. and various subscribers.(7)
10.18 Employment Arrangement between Henry Mourad and
Registrant (without Exhibits).(7)
10.19 Employment Arrangement between Barry Reifler and
Registrant (without Exhibits).(7)
10.20 Employment Agreement between Registrant and Jacques
Moisset dated July 1, 1995.(8)
10.21 Employment Agreement dated January 1, 1996 between
XIT and Carmine T. Oliva.(8)
10.22 XIT Corporation Note and Credit Agreement re:
Imperial Bank Revolver Loan #0070000702700003.(8)
10.23 XIT Corporation Note and Credit Agreement re:
Imperial Bank Term Loan #0070000702700004.(8)
10.24 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Revolver Loan
#0070000702600003.(8)
10.25 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Term Loan #0070000702600004.(8)
10.26 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Term Loan #0070000702600005.(8)
-81-
<PAGE> 146
Exhibit
Number Description
------ -----------
10.27 Lease Agreement between XIT Corporation and P&S
Development.(8)
10.28 Lease Agreement between XIT Corporation and Don
Mosco.(8)
10.29 General Partnership Agreement between XIT
Corporation and P&S Development.(8)
10.30 Lease Agreement between XCEL Arnold Circuits, Inc.
and Frances I. Peters.(8)
10.31 Lease Agreement between XCEL Arnold Circuits, Inc.
and Don Wilson and Zenna N. Wilson.(8)
10.32 Lease Agreement between XCEL Arnold Circuits, Inc.
and Ellis Wesson.(8)
10.33 Lease Agreement between XCEL Arnold Circuits, Inc.
and Roland E. Hay and Doris L. Hay.(8)
10.34 Lease Agreement between XCEL Arnold Circuits, Inc.
and RKR Associates.(8)
10.35 Option Agreement between MicroTel International,
Inc. and Elk International Corporation dated
November 15, 1996.(8)
10.36 Amendment to Option Agreement between MicroTel
International, Inc. and Daniel Dror dated November
15, 1996.(8)
10.37 Option Agreement between MicroTel International,
Inc. and Elk International Corporation dated
December 3, 1996.(8)
10.38 Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Elk International
Corporation.(8)
10.39 Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry
dated June 28, 1996.(8)
10.40 Amended Agreement of Settlement and Mutual Release
between MicroTel International, Inc. and Francis
John Gorry dated November 30, 1996.(8)
-82-
<PAGE> 147
10.41 Promissory Note between MicroTel International, Inc.
and Jack Talan dated February, 1997.(8)
21.1 List of Subsidiaries of MicroTel International,
Inc.(7)
23.1 Consent of BDO SEIDMAN, LLP. #
23.2 Consent of KPMG Peat Marwick LLP #
23.3 Consent of Deloitte & Touche, LLP.*
27. Financial Data Schedule. #
99.1 Undertakings to be Incorporated by Reference to
Forms S-8 33-27454 and 33-77926.(4)
99.2 Undertakings to be Incorporated by Reference to Form
S-8 333-12567.
---------------
# Filed herewith.
* To be filed by amendment.
(1) Incorporated by reference to MicroTel International, Inc.
report on Form 8-K filed as Exhibit 1 to Item 2 of the
Report on January 21, 1997 (File No. 1-10346).
(2) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December
31, 1995 (File No. 1-10346).
(3) Incorporated by reference to CXR Corporation Registration
Statement on Form S-4 No. 33-30818.
(4) Incorporated by reference to CXR Corporation annual
report on Form 10-K for the year ended June 30, 1994
(File No. 1-10346).
(5) Incorporated by reference to CXR Telecom Corporation
annual report on Form 10-K for the year ended June 30,
1993 (File No. 1-10346).
(6) Incorporated by reference to CXR Corporation Registration
Statement on Form S-8 No. 33-77926.
(7) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December
31, 1996 (File No. 1-10346).
(8) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K/A for the year ended December
31, 1996 (File No. 1-10346).
-83-
<PAGE> 148
ITEM 17 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above in Item 14, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
-84-
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Ontario, California, on this _____ day of ,
1997.
MicroTel International Inc.
By: /s/ Carmine T. Oliva
-------------------------------------
Carmine T. Oliva
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by or on behalf of the following
persons in the capacities and on the dates indicated.
Each person, in so signing, also makes, constitutes and appoints Carmine
T. Oliva, Chairman and Chief Executive Officer, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, and to do and perform each and every act and
thing necessary to effectuate the same.
Signature Capacity Date
--------- -------- ----
/s/ Carmine T. Oliva President
- ----------------------------- and Chief Executive
Carmine T. Oliva Officer and Director
(Principal Executive Officer)
/s/ David A. Barrett Director
- -----------------------------
David A. Barrett
/s/ Laurence P. Finnegan, Jr. Director
- -----------------------------
Laurence P. Finnegan, Jr.
/s/ Robert B. Runyon Director
- -----------------------------
Robert B. Runyon
/s/ Jack R. Talan Director
- -----------------------------
Jack R. Talan
/s/ Barry E. Reifler Chief Financial Officer
- ----------------------------- (Principal Accounting and
Barry E. Reifler Financial Officer)
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
MicroTel International, Inc.
Ontario, California
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated April 14, 1997, relating to the
financial statements of MicroTel International, Inc., which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
San Francisco, California
June 23, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Microtel International, Inc.:
The audits referred to in our report dated December 13, 1996, except
for note 13, which is as of June 18, 1997, included the related financial
statement schedule as of September 30, 1996, and for each of the years in the
three-year period ended September 30, 1996, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Orange County, California
June 18, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> XXX-XX-XXXX
<PERIOD-END> SEP-30-1996
<CASH> 786,149
<SECURITIES> 0
<RECEIVABLES> 4,614,893
<ALLOWANCES> 46,586
<INVENTORY> 6,504,736
<CURRENT-ASSETS> 12,414,172
<PP&E> 7,972,331
<DEPRECIATION> 2,912,411
<TOTAL-ASSETS> 19,813,466
<CURRENT-LIABILITIES> 10,251,260
<BONDS> 2,677,617
776,099
0
<COMMON> 9,018,077
<OTHER-SE> (3,172,426)
<TOTAL-LIABILITY-AND-EQUITY> 19,613,466
<SALES> 31,248,596
<TOTAL-REVENUES> 31,248,596
<CGS> 23,056,559
<TOTAL-COSTS> 23,056,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,247
<INTEREST-EXPENSE> 506,591
<INCOME-PRETAX> 1,105,049
<INCOME-TAX> 22,137
<INCOME-CONTINUING> 1,082,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,082,912
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
