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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period __________
Commission file Number 1-10346
MICROTEL INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0226211
4290 E. Brickell Street, Ontario, California 91761 (909) 391-4321
(Address of principal executive offices) (Registrant's telephone
number, including area
code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.0033 par value None
Securities registered pursuant to Section 12 (g) of the Act:
None
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10- K or any
amendment to this Form 10-K. [ ].
The aggregate market value of the voting stock at March 31, 1997 held by
nonaffiliates was approximately $13,042,190.
As of March 31, 1997 there were 9,305,127 shares of Common Stock, Par Value
$.0033, outstanding.
When used in this Form 10-K, the words "may," "will," "expect," "anticipate,"
"continue," "estimate,""project," "intend" and similar expressions are intended
to identify forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, operating costs and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially than those included
within the forward-looking statements as a result of various factors.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement in respect of the 1997 Annual Meeting of
Shareholders of the Company is incorporated by reference into Part III of this
Form 10-K.
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Item 1. Business
INTRODUCTION
CXR Telcom Corporation ("CXR Telcom") was incorporated in l984
under the laws of the State of Delaware. In 1989, the stockholders adopted a
plan creating CXR Corporation as a holding company for the stock of CXR Telcom
Corporation and CXR S.A., its European subsidiary. CXR Corporation is also
incorporated under the laws of the State of Delaware. At the annual meeting of
shareholders on February 28, 1995, the majority of shareholders voted to change
CXR Corporation's name to MicroTel International, Inc. ("MicroTel" or the
"Company"). On March 26, 1997, MicroTel consummated a merger transaction (the
"Merger") pursuant to which XIT Corporation ("XIT"), a New Jersey corporation,
became a wholly owned subsidiary of MicroTel. In connection with the Merger, the
principal executive offices of MicroTel have been relocated to 4290 E. Brickell
Street, Ontario, California 91761. A description of the business of CXR Telcom
and CXR S.A. is set forth immediately below and is followed by a description of
the business of XIT.
CXR TELCOM AND CXR S.A.
CXR Telcom and CXR S.A. (collectively, "CXR") design, manufacture
and market electronic telecommunications test equipment and data communications
equipment, and perform network integration services. Their customers include
AT&T, the Regional Bell Operating Companies ("RBOCS"), interconnect carriers,
independent telephone operating companies, private communications networks,
banks, brokerage firms and Government agencies. See Note 4 to the Consolidated
Financial Statements for financial information regarding foreign versus
domestic operations for CXR.
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PRODUCTS
Test Instruments
TELECOM TEST INSTRUMENTS. The CXR telecommunications test
instruments are part of the Information Superhighway and offer various options
for the measurement of the transmission characteristics of telephone circuits.
Most of these instruments are offered in portable versions; some have rack
mounting options for permanent installation. Some are offered with either
Bell-compatible (U.S.) or CCITT (European) measurement standards.
The Model 100 Series Responders allow the RBOCS, interexchange
carriers, such as AT&T, MCI, U.S. Sprint, etc., or end users to remotely and
automatically monitor, and actively test the quality of their 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.
As a result of the AT&T divestiture of its operating companies and
the trend towards user ownership of equipment, local telephone operating
companies have been forced to develop their internal capacity to identify and
isolate troubles in the network transmission facilities in both telephone
company owned or subscriber owned equipment.
The basic components of these network 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
the 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 LEA 8000 Transmission Test Set is a product designed for
qualifying, commissioning and maintaining digital baseband leased lines, mono
and stereo radio channels and basic and primary rate voice and digital (ISDN)
subscriber loops. It is capable of making at very high transmission speeds all
of the necessary measurements according to the international CCITT
recommendations.
CXR is now completing development of a comprehensive new family of
test sets incorporating powerful and cost-effective Digital Signal Processing
(DSP) measurement technology. These designs are incorporated into a new series
of general purpose instruments being sold as the model 5200 Universal
Transmission Analyzer. This product combines into one instrument the
capabilities of a Data Transmission Impairment Analyzer, a DS1 BERT Tester,
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a VF Signaling Network Access Unit, a T-1 Channel access Test Unit and a DDS
private line and switched digital service test product.
CXR has developed an exceptional understanding of the telephone
market and computer systems applications, including not only the market demand
for testing and termination devices, but also, the competitive element factors
as well. As a result, CXR is positioning itself to provide a family of products
which satisfy the requirements of reasonable cost, high degree of reliability,
ease of operation and a clear migration path for future enhancement upgrades.
CXR's product line, based on its model 5200, consists of a highly
modular device, encompassing a full gamut of testing functions, which works
considerably better than competitive equipment costing much more. Sales are
confined to small specialized areas within the maintenance organization of the
telephone companies. The product is multi-processor based using the highly
successful Intel X86 family, supported by a dual 32 bit Digital Signal
Processor. The product operates through a customized, internally developed
real-time operating system.
The 5200 product line covers the specialized installation and
maintenance of all circuits involving voice, signalling transmission, data
64Kb/s data, 1.5Mb/s data as well as the new emerging ISDN qualification
testing. The 5200 is the first product of its kind to offer all these testing
capabilities within one package. Its success is based on its simple operational
format with a large easy-to-read LCD screen. The product is also powered by
internal batteries, in order to accommodate special hard-to-reach environments.
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. These 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 include the CXR Telcom 840A and 841A Network Signalling
Analyzers. The 840A 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 Integrated Services for the Digital
Network (ISDN). Additional software features include the capabilities to test
and monitor 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. It establishes which path the long distance
call will take in routing the call. The 841A is ideal for central office use as
well.
Test instruments represented 35% of CXR sales for the year ended
December 31, 1996, 28% of CXR sales for the year ended December 31, 1995, 31% of
CXR sales for the six months ended December 31, 1994, and 41% of CXR sales for
the year ended June 30, 1994.
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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 or as
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- or
4-wire leased lines. The series features trellis coded modulation and local and
remote echo cancellation, with 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 allows 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 simplicity
of keeping track with real time monitoring and reporting of all activities 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.
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CXR is also introducing a new product line, the AJ 6900 series for
T1 and fractional T1 CSU-DSU application. These newly introduced products will
provide for the direct interface between the customer's equipment and the T1
facilities. The AJ 6900 series will operate 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 share the same T1
facility. The AJ 6900 series have an integrated Simple Network Management
Protocol (SNMP) and therefore can easily be managed by any network management
system using SNMP.
Transmission products represented 44% of CXR sales for the year
ended December 31, 1996, 62% of CXR sales for the year ended December 31, 1995,
61% of CXR sales for the six months ended December 31, 1994, and 38% of CXR
sales for the year ended June 30, 1994.
At the end of fiscal 1994 CXR sold its network management (NAMS),
local area network testing (LAN) and protocol analyzer product line (Digilog
Division) to Numerex Corporation. (See Note 3 to the 1996 Consolidated Financial
Statements included elsewhere herein).
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 turnkey 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 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.
Networking system revenues for its first year were $2,807,000 or
17% of CXR sales for year-ended December 31, 1996.
PRODUCT DEVELOPMENT AND ENGINEERING
CXR's product development and engineering is critical in view of
rapid technological innovation in the telecommunications industry. Currently 25
engineers and technicians are engaged in CXR's research and development efforts.
During the year ended December 31, 1996 and the year ended December
31, 1995, engineering and product development costs were $2,612,000 and
$2,373,000, respectively, of which $795,000 and $699,000, respectively, were
capitalized. Amortization is calculated using the greater of the straight line
method over three years or the ratio of the product's current revenues divided
by its total anticipated revenues. For the six months ended December 31, 1994
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and fiscal year ended June 30, 1994 CXR's engineering and product development
costs were $659,000 and $2,960,000, 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 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.
CUSTOMERS AND MARKETING
Customers for CXR's products include AT&T, the RBOCS, international
telephone companies and private communications networks. Data communications
test equipment and modem equipment are purchased by telecommunications equipment
manufacturers and used in the design, manufacture, installation and maintenance
of the electronic equipment they provide. Network test equipment is purchased by
the major long distance carriers.
CXR sells its products through its own direct sales and marketing
force and independent representative firms and distributors in the United
States. It direct sells in the European Community through CXR S.A. Other
international sales are made through independent representatives in various
parts of the world.
During the year ended December 31, 1996 and the year ended December
31, l995 no one customer accounted for 10% or more of net revenue. Net revenues
for the six months ended December 31, 1994 included sales of 10% to one
customer. Net revenues for the year ended June 30, 1994 included sales of 11%
to one customer.
COMPETITION
CXR has numerous competitors in all of its product areas. In each
product area there are competitors with greater technological, financial and
marketing resources than those possessed by CXR. The ability of CXR to compete
is dependent on several factors including price, technology, product
performance, service and its ability to attract and retain qualified management
and technical personnel. CXR's business is subject to rapid technological
changes and the introduction of new products incorporating technological
advances is vital to CXR's success.
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BACKLOG
CXR's business is not seasonal and its production capacity is
sufficient to meet current customer demand. Backlog of firm, unshipped orders
was approximately $1,268,000 at December 31, 1996, as compared to $682,000 at
December 31, l995, $1,858,000 at December 31, 1994 and $1,598,000 at June 30,
1994. Backlog is not deemed a significant measure of CXR's business, as
it has transitioned itself to become a Just-In-Time (JIT) provider, in order
to be more responsive to its customer base. Market pressures and quick delivery
requirements in the transmission product business area have necessitated the
implementation of a forecasting system coupled with a material requirement
planning process to accomplish this transition. The above change produced
quicker deliveries, which resulted in better customer satisfaction and a
smaller backlog as well.
MANUFACTURING
CXR purchases the electronic components required for the
manufacture of its products from a number of vendors and has experienced no
significant difficulties in obtaining timely delivery of components. At present,
CXR Telcom's main manufacturing facility is located in San Jose, California and
CXR S.A.'s main facility is located in Abondant, France. CXR has a vertically
integrated strategy. Since manufacturing labor costs are less than 10% of total
production costs, and there is ample facility space, there is very little to be
saved by using outside contractors. Considering the overall scale volume of
manufacturing for all the different products, the pursuit of offshore
manufacturing is not at all practical. Because the production process involves a
fairly straightforward electronic assembly, CXR achieves an incremental cost
advantage through the use of limited automation.
However, CXR spends considerable time on manufacturability in
product design and therefore harvests the benefits associated with the lower
costs and flexibility during the manufacturing process. An additional benefit of
in-house manufacturing is the ability to support normal production with all the
current design improvements as well as keeping track of the overall quality. CXR
is certified by both AT&T and Bellcore organizations as a quality vendor and
supplier of products and has obtained its full certification as an ISO 9001
member.
EMPLOYEES
As of December 31, 1996, CXR employed 121 persons, of which 69 are
employed in the United States and 52 in France, as follows:
<TABLE>
<CAPTION>
United States France
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<S> <C> <C>
Manufacturing 27 12
Marketing & Customer Service 19 18
Research & Development 13 12
Administration 10 10
</TABLE>
None of CXR's employees are represented by labor unions, and CXR
has had no work stoppages. Management believes that its employee relations are
good.
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PATENTS AND TRADEMARKS
CXR owns several patents and possesses certain trademarks and
proprietary information, such as know-how and trade secrets it considers
important to its business and which it intends to protect through all
appropriate means, including legal action. CXR's business, however, is subject
to rapid technology changes and it believes that its success is dependent upon
skills in engineering, manufacturing and marketing rather than its patent
position. CXR has, nonetheless, followed a policy of filing applications for
patents on inventions which it considers significant.
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, electronic components and therefore discharges into the
environment are believed to be negligible.
XIT CORPORATION
XIT is an international diversified electronics designer and
manufacturer of custom interconnect products (assembled printed circuit boards,
including chassis enclosures and front panels), digital switches, keypad and
keyboard input products, cathode ray tube and flat panel display products, bare
printed circuit boards, hybrid microelectronic circuits and electronic
subsystems incorporating custom input and display products. Its sales and
services are principally directed towards OEMs in the electronics industry,
including manufacturers of communications equipment, industrial and business
computers, automatic teller machines ("ATMs"), medical devices, industrial
instruments and test equipment and aerospace and military products.
XIT's various product lines are divided into two sectors. XIT's
Components and Subsystem Assemblies Sector includes data input and display
components and outsourced input and display subsystems (Subsystem Engineering
and Manufacturing or SEM). The Circuits Sector includes electronic OEM circuits
(printed circuit boards, hybrid micro-electronic circuits). XIT manufacturers
and markets its products through its headquarters office in Ontario, California
and its subsidiaries and divisions - XCEL Arnold Circuits, Inc. (printed circuit
boards), XCEL Circuits Division (printed circuit boards), XCEL Etch Tek (printed
circuit boards), Digitran Division (keypads, keyboards, digital switches and
electronic subsystems), and HyComp, Inc. (thin film hybrid circuits and resistor
networks). In addition, XIT has three wholly-owned foreign subsidiaries which
assemble and market its products: XCEL Corporation Ltd., located in the United
Kingdom (components and subsystem assemblies), XCEL Abbott Ltd., located in the
United Kingdom (power supplies), and XCEL Japan Ltd., located in Japan
(reselling XIT and third party sourced components and providing purchasing
services to XIT).
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XIT was incorporated in the State of New Jersey in 1972 and, after
a period of time operating an unrelated business under a different name, changed
its name to XCEL Computron Corporation in 1983 (and later to XCEL Corporation in
1986). In November of 1996, the Company changed its name from XCEL Corporation
to XIT Corporation and qualified to do business under the tradename "XCEL
Information Technologies Corporation" to better reflect the current nature of
the Company's business operations.
In August of 1981, XIT began developing video display products.
Shipments of these products began in June 1983. In 1985, XIT expanded
significantly through the acquisition of its Digitran Division from Becton
Dickinson & Co. ("BD").
In 1991, XIT began a fundamental transition of its business
operations by divesting $1.5 million in unprofitable bare printed circuit board
volume for outside customers 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 boards. Commencing in that year, XIT has invested heavily in
research and development in order to diversify its product line and reduce its
dependence on military sales.
Commencing in 1994, XIT began actively seeking acquisition
candidates with complementary product lines. In July 1994, XIT acquired 84% of
HyComp, Inc. ("HyComp") through an exchange of its shares of Common Stock.
HyComp, formed in 1969, designs and manufacture hybrid circuits, resistor
networks, and thin film components. These products have a variety of uses in
military, aerospace, medical, computer, industrial control and communications
electronics. HyComp's products are for high-reliability applications where they
must withstand extremes of temperature, humidity, or environment. In December
1995 and January 1996, XIT acquired an additional 5% of HyComp Common Stock
through an exchange of XIT Common Stock for HyComp common shares and XIT Common
Stock for 100% of the HyComp Preferred Stock.
In May 1995, XIT established a printed circuit board contract
assembly operation, XCMD, in Philadelphia, Pennsylvania. This operation was part
of Janbridge, Inc., that filed for bankruptcy in April 1995. XIT purchased
certain work-in-process from Janbridge's bankruptcy trustee and retained a
certain number of Janbridge's former employees. This operation is now being run
at the Ontario, California facility as part of the SEM activity.
In July 1995, XCEL sold its Computron Display Systems Division
("Computron"), based in Forest Park, Illinois, a manufacturer of higher cost
custom color and monochrome displays, for $1.8 million. Computron was sold
because XIT management perceived that the demand for its product lines would be
declining, and because XIT's growth in this product area was 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, rather than the existing Computron products.
In September 1995, though a newly established wholly-owned
subsidiary XCEL Arnold Circuits, Inc. ("XCEL Arnold"), XIT completed the
acquisition of the assets of Arnold
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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., 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. XCEL
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"), XCEL's
wholly owned British subsidiary, acquired Abbott Electronics, Ltd. ("Abbott")
from a large international British corporation, Adwest Ltd. XCEL UK operates
Abbott as a wholly-owned subsidiary of XCEL UK. Abbott specializes in the design
and manufacture of high and low voltage, high specification, compact and
micro-electronic power supplies to meet rugged environmental and high tolerance
electrical requirements. Abbott's power supplies are AC or DC, and are packaged
to meet the most demanding custom space and electrical requirements. The power
supplies use the latest hybrid circuit technology which can be sourced
internally from HyComp, rather than purchased from outside manufacturers. Also,
the non-hybrid circuits which are built on printed circuit boards are sourced
internally from XIT's Circuit Group's various circuit board manufacturing units.
XIT's business plan is to integrate its input, display and
printed circuit board components into subsystem assemblies for a select number
of OEMs in a diverse range of industries, including communications, industrial,
medical, aerospace and the military. In recent years, through the process of
outsourcing (utilizing contract assemblers for manufacturing), OEMs have been
able to reduce their investment in the facilities, equipment, personnel and
technological and manufacturing know-how necessary to assemble systems.
Outsourcing allows them to focus their efforts and resources on other areas such
as product research and development and marketing. Through the Digitran
Division, XCEL U.K. and XCEL Etch Tek, XIT offers complete manufacturing
solutions, including concurrent engineering, assembly of printed circuit boards
incorporating its input and display components, assembly of subsystems, test
engineering, software development and accessory packaging. XIT 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 subsystem assemblies that can enable it to capture a
significant portion of this burgeoning market.
XIT's business strategy is to: (i) continue to capitalize on
the benefits of operating as a vertically integrated electronics company; (ii)
increase sales to existing customers; (iii) add new customers, products and
services through technology implementation; (iv) leverage its customer base to
generate increased subsystem assembly business; and (v) expand the sales of both
component and subsystem assemblies by acquiring companies or establishing
operations in new markets.
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PRODUCT LINES
XIT, through its various divisions and subsidiaries, designs
and manufactures printed circuit boards, hybrid circuits, resistor networks and
thin film components, data input and display devices and incorporates these
devices into fully integrated front panels, control panels, and other electronic
subsystems. A description of these products and subsystems follows:
- Printed Circuit Boards. Circuit boards, also called printed
circuit boards or printed wiring 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. Further circuit board
sophistication is currently being achieved by decreasing the width
and separation of the traces, drilling smaller holes to connect the
internal trace layers and precisely situating the traces and pads
on the board surface to accommodate surface mount components.
XCEL Arnold, XCEL Etch Tek and XCEL Circuits
manufacture a full range of custom double-sided and multi-layer
printed boards. XIT is MIL 55110 E, 94V-O, UL796 and ISO 9001
qualified. Boards can be produced as large panels, with deep gold
plating, in small and large lot sizes and in a multitude of forms.
XCEL Arnold specializes in high density, multi-layer printed
circuit boards of up to 12 layers, produced using a variety of
materials. The majority of the XCEL Arnold's multi-layer rigid
circuit boards are manufactured on a standard base laminate
material having broad functionality. XCEL Etch Tek produces
commercial and military multi-layer boards up to 24 layers. XIT
Circuits Division also produces high performance circuit boards
constructed from specialty materials.
High performance circuit boards are used in electronic
products requiring high speed and high frequency interconnect
solutions, such as cellular phone base stations and other
communications, computing and instrumentation products. High
performance circuits are manufactured using specialty materials
with properties that address the need for faster speed, higher
operating temperatures and higher frequencies. XCEL Arnold, XCEL
Etch Tek and the XIT Circuits division have developed the expertise
and specialized engineering processes required to manufacture high
performance circuit boards using a broad range of materials,
including Duroid(R), Cyanate Ester, GETEK(R) and Poly-Imed. XIT
believes that it is one of the few merchant suppliers capable of
producing high performance circuits using a combination of high
performance base materials at acceptable quality and yield levels.
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<PAGE> 13
- Digital Switches. XIT's Digitran Division
manufactures and sells a full line of military, industrial, and
commercial switches. These products are thumb wheel, push button
and lever modules or assemblies. The switches come in a variety of
dial positions, assembly spacers, message units, markings and
characters. Furthermore, the switches offer replaceable lighting,
wire wrap terminals, RFI shielding and printed circuit board
mounting.
- Displays. XCEL UK's color and monochrome CRT and
XCEL-Lite monitors, manufactured by the Digitran Division, come in
a variety of screen sizes, from five to twenty-one inches. 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 market segments for
these displays are medical, test instruments and rugged continuous
use ATMs.
- Keypads & Keyboards. Beginning with the input of
information, XIT offers a wide variety of custom keypads and
keyboards. Its keypads, produced by the Digitran Division, are
available in standard arrays of six (two rows of three), twelve
(four rows of three), sixteen (four rows of four), or twenty (five
rows of four or four rows of five) keys. In addition, these keypads
can be especially designed in an almost unlimited variety of highly
custom formats. XIT's keyboards produced by the Digitran Division
are available with up to 123 keys and two LCD display options with
touch screen user interfaces. The keyboards offer fully
programmable LCD displays and menus with PC AT, RS-232, RS-422 or
RS-423 system interfaces, along with two level adjustable audible
feedback. XIT's patented capacitance keyboard switch design
provides 100 million life cycles.
- Subsystem Engineering and Manufacturing ("SEM"). By
integrating the above described printed circuit boards and input
and display components, XIT's Digitran Division and XCEL are able
to engineer and manufacture a wide variety of communications
equipment, medical testing equipment, industrial machine
controllers, and military weapons subsystems. Various medical
equipment and gasoline service point of sales terminals and machine
tools use Digitran's proprietary PF-Shield, a thin, tough PolyFilm
which provides environmental protection from dust, most fuels,
solvents and petroleum based products, yet does not detract from
its cosmetic appearance or function performance. Furthermore, the
shield is highly resistant to puncture, remarkably flexible,
stabilized, 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.
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<PAGE> 14
- Microelectronic Circuits. HyComp's hybrid circuits
combine components, such as resistors, capacitors, and integrated
circuit chips, into one functional unit in a single sealed package.
Hybrid circuits have advantages in size, weight, performance
ruggedness, and reliability over separate individual components.
HyComp's resistor networks are interconnected groups of resistors
with extremely accurately matched resistance values, connected in a
single sealed package and used in high-precision analog circuits.
HyComp's thin-film components include chip resistors,
patterned substrates, and metalized wafers. They are sold to OEM
manufacturers and other hybrid manufacturers who need the accuracy
and small size of thin-film components, but do not have HyComp's
experience or expertise in this technology. The predominant market
segments for these circuits are communications, medical, aerospace
and military.
- Power Supplies. Abbott specializes in the design and
manufacture of high and low voltage, high specification, compact
and micro-electronic power supplies to meet rugged environmental
and high tolerance electrical requirements.
MANUFACTURING AND OPERATIONS
XIT is a vertically integrated diversified international
electronics manufacturer specializing in the following sectors: (1) bare printed
circuit boards and high performance hybrid custom micro-electronic circuits; and
(2) discrete data input and display components and custom integrated data input
and display subsystems. An overview of the operations and manufacturing
capability of its two market sectors follows:
Circuits Sector
XIT's printed circuit board operations (XCEL Circuits Group), are
conducted by XCEL Arnold, XCEL Etch Tek, XCEL Circuits and HyComp. XCEL Arnold
carries out its operations in a 45,000 square foot facility in La Habra, CA,
XCEL Etch Tek is located in a 20,000 square foot facility in Concord, CA and XIT
Circuits carries out its operations at a 10,000 square foot facility in
Monrovia, CA. XCEL Arnold specializes in high density, multi-layer printed
circuit boards of up to 12 layers, produced using a variety of materials. The
majority of the XCEL Arnold's multi-layer rigid circuit boards are manufactured
on a standard base laminate material. It also produces high performance circuit
boards constructed from speciality materials.
XCEL Arnold embraces Total Quality Management ("TQM") to meet the
highest industry standards for product quality. XCEL Arnold gained ISO 9002
certification in 1995, when it was among the first independent circuit board
operations in the United States to be certified to this level of international
quality standards.
XCEL Arnold has developed proprietary techniques and manufacturing
expertise, particularly in the area of complex multi-layer, surface mount
circuit boards. XCEL
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<PAGE> 15
Arnold has not patented these proprietary techniques and instead relies on trade
secret protection. XCEL Arnold believes that although such techniques and
expertise are subject to misappropriation or obsolescence, development of
improved methods and processes and new techniques by XCEL Arnold will continue
on an ongoing basis as dictated by the technological needs of the business.
XCEL Etch Tek has been established as a division of XCEL
Arnold, and trades as XCEL Etch Tek. XCEL Etch Tek is a manufacturer of
sophisticated high multi-layer and quick turn and prototype printed circuit
boards, and is located in a modern, well-equipped 20,000 square foot facility in
Concord, California.
HyComp manufactures products for high-reliability applications
where they must withstand extremes of temperature, humidity, or environment.
HyComp's hybrid circuits combine components, such as resistors, capacitors and
integrated circuit chips, into one functional unit in a single sealed package.
HyComp's engineering activities include design and process
engineering, simulation, layout, CAD/CAE, and test software and hardware
development. Production takes place in class 10,000 and class 100,000 clean
rooms, with critical areas maintained at class 1,000. Production operations
include photo lithography, deposition, laser trim, wafer sawing, substrate
mount, wire bonding, assembly, trim, test, and environmental screening. HyComp's
thick film hybrids are manufactured by HyComp's strategic partner SIMESA in its
automated cassette to cassette production facility located in Vitoria, Spain.
This facility is ISO 9001 certified, as well as meeting many other European
quality standards. HyComp's US facility is certified and qualified to
MIL-STD-1772, and manufactures to MIL-H-38534 and MIL-STD-883. Quality programs
incorporate TQM and Statistical Process Control ("SPC").
Components Subsystem Assemblies Sector
XIT's components operations are conducted by the Digitran
Division, XCEL UK, Abbott and XCEL Japan, and subsystems engineering and
manufacturing for outsourced Input and Display Subsystem assemblies (SEM) and
other build-to-print assemblies are produced by the Digitran Division, XCEL UK
and Abbott.
XIT's Digitran Division manufactures and sells digital switch
products serving principally the aerospace market, but also for communications,
industrial and commercial applications. Thumbwheel, push button, lever modules,
together with assemblies are manufactured in 16 different model families.
XIT integrates its switch, data input and display devices with
an extensive vertically integrated manufacturing capability. Its state of the
art manufacturing and testing expertise provide quality and reliability.
For the XCEL-Lite display monitor product, XIT designed,
equipped and procedurized a color monitor production line. XIT increased
production volume by 30% and improved product quality and reliability. UL, CUL
and TUV certifications were awarded to the product. Overhead support functions
were integrated into an XCEL-Lite production line.
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<PAGE> 16
Customer returns were reduced by increasing quality and incorporated production
efficiencies by initiating Just-in-Time ("JIT") SPC and build-to-box assembly
methods.
In its SEM manufacturing, XIT uses a variety of advanced
technologies and processes and offers complete manufacturing solutions,
including concurrent engineering assembly of complex printed circuit boards and
other electronic assemblies, test engineering, software design, accessory
packaging and post manufacturing services. As electronic products evolve to meet
customer demands for increased functionality and performance in smaller, more
complex packages, XIT's manufacturing technologies and processes are evolving
from surface mount technology to include tape automated binding, full grid
arrays, chip on board chip in flux and emerging technologies such as flip chip
and multi-chip modules.
Abbott brings in-house all high voltage and low voltage power
supply requirements for XIT's telecommunications, aerospace, military, medical
and industrial displays and other information-based products. Approximately 75%
of Abbott's total sales are for aerospace and military customers. The remaining
25% is almost exclusively for communications information systems applications.
Thus, Abbott's product applications fit neatly with XIT's goal to expand its
information technology business.
Abbott currently sells its products and services throughout
Europe and to a lesser extent in the U.S. XIT intends to expand Abbott's U.S.
presence through support for Abbott by XIT's U.S. based sales and marketing
staff.
Summary
As part of XIT's commitment to continuous improvement, XIT has
instituted a corporate-wide quality assessment program in all departments
throughout its manufacturing operations. To date, XIT has received ISO 9000
certification for XCEL Arnold and is in the final phase of certification for
XCEL UK. Preparatory work is underway to certify the Digitran Division for
switch and other input devices along with the XIT-Lite display product line. XIT
believes that its proactive corporate-wide mandate to continually analyze and
improve all processes will enhance XIT's ability to build quality into all of
its component products and subsystem assemblies.
XIT integrates the diversity of its manufacturing facilities
to produce high quality products at a price OEMs can afford. XIT has
administrative, design and development and manufacturing facilities on both the
East and West Coasts. For worldwide support, XIT can offer services from its
European and Japanese sales and manufacturing facilities. XIT's design team acts
as an extension of its customer's development teams to shorten their design and
manufacturing time, reduce their vendor coordination and minimize their capital
equipment requirements. From concept through design, from prototypes to full
production, XIT's goal is to offer the complete solution: an integrated, fully
tested, reliable product built from the bare printed circuit board on up.
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<PAGE> 17
MARKETING AND SALES
XIT's marketing and sales program is designed to ensure
continuous working relationships with its customers early in the design phase of
the customer's product development. XIT uses a technical sales approach in which
each salesperson has back-up from an engineer to provide technical support to
the customer. This approach also creates a basis for upgrading equipment,
developing processes and maintaining a position of technological leadership.
Circuits Sector
In its circuits sector, XIT's customers include a diversified
base of leading OEMs in the communications, industrial instrumentation and
computer market segments of electronics. These customers often employ leading
edge technologies and their product requirements generally drive the advancement
of electronic interconnect manufacturing technology. Currently, XCEL Arnold's
largest customer is the Cellular Infrastructure Group of Motorola, accounting
for approximately 55% of XCEL Arnold's sales (and 41% of XIT's overall sales)
for the fiscal year ended September 30, 1996, XIT's first full year of
ownership. The Cellular Infrastructure Group manufacturers the equipment that
goes into a cellular base station including towers, mobile telephone switching
offices, cell site equipment and microwave equipment.
XIT recognizes that its Circuit Group must decrease its
dependence on Motorola and rapidly expand XCEL Arnold's customer base. XIT
intends to accomplish this through the acquisition of other printed circuit
board companies and by directing its sales and marketing efforts to other OEMs.
In addition, XIT's direct sales force from its other operations are now selling
XCEL Arnold's bare printed boards. By this activity, XIT expects to reduce the
Motorola concentration.
Components and Subsystem Assemblies Sector
XIT's components sector is accelerating its discrete digital
switch sales growth by providing value-added integrated SEM assembly of the
entire switch panel assembly and by providing other components attached behind
the switch. In the keyboard and keypad product areas, the Digitran Division has
developed specialized ruggedized and sealed high margin keyboards capitalizing
on Digitran's existing patented keyboard innovations.
XIT's growing line of color XCEL-Lite CRT and flat panel
display products include color displays for the banking and industrial equipment
markets. This product line has been evolving in conjunction with this industry
trend. U.S. and foreign financial institutions such as banks have been steadily
replacing old ATM machines with newer, more advanced models as banks strive to
replace costly tellers and back-office personnel. In addition, ATMs are evolving
beyond their original role as mere cash dispensers and deposit takers and in the
future will do such things as issue theater tickets and travelers checks and
dispense medications.
Capitalizing on its existing people and product strengths, XIT
has created an SEM capability that serves the data input and display integration
requirements specified by its customers. XIT's expertise in the design
engineering and manufacturing of stand-alone discrete
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<PAGE> 18
data input and displays is the foundation for a new market for integrated fully
assembled data input and display subsystem assemblies. It is a market where XIT
believes it has proven the need and believes there are few commercial domestic
competitors positioned to participate. Those who do participate tend to be
high-cost speciality military-oriented competitors. To serve the market, XIT
integrates for its customers discrete components for which its divisions already
have individual name recognition and proven specialty products.
XIT's products and subsystems are marketed through a sales
engineering staff that provides technical support, product training and pricing
services by various direct salespersons, sales representatives and distributors.
The digital switch and other input devices are sold through a direct sales
engineering staff and four distributors. CRT and flat panel displays and SEM are
sold through direct sales engineers. Printed circuit boards are sold through
XIT's direct sales force and several independent sales representatives, while
HyComp products use twelve representative firms. In Europe, sales are generated
by ten sales representatives and a direct sales engineering staff. In Japan, XIT
uses a direct sales engineering staff as well as five distributors.
Along with its various marketing and sales programs, XIT has
recently established a World Wide Web site (address: http://www.XITcorp.com),
promoting Digitran digital input devices, XCEL-Lite displays, and SEM
subsystems. Additionally, HyComp has established a Web site in support of its
hybrid microelectronic circuits and eventually will have a site for its new
technology, epoxy flip-chip multichip modules and assemblies. XCL and XCEL Japan
are also on the Internet.
RESEARCH AND DEVELOPMENT
The research and development efforts of XIT are focused on
internal and customer designs and requirements. XCEL Arnold, XCEL Etch Tek, the
Digitran Division, HyComp and XCEL UK offer value-added engineering design
services that range from concurrent engineering to total product assembly.
To meet customer demands for reduced cycle time in the
development process, XIT has continued to invest in electronic design automation
and synthesis tools. This equipment allows XIT's engineers to work at a more
conceptual level. As a result, XIT's project teams can quickly try out
alternative design approaches once and thereafter synthesize the design into the
selected technology automatically. The automation provided by these tools
significantly shortens the development cycle while improving cost and quality.
These tools allow XIT to pursue designs which could not be attempted with less
sophisticated tools and methods.
In 1993 and 1994, XIT invested approximately $1.5 million in
research and development to accelerate the introduction of new non-military
products. With this investment, XIT has been able to capture new industrial
business to more than offset the drop in military volume experienced since 1992.
In 1992, HyComp began investigating 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
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<PAGE> 19
flip chip process promises all the benefits of flip chip, but with substantially
lower capital investment and manufacturing costs.
In 1995, HyComp received a $750,000 contract from the Advanced
Research Projects Agency of the Department of Defense ("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 space 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.
XIT's and HyComp's management believe 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. HyComp's management expects that over the next
five years, flip chip will be the microelectronic packaging of choice for high
performance circuits. A prototype production process and initial samples are
expected by June, 1997 with production orders to follow in three months from
that time.
PATENTS AND TRADEMARKS
XIT regards its software and hardware as proprietary and
relies primarily 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. XIT 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 counties do not protect XIT's proprietary
rights to the same extent as do the laws of the United States. XIT requires that
its employees enter into confidentiality agreements.
COMPETITION
The electronic product and systems market is intensely
competitive and characterized by rapid technological changes and frequent
introductions of new systems and products. A whole myriad of companies currently
offer systems and products that compete directly or indirectly with one or more
of XIT's products or subsystems. XIT's ability to be competitive depends on such
factors as price, quality of service, technological support and service, product
development capability, marketing, distribution channels and the quality and
expertise of its personnel.
The market for printed circuit boards in the United States is
fragmented and very competitive. There are over 700 companies producing circuit
boards in the United States. XIT competes primarily against other merchant
manufacturers. There are no dominant manufacturers in the segment of the
industry served by XIT and 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 primary
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competitor of XCEL Arnold is Hadco Corporation of Salem, New Hampshire, a
leading supplier of electronic interconnect products and services. XIT also
faces competition from certain captive circuit board manufacturers such as IBM.
These manufacturers may seek orders in the open market to fill excess capacity,
thereby increasing price competition. A number of XIT's competitors are larger
than XIT and have greater financial, marketing and other resources.
The market for printed circuit boards as well as HyComp's
microcircuits is characterized by competitive factors such as product quality,
technological capability, responsiveness to customers in delivery and service,
and price. XIT believes that competition in the market segments served by XIT is
based on product quality, delivery and price. XIT competes on the basis of the
customer's total cost of acquisition, which includes tangibles such as unit cost
and quality and intangibles, such as flexibility, capacity forecasting,
responsiveness and dedication to customer satisfaction.
XIT's SEM manufacturing competes in a highly fragmented market
composed of a diverse group of U.S.-based manufacturers. XIT believes that the
primary bases of competition in its markets are capability, price, manufacturing
quality, advanced manufacturing technology, and reliable delivery. XIT's
principal competitor is IEE Electronics, Inc. Many of the largest contract
manufacturers such as Solectron and SCI operate high-volume facilities and focus
on target markets, such as the computer industry, that XIT does not serve. XIT
believes that by focusing on low to medium-volume production, and by
manufacturing subsystems using its inhouse manufactured components, XIT 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, XIT
believes it is able to diversify its workload and is not as dependent as some of
its competitors on individual contracts, customers or industries.
EMPLOYEES
As of December 31, 1996, XIT employed approximately 390 persons,
broken down between corporate and its subsidiaries and divisions as follows:
XIT Corporate 52
XCEL Arnold Subsidiary 110
XIT Circuits Division 15
Digitran Division 110
HyComp Subsidiary 32
XCEL UK 16
XCEL Abbott 46
XCEL Japan 9
---
TOTAL 390
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XIT has no collective bargaining agreements covering any of
its employees, has never experienced any material labor disruption and is
unaware of any current efforts or plans to organize its employees. XIT considers
relations with its employees to be excellent.
GOVERNMENT REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE
XIT's business is not regulated in the jurisdictions in which
it does business except for general business regulation and taxation applicable
to businesses.
XIT's business is 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.
Item 2. Properties
PROPERTIES
CXR Telcom's executive offices and CXR Telcom's manufacturing
facilities are located in a leased building containing approximately 40,000
square feet of floor space in San Jose, California. This lease expires July 1997
and it is anticipated that it will be renewed.
CXR S.A. leases an aggregate of approximately 12,000 square feet in
France. This lease expires May 1998.
All leased facilities are leased from unaffiliated third parties.
CXR owns a 13,000 square foot facility in Abondant, France which is
used for manufacturing and engineering of all of its European products.
XIT operates in the following facilities which are all leased,
other than the Melbourne facility which is owned by XCL, and the Ontario
facility which is owned by Capital Source Partners, a California partnership in
which XIT holds a 50% interest:
<TABLE>
<S> <C> <C>
Headquarters Office 10,000 sq. ft. Ontario, CA
Digitran Division 53,000 sq. ft. Ontario, CA
Office/Factory
XCEL Circuit 10,000 sq. ft. Monrovia, CA
Division
Office/Factory
XCEL Corp. Ltd. 10,000 sq. ft. Melbourne, Royal
Office/Factory Herts, UK
</TABLE>
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<TABLE>
<S> <C> <C>
Headquarters Office 10,000 sq. ft. Ontario, CA
XCEL Abbott Ltd. 25,000 sq. ft. Ashford, Kent
Office/Factory UK
XCEL Japan, Ltd. 6,000 sq. ft. Higashi-Gotanda,
Office/Assembly Tokyo
XCEL Arnold, Inc. 45,000 sq. ft. La Habra, CA
Office/Factory
HyComp, Inc. 20,000 sq. ft. Marlborough, MA
Office/Factory _______________
Total 179,000 sq. ft.
===============
</TABLE>
The Company believes its facilities provide adequate capacity for
its manufacturing, engineering and related marketing and administrative
activity at present and for the anticipated future.
Item 3. Legal Proceedings
In September, 1994 Raymond Jacobson, a former director of MicroTel,
brought an action against MicroTel in the California Superior Court, Santa Clara
County, alleging that MicroTel has breached its contract to pay Mr. Jacobson
$3,495 bi-weekly for life under a 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 MicroTel 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 Raymond 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, Raymond 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, 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
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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 any settlement in the
matter will 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 MicroTel, 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 can not
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 and its subsidiaries are 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
effect on the consolidated financial statements.
Item 4. Submission of Matters to Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) 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.
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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>
Year Ended Year Ended
December 31, 1996 December 31, 1995
Quarter High Low High Low
- ------- --------------------------- ------------------------
<S> <C> <C> <C> <C>
1st $9.375 $5.3125 $4.375 $3.125
2nd 8.750 4.6875 6.25 3.75
3rd 5.625 3.125 7.50 5.3125
4th 3.25 1.0625 6.5625 4.0625
</TABLE>
(b) Shareholders:
As of March 31, 1997, the Company had approximately 3700 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.
(d) Recent Sales of Unregistered Securities:
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. No underwriter was
used. 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 Regulations 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).
The Company did not sell any unregistered securities during the fiscal year
ended December 31, 1996.
24
<PAGE> 25
Item 6. Selected Financial Data
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In Thousands Except Per Share Amounts and Employees)
<TABLE>
<CAPTION>
Six Months
Year Ended Dec. 31 Dec 31 Fiscal Year Ended June 30
1996 1995 l994 1994 l993
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 16,303 $ 18,352 $ 9,931 $ 21,648 $ 25,123
Net Income (Loss) $ (4,597) $ (667) $ 298 $ (639) $ (6,909)
Net Income (Loss)
Per Share $ (1.65) $ (.25) $ .15 $ (.39) $ (4.47)
Total Assets $ 9,319 $ 11,325 $ 11,806 $ 11,322 $ 11,539
Long-term
Obligations $ 543 $ 1,075 $ 2,022 $ 1,327 $ 1,872
Stockholders'
Equity $ 2,776 $ 4,956 $ 4,978 $ 4,614 $ 4,341
Shares
Outstanding at
Year End 2,940 2,751 2,608 1,939 1,546
Employees at
Year End 121 131 l40 l48 170
</TABLE>
No cash dividends were declared during any of the periods presented. On August
15, 1996, the shareholders of the Company ratified a one-for-five reverse split
effective for holders of record on August 29, 1996. Share and per share data
above and in the Management Discussion and Analysis of Condition and Results of
Operations following have been restated to give effect to the reverse split.
25
<PAGE> 26
Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of Operations
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, approximately 65% of
the Common Stock of the Company on a fully-diluted basis as of the date of the
transaction.
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.
Therefore, the Consolidated Financial Statements herein and the following
discussion thereof will not appear in future Annual Reports of the Company.
Rather, the separate financial statements of XIT for periods prior to the merger
will be included in future financial reports of the Company.
Presented in Note 13 to the Consolidated Financial Statements are unaudited
proforma results of operations as if the companies combined at the beginning of
each of the last two years. This information is for illustrative purposes only
and does not purport to be indicative of the results that would have occurred
had the merger taken place at those dates or of results which may occur in the
future. A summary of XIT's separate results of operations used in the pro forma
data and summary balance sheet data for XIT as of its fiscal year ended
September 30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $31,248 $19,602
Net income 1,142 396
Total assets 20,524
Long term obligations 3,723
Stockholders' equity 6,550
</TABLE>
26
<PAGE> 27
RESULTS OF OPERATIONS
FISCAL YEAR CHANGES
Effective December 31, 1994, the Company changed its 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 1996 annual report comprise the two years ended December 31, 1996 and 1995,
the six months ended December 31, l994 and the year ended June 30, l994.
Management believes that a comparison of the consolidated statements of
operations for the twelve month period ended December 31, 1995 and the six month
period ended December l994 is not meaningful because of the length of the
reporting periods. Accordingly condensed consolidated statements of operations
for the three years ended December 31, 1996, l995 and l994 are presented below
for comparative purposes (in thousands except per share data).
The condensed statement of operations for the twelve months ended December 31,
l994 presented below 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.
Consolidated statements of operations data:
<TABLE>
<CAPTION>
Twelve Months Ended December 3l,
1996 1995 l994
(unaudited)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 16,303 $ 18,352 $ l9,938
-------- -------- --------
Cost of Sales 10,819 11,322 11,932
Engineering and Product
Development 1,817 1,674 2,157
Marketing and Selling 3,715 3,928 3,695
Administration 3,115 2,211 2,328
Severance & Related Settlement Costs 1,567
Other (Income) Expense - Net (48) 35 29
-------- -------- --------
20,985 19,170 20,141
-------- -------- --------
Loss before
Income Tax
Benefit (4,682) (818) (203)
Income Tax Benefit (85) (151) --
-------- -------- --------
Net Loss $ (4,597) $ (667) $ (203)
========= ======== ========
Net Loss per Share $ (1.65) $ (.25) $ (.11)
======== ======== ========
Weighted Average Number of
Shares Outstanding 2,783 2,678 1,910
======== ======== ========
</TABLE>
27
<PAGE> 28
Overview
The company incurred a net loss of $4,597,000 in 1996 versus a net loss of
$667,000 in 1995 and a net loss of $203,000 in 1994. Net sales declined by 11%
in 1996 from those in 1995, and 1995 sales were 8% lower than those in 1994. The
loss in 1996 included significant fourth quarter charges totaling $3,048,000 as
described below.
Significant Fourth Quarter 1996 Adjustments
In the fourth quarter of 1996, the Company incurred severance and related
settlement costs totaling $1,567,000 related to the resignation of its Chairman
and settlement with its principal shareholder in anticipation of the merger with
XIT (see Note 2 to the Consolidated Financial Statements).
The Company also reduced the carrying value of certain inventory and capitalized
software development costs by $376,000 and $630,000, respectively, to their net
realizable value. These write-downs charged to cost of sales resulted from the
Company's reassessment of the anticipated continuing near-term impact of
industry and economic factors which affected the Company's 1996 operations. CXR
Telcom's sales have been 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 have been 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. Although the Company believes based on its
current assessment that the write-downs are adequate, no assurance can be given
should actual business conditions deteriorate.
Additionally, the Company recorded estimated litigation settlement costs
totaling $475,000, comprised of expected incremental costs of $344,000 to settle
a dispute regarding a former officer's deferred compensation agreement 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.
Sales
Consolidated sales for the three years ended December 31, 1996, l995 and 1994
were comprised of the following for the Company's U.S. operating subsidiary, CXR
Telcom, and its French operating subsidiary, CXR S.A.(in thousands):
<TABLE>
<CAPTION>
1996 l995 1994
------- ------- -------
<S> <C> <C> <C>
CXR Telcom $ 6,825 $ 8,255 $ 8,045
CXR S.A 9,478 10,097 10,565
Operation Sold 6/30/94 -- -- 1,328
------- ------- -------
$16,303 $18,352 $19,938
======= ======= =======
</TABLE>
28
<PAGE> 29
Sales of $l9,938,000 during the twelve months ended December 31, l994 include
$1,328,000 in sales of NAMS and LAN products. These product lines were sold to
Numerex (see Note 3 to the Consolidated Financial Statements) at the end of
fiscal l994.
Consolidated sales for 1996 declined by $2,049,000 or 11% from those in 1995,
comprised of declines for CXR Telcom and CXR S.A. of $1,430,000 or 17% and
$619,000 or 6%, respectively. These overall declines were caused by the factors
discussed above under Significant Fourth Quarter 1996 Adjustments. Lower
transmission product sales accounted for all of CXR Telcom's decline, while a
decline in transmission product sales of $2,658,000 for CXR S.A. was
substantially mitigated by increased revenues from its new network systems
business unit.
Although consolidated sales in l995 were approximately the same as l994, given
the effect of the sale of product lines discussed above, revenues were affected
by several factors. Firstly, although CXR Telcom sales were up modestly by 3%,
the U.S. Government shutdown caused the delay of processing of several major
orders of communications test equipment from several Government agencies.
Secondly, sales for CXR S.A. were down by 4% due to a slowdown in business
activity which occurred in France as a result of the national strikes and the
work stoppages against the French government's services which took place in the
latter part of l995. Thirdly, a general decline in demand for analog hand-held
test equipment and increased competition in the modem market in Europe further
pressured CXR S.A. revenues.
Gross Profit
Consolidated gross profit and its percentage of sales for the three years ended
December 31, 1996, 1995 and 1994 was $5,484,000 or 34%, $7,030,000 or 38%, and
$8,006,000 or 40%, respectively. Gross profit for 1996 was impacted by the
write-downs described above under Significant Fourth Quarter 1996 Adjustments.
Excluding the effects of the write-downs totaling $1,006,000, the gross profit
percentage for 1996 would have been 40%. The improvement of this adjusted margin
percentage over that of 1995 was due to improved margins on upgraded test
instrument product offerings by CXR Telcom more than compensating for the
decline in margins on transmission product sales and the relatively lower
margins achieved on CXR S.A.'s new network systems sales than those historically
achieved from transmission product sales that they have replaced. The decline in
gross profit percentage in 1995 from that of 1994 was due to lower margins
achieved on aging versions of test instruments sold during the year prior to new
test instrument product introductions in the fourth quarter of 1995.
Expenses
Engineering and product development costs for the three years ended December 31,
1996, 1995 and 1994 presented are as follows (in thousands):
<TABLE>
<CAPTION>
Period Total Cost Capitalized Software Net Expense
- ------ ---------- -------------------- -----------
<S> <C> <C> <C>
1996 $2,612 $795 $1,817
1995 2,373 699 1,674
1994 2,647 490 2,157
</TABLE>
29
<PAGE> 30
Engineering and product development costs relate to both the development and
maintenance of the Company's product lines. Current development efforts are
directed primarily toward enhancements to the current test instrument product
line and development of increased bandwidth (faster speed) transmission
products. The level of engineering and product development expenditures has
remained relatively constant over the three year period ended December 31, 1996,
with the capitalization of software development costs varying by year depending
on the mix of product development versus product maintenance efforts.
Marketing and selling costs in relation to sales increased to 23% in 1996 from
21% in 1995 and from 19% in 1994. The increase in 1996 over 1995 is due
principally to the decline in sales levels, with approximately the same level of
fixed departmental expenses. The increase in 1995 over 1994 is due to planned
marketing initiatives by CXR S.A.
Administrative expenses increased by $904,000 in 1996 over 1995. In addition to
the estimated litigation settlement costs of $475,000 discussed above under
Significant Fourth Quarter 1996 Adjustments, 1996 costs reflect increased legal
fees related to litigations and general corporate matters, increased business
development efforts, and increased personnel costs. Administrative expenses were
comparable between 1995 and 1994.
Other Income and Expense
Other (income) expense is comprised of the following for the three years ended
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Interest income $(371) $(117)
Interest expense 319 164 $ 239
Other 4 (12) (210)
----- ----- -----
$ (48) $ 35 $ 29
===== ===== =====
</TABLE>
Interest income in 1996 and 1995 was comprised principally of interest and/or
extension fees of $350,000 and $107,000, respectively, on the promissory note
taken in payment of the stock subscription from Elk International Corporation
Ltd. (see Note 2 to the Consolidated Financial Statements). Interest expense is
comprised principally of interest related to deferred compensation liabilities
and the Company's short-term borrowings. Fluctuations between the periods is
related primarily to the level of borrowings during the respective periods.
Other income was $210,000 in 1994 versus nominal amounts in 1996 and 1995 due
principally to foreign currency exchange gains and a gain on termination of a
facility lease in that year.
Income Taxes
The income tax benefits for 1996 and 1995 are due to recovery of prior year
taxes in France resulting from research tax credits.
The Company has gross deferred tax assets of $9,841,000, $8,017,000 and
$7,890,000 at December 31, 1996, 1995 and 1994 respectively. The most
substantial portion of the gross deferred tax assets represent the future
benefits of net operating loss carryforwards which expire
30
<PAGE> 31
as detailed in Note 7 to the Consolidated Financial Statements. 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.
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. Further, the
gross deferred tax assets will decline significantly in 1997 as a result of
restrictions on the use of the Company's net operating loss carryforwards
arising from the ownership change for tax purposes accompanying the merger with
XIT.
Effects of Inflation
The impact of inflation and changing prices on Company's financial condition and
results of operations has not been significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for 1996 was $201,000 compared to cash provided by
operations of $145,000 for 1995, $820,000 cash used in operations for the six
months ended December 31, l994, and cash provided by operations of $166,000 for
the year ended June 30, l994. Fluctuations between periods relate principally to
changes in working capital elements arising from business levels immediately
preceding the respective period ends. The Company had $519,000, $540,000,
$216,000, and $669,000 in depreciation and amortization expense which did not
require cash outlay for the years ended December 31, l996 and 1995, for the six
months ended December 31, l994, and for the year ended June 30, l994,
respectively. In addition, in 1996 the Company incurred non-cash charges
totaling $2,760,000 including $2,573,000 related to stock based costs of
severance and related settlements and certain asset write-downs as discussed
above, as well as certain other stock-based payments of expenses.
During the six months ended December 31, l994, the Company received $1,025,000
in cash from Numerex Corp. to satisfy the purchase price for the Digilog assets.
The proceeds were applied to reduce accounts payable and purchase a certificate
of deposit, which was subsequently used for cash needs in 1995.
MicroTel's cash uses during 1996 have been financed through short-term bank
borrowings, the proceeds from the exercise of warrants and options on the
Company's common stock, and the collection of approximately $380,000 of the
stock subscription by Elk International Corporation Limited. At December 31,
1996, the Company had no significant commitments for future capital
expenditures.
Since December 31, 1996, the Company has supplemented cash flows from
operations, which continue to be depressed for CXR Telecom in the U.S., with a
$500,000 loan from an officer. 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
31
<PAGE> 32
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 primarily to European
institutional investors pursuant to the exemption afforded by Regulation S
under the Securities Act of 1933, as amended. 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.
Management believes that cash flows from operations and proceeds from the
offering will be adequate to support its working capital and business
development needs in 1997.
There are two significant legal proceedings pending against the Company (see
"Legal Proceedings" and Note 10 to the Consolidated Financial Statements).
Management believes that the outcome of these pending litigations will not have
a material adverse effect on the Company.
Outlook
In the U.S. the negative impact of the reorganizations of CXR Telcom's customers
in response to the signing of the Telecommunications Bill of 1996 continues, but
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 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. CXR Telcom has been working with its customers
to prepare for their future needs in the expansion of their markets.
To overcome the negative factors impacting the Company's French operation, CXR
S.A. has implemented various 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 OEM products, and has refocused its marketing to expand its markets
outside of France. Revenue improvements have begun to be realized as a result of
these efforts.
With respect to XIT's business, beginning in the fourth quarter of its fiscal
year ended September 30, 1996, its gross margins began to decline significantly
as a result of lower gross margins in its XCEL Arnold Circuits, Inc. subsidiary
when Motorola, its largest customer, increased its demand for newer, digital
products to replace the higher gross margin analog products previously purchased
by Motorola. The Company does not anticipate the gross margins for the Circuits
Sector of XIT to improve until the latter part of the second quarter of calendar
1997, when it expects yield improvements, reductions in overtime and
outsourcing, improved cost control, and higher pricing for digital products sold
to Motorola will begin to show an effect.
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
32
<PAGE> 33
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. Addition 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 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 previously, 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.
33
<PAGE> 34
Item 8. Financial Statements and Supplementary Data
This information appears in a separate section of this Report
following Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Items 10-13.
The information required by items 10-13 will either be set forth in
the definitive proxy statement in respect of the 1997 Annual Meeting of
Stockholders of the Company to be filed within 120 days of December 31, 1996,
pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the 1997
Proxy Statement), which is incorporated herein by reference, or the required
information will be included as an amendment to this form 10-K Annual Report
on or before April 30, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (2) Reference is made to the "Index to Consolidated Financial
Statements and Financial Statement Schedules" appearing in a
separate section of this Report following this Part IV.
(a)(3) Exhibits. See attached Exhibit Index.
(b) None.
(c) The exhibits required by this portion of Item 14 are submitted
as a separate section of this report.
(d) None.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: 4/15/97 MicroTel International, Inc.
(Registrant)
By: /s/ Carmine T. Oliva
----------------------------------------
Carmine T. Oliva
Chief Executive Officer
35
<PAGE> 36
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ Carmine T. Oliva Chairman of the Board 4/15/97
- --------------------------- of Directors
Carmine T. Oliva
/s/ David A. Barrett Director 4/15/97
- ---------------------------
David A. Barrett
/s/ Robert B. Runyon Director 4/15/97
- ---------------------------
Robert A. Runyon
/s/ Barry E. Reifler Chief Financial Officer
- --------------------------- (Principal Accounting and
Barry E. Reifler Financial Officer) 4/15/97
/s/ Laurence P. Finnegan, Jr. Director 4/15/97
- ---------------------------
Laurence P. Finnegan, Jr.
</TABLE>
36
<PAGE> 37
Index to Exhibits
<TABLE>
<S> <C>
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.#
10.1 Lease for 2040 Fortune Dr., San Jose, CA 95131.(4)
10.2 1986 Incentive Stock Option Plan.(5)
10.3 Form of Officers Deferred Compensation Agreement by
and between Raymond E. Jacobson and CXR
Corporation.(6)
10.4 Agreement from San Jose National Bank for CXR Telcom
Corporation dated May 19, 1995.(7)
10.5 Qualified Employee Stock Purchase Plan.(8)
10.6 1993 Incentive Stock Option Plan.(9)
10.7 Stock Purchase Agreement with DDC.(10)
10.8 First Amendment to Stock Purchase Agreement with
DDC.(11)
10.9 Second Amendment to Stock Purchase Agreement with
DDC.(12)
10.10 Warrant to Purchase Common Stock of MicroTel
International, Inc. Issued to DDC.(13)
10.11 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Yorkton Securities, Inc.#
10.12 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to entrenet Group, L.L.C.#
10.13 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to various subscribers.#
</TABLE>
37
<PAGE> 38
<TABLE>
<S> <C>
10.14 Agreement between MicroTel International, Inc. and Elk
International Corporation, Ltd. dated November 15, 1996
(without Exhibits).*
10.15 Settlement Agreement between MicroTel International, Inc.
and Daniel Dror dated December 3, 1996 (without
Exhibits).*
10.16 Agency Agreement between MicroTel International, Inc.
and Yorkton Securities, Inc.#
10.17 Form of Subscription Agreement between MicroTel
International, Inc. and various subscribers.#
10.18 Employment Arrangement between Henry Mourad and
Registrant. (without Exhibits)#
10.19 Employment Arrangement between Barry Reifler and
Registrant. (without Exhibits)#
10.20 Employment Agreement between Registrant and Jacques
Moisset dated July 1, 1995.*
10.21 Employment Agreement dated January 1, 1996 between
XIT and Carmine T. Oliva.*
10.22 XIT Corporation Note and Credit Agreement re: Imperial
Bank Revolver Loan #0070000702700003.*
10.23 XIT Corporation Note and Credit Agreement re: Imperial
Bank Term Loan #0070000702700004.*
10.24 XCEL Arnold Circuits, Inc. Note and Credit Agreement re:
Imperial Bank Revolver Loan #0070000702600003.*
10.25 XCEL Arnold Circuits, Inc. Note and Credit Agreement re:
Imperial Bank Term Loan #0070000702600004.*
10.26 XCEL Arnold Circuits, Inc. Note and Credit Agreement re:
Imperial Bank Term Loan #0070000702600005.*
10.27 Lease Agreement between XIT Corporation and P&S
Development.*
10.28 Lease Agreement between XIT Corporation and Don
Mosco.*
10.29 General Partnership Agreement between XIT Corporation
and P&S Development.*
10.30 Lease Agreement between XIT Arnold Circuits, Inc. and
Frances I. Peters.*
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C>
10.31 Lease Agreement between XCEL Arnold Circuits, Inc. and
Don Wilson and Zenna N. Wilson.*
10.32 Lease Agreement between XCEL Arnold Circuits, Inc. and
Ellis Wesson.*
10.33 Lease Agreement between XCEL Arnold Circuits, Inc. and
Roland E. Hay and Doris L. Hay.*
10.34 Lease Agreement between XCEL Arnold Circuits, Inc. and
RKR Associates.*
10.35 Option Agreement between MicroTel International, Inc. and
Elk International Corporation dated November 15, 1996.*
10.36 Amendment to Option Agreement between MicroTel
International, Inc. and Daniel Drorr dated November 15,
1996.*
10.37 Option Agreement between MicroTel International, Inc. and
Elk International Corporation dated December 3, 1996.*
10.38 Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Elk International
Corporation.*
10.39 Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry dated
June 28, 1996.*
10.40 Amended Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry
dated November 30, 1996.*
10.41 Promissory Note between MicroTel International, Inc. and
Jack Talan dated February, 1997.*
21.1 List of Subsidiaries of MicroTel International, Inc.#
23.1 Consent of BDO Seidman, LLP.#
23.2 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.(14)
99.2 Undertakings to be Incorporated by Reference to Form S-8
333-12567.
</TABLE>
- ---------------------
# Filed herewith.
* To be filed by amendment.
(1) Incorporated by reference to MicroTel International, Inc. report on
Form 8K 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.
39
<PAGE> 40
(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 Corporation Registration
Statement on Form S-4 No. 33-30818.
(6) Incorporated by reference to CXR Telecom Corporation annual
report on Form 10-K for the year ended June 30, 1993 (File No. 1-
10346).
(7) Incorporated by reference to MicroTel International, Inc. annual
report on Form 10-K for the year ended December 31, 1995 (File No.
1-10346).
(8) Incorporated by reference to CXR Corporation Registration
Statement on Form S-4 No. 33-30818.
(9) Incorporated by reference to CXR Corporation Registration
Statement on Form S-8 No. 33-77926.
(10) Incorporated by reference to CXR Corporation annual report on Form
10-K for the year ended June 30, 1994 (File No. 1-10346).
(11) Incorporated by reference to CXR Corporation annual report on Form
10-K for the year ended June 30, 1994 (File No. 1-10346).
(12) Incorporated by reference to CXR Corporation annual report on Form
10-K for the year ended June 30, 1994 (File No. 1-10346).
(13) Incorporated by reference to CXR Corporation annual report on Form
10-K for the year ended June 30, 1994 (File No. 1-10346).
(14) Incorporated by reference to CXR Corporation annual report on Form
10-K for the year ended June 30, 1994 (File No. 1-10346).
40
<PAGE> 41
MICROTEL INTERNATIONAL INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Independent Auditors' Report F-3
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995 F-4
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-5
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-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996 and 1995, six months ended December 31, 1994 and the year ended June 30, 1994 F-7
Notes to Consolidated Financial Statements F-8 to F-27
Consolidated Financial Statement Schedules:
Schedule II-
Valuation and Qualifying Accounts F-28
</TABLE>
All other schedules have been omitted since the required information is
contained in the Consolidated Financial Statements or because such schedules
are not required.
F-1
<PAGE> 42
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-2
<PAGE> 43
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-3
<PAGE> 44
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 of $186 and $425, respectively 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-4
<PAGE> 45
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-5
<PAGE> 46
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-6
<PAGE> 47
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 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-7
<PAGE> 48
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-8
<PAGE> 49
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-9
<PAGE> 50
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-10
<PAGE> 51
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-11
<PAGE> 52
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-12
<PAGE> 53
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-13
<PAGE> 54
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-14
<PAGE> 55
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-15
<PAGE> 56
<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-16
<PAGE> 57
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-17
<PAGE> 58
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-18
<PAGE> 59
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-19
<PAGE> 60
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-20
<PAGE> 61
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-21
<PAGE> 62
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-22
<PAGE> 63
The following table shows activity in the outstanding options.
<TABLE>
<CAPTION>
Year Ended December 31,
1996
---------------------- Six Months
Weighted Ended Year Ended
Average December June 30,
Exercise 1995 31, 1994 1994
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-23
<PAGE> 64
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 amts
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-24
<PAGE> 65
<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-25
<PAGE> 66
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-26
<PAGE> 67
$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-27
<PAGE> 68
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-28
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MICROTEL INTERNATIONAL INC.
The undersigned, being, respectively, Chief Executive Officer
and Secretary of MicroTel International, Inc., a Delaware corporation (the
"Corporation"), do hereby certify as follows:
FIRST: That the Board of Directors of the Corporation adopted
a resolution proposing and declaring advisable a reverse split of the
Corporation's Common Stock, $.0033 par value per share, on a one-for-five basis
(without modification in par value), and an increase in the total number of
shares of preferred stock authorized by adoption of the following amendment to
the Certificate of Incorporation of said corporation:
"FOURTH: The aggregate number of shares of all classes of
capital stock which the Company has the authority to issue is
thirty (35,000,000), which is divided into two classes as follows:
Twenty-Five Million (25,000,000) shares of Common Stock
(Common Stock) with a par value of 1/3 cent per share, and
Ten Million (10,000,000) shares of Preferred Stock (Preferred
Stock) with a par value of $.01 per share.
The designations, voting powers, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions of the Preferred Stock is as follows:
(1) Issuance in Series.
Shares of Preferred Stock may be issued in one or more series at such
time or times, and for such considerations as the Board of Directors may
determine. All shares of any one series of Preferred
<PAGE> 2
Stock will be identical with each other in all respects, except that shares of
one series issued at different times may differ as to dates from which dividends
thereon may be cumulative. All series will rank equally and be identical in all
respects, except as permitted by the following provisions of paragraph 2 of this
Article FOURTH.
(2) Authority of the Board with Respect to Series.
The Board of Directors is authorized, at any time and from time to
time, to provide for the issuance of the shares of Preferred Stock in one or
more series with such designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
thereof as are stated and expressed in the resolution or resolutions providing
for the issue thereof adopted by the Board of Directors, and as are not stated
and expressed in this Certificate of Incorporation or any amendment hereto
including, but not limited to, determination of any of the following:
(i) The number of shares constituting that series and the
distinctive designation of that series;
(ii) The dividend rate or rates on the shares of that series,
whether dividends shall be cumulative, and, if so, from which date or dates, the
payment date or dates for dividends and the relative rights of priority, if any,
of payment of dividends on shares of that series;
(iii) Whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(iv) Whether that series shall have conversion privileges and,
if so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(v) Whether or not the share of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the date or date upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(vi) Whether that series shall have a sinking or retirement
fund for the redemption or purchase of shares of that series, and, if so, the
terms and amount of such sinking or retirement fund;
(vii) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the Company,
and the relative rights of priority, if any, of payment of shares of that
series;
<PAGE> 3
(viii) Any other preferences, privileges and powers, and
relative participating, optional or other special rights, and qualifications,
limitations or restrictions of a series, as the Board of Directors may deem
advisable and are not inconsistent with the provisions of this Certificate of
Incorporation.
(3) Dividends.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment in accordance with their respective
preferential and relative rights before any dividends shall be paid or declared
and set apart for payment on the outstanding shares of Common Stock with respect
to the same dividend period.
(4) Liquidation.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the assets available for distribution to holders of
shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential and relative amounts
(including unpaid cumulative dividends, if any) payable with respect thereto.
(5) Reacquired Shares.
Shares of Preferred Stock which have been issued and reacquired in any
manner by the Company (excluding, until the Company elects to retire them,
shares which are held as treasury shares but including shares redeemed, shares
purchased and retired, and shares which have been converted into shares of
Common Stock) will have the status of authorized and unissued shares of
Preferred Stock and may be reissued.
(6) Voting Rights.
Shares of Preferred Stock shall each have the number of votes provided
in the resolution or resolutions of the Board of Directors creating any series
of Preferred Stock, or as otherwise required by law. Unless and except to the
extent otherwise required by law or provided in the resolution or resolutions of
the Board of Directors creating any series of Preferred Stock, the holders of
the Preferred Stock shall have no voting power with respect to any matter
whatsoever."
SECOND: The foregoing amendment has been duly adopted by the
stockholders of the Corporation in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
<PAGE> 4
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be signed by Daniel Dror, its Chief Executive Officer, and
attested by Barry Reifler, its Secretary, this 29th day of August, 1996.
/s/ Daniel Dror
----------------------------------------
Daniel Dror
Chief Executive Officer
ATTEST:
/s/ Barry Reifler
- -----------------------------------
Barry Reifler,
Secretary
<PAGE> 1
Exhibit 10.11
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING
WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE
EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON, THE WARRANTS AND WARRANT SHARES
MAY NOT BE OFFERED OR SOLD TO ANY U.S. PERSON, THE WARRANTS MAY NOT BE EXERCISED
IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), AND THE WARRANT
SHARES MAY NOT BE DELIVERED IN THE UNITED STATES, UNLESS, IN EACH CASE, THE
WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD,
PLEDGED, HYPOTHECATED OR ENCUMBERED EXCEPT UNDER THE LAWS OF DESCENT AND
DISTRIBUTION OR BY OPERATION OF LAW.
WARRANTS TO PURCHASE COMMON STOCK
MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company")
hereby grants to Yorkton Securities, Inc. (the "Holder") _____________________
(____) non-transferable warrants (the "Warrants") for the purchase of common
stock of the Company (the "Common Stock"), with each whole Warrant entitling the
Holder to purchase one share of Common Stock (each a "Warrant Share" and
collectively the "Warrant Shares") on the terms and subject to the conditions
set forth herein. The Warrants have been issued pursuant to an Agency Agreement
dated for reference purposes as of March 21, 1997 entered into between the
Holder and the Company (the "Agency Agreement") and as part of a larger private
offering by the Company described in that certain Confidential Offering
Memorandum of the Company dated March 21, 1997.
1. TERM. The Warrants may be exercised, in whole or in part, at any time
and from time to time from the date hereof until 5:00 Pacific Time on
___________, 2000 (the "Exercise Period").
2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall
be $2.66 (the "Exercise Price"). The Exercise Price shall be subject to
adjustment as provided in Section 10.
3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms
provided herein at any time during the Exercise Period by the surrender of this
certificate to the Company at its principal office together with the Notice of
Exercise annexed hereto duly completed and executed on behalf of the Holder,
accompanied by payment in full, in immediately available funds, of the amount of
the aggregate Exercise Price of the Warrant Shares being purchased upon such
exercise. The Holder shall be deemed the record owner of such Warrant Shares as
of and from
1
<PAGE> 2
the close of business on the date on which this certificate is surrendered
together with the completed Notice of Exercise and payment in full as required
above (the "Exercise Date"). The Company agrees that the Warrant Shares so
purchased shall be issued as soon as practicable thereafter. It shall be a
condition to the exercise of the Warrants that the Holder or any transferee
hereof certify to the Company, at the time of exercise, either that the Holder
is not a U.S. person (as defined in Regulation S under the Securities Act) and
that the Warrants are not being exercised on behalf of a U.S. person, or to
provide an opinion of counsel reasonably satisfactory to the Company that the
Warrants and the Warrant Shares to be delivered upon exercise thereof have been
registered under the Securities Act or that an exemption from the registration
requirements of the Securities Act is available. It shall be a further condition
to the exercise of the Warrants that the Warrants may not be exercised in the
United States and the Warrant Shares may not be delivered in the United States
absent registration under the Securities Act or an available exemption from
registration, unless otherwise permitted by Regulation S.
4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common
Stock upon exercise of the Warrants, the Company may pay the Holder a cash
amount determined by multiplying the fraction of a share otherwise issuable by
the Fair Market Value of one share of Common Stock. For this purpose, "Fair
Market Value" means the average closing sale price for the ten trading days
immediately preceding the Exercise Date or, if there is no last-sale reporting
for the Common Stock at such time, then the value as determined in good faith by
the Board of Directors of the Company.
5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any
rights as a stockholder of the Company with regard to the Warrant Shares prior
to the Exercise Date for any actual purchase of Warrant Shares.
6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrants Shares
issuable upon the exercise of the Warrants have been registered under the
Securities Act or any state securities laws. The Holder acknowledges by
acceptance of this certificate that, as of the date of this Warrant and at the
time of exercise, (a) the Holder has acquired the Warrants or the Warrant
Shares, as the case may be, for investment and not with a view to distribution;
and either (b) the Holder has a pre-existing personal or business relationship
with the Company or its executive officers, or by reason of the Holder's
business or financial experience the Holder has the capacity to protect the
Holder's own interests in connection with the transaction; and (c) the Holder is
an accredited investor as that term is defined in Rule 501(a) of Regulation D
under the Securities Act. The Holder agrees, by acceptance of this certificate,
that any Warrant Shares purchased upon exercise of the Warrants may have to be
held indefinitely, until registered and qualified for resale pursuant to Section
7, or until an exemption from registration is available, as evidenced by an
opinion of counsel reasonably satisfactory to the Company. The Holder, by
acceptance of this certificate, consents to the placement of a restrictive
legend (the "Legend") on the certificates representing any Warrant Shares that
are purchased upon exercise of the Warrants during the applicable restricted
period under Regulation S or any other applicable restricted period under the
Securities Act. The Legend shall be in substantially the following form:
2
<PAGE> 3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR
ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED
STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN REGULATION S
UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, OR (2)
UPON DELIVERY TO THE COMPANY OF AN OPINION OF U.S. COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT
REGISTRATION PURSUANT TO (A) RULE 144, RULE 144A, OR RULE 904 OF
REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR (B) ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT.
7. REGISTRATION RIGHTS. The Warrant Shares which are purchasable upon
exercise of the Warrants are entitled to the registration rights which are set
forth in Section 9 of the Agency Agreement.
8. RESERVATION OF SHARES. The Company agrees that, at all times during the
Exercise Period, the Company will have authorized and reserved, for the
exclusive purpose of issuance and delivery upon exercise of the Warrants, a
sufficient number of shares of its Common Stock to provide for the issuance of
the Warrant Shares.
9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time
during the Exercise Period shall, by subdivision, combination or
reclassification of securities, change any of the securities into which the
Warrants are exercisable into the same or a different number of securities of
any class or classes, the Warrants shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares if the Warrant Shares
had been outstanding immediately prior to such subdivision, combination, or
reclassification. If shares of the Company's Common Stock are subdivided into a
greater number of shares of Common Stock, the Exercise Price for the Warrant
Shares upon exercise of the Warrants shall be proportionately reduced and the
number of Warrant Shares shall be proportionately increased; and conversely, if
shares of the Company's Common Stock are combined into a smaller number of
shares of Common Stock, the Exercise Price shall be proportionately increased,
and the number of Warrant Shares shall be proportionately decreased.
3
<PAGE> 4
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any certificate representing the Warrants or the
Warrant Shares (referred to herein as the "original certificate"), and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to the Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the original
certificate if mutilated, the Company will make and deliver a new certificate of
like tenor in lieu of the original certificate.
11. ASSIGNMENT. The Warrants may not be transferred, sold, pledged,
hypothecated or encumbered except under the laws of descent and distribution or
by operation of law. The Warrants may not be exercised by or on behalf of any
U.S. person, the Warrants and Warrant Shares may not be offered or sold to any
U.S. person, the Warrants may not be exercised in the United States (except as
permitted by Regulation S), and the Warrant Shares may not be delivered in the
United States, unless, in each case, the Warrants and Warrant Shares have been
registered under the Securities Act or an exemption from such registration is
available, as evidenced by an opinion of counsel reasonably satisfactory to the
Company.
12. GENERAL. This certificate shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. The headings herein are for purposes of convenience and
reference only and shall not be used to construe or interpret the terms of this
certificate. The terms of this certificate may be amended, waived, discharged or
terminated only by a written instrument signed by both the Company and the
Holder. All notices and other communications from the Company to the Holder
shall be mailed by first-class registered or certified mail, postage pre-paid,
to the address furnished to the Company in writing by the last Holder who shall
have furnished an address to the Company in writing.
Dated: April , 1997
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
-----------------------------------------
(Authorized Signature)
President and CEO
-----------------------------------------
(Name and Title)
4
<PAGE> 5
NOTICE OF EXERCISE
To: MicroTel International, Inc. (the "Company")
1. The undersigned hereby elects to exercise a total of ___________
Warrants for the purchase of a like number of Warrant Shares, and tenders
herewith payment of the Exercise Price for such shares in full.
2. In exercising the Warrants, the undersigned hereby confirms and
acknowledges that the Warrant Shares are being acquired solely for the account
of the undersigned for investment, and that the undersigned will not offer, sell
or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have
been registered under the Securities Act or an exemption from such registration
is available, as evidenced by an opinion of counsel reasonably satisfactory to
the Company.
3. The undersigned hereby certifies that either (i) the undersigned is not
a U.S. person (as such term is defined in Regulation S under the Securities
Act), or (ii) the undersigned has delivered to the Company an opinion of counsel
to the effect that the Warrants and the Warrant Shares have been registered
under the Securities Act or an exemption from such registration is available.
4. The undersigned further certifies that the Warrants are not being
exercised in the United States and understands and agrees that the Warrant
Shares may not be delivered in the United States, except as permitted by
Regulation S, absent registration under the Securities Act or an available
exemption from such registration.
5. Please issue a certificate representing the Warrant Shares in the name
of the Holder and deliver the certificate to the address set forth below.
6. Please issue a new certificate representing the unexercised portion (if
any) of the Warrants in the name of the Holder and deliver the certificate to
the address set forth below.
Dated: _____________________ ____________________________________________
(Name of Holder)
____________________________________________
(Authorized Signature)
Address for Delivery:
____________________________________________
____________________________________________
____________________________________________
____________________________________________
5
<PAGE> 1
Exhibit 10.12
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING
WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE
EXERCISED OFFERED OR SOLD UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED, SOLD, PLEDGED,
HYPOTHECATED AND ENCUMBERED SUBJECT TO THE PROVISIONS CONTAINED HEREIN.
WARRANTS TO PURCHASE COMMON STOCK
MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company")
hereby grants to the entrenet Group, L.L.C. (the "Holder") __________________
(_______) transferable warrants (the "Warrants") for the purchase of common
stock of the Company (the "Common Stock"), with each whole Warrant entitling
the Holder to purchase one share of Common Stock (each a "Warrant Share" and
collectively the "Warrant Shares") on the terms and subject to the conditions
set forth herein. The Warrants have been issued as part of a larger private
offering by the Company described in a certain Confidential Offering Memorandum
of the Company dated March 21, 1997.
1. TERM. The Warrants may be exercised, in whole or in part, at any
time and from time to time from the date hereof until 5:00 Pacific Time on
April __, 2000 (the "Exercise Period").
2. EXERCISE PRICE. The initial exercise price of each whole Warrant
shall be $2.66 (the "Exercise Price"). The Exercise Price shall be subject to
adjustment as provided in Section 10.
3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms
provided herein at any time during the Exercise Period by the surrender of this
certificate to the Company at its principal office together with the Notice of
Exercise annexed hereto duly completed and executed on behalf of the Holder,
accompanied by payment in full, in immediately available funds, of the amount
of the aggregate Exercise Price of the Warrant Shares being purchased upon such
exercise. The Holder shall be deemed the record owner of such Warrant Shares as
of and from the close of business on the date on which this certificate is
surrendered together with the completed Notice of Exercise and payment in full
as required above (the "Exercise Date"). The Company agrees that the Warrant
Shares so purchased shall be issued as soon as practicable thereafter. It shall
be a condition to the exercise of the Warrants that the
1
<PAGE> 2
Holder or any transferee hereof provide an opinion of counsel reasonably
satisfactory to the Company that the Warrants and the Warrant Shares to be
delivered upon exercise thereof have been registered under the Securities Act
or that an exemption from the registration requirements of the Securities Act
is available.
4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common
Stock upon exercise of the Warrants, the Company may pay the Holder a cash
amount determined by multiplying the fraction of a share otherwise issuable by
the Fair Market Value of one share of Common Stock. For this purpose, "Fair
Market Value" means the average closing sale price for the ten trading days
immediately preceding the Exercise Date or, if there is no last-sale reporting
for the Common Stock at such time, then the value as determined in good faith
by the Board of Directors of the Company.
5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have
any rights as a stockholder of the Company with regard to the Warrant Shares
prior to the Exercise Date for any actual purchase of Warrant Shares.
6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrant
Shares issuable upon the exercise of the Warrants have been registered under the
Securities Act or any state securities laws. The Holder acknowledges by
acceptance of this certificate that, as of the date of this Warrant and at the
time of exercise, (a) the Holder has acquired the Warrants or the Warrant
Shares, as the case may be, for investment and not with a view to distribution;
and either (b) the Holder has a pre-existing personal or business relationship
with the Company or its executive officers, or by reason of the Holder's
business or financial experience the Holder has the capacity to protect the
Holder's own interests in connection with the transaction; and (c) the Holder
and its members are each accredited investors as that term is defined in Rule
501(a) of Regulation D under the Securities Act. The Holder agrees, by
acceptance of this certificate, that any Warrant Shares purchased upon exercise
of the Warrants may have to be held indefinitely, until registered and
qualified for resale pursuant to Section 7, or until an exemption from
registration is available, as evidenced by an opinion of counsel reasonably
satisfactory to the Company. The Holder, by acceptance of this certificate,
consents to the placement of a restrictive legend (the "Legend") on the
certificates representing any Warrant Shares that are purchased upon exercise
of the Warrants during the applicable restricted period under Rule 144 or any
other applicable restricted period under the Securities Act. The Legend shall
be in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
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<PAGE> 3
SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, UNLESS IN THE WRITTEN LEGAL OPINION (APPROVED BY THE
COMPANY) OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION IS
NOT REQUIRED.
7. REGISTRATION RIGHTS. The Company agrees, on the following terms and
subject to the following conditions, to register under the Securities Act the
resale of all Warrant Shares which are purchasable upon the exercise of the
Warrants (the "Registrable Securities"), at the Company's own expense, with the
exception of any legal and advisory fees or expenses incurred by the Holder in
connection with the registration.
7.1 FILING OF REGISTRATION STATEMENT. The Company shall prepare and
file with the United States Securities and Exchange Commission ("SEC") not
later than 60 days after the date hereof a registration statement on an
appropriate form (the "Registration Statement") for registration under the
Securities Act of the resale of the Registrable Securities.
7.2 INFORMATION. In connection with the preparation of the Registration
Statement:
(1) The Holder shall furnish to the Company all information reasonably
requested by the Company (including, for example, information regarding the
Holder's intended method of disposition of the Registrable Securities) for
inclusion in the Registration Statement and response to the SEC comments
and questions.
(2) As the Holder may be deemed a statutory underwriter of any
Registrable Securities sold by the Holder under the Registration Statement,
the Company shall give the Holder and its legal counsel and accountants
such access to copies of the Company's records and documents and such
opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial
statements as shall be reasonably necessary, in the opinion of the Holder
or its legal counsel, to conduct a reasonable investigation within the
meaning of the Securities Act.
7.3 EFFECTIVENESS OF REGISTRATION STATEMENT. The Company shall use its
best efforts to cause the Registration Statement to become effective within 150
days after the date hereof (but if not effective within such period, the
Company shall continue to use its best efforts to cause the Registration
Statement to become effective as soon as possible thereafter) and
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<PAGE> 4
to keep the Registration Statement effective thereafter until the earlier of (i)
the date on which all Registrable Securities have been resold pursuant to the
Registration Statement or otherwise resold without restriction under the
Securities Act, or (ii) the date on which is ended the two-year period
referenced in Rule 144(k) under the Securities Act or any successor rule or
subsection relating to the resale of "restricted securities" by
"non-affiliates" of an issuer, as such terms are defined in the Securities Act
and the rules and regulations promulgated thereunder.
7.4 AMENDMENT AND SUPPLEMENTS. The Company shall prepare and file with
the SEC such amendments and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of the Registrable Securities.
7.5 COPIES OF PROSPECTUSES. The Company shall furnish to the Holder of
such numbers of copies of prospectuses or prospectus documents conforming with
the requirements of the Securities Act as the Holder may reasonably request in
order to facilitate the disposition of Registrable Securities owned by the
Holder.
7.6 BLUE SKY REGULATIONS. The Company shall use its best efforts to
register and qualify the Registrable Securities under the state securities or
Blue Sky laws ("State Laws") of such jurisdictions as the Holder reasonably
requests.
7.7 QUIET PERIODS. The Holder agrees that, upon its receipt of any
notice from the Company of the happening of any event which makes any statement
made in the Registration Statement, the prospectus or any documents incorporated
therein by reference, untrue in any material respect or which requires the
making of any changes in the Registration Statement, the prospectus or any
document incorporated therein by reference, in order to make the statements
therein not misleading in any material respect, the Holder will forthwith
discontinue disposition of Registrable Securities under the prospectus related
to the Registration Statement until the Company provides the Holder with copies
of the supplemented or amended prospectus or prospectus documents, or until the
Holder is advised in writing by the Company that the use of the prospectus may
be resumed. The Company agrees to provide the Holder with such copies of the
supplemented or amended prospectus or prospectus documents, or notice that use
of the prospectus may be resumed, as soon as reasonably practicable.
7.8 TRADING MARKET. The Company covenants to use its best efforts to
maintain a continuous trading market for its Common Stock on the Nasdaq
SmallCap Market or National Market System or a
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<PAGE> 5
United States national securities exchange throughout the period that the
registration rights afforded by this Section 7 remain in effect.
7.9 COMPLIANCE WITH ANTI-MANIPULATION RULES. The Holder agrees that,
with respect to the offering for resale of the Registrable Securities, the
Holder will comply with Regulation M promulgated under the Exchange Act and
such other or additional anti-manipulation rules then in effect (the
"Anti-Manipulation Rules") until such offering has been completed. The Company
also agrees to comply with the Anti-Manipulation Rules with respect to the
offering for resale of the Registrable Securities until such offering has been
completed.
7.10 INDEMNIFICATION. To the extent permitted by law, the Company agrees
to indemnify and hold harmless the Holder and its affiliates and agents, and
the Holder agrees to indemnify and hold harmless the Company and its
affiliates and agents:
(1) against any losses, claims, damages and liabilities and any legal
or other costs and expenses reasonably incurred by such indemnified
parties in connection with investigating or defending any such loss,
claim, damage liability, or action to which such parties may become
subject under the Securities Act or other federal or state law, insofar as
such losses, claims, damages, liabilities, costs or expenses (or actions in
respect thereof) did not arise out of and were not based upon written
information furnished by such parties expressly for use in the Registration
Statement; and
(2) for amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected by the indemnifying
party without the prior written consent of the other party to this Warrant,
which consent shall not be unreasonably withheld.
7.11 ENFORCEMENT. In the event of a material breach of the terms of this
Section 7 by the Company, the Holder will be entitled to enforce its rights
under this Section 7 specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision hereof, and to exercise
all other rights existing in its favor. The parties hereto agree and acknowledge
that money damages may not be an adequate remedy for any breach by the Company
of the provisions hereof, and that the Subscriber may in its sole discretion
apply to a court of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violation of the provisions
hereof. In addition, upon the occurrence of a material breach by the Company or
by the Holder of this Section 7, the breaching party shall pay all costs and
expenses (including the prevailing party's
5
<PAGE> 6
attorney's fees and expenses) reasonably incurred in connection with the
preservation and enforcement of such party's rights hereunder.
7.12 SUBSEQUENT HOLDERS. Any person who acquires the Warrants or
Warrant Shares in a transaction that does not result in such person receiving
securities which are free of restrictions on transfer in the United States and
to U.S. Persons, such person shall be entitled to the benefit of all of the
rights and privileges set forth in this Section 7, provided that such person
agrees in a writing to the Company to undertake all of the obligations of the
Holder under this Section 7.
8. RESERVATION OF SHARES. The Company agrees that, at all times during
the Exercise Period, the Company will have authorized and reserved, for the
exclusive purpose of issuance and delivery upon exercise of the Warrants, a
sufficient number of shares of its Common Stock to provide for the issuance of
the Warrant Shares.
9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time
during the Exercise Period shall, by subdivision, combination or
reclassification of securities, change any of the securities into which the
Warrants are exercisable into the same or a different number of securities of
any class or classes, the Warrants shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares if the Warrant Shares
had been outstanding immediately prior to such subdivision, combination, or
reclassification. If shares of the Company's Common Stock are subdivided into a
greater number of shares of Common Stock, the Exercise Price for the Warrant
Shares upon exercise of the Warrants shall be proportionately reduced and the
number of Warrant Shares shall be proportionately increased; and conversely, if
shares of the Company's Common Stock are combined into a smaller number of
shares of Common Stock, the Exercise Price shall be proportionately increased,
and the number of Warrant Shares shall be proportionately decreased.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt
by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any certificate representing the Warrants or the
Warrant Shares (referred to herein as the "original certificate"), and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to the Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the original
certificate if mutilated, the Company will make and deliver a new certificate
of like tenor in lieu of the original certificate.
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<PAGE> 7
11. ASSIGNMENT. The Warrants may be transferred subject to the
provisions of Section 6.
12. GENERAL. This certificate shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. The headings herein are for purposes of convenience and
reference only and shall not be used to construe or interpret the terms of this
certificate. The terms of this certificate may be amended, waived, discharged or
terminated only by a written instrument signed by both the Company and the
Holder. All notices and other communications from the Company to the Holder
shall be mailed by first-class registered or certified mail, postage pre-paid,
to the address furnished to the Company in writing by the last Holder who shall
have furnished an address to the Company in writing.
Dated: April , 1997
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
------------------------------------
(Authorized Signature)
President and CEO
------------------------------------
(Name and Title)
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<PAGE> 8
NOTICE OF EXERCISE
To: MicroTel International, Inc. (the "Company")
1. The undersigned hereby elects to exercise a total of ______________
Warrants for the purchase of a like number of Warrant Shares, and tenders
herewith payment of the Exercise Price for such shares in full.
2. In exercising the Warrants, the undersigned hereby confirms and
acknowledges that the Warrant Shares are being acquired solely for the account
of the undersigned for investment, and that the undersigned will not offer,
sell or otherwise dispose of any of the Warrant Shares unless the Warrant
Shares have been registered under the Securities Act or an exemption from such
registration is available, as evidenced by an opinion of counsel reasonably
satisfactory to the Company.
3. The undersigned hereby certifies that the undersigned has delivered
to the Company an opinion of counsel to the effect that the Warrants and the
Warrant Shares have been registered under the Securities Act or an exemption
form such registration is available.
4. Please issue a certificate representing the Warrant Shares in the
name of the Holder and deliver the certificate to the address set forth below.
5. Please issue a new certificate representing the unexercised portion
(if any) of the Warrants in the name of the Holder and deliver the certificate
to the address set forth below.
Dated: __________________
______________________________________
(Name of Holder)
______________________________________
(Authorized Signature)
Address for Delivery:
______________________________________
______________________________________
______________________________________
______________________________________
8
<PAGE> 1
EXHIBIT 10.13
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING
WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE
EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON, THE WARRANTS AND WARRANT SHARES
MAY NOT BE OFFERED OR SOLD TO ANY U.S. PERSON, THE WARRANTS MAY NOT BE EXERCISED
IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), AND THE WARRANT
SHARES MAY NOT BE DELIVERED IN THE UNITED STATES, UNLESS, IN EACH CASE, THE
WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD,
PLEDGED, HYPOTHECATED OR ENCUMBERED EXCEPT UNDER THE LAWS OF DESCENT AND
DISTRIBUTION OR BY OPERATION OF LAW.
WARRANTS TO PURCHASE COMMON STOCK
MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company")
hereby grants to __________________________________________ (the "Holder")
_____________________ (____) non-transferable warrants (the "Warrants") for the
purchase of common stock of the Company (the "Common Stock"), with each whole
Warrant entitling the Holder to purchase one share of Common Stock (each a
"Warrant Share" and collectively the "Warrant Shares") on the terms and subject
to the conditions set forth herein. The Warrants have been issued pursuant to a
Subscription Agreement dated for reference purposes as of March 21, 1997 entered
into between the Holder and the Company (the "Subscription Agreement") and as
part of a larger private offering by the Company described in that certain
Confidential Offering Memorandum of the Company dated March 21, 1997.
1. TERM. The Warrants may be exercised, in whole or in part, at any
time and from time to time from the date hereof until 5:00 Pacific Time on April
__, 2000 (the "Exercise Period").
2. EXERCISE PRICE. The initial exercise price of each whole Warrant
shall be $3.45 (the "Exercise Price"). The Exercise Price shall be subject to
adjustment as provided in Section 10.
3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms
provided herein at any time during the Exercise Period by the surrender of this
certificate to the Company at its principal office together with the Notice of
Exercise annexed hereto duly completed and executed on behalf of the Holder,
accompanied by payment in full, in immediately available funds, of the amount of
the aggregate Exercise Price of the Warrant Shares being purchased upon such
exercise. The Holder shall be deemed the record owner of such Warrant Shares as
of and from the close of business on the date on which this certificate is
surrendered together with the completed Notice of Exercise and payment in full
as required above (the "Exercise Date"). The Company agrees that the Warrant
Shares so purchased shall be issued as soon as practicable
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<PAGE> 2
thereafter. It shall be a condition to the exercise of the Warrants that the
Holder or any transferee hereof certify to the Company, at the time of exercise,
either that the Holder is not a U.S. person (as defined in Regulation S under
the Securities Act of 1933, as amended (the "Securities Act")) and that the
Warrants are not being exercised on behalf of a U.S. person, or to provide an
opinion of counsel reasonably satisfactory to the Company that the Warrants and
the Warrant Shares to be delivered upon exercise thereof have been registered
under the Securities Act or that an exemption from the registration requirements
of the Securities Act is available. It shall be a further condition to the
exercise of the Warrants that the Warrants may not be exercised in the United
States and the Warrant Shares may not be delivered in the United States absent
registration under the Securities Act or an available exemption from
registration, unless otherwise permitted by Regulation S.
4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common
Stock upon exercise of the Warrants, the Company may pay the Holder a cash
amount determined by multiplying the fraction of a share otherwise issuable by
the Fair Market Value of one share of Common Stock. For this purpose, "Fair
Market Value" means the average closing sale price for the ten trading days
immediately preceding the Exercise Date or, if there is no last-sale reporting
for the Common Stock at such time, then the value as determined in good faith by
the Board of Directors of the Company.
5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have
any rights as a stockholder of the Company with regard to the Warrant Shares
prior to the Exercise Date for any actual purchase of Warrant Shares.
6. REDEMPTION. The Warrants may be redeemed by the Company at any time
for cash at the price of $.05 per Warrant, provided that (i) the Warrant Shares
have been registered for resale pursuant to the Securities Act, (ii) written
notice of the redemption (the "Redemption Notice") is delivered by the Company
to the Holder not less than 30 days prior to the date of redemption (the
"Redemption Date"), and (iii) the last sale price of the Common Stock on the
Nasdaq SmallCap Market or National Market System, or on a national securities
exchange in the United States, for ten consecutive trading days is equal to or
exceeds 150% of the Exercise Price of the Warrants (as adjusted). Following
delivery of the Redemption Notice, the Holder may continue to exercise the
Warrants in whole or in part on the terms provided herein until the last
business day prior to the Redemption Date.
7. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrant
Shares issuable upon the exercise of the Warrants have been registered under the
Securities Act or any state securities laws. The Holder acknowledges by
acceptance of this certificate that, as of the date of this Warrant and at the
time of exercise, (a) the Holder has acquired the Warrants or the Warrant
Shares, as the case may be, for investment and not with a view to distribution;
and either (b) the Holder has a pre-existing personal or business relationship
with the Company or its executive officers, or by reason of the Holder's
business or financial experience the Holder has the capacity to protect the
Holder's own interests in connection with the transaction; and (c) the Holder is
an accredited investor as that term is defined in Rule 501(a) of Regulation D
under the Securities Act. The Holder agrees, by acceptance of this certificate,
that any Warrant Shares purchased upon exercise of the Warrants may have to be
held indefinitely, until registered and qualified for resale pursuant to Section
8, or until an exemption from registration is available, as
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<PAGE> 3
evidenced by an opinion of counsel reasonably satisfactory to the Company. The
Holder, by acceptance of this certificate, consents to the placement of a
restrictive legend (the "Legend") on the certificates representing any Warrant
Shares that are purchased upon exercise of the Warrants during the applicable
restricted period under Regulation S or any other applicable restricted period
under the Securities Act. The Legend shall be in substantially the following
form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR
ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND
MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE
UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN
OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE
SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE
144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE
SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES
ACT.
8. REGISTRATION RIGHTS. The Warrant Shares which are purchasable upon
exercise of the Warrants are entitled to the registration rights which are set
forth in Section 9 of the Subscription Agreement.
9. RESERVATION OF SHARES. The Company agrees that, at all times during
the Exercise Period, the Company will have authorized and reserved, for the
exclusive purpose of issuance and delivery upon exercise of the Warrants, a
sufficient number of shares of its Common Stock to provide for the issuance of
the Warrant Shares.
10. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time
during the Exercise Period shall, by subdivision, combination or
reclassification of securities, change any of the securities into which the
Warrants are exercisable into the same or a different number of securities of
any class or classes, the Warrants shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares if the Warrant Shares
had been outstanding immediately prior to such subdivision, combination, or
reclassification. If shares of the Company's Common Stock are subdivided into a
greater number of shares of Common Stock, the Exercise Price for the Warrant
Shares upon exercise of the Warrants shall be proportionately reduced and the
number of Warrant Shares shall be proportionately increased; and conversely, if
shares of the Company's Common Stock are combined into a smaller number of
shares of Common Stock, the Exercise Price shall be proportionately increased,
and the number of Warrant Shares shall be proportionately decreased.
11. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt
by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any certificate representing the Warrants or the
Warrant Shares (referred to herein as the "original
3
<PAGE> 4
certificate"), and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to the Company, and upon reimbursement to the
Company of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the original certificate if mutilated, the Company will make and
deliver a new certificate of like tenor in lieu of the original certificate.
12. ASSIGNMENT. The Warrants may not be transferred, sold, pledged,
hypothecated or encumbered except under the laws of descent and distribution or
by operation of law. The Warrants may not be exercised by or on behalf of any
U.S. person, the Warrants and Warrant Shares may not be offered or sold to any
U.S. person, the Warrants may not be exercised in the United States (except as
permitted by Regulation S), and the Warrant Shares may not be delivered in the
United States, unless, in each case, the Warrants and Warrant Shares have been
registered under the Securities Act or an exemption from such registration is
available, as evidenced by an opinion of counsel reasonably satisfactory to the
Company.
13. GENERAL. This certificate shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. The headings herein are for purposes of convenience and
reference only and shall not be used to construe or interpret the terms of this
certificate. The terms of this certificate may be amended, waived, discharged or
terminated only by a written instrument signed by both the Company and the
Holder. All notices and other communications from the Company to the Holder
shall be mailed by first-class registered or certified mail, postage pre-paid,
to the address furnished to the Company in writing by the last Holder who shall
have furnished an address to the Company in writing.
Dated: April __, 1997
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
__________________________________________
(Authorized Signature)
President and CEO
__________________________________________
(Name and Title)
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<PAGE> 5
NOTICE OF EXERCISE
To: MicroTel International, Inc. (the "Company")
1. The undersigned hereby elects to exercise a total of ___________
Warrants for the purchase of a like number of Warrant Shares, and tenders
herewith payment of the Exercise Price for such shares in full.
2. In exercising the Warrants, the undersigned hereby confirms and
acknowledges that the Warrant Shares are being acquired solely for the account
of the undersigned for investment, and that the undersigned will not offer, sell
or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have
been registered under the Securities Act or an exemption from such registration
is available, as evidenced by an opinion of counsel reasonably satisfactory to
the Company.
3. The undersigned hereby certifies that either (i) the undersigned is
not a U.S. person (as such term is defined in Regulation S under the Securities
Act), or (ii) the undersigned has delivered to the Company an opinion of counsel
to the effect that the Warrants and the Warrant Shares have been registered
under the Securities Act or an exemption from such registration is available.
4. The undersigned further certifies that the Warrants are not being
exercised in the United States and understands and agrees that the Warrant
Shares may not be delivered in the United States, except as permitted by
Regulation S, absent registration under the Securities Act or an available
exemption from such registration.
5. Please issue a certificate representing the Warrant Shares in the
name of the Holder and deliver the certificate to the address set forth below.
6. Please issue a new certificate representing the unexercised portion
(if any) of the Warrants in the name of the Holder and deliver the certificate
to the address set forth below.
Dated: _____________________ ____________________________________________
(Name of Holder)
____________________________________________
(Authorized Signature)
Address for Delivery:
____________________________________________
____________________________________________
____________________________________________
____________________________________________
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<PAGE> 1
Exhibit 10.16
AGENCY AGREEMENT
THIS AGENCY AGREEMENT is dated for purposes of reference as of March
21, 1997, and is entered into between MICROTEL INTERNATIONAL, INC., a Delaware
corporation (the "Issuer"), on the one hand, and YORKTON SECURITIES INC., an
Ontario corporation (the "Agent"), on the other hand, with respect to the
following facts:
A. The Issuer proposes to make a private placement (the "Private
Placement") of units ("Units"), each comprised of one share (individually, a
"Share," and collectively, the "Shares") of the Issuer's common stock, par
value of 1/3 cent per share ("Common Stock"), and one-quarter of a detachable
non-transferable redeemable Common Stock purchase warrant (each whole warrant,
individually, a "Warrant," and collectively, the "Warrants"). The Issuer
desires to raise minimum gross proceeds of $5,000,000 and maximum gross
proceeds of $10,000,000 through the Private Placement. All dollar amounts set
forth in this Agreement are denominated in U.S. dollars. The Units, Shares,
Warrants and Warrant Shares are sometimes collectively referred to in this
Agreement as the "Securities."
B. On the terms and subject to the conditions of this Agreement,
the Issuer wishes to appoint the Agent to act as its exclusive agent for
purposes of placing the Units in the Private Placement and the Agent is willing
to accept such appointment.
In consideration of the mutual promises contained in this Agreement,
the parties agree as follows:
1. Appointment of Agent.
--------------------
1.1 On the terms and subject to the conditions of this Agreement,
the Issuer appoints the Agent as its exclusive agent for purposes of placing
the Units in the Private Placement, and the Agent accepts the appointment and
agrees to use its best efforts to find and introduce to the Issuer potential
investors to purchase the Units. For control purposes, all subscribers in the
Private Placement (the "Subscribers") shall be deemed the Agent's clients.
1.2 The Agent may associate with other qualified securities
dealers and may allow members of any such selling group such part of Agent's
commission, fees or expense reimbursement as Agent may determine; provided,
however, that each selling group member must agree in writing to comply with
the requirements of Regulation S in connection with the Private Placement.
1.3 The Private Placement shall be made on the terms and subject
to the conditions stated in this Agreement and in the subscription agreements
between the Issuer and each of the Subscribers (the "Subscription Agreements"),
each of which is dated for reference purposes March 21, 1997.
2. Terms of the Private Placement.
------------------------------
2.1 The Agent shall use its best efforts to raise for the benefit
of the Issuer, pursuant to the Private Placement, minimum gross proceeds of
$5,000,000 ("Minimum Proceeds") and
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<PAGE> 2
maximum gross proceeds of $10,000,000 ("Maximum Proceeds"). The closing of the
Private Placement (the "Closing") shall be governed by the terms of Section 8
of this Agreement. As provided in Section 8, there may be more than one
Closing of the Private Placement. The Private Placement will terminate on the
earlier of (i) the date on which the Maximum Proceeds are received by the
Issuer, and (ii) April 18, 1997, unless extended by the mutual agreement of the
Issuer and the Placement Agent (such date, as same may be extended, is referred
to herein as the "Termination Date"). In the event that the Issuer does not
receive the Minimum Proceeds by the Termination Date, the Private Placement
will be terminated and all subscription funds will be returned by the Agent to
the Subscribers without interest thereon or deduction therefrom.
2.2 The price per Unit issued in the Private Placement (the "Price
Per Unit") shall, for purposes of the First Closing, be $2.50, and shall, for
purposes of the Second Closing, be equated to 80% of the average closing bid
price of the Issuer's Common Stock as reported by the Nasdaq SmallCap Market
for the 10 trading days immediately preceding the date (the "Contract Date") on
which the Agent contracts with the Subscribers to purchase the Units (the
"Average Reported Price"), provided, however, that in no event will the Price
Per Unit for purposes of the Second Closing be less than $2.50 nor more than
$3.50. The Agent shall notify the Issuer of the Contract Date for each Closing
and shall confirm with the Issuer the proper calculation of the Price Per Unit
as provided in the previous sentence.
2.3 The number of Units issuable to each Subscriber shall be
determined by dividing the total purchase price paid by such Subscriber by the
applicable Price Per Unit. No fractional Units shall be issued in the Private
Placement. Any fractional Units shall be rounded down to the nearest whole
Unit.
2.4 Each whole Warrant will entitle the holder to purchase one
additional share of Common Stock (individually, a "Warrant Share," and
collectively, the "Warrant Shares") at an exercise price ("Exercise Price")
which, for purposes of the First Closing, shall be $3.45 and, for purposes of
the Second Closing, shall be equated to a 30% premium to the Average Reported
Price, subject to adjustments as provided in the form of the Warrants attached
to the Issuer's Confidential Private Offering Memorandum dated March 21, 1997
(the "Offering Memorandum"). The Warrants will be exercisable until 5:00 p.m.
Pacific time on the date of the third anniversary of the First Closing of the
Private Placement. The Warrants will be redeemable by the Issuer at a price of
$.05 per Warrant, provided that (i) the Warrant Shares have been registered for
resale pursuant to the Securities Act, (ii) written notice of the redemption
(the "Redemption Notice") is delivered by the Issuer to the holders not less
than 30 days prior to the date of redemption (the "Redemption Date"), and (iii)
the last sale price of the Common Stock on the Nasdaq SmallCap Market or
National Market System, or on a national securities exchange in the United
States, for ten consecutive trading days is equal to or exceeds 150% of the
Exercise Price of the Warrants (as adjusted). Following delivery of the
Redemption Notice, the holders may continue to exercise the Warrants in whole
or in part until the last business day prior to the Redemption Date.
2.5 Each of the Securities will be issued with a restrictive
legend substantially as provided in the form of the Subscription Agreement and
the form of the Warrants attached as exhibits to the Offering Memorandum.
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2.6 The Issuer will grant to Subscribers the registration rights
set forth in Section 9 of the Subscription Agreements.
2.7 The Agent shall obtain from each Subscriber a fully completed
and executed Subscription Agreement, together with payment in full for the
Units subscribed for thereunder.
3. Representations and Warranties of the Issuer.
--------------------------------------------
The Issuer hereby represents and warrants as of the date of this
Agreement and at each Closing (with the understanding that the Agent will be
relying upon such representations and warranties in entering into this
Agreement) that, except as otherwise disclosed in the Offering Documents (as
such term is defined in Section 7.2 of the Subscription Agreements) or in
Schedule A attached hereto:
3.1 Organization. The Issuer has been duly incorporated and is
validly existing in good standing as a corporation under the laws of the State
of Delaware. On March 26, 1997, XIT Acquisition Inc., a wholly-owned
subsidiary of the Issuer ("Sub"), merged with and into XIT Corporation (the
"Merger"), whereby XIT Corporation became a wholly-owned subsidiary of the
Issuer and XIT Corporation's subsidiaries became indirectly owned subsidiaries
of the Issuer. All of the Issuer's subsidiaries (which term, as used in this
Agreement, includes both wholly-owned and indirectly-owned subsidiaries) have
been duly organized and are validly existing in good standing under the laws of
the respective jurisdictions in which they have been organized.
3.2 Good Standing. The Issuer and its subsidiaries are duly
qualified to do business as foreign corporations in good standing in those
jurisdictions which require such qualification except to the extent that
failure to so qualify would not have a material adverse effect on the Issuer's
business, financial condition or results of operations.
3.3 Authority. The Issuer has corporate power and authority to
enter into this Agreement and perform its obligations hereunder, and the Issuer
and its subsidiaries have corporate power and authority to own their respective
properties and assets and to carry on their respective businesses as described
in the Offering Documents. All corporate action on the part of the Issuer, its
directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement by the Issuer and the performance of all of
the Issuer's obligations hereunder has been duly taken.
3.4 Enforceability. This Agreement and the Subscription
Agreements, when executed and delivered by the Issuer, will, if duly
authorized, executed and delivered by the other respective parties to such
agreements, be valid and binding obligations of the Issuer, enforceable against
the Issuer in accordance with their terms, except to the extent that rights to
indemnity and contribution thereunder may be limited by federal or state
securities laws or the public policy underlying such laws and except as the
foregoing may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally and by general principles of equity. The Warrants and the
Agent's Warrants (as defined in Section 9.5) will, when executed and delivered
by the Issuer, be binding obligations of the Issuer, enforceable against the
Issuer in accordance with their terms, except as the foregoing may be limited
by
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bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or
other similar laws affecting the rights of creditors generally and by general
principles of equity.
3.5 No Violation. The execution and delivery of this Agreement
and the consummation of the transactions or performance of the obligations
contemplated by this Agreement do not and will not result in a breach of any
term of, or constitute a default under, the Issuer's charter or bylaws, any
statute, any indenture, mortgage, or other agreement or instrument to which the
Issuer or any of its subsidiaries is or are a party or by which any of them is
or are bound, or any order, writ, judgment or decree.
3.6 Actions and Claims. To the best of the Issuer's knowledge,
there are no actions or proceedings of any kind whatsoever outstanding,
pending, contemplated or threatened relating to the bankruptcy or insolvency of
the Issuer or any of its subsidiaries. To the best of its knowledge, there are
no other claims, actions, suits, judgments, investigations or proceedings of
any kind whatsoever outstanding, pending or threatened against or affecting the
Issuer, its subsidiaries, or the directors, officers or promoters of the Issuer
or its subsidiaries, at law or in equity or before or by any federal, state,
municipal or other governmental department, commission, board, bureau or agency
of any kind whatsoever which could materially affect its business or financial
condition and, to the best of its knowledge, there is no basis therefor.
3.7 Disclosure. The Offering Documents do not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they have been made, not misleading.
3.8 Authorized and Validly Issued Securities. The issued and
outstanding capital stock of the Issuer as of the dates set forth in the
Offering Documents is as disclosed in the Offering Documents, and the issued
and outstanding shares of Common Stock of the Issuer are fully paid and
non-assessable. The Issuer has sufficient authorized and unissued shares of
Common Stock to provide for the issuance and delivery of the Shares, the
Warrant Shares and the Agent's Warrant Shares. The Issuer's authorized capital
stock includes 25,000,000 shares of Common Stock with a par value of 1/3 cent
per share and 10,000,000 shares of Preferred Stock with a par value of $.01 per
share. The Shares, when issued in the manner contemplated by the provisions of
the Subscription Agreements, will be duly authorized and validly issued and
will be fully paid and non-assessable. The Warrant Shares, when issued in the
manner contemplated by the Warrants, will be duly authorized and validly issued
and will be fully paid and non-assessable. The Agent's Warrants Shares (as
defined in Section 9.5), when issued in the manner contemplated by the Agent's
Warrants, will be duly authorized and validly issued and will be fully paid and
non-assessable.
3.9 Convertible Securities. Other than (i) the Warrants which are
issuable under the Subscription Agreements, (ii) the Agent's Warrants which are
issuable under this Agreement, and (iii) an aggregate of 330,368 stock options
awarded to Barry Reifler and Henry Mourad in connection with the continuation
of their employment with the Issuer following the Merger, no securities
convertible or exchangeable into Common Stock of the Issuer or agreements,
warrants, options, rights or privileges for the purchase or other acquisition
of any unissued securities of the Issuer are outstanding.
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3.10 Intellectual Property Rights. The Issuer or its subsidiaries
own, possess or have access to adequate rights to use all material patents,
patent rights, inventions, trademarks, service marks, trade names, copyrights
and proprietary rights necessary for the conduct of their businesses as
described in the Offering Documents; and the Issuer has no knowledge of any
infringement of or conflict with rights of others, or any claims thereof, with
respect to any patents, patent rights, inventions, trademarks, service marks,
trade names, copyrights or other proprietary rights, the effect of which
infringement, conflict or claims would be materially adverse to the Issuer.
3.11 Financial Statements. The financial statements included in
the Offering Documents (the "Financial Statements") are true and correct in all
material respects and present fairly and accurately the financial position and
results of the operations of the Issuer and its subsidiaries and of XIT
Corporation and its subsidiaries for the periods shown therein, and the
Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States applied on a consistent
basis except for normal year-end adjustments.
3.12 Change in Circumstances. Since September 30, 1996, there has
not been any adverse material change of any kind whatsoever in the financial
position or condition of the Issuer (or of XIT Corporation prior to the Merger)
or of any of the Issuer's subsidiaries, or any damage, loss or other change of
circumstances of any kind whatsoever materially affecting the business or
assets of the Issuer or of any of its subsidiaries or the right or capacity of
the Issuer or of any of its subsidiaries to carry on their businesses.
3.13 Defaults. Since September 30, 1996, neither the Issuer nor
any of its subsidiaries has defaulted, or is currently in default (i) with
respect to the payment of interest or principal on any material indebtedness of
the Issuer or its subsidiaries, or (ii) under any material contract to which
the Issuer or any of its subsidiaries is a party.
3.14 Stop Orders. No order prohibiting the sale of the Issuer's
securities has been issued against the Issuer or, to Issuer's knowledge, its
directors, officers or promoters, and no proceedings for this purpose have been
instituted, are pending, or, to its knowledge, are contemplated or threatened.
3.15 Transfer Agent. American Securities Transfer, Inc., having
its principal office in Lakewood, Colorado, has been duly appointed as the
transfer agent for the Issuer's Common Stock.
3.16 Reporting Company. The Issuer has a class of securities
registered pursuant to Section 12(b) or 12(g) of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act") or is required to file
reports pursuant to Section 15(d) of the Exchange Act.
3.17 Exchange Act Reports. At the commencement of the Private
Placement, the Issuer had filed all the material required to be filed pursuant
to Section 13(a) or 15(d) of the Exchange Act for a period of at least the
twelve months immediately prior thereto, and the Issuer has since remained, and
continues to remain, current in satisfying such filing obligations.
3.18 No Directed Selling Efforts. The Issuer, its affiliates, and
persons acting on behalf of the foregoing have not made and will not make any
Directed Selling Efforts in the United
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States with respect to the Securities or the Agent's Warrants or Agent's
Warrant Shares. For purposes of this Agreement, "Directed Selling Efforts"
include any activity undertaken for the purpose of, or that could reasonably be
expected to have the effect of, conditioning the market in the United States
for the the subject securities, including, but not limited to, the placement of
an advertisement in a publication with a general circulation in the United
States that refers to the offering of the subject securities, the mailing of
promotional materials to persons located in the United States or the holding of
promotional meetings or seminars in the United States.
3.19 Compliance with Regulation S. Assuming that the
representations and warranties of the Subscribers in their respective
Subscription Agreements, and of the Agent in this Agreement, are correct, the
offer and sale of the Shares and the Warrants in the Private Placement is not
subject to the registration or prospectus delivery requirements of the
Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2))
of Regulation S promulgated under the Securities Act. Assuming that (A) the
representations and warranties of the Subscribers in their respective
Subscription Agreements, and of the Agent in this Agreement, are correct, (B)
the Warrants are exercised in accordance with all of their terms, and (C) the
representations and warranties in the Notice of Exercise attached to the
Warrants are true and correct when each Notice of Exercise is signed and
delivered to the Issuer, the offer and sale of the Warrant Shares is not
subject to the registration or prospectus delivery requirements of the
Securities Act by virtue of compliance with Rule 903 (including Rule 903(c)(2))
of Regulation S promulgated under the Securities Act. Assuming that the
representations and warranties of the Agent in this Agreement are correct, the
offer and sale of the Agent's Warrants is not subject to the registration or
prospectus delivery requirements of the Securities Act by virtue of compliance
with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the
Securities Act. Assuming that (A) the representations and warranties of the
Agent in this Agreement are correct, (B) the Agent's Warrants are exercised in
accordance with all of their terms, and (C) the representations and warranties
in the Notice of Exercise attached to the Agent's Warrants are true and correct
when the Notice of Exercise is signed and delivered to the Issuer, the offer
and sale of the Agent's Warrant Shares is not subject to the registration or
prospectus delivery requirements of the Securities Act by virtue of compliance
with Rule 903 (including Rule 903(c)(2)) of Regulation S promulgated under the
Securities Act.
3.20 Placement Authorized. The terms of the Private Placement as
set forth in the Offering Memorandum, and the form of the Offering Memorandum
and exhibits thereto, have been duly authorized by all necessary corporate
action on the part of the Issuer.
3.21 Franchises. The Issuer and its subsidiaries hold all
franchises, approvals, grants, authorizations, licenses, permits, easements,
consents, certificates and orders ("franchises") from all federal, state and
other governmental agencies, except to the extent that the failure to have any
such franchise or franchises would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Issuer and its subsidiaries on a consolidated basis; and the Issuer and its
subsidiaries have not received any notice of proceedings relating to the
revocation or modification of any franchise or franchises which, singly or in
the aggregate, if the subject of any unfavorable decision, ruling or finding,
would have a material adverse effect on the business, properties, financial
condition or results of operations of the Issuer and its subsidiaries on a
consolidated basis.
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3.22 Taxes. The Issuer and its subsidiaries have filed all tax
returns required to be filed by them and have paid all taxes shown as due
thereon; the Issuer or its subsidiaries have not been notified, either orally
or in writing, that any taxing authority is conducting or intends to conduct an
audit of any tax return or report filed by the Issuer or its subsidiaries
concerning their business or properties; and the Issuer has no knowledge of any
tax deficiency which has been asserted or threatened against the Issuer or its
subsidiaries; provided, however, that the foregoing representations and
warranties exclude matters which are immaterial in respect to, or have had and
will have no material adverse effect on the business, properties, financial
condition or results of operations of the Issuer and its subsidiaries on a
consolidated basis.
3.23 Dividends and Distributions. Except as described below, the
Issuer has not, directly or indirectly, declared or paid any dividend or
declared or made any other distribution on or of any of its Common Stock or
Preferred Stock or other securities of any class, nor does the Issuer currently
have any agreement or obligation, whether directly or indirectly, to redeem,
purchase or otherwise acquire any such Common Stock, Preferred Stock or other
securities of any class. The Issuer entered into an April 18, 1995 agreement
with F. Jack Gorry, former President of the Issuer, to issue, register and
tender to Mr. Gorry 130,000 shares of the Issuer's Common Stock (the "Gorry
Shares"), and subsequently entered into an Agreement of Settlement and Mutual
Release dated June 28, 1996 (the "Settlement Agreement"), which provided for
the Issuer to pay $1,700 per month to Mr. Gorry until the sooner of December 1,
1996 or the lifting of the restrictions on the Gorry Shares, plus payment of
certain attorney's fees. The Settlement Agreement also provided that, if the
Gorry Shares have a market value less than $170,000 on the date trading
restrictions on the Gorry Shares are lifted, the Issuer will pay Mr. Gorry the
difference in value within ten days, and, if the Gorry Shares are not freely
transferable by November 30, 1996, the Issuer will pay liquidated damages of
$170,000 to Mr. Gorry by December 10, 1996 and Mr. Gorry will surrender to the
Issuer the stock certificate representing the Gorry Shares. On November 30,
1996 the parties amended the Settlement Agreement (the "Amendment") to provide
for an additional payment to Mr. Gorry of $17,500, continued payments to Mr.
Gorry of $1,700 per month until the sooner of July 1, 1997 or the lifting of
restrictions on the Gorry Shares, and the payment of certain additional
attorney's fees. The Amendment also changed the deadline for lifting of
restrictions from November 30, 1996 to June 30, 1997 and the deadline for
payment of liquidated damages from December 10, 1996 to July 10, 1997.
3.24 Exclusive Agent; No Finder. Other than the Agent and its
agents, there is no person, firm or corporation acting or purporting to act at
the request of the Issuer who is entitled to any brokerage or finder's fee in
connection with sales of Units to the Agent's clients.
3.25 Labor Relations. To the Issuer's knowledge, labor relations
with employees of the Issuer and its subsidiaries are good and no labor
disturbance or stoppage by the employees of the Issuer or its subsidiaries
exists or is imminent which might be expected to materially and adversely
affect the conduct of the business of the Issuer.
3.26 Insurance. The Issuer and its subsidiaries maintain
insurance, which is in full force and effect, of the types and in the amounts
which the Issuer believes are adequate for its business and in line with
insurance maintained by similar companies and businesses, including but not
limited to, insuring all personal property owned or leased by the Issuer
against theft, damage, destruction, acts of vandalism, public liability and all
other risks customarily insured against.
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3.27 No Price Manipulation or Stabilization. Since January 1,
1997, the Issuer has not taken, directly or indirectly, any action designed to
constitute or which has constituted or which might reasonably be expected to
cause or result in, the stabilization or manipulation of the price of any
security issued by the Issuer.
3.28 No Significant Proposed Transactions. The Issuer has not
agreed, or agreed in principle, to merge with or acquire any other business,
division or unit thereof or to sell the Issuer's business or any significant
part of the Issuer's assets otherwise than through transactions occurring in
the ordinary course of the Issuer's business.
3.29 Books and Records. The Issuer and its subsidiaries make and
keep accurate books and records and maintain internal accounting controls which
provide reasonable assurance that (a) transactions are executed in accordance
with management's authorization, (b) transactions are recorded as necessary to
permit preparation of financial statements and to maintain accountability for
assets, (c) access to assets is permitted only in accordance with management's
authorization and, (d) reported assets are compared with existing assets at
reasonable intervals.
4. Representations and Warranties of Agent.
---------------------------------------
The Agent represents and warrants to and for the benefit of the Issuer
that:
4.1 The Agent is a corporation duly organized, validly existing
and in good standing under the laws of the Province of Ontario. The Agent has
the requisite corporate power to carry on its business as presently conducted,
and to enter into and carry out the provisions of this Agreement and the
transactions contemplated hereby.
4.2 All corporate action on the part of the Agent, its directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Agreement by the Agent and the performance of all of the
Agent's obligations hereunder has been taken. This Agreement, when executed
and delivered by the Agent, will, if duly authorized, executed and delivered by
the Issuer, be a valid and binding obligation of the Agent, enforceable against
the Agent in accordance with its terms, except to the extent that rights to
indemnity and contribution hereunder may be limited by federal or state
securities laws or the public policy underlying such laws and except as the
foregoing may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally and by general principles of equity.
4.3 The execution and delivery of this Agreement and the
consummation of the transactions contemplated in this Agreement do not and will
not conflict with and do not and will not result in a breach of any of the
terms of the Agent's incorporating documents or any agreement or instrument to
which the Issuer is a party.
5. Covenants of the Issuer.
-----------------------
The Issuer covenants and agrees with the Agent that:
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5.1 The Issuer shall furnish the Agent with copies of the Offering
Documents, and all amendments and supplements thereto, in each case as soon as
available and in such quantities as the Agent may reasonably request for its
use in connection with the Private Placement.
5.2 The Issuer covenants to comply with all applicable
requirements of Regulation S under the Securities Act in connection with the
Private Placement.
5.3 The Issuer will deliver to the Agent and to its legal counsel
at the time of each Closing a certificate (the "Officer's Certificate")
addressed to the Agent and dated the Closing Date for such Closing, signed by
the Chief Executive Officer or Chief Financial Officer of the Issuer, to the
effect that (i) there has not been, since the respective dates as of which
information is given in the Offering Documents, any material adverse change
(whether financial or otherwise) in the business, affairs, operations, assets,
liabilities (contingent or otherwise) or capital of the Issuer on a
consolidated basis; (ii) all of the representations and warranties contained in
Section 3 hereof are true and correct with the same force and effect as though
expressly made at and as of such Closing, after giving effect to the
transactions contemplated hereby (and subject to the disclosures made on
Schedule A to this Agreement); and (iii) the Issuer has performed and complied
in all material respects with all agreements, covenants, terms and conditions
required to be performed, complied with and satisfied by it up to the time of
such Closing.
5.4 At the time of each Closing, the Issuer will deliver all
required Legal Opinions (as defined in Section 8.7) to the Agent and its
counsel.
5.5 From and including the date that this Agreement is executed
through and including the Closing Date for each Closing, the Issuer will do all
such acts and things reasonably necessary to ensure that all of the
representations and warranties of the Issuer contained in this Agreement or any
Officer's Certificate delivered by the Issuer pursuant to this Agreement remain
true and correct.
5.6 From and including the date that this Agreement is executed
through and including the Closing Date for each Closing, the Issuer will not do
any act or thing that would render any representation or warranty of the Issuer
contained in this Agreement or any Officer's Certificate delivered by the
Issuer pursuant to this Agreement untrue or incorrect.
5.7 Prior to each Closing, the Issuer will allow the Agent to
conduct all due diligence which the Agent may reasonably require.
5.8 At all times during the Exercise Period of the Warrants (as
defined in the Warrants), the Issuer shall have authorized and reserved, for
the exclusive purpose of issuance and delivery upon exercise of the Warrants, a
sufficient number of shares of its Common Stock to provide for the exercise of
the Warrants in accordance with their terms. In addition, at all times during
the Exercise Period of the Agent's Warrants (as defined in the Agent's
Warrants), the Issuer shall have authorized and reserved, for the exclusive
purpose of issuance and delivery upon exercise of the Agent's Warrants, a
sufficient number of shares of its Common Stock to provide for the exercise of
the Agent's Warrants in accordance with their terms.
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5.9 The Issuer will duly and punctually perform all of the
obligations to be performed by it under this Agreement, the Subscription
Agreements, the Warrants and the Agent's Warrants.
5.10 The Issuer will use its best efforts to maintain the quotation
of the Issuer's Common Stock on Nasdaq on either the SmallCap Market or the
National Market System, or to obtain and maintain the listing of the Issuer's
Common Stock for trading on a United States national securities exchange, as
such term is defined in Section 6 of the Exchange Act and rules and regulations
promulgated thereunder.
5.11 Prior to or promptly after each Closing, the Issuer will take
all actions necessary for the Shares issued in such Closing to be quoted for
trading on the Nasdaq SmallCap Market. Promptly after the first exercise of
any Warrants or Agent's Warrants issued in the Private Placement, the Issuer
will take all actions necessary for all of the Warrant Shares and Agent's
Warrant Shares which are issuable as a result of the Private Placement to be
quoted for trading on the Nasdaq SmallCap Market or quoted or listed on such
other automated quotation system or national securities exchange which, at that
time, is the principal market for trading of the Issuer's Common Stock.
5.12 For at least one year after the last Closing of the Private
Placement, the Issuer will engage and adequately compensate a public relations
firm to disseminate news and other corporate information to the North American
stock brokerage community in conformity with applicable laws and regulations.
6. Covenants of the Agent.
----------------------
The Agent covenants and agrees with the Issuer that:
6.1 The Agent will comply with all applicable laws of each
jurisdiction in which it offers the Units for sale on behalf of the Issuer;
provided, however, that the Issuer shall be solely responsible for making any
required filings and obtaining any required permits in respect thereto.
6.2 The Agent will comply with all applicable requirements of
Regulation S under the Securities Act in connection with the Private Placement.
6.3 The Agent will duly and punctually perform all of its
obligations under this Agreement and the Subscription Agreements.
7. Conditions Precedent.
--------------------
The following are conditions precedent to the obligations of the Agent
to complete the transactions contemplated in this Agreement:
7.1 All actions required to be taken by or on behalf of the
Issuer, including the adopting of all requisite resolutions of directors of the
Issuer, will have been taken so as to validly offer, sell, allot, issue and
deliver the Units to the Subscribers.
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7.2 No order prohibiting the offer, sale, allotment, issuance or
delivery of the Units will have been issued and no proceedings for such
purpose, to the knowledge of the Issuer, will be pending or threatened.
7.3 The Issuer will have delivered, at the time of each Closing,
all Legal Opinions (as hereinafter defined) and Officer's Certificates required
under this Agreement.
7.4 The Issuer will, as of the time of each Closing, have complied
with all of its covenants and agreements contained in this Agreement.
7.5 The Agent will have been entirely satisfied with the results
of its due diligence investigations.
7.6 Except as otherwise disclosed in writing by the Issuer to the
Agent, the representations and warranties of the Issuer contained in this
Agreement will, as of the time of each Closing, be true and correct as if such
representations and warranties had been made as of the time of such Closing.
8. Closing.
-------
8.1 The first Closing ("First Closing") of the Private Placement
may be held only on condition that the Minimum Proceeds have been received by
the Agent from the Subscribers and the Merger of XIT Corporation into the
Issuer has been completed. The Issuer hereby represents and warrants that, as
of the date of execution of this Agreement, the Merger has already been
completed.
8.2 Provided that all of the conditions to the First Closing have
been satisfied or waived in accordance with the terms of this Agreement and the
Subscription Agreements, the First Closing shall take place on April 1, 1997 at
9:00 a.m. (Pacific time) or on such other date or at such other time as the
Issuer and the Agent shall mutually agree. If an amount less than the Maximum
Proceeds is received by the Issuer in the First Closing, the Issuer and the
Agent may agree to hold a second Closing (the "Second Closing") on or before
the Termination Date for all or any part of the balance of the Maximum Proceeds
not received by the Issuer in the First Closing. The date of each such Closing
is referred to in this Agreement as a "Closing Date." Prior to each Closing,
all subscription funds received by the Agent will be held by the Agent in trust
for the benefit of the Subscribers.
8.3 Each Closing will be held at the offices of the Issuer located
at 4290 Brickell Street in Ontario, California, and/or such other place or
places as may be mutually acceptable to the Issuer and the Agent.
8.4 Prior to each Closing, the Agent will deliver or cause to be
delivered to the Issuer the Subscription Agreements executed by the
Subscribers.
8.5 Prior to each Closing, the Issuer will deliver to the Agent or
its counsel a certificate of good standing from each jurisdiction where the
Issuer and its subsidiaries are incorporated and are qualified or required to
be qualified to do business as foreign corporations;
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provided, however, that this obligation shall apply with respect to non-U.S.
subsidiaries of the Issuer only to the extent that such certificates (or their
legal equivalent) are reasonably available to the Issuer under the
circumstances.
8.6 The Issuer will cause the definitive instruments representing
the Shares, the Warrants and Agent's Warrants (the "Certificates") to be issued
at each Closing to be executed and made available for inspection by the Agent
or its counsel prior to such Closing.
8.7 At each Closing, the Issuer shall (i) upon its acceptance of
the Subscription Agreements, execute and deliver the Subscription Agreements to
the Agent, and (ii) deliver to the Agent the Officer's Certificate described in
Section 5.3 and such opinions of the Issuer's legal counsel as the Agent
reasonably requires ("Legal Opinions"); following which the Agent will deliver,
or cause to be delivered to the Issuer, by wire transfer or account transfer in
immediately available funds, an amount equal to the Net Proceeds of the Private
Placement (as hereinafter defined) for such Closing. The Issuer will provide
the Agent with its wire or account transfer instructions prior to each Closing.
8.8 Upon receipt of confirmation of the wire or account transfer
of the Net Proceeds of the Private Placement for each Closing, the Issuer shall
deliver the Certificates to the Agent or its counsel, and the Agent shall
arrange for the prompt distribution to the Subscribers of the certificates
representing the Shares and Warrants.
9. Agent's Fee and Expenses.
------------------------
9.1 Immediately prior to each Closing and the release of proceeds
from the sale of Units to the Issuer, the Issuer and Agent shall identify all
Units being sold as to which the Agent is entitled to a fee, with the gross
proceeds of the sale of such Units being referred to herein as the "Gross
Proceeds of the Private Placement."
9.2 On the Closing Date for each Closing the Issuer will pay to
the Agent, in consideration of the services performed by the Agent under this
Agreement, a cash fee of seven percent (7%) of the Gross Proceeds of the
Private Placement (the "Placement Fee") for such Closing. The Placement Fee
shall be in addition to the reimbursement of the Agent's Expenses provided for
in Section 9.3 of this Agreement.
9.3 On the Closing Date for each Closing, the Issuer shall
reimburse in full all of the Agent's legal and out-of-pocket expenses related
to the Private Placement in an amount not to exceed two percent (2%) of the
Gross Proceeds of the Private Placement for such Closing, net of any amounts
previously advanced by the Issuer to the Agent for such purpose (the "Agent's
Expenses"). The Agent shall, as soon as practicable after each Closing,
provide the Issuer with an itemized accounting of the Agent's Expenses for such
Closing.
9.4 With respect to each Closing, the Gross Proceeds of the
Private Placement, less the amount of the Placement Fee and the amount of the
Agent's Expenses, shall constitute the "Net Proceeds of the Private Placement"
for purposes of this Agreement.
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<PAGE> 13
9.5 On the Closing Date for each Closing, the Issuer shall also
grant and deliver to the Agent, as additional consideration hereunder,
non-transferable warrants to purchase such number of shares of Common Stock as
equals 7% of the number of Shares issued to Subscribers at such Closing (the
"Agent's Warrants"). The Agent's Warrants shall be exercisable for a period of
three years from such Closing Date at an exercise price equal to the lesser of
the Average Reported Price and $3.50. The Agent's Warrants shall be in
substantially the same form as that of the Warrants issued to Subscribers at
the Closing, including standard anti-dilution adjustments. With respect to the
shares of Common Stock purchasable upon exercise of the Agent's Warrants (the
"Agent's Warrant Shares"), the Issuer hereby grants to the Agent the same
registration rights provided to Subscribers under Section 9 of the Subscription
Agreements, and the provisions of Section 9 of the Subscription Agreements
(except for Section 9.12) are incorporated herein by this reference
(substituting the word "Issuer" for the word "Company" wherever it appears, the
word "Agent" for the word "Subscriber" wherever it appears, the words "Agent's
Warrants" for the word "Warrants" wherever it appears, and the words "Agent's
Warrant Shares" for the word "Shares" wherever it appears). In connection with
the offer and sale of the Agent's Warrants and the Agent's Warrant Shares to
the Agent, the Agent hereby makes the Subscriber representations and warranties
to the Issuer which are set forth in Sections 7.7, 7.8 and 7.9 of the
Subscription Agreements (substituting the words "Agent's Warrants and Agent's
Warrant Shares" for the word "Units" wherever it appears), all of which
provisions (as thus modified) are incorporated herein by this reference.
9.6 The Issuer will pay its own expenses incident to the
transactions contemplated by this Agreement. The expenses of the Issuer
include, but are not limited to (i) fees and disbursements of counsel for the
Issuer; (ii) costs of the preparation, review, printing or photocopying, and
delivery of the Offering Documents, Subscription Agreements and each amendment
or supplement thereto; and (iii) Issuer's fees and expenses which may be
incurred pursuant to the registration rights provisions referred to in Section
9.5 of this Agreement.
10. Indemnification.
---------------
10.1 The Issuer hereby covenants and agrees to protect, indemnify
and hold harmless the Agent and its directors, officers, employees, solicitors,
attorneys and agents, but specifically excluding any investor in the Private
Placement (individually, an "Indemnified Party" and, collectively, the
"Indemnified Parties") from and against all losses, claims, costs, expenses,
obligations, damages, recoveries, forfeitures or liabilities, including
interest, penalties and reasonable attorneys' fees, which they may suffer or
incur caused by or arising directly or indirectly by reason of:
10.1.1 any information or statement contained in the
Offering Documents or any other representation made by the Issuer to
the Agent or to a Subscriber or potential Subscriber in this Agreement
or the Subscription Agreements being or being alleged to be a material
misrepresentation;
10.1.2 the omission or alleged omission to state in the
Offering Documents a material fact required to be stated therein or
necessary to prevent any statement made therein from being false or
misleading in light of the circumstances under which it was made;
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<PAGE> 14
10.1.3 the Issuer's failure to comply with any
requirement of securities laws or regulations of any jurisdiction
applicable to the Private Placement;
10.1.4 any order made or any inquiry, investigation
(whether formal or informal) or proceeding commenced or threatened by
any regulatory authority based upon an allegation that any untrue
statement of a material fact or alleged omission or any
misrepresentation or alleged misrepresentation of a material fact
exists in the Offering Documents or in any public statement or press
release by the Issuer which prevents or restricts the trading in or
distribution of the Units otherwise permitted;
10.1.5 the Issuer's failure to comply with any of its
obligations hereunder, through no fault of the Agent or Indemnified
Party, including any material breach of or default under any
representation, warranty, covenant or agreement of the Issuer
contained in this Agreement or any other document to be delivered
pursuant to this Agreement;
10.1.6 any order made by any court or regulatory
authority setting aside the sale or issuance of any of the Units,
Agent's Warrants, or underlying securities; or
10.1.7 the failure or inability of the Issuer to issue
and deliver in satisfactory form the instruments representing Units or
Agent's Warrants.
Provided, however, that the Issuer will not be liable in any such case to the
extent that any such loss, claim, damage, cost, expense, obligation, recovery,
forfeiture or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission made in the Offering Documents in reliance
upon and in conformity with information furnished to the Issuer by the Agent
expressly for use therein; and provided, further that such indemnity shall not
inure to the benefit of the Indemnified Parties to the extent that any loss,
claim, damage, cost, expense, obligation, recovery, forfeiture or liability
results from the fact that the Agent failed to send or give a copy of the
Offering Documents to any person at or prior to the confirmation of the sale of
the Units to such person or to the extent any Indemnified Party fails to comply
with the Securities Act in connection with the sale of the Units.
10.2 If any action or claim shall be asserted against an
Indemnified Party in respect of which indemnity may be sought from the Issuer
pursuant to the provisions hereof, or if any potential claim contemplated by
this Section shall come to the knowledge of an Indemnified Party, the
Indemnified Party shall promptly notify the Issuer in writing of the nature of
such action or claim (provided that any failure to so notify shall not affect
the Issuer's liability under this Section unless such delay has prejudiced the
defense of such claim). The Issuer will assume the defense of the action or
claim, including the employment of counsel and the payment of all expenses.
The Indemnified Parties will have the right to employ separate counsel at the
expense of the Issuer in the event of a conflict of interests between the
Issuer and such Indemnified Party or Parties; provided, however, that the
Indemnified Parties shall not unreasonably delay their exercise of this right.
Neither party shall effect any settlement of any such action or claim or make
any admission of liability without the written consent of the other party, such
consent not to be unreasonably withheld or delayed. The indemnity hereby
provided for shall remain in full force and effect and shall not be limited to
or affected by any other indemnity in respect of any matters specified in this
Agreement obtained by the Indemnified Party from any other person and will
continue in full force
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<PAGE> 15
and effect until all possible liability of the Indemnified Parties arising out
of the transactions contemplated by this Agreement has been extinguished by the
operation of law.
10.3 To the extent that any Indemnified Party is not a party to
this Agreement, the Agent shall obtain and hold the right and benefit arising
under this Section on their behalf in trust for and on behalf of such
Indemnified Party.
10.4 The Issuer hereby consents to personal jurisdiction and
service and venue in any court in which any claim which is subject to
indemnification hereunder is brought against the Agent or any Indemnified Party
and to the assignment of the benefit of this Section to any Indemnified Party
for the purpose of enforcement; provided, that nothing herein shall limit the
Issuer's right or ability to contest the appropriate jurisdiction or forum for
the determination of any such claims.
11. Contribution.
------------
11.1 In the event that, for any reason, the indemnity provided for
in Section 10 hereof is held to be illegal or unenforceable, the Agent and the
Issuer shall contribute to the aggregate of all losses, claims, costs, damages,
expenses or liabilities of the nature provided for in Section 10, such that the
Agent shall be responsible for that portion thereof represented by the
percentage that the Placement Fee bears to the Gross Proceeds of the Private
Placement, and the Issuer shall be responsible for the balance.
11.2 Notwithstanding Section 11.1, a person who has committed a
fraudulent misrepresentation shall not be entitled to contribution from any
other party.
11.3 Any party entitled to contribution will, promptly after
receiving notice of commencement of any claim, action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party under this Section, notify such party from whom
contribution may be sought; provided, however, that the omission of any party
to notify such other party or parties shall not relieve the party or parties
from whom contribution is sought from any obligation hereunder to the extent
such party or parties were not adversely affected by such omission.
11.4 The right to contribution provided in this Section shall be in
addition to, and not in derogation of, any other right to contribution which
the Agent may have by statute or otherwise by law.
12. Termination of Agent's Obligations.
----------------------------------
12.1 With respect to each Closing, the Agent may terminate its
obligations hereunder and the Subscribers' obligations under the Subscription
Agreements, by written notice to the Issuer, in the event that after the date
hereof and at or prior to the Closing Date for the such Closing:
12.1.1 any order prohibiting or restricting the
distribution of the Units is made, or proceedings are announced,
commenced or threatened for the making of any such order,
15
<PAGE> 16
by any securities commission or exchange or any other competent
authority and has not been rescinded, revoked or withdrawn;
12.1.2 any inquiry, action, suit or investigation
(whether formal or informal) or other proceeding in relation to the
Issuer or any of its respective directors or executive officers is
announced, commenced or threatened by any securities commission or
exchange or by any other competent authority if, in the opinion of the
Agent, the announcement, commencement or threatening thereof adversely
affects the distribution of the Units;
12.1.3 the Issuer is in material breach of, default
under, or non-compliance with any representation, warranty, term or
condition of this Agreement;
12.1.4 the Units cannot, in the opinion of the Agent, be
profitably marketed due to the state of the financial markets;
12.1.5 there shall have occurred any material change from
the disclosures set forth in the Offering Documents, as determined by
the Agent in its sole discretion, in the business, operations, capital
or condition (financial or otherwise) or the results of operations of
the Issuer and its subsidiaries (taken as a whole), or its properties,
assets, liabilities or obligations (absolute, accrued, contingent or
otherwise);
12.1.6 there should develop, occur or come into effect or
existence any event, action, state, condition or financial occurrence,
or any catastrophe, of national or international consequence, any
action, law or regulation, or any other occurrence of any nature
whatsoever, which, in the sole opinion of the Agent, seriously
adversely affects or involves, or may seriously adversely affect or
involve, the financial markets or the business, operations or affairs
of the Issuer and its subsidiaries (taken as a whole), the
distribution of the Units, or a Subscriber's decision to purchase the
Units, even if the Subscriber has already executed a Subscription
Agreement for all or a portion of the Units offered; or
12.1.7 the Agent is not satisfied with the results of its
due diligence investigations relating to the Issuer and its
subsidiaries.
12.2 The right of the Agent to terminate its obligations under this
Agreement is in addition to such other remedies as it has or may have in
respect of any default, act or failure to act of the Issuer in respect of any
of the matters contemplated by this Agreement.
13. Garnishing Orders.
-----------------
13.1 If at any time before the completion of any Closing of the
Private Placement the Agent receives a garnishing order or other form of
attachment purporting to attach or garnish a part or all of the sale price of
any of the Units, the Agent may pay the amount purportedly attached or
garnished into court.
13.2 Any payment by the Agent into court contemplated in this
Agreement is deemed to have been received by the Issuer as payment by the Agent
against the sale price of the Units to
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<PAGE> 17
the extent of the amount paid, and the Issuer is bound to issue and deliver the
Units proportionately to the amount paid by the Agent.
13.3 The Agent is not bound to ascertain the validity of any
garnishing order or attachment, or whether in fact it attaches any monies held
by the Agent, and the Agent may act with impunity in responding to any
garnishing order or attachment by payment into court.
13.4 The Issuer shall release, indemnify and save harmless the
Agent in respect of all damages, costs, expenses or liabilities arising from
any acts of the Agent under this Section 13.
14. Notices.
-------
14.1 Any notice required or permitted under this Agreement shall be
given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified by hand or by professional courier service, or by
telecopier via the telefax numbers indicated below. Any notice shall be
addressed to the party to be notified at the addresses indicated below:
In the case of the Issuer: MicroTel International, Inc.
4290 East Brickell Street
Ontario, California 91761, U.S.A.
Attention: Carmine T. Oliva
Telefax: (909) 391-4558
with a copy to: Gallagher, Briody & Butler
212 Carnegie Center, Suite 402
Princeton, New Jersey 08540, U.S.A.
Attention: Thomas P. Gallagher, Esq.
Telefax: (609) 452-6000
In the case of the Agent: Yorkton Securities Inc.
10th Floor, Bentall 4
1055 Dunsmuir Street
Vancouver, British Columbia
Canada V7X 1L4
Attention: Gordon Keep
Telefax: (604) 640-0512
with a copy to: Miller & Holguin
1801 Century Park East
Seventh Floor
Los Angeles, California 90067, U.S.A.
Attention: J. Brad Wiggins, Esq.
Telefax: (310) 557-2205
14.2 The Issuer and the Agent may change their respective addresses
for notice by notice given in the manner referred to in this Section, upon ten
(10) days' advance notice.
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<PAGE> 18
15. Miscellaneous.
-------------
15.1 Survival. The representations and warranties made in this
Agreement shall be true at the time of each Closing as though they were made at
the time of such Closing, and they shall survive the completion of the
transactions contemplated under this Agreement for one year thereafter. The
provisions of this Agreement which, by their terms, require performance by a
party to this Agreement subsequent to any Closing of the Private Placement
shall survive such Closing.
15.2 Further Assurances. The parties hereto shall execute and
deliver all such further documents and instruments and do all such acts and
things as a party may, either before or after each Closing of the Private
Placement, reasonably require in order to carry out the full intent and meaning
of this Agreement.
15.3 Successors and Assigns. This Agreement will inure to the
benefit of and be binding upon the Issuer, the Agent, and their respective
successors and representatives. This Agreement and its conditions and
provisions are intended to be and are for the sole and exclusive benefit of the
parties to it and their respective successors and representatives, and not for
the benefit of any other person, firm or corporation unless expressly stated
otherwise. This Agreement may not be assigned by any party hereto without the
prior written consent of both of the parties hereto.
15.4 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
15.5 Execution and Delivery. The parties hereto may rely on
delivery by facsimile machine of an executed copy of this Agreement, and
acceptance by any party of such facsimile copy shall be equally effective to
create a valid and binding agreement between the parties in accordance with the
terms hereof.
15.6 Governing Laws. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of
California applicable to contracts between California residents entered into
and to be performed entirely within the State of California.
15.7 Titles. The titles of the sections and subsections of this
Agreement are for the convenience of reference only and are not to be
considered in construing this Agreement.
15.8 Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties with respect to the subject
matters herein, and supersedes and replaces any prior agreements and
understandings, whether oral or written, between them with respect to such
matters. Each party to this Agreement acknowledges that no representation,
inducement, promise or agreement, whether written or oral, has been made by any
party, or anyone acting on behalf of any party, which is not embodied or
referenced herein, and that no other agreement, statement, or promise not
contained or referenced in this Agreement shall be valid or binding.
15.9 Amendment. Any modification of this Agreement will be
effective only if it is in writing and signed by all parties to this Agreement.
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<PAGE> 19
15.10 Waiver. Any party to this Agreement may waive compliance by
the other with any of the terms, provisions and conditions set forth in this
Agreement; provided, however, that any such waiver must be in a writing
specifically setting forth the provisions thus waived and may not result in a
material change to any of the material terms of the Private Placement unless
such change is consented to by each Subscriber participating in the Private
Placement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year herein above first written.
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
- ---------------------- -------------------------------------
Title: President/CEO
YORKTON SECURITIES INC.
By: /s/ Gordon B. Keep
- ---------------------- -------------------------------------
Title: V.P. Corporate Finance
19
<PAGE> 20
SCHEDULE A
----------
[None]
20
<PAGE> 1
Exhibit 10.17
THE SECURITIES TO WHICH THIS AGREEMENT RELATES HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY
STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS
OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON" (AS DEFINED
HEREIN) EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER
THE SECURITIES ACT COVERING THE SECURITIES, (2) UPON DELIVERY TO THE COMPANY OF
AN OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE
SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144,
RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OR
(B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT, OR (3) AS OTHERWISE PERMITTED UNDER THE
TERMS OF SUBSECTION 10.2 OF THIS AGREEMENT.
SUBSCRIPTION AGREEMENT
Dated for reference purposes March 21, 1997
TO: MICROTEL INTERNATIONAL, INC. PERSONAL & CONFIDENTIAL
2040 Fortune Drive, Suite 102
San Jose, California 95131
1. SUBSCRIPTION FOR UNITS. The undersigned (the "Subscriber")
hereby irrevocably subscribes for and agrees to purchase from Microtel
International, Inc. (the "Company"), subject to the terms and conditions set
forth in this Subscription Agreement, units (the "Units") consisting of one
share ("Share") of $.0033 par value common stock of the Company (the "Common
Stock") and a one-quarter non-transferable share Purchase Warrant ("Warrant")
for the total purchase price set forth next to the Subscriber's name on page 14
hereof (the "Total Purchase Price"). Each full Warrant shall entitle the
holder to purchase one (1) additional share of the Company's Common Stock at a
price equated to a 30% premium to the ten day moving average in market price of
the Company's Common Stock for the ten days immediately preceding the date of
contracting under this Subscription Agreement. The Warrants are subject to
redemption under certain circumstances as set forth in the Warrant Agreement.
All dollar amounts set forth herein refer to U.S. dollars, unless otherwise
indicated. The Units form part of a larger private placement (the "Private
Placement") of Units for an aggregate minimum offering price of $5,000,000 and
an aggregate maximum offering price of $10,000,000. The Units are being sold
by the Company pursuant to an agency agreement dated for reference purposes
March 21, 1997 (the "Agency Agreement") between Yorkton Securities Inc. (the
"Agent") and the Company pursuant to which the Agent has agreed to act as the
sole and exclusive agent of the Company to solicit offers to purchase the Units
on a best efforts basis. Subject to the terms hereof, this subscription will
be effective upon its acceptance by the Company.
2. NUMBER OF UNITS. The number of Units subscribed for herein
shall be determined by dividing the Total Purchase Price by the Price Per Share
as defined in Section 3 hereof.
3. PRICE PER UNIT. The price per Unit ("Price Per Unit") shall
be equal to 80% of the average closing bid price of the Company's Common Stock
as it trades on the Nasdaq SmallCap Market for the 10 trading days immediately
preceding the date of contracting under this subscription agreement, provided,
however, that in no event will the Price Per Unit based on this calculation be
less than $2.50 or more than $3.50.
4. SUBSCRIPTION. The Subscriber must deliver to the Agent a
fully completed and executed copy of this Subscription Agreement, including
completed registration and delivery instructions appearing after the
Subscriber's signature hereto.
<PAGE> 2
5. PAYMENT. Together with this Subscription Agreement, the
Subscriber must deliver to the Agent the Total Purchase Price of the Units
subscribed for hereunder, paid by certified check or bank draft payable to the
Agent or payable in such other manner as may be specified by the Agent.
6. TERMS OF CLOSING.
6.1 Closing. Provided that the Agent has received
Private Placement subscriptions equaling or exceeding the aggregate minimum
offering price of $5,000,000 and all other terms and conditions of this
Subscription Agreement have been satisfied, the closing of the Private
Placement (the "Closing") shall take place on such date or dates as the Company
and the Agent shall mutually agree (the "Closing Date"). The Closing shall be
held at the place or places provided for in the Agency Agreement. At the
Closing, the proceeds of the Private Placement will be delivered to the Company
(net of amounts due to the Agent under the terms of the Agency Agreement) and
certificates (the "Certificates") representing the Units (which shall contain
all legends required under the terms of this Subscription Agreement) will be
delivered to the Agent for the benefit of the Subscriber.
6.2 Failure to Close. In the event that the Agent does
not receive the aggregate minimum offering price required to close the Private
Placement, or any other condition to the Closing is not satisfied or waived in
accordance with the terms of this Subscription Agreement, the Total Purchase
Price of the Units, exclusive of any interest thereon, shall promptly be
returned by the Agent to the Subscriber.
7. SUBSCRIBER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. The
Subscriber hereby represents, warrants and covenants to the Company and the
Agent as of the date of this Subscription Agreement and at the Closing that:
7.1 Investment Intent. The Subscriber's acquisition of
the Units is solely for the Subscriber's own account, for investment, and not
with a view to, or to offer or sell for an issuer in connection with, any
distribution thereof, and the Subscriber has no present intention of selling or
distributing any of the Units. The Subscriber has no contract, arrangement or
understanding with the Company, the Agent, or any other person to participate
in a distribution of the Units, is not an affiliate of a person which has such
a contract, arrangement or understanding, and will not act on behalf of any of
the foregoing persons in any offer or sale of the Units. The Subscriber is
acquiring the Units in the ordinary course of its business.
7.2 Access to Information. The Subscriber has received a
copy of the offering memorandum for the Private Placement (the "Offering
Memorandum") and each of the following documents, which are attached as
Exhibits to the Offering Memorandum, including: (i) the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1995, (ii) the Proxy
Statement for the Company's Annual Meeting of Stockholders held on August 15,
1996, and (iii) the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1996 (collectively referred to in this Subscription
Agreement as the "Offering Documents"), and, if desired, has sought and
obtained from management of the Company such additional information concerning
the business, management and financial affairs of the Company as the Subscriber
has deemed necessary or appropriate in determining whether or not to purchase
the Units. The Subscriber understands and acknowledges that the Agent has been
engaged solely to act as placement agent for the offering of the Units and has
not independently verified any of the information contained in the Offering
Documents and assumes no responsibility for the accuracy or completeness
thereof. The Subscriber acknowledges that it has not relied on the Agent or
any person affiliated or associated with the Agent in connection with its
investigation of the information in the Offering Documents or in connection
with its investment decision.
2
<PAGE> 3
7.3 Accredited Investor; Knowledge and Experience. The
Subscriber is an "accredited investor," as that term is defined in Rule 501(a)
under the Securities Act, a copy of which the undersigned has read and
understands. The Subscriber has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in the Units, and it is able to bear the economic risk of losing up
to the entire amount of its investment therein. Further, the individual
executing this Subscription Agreement has such knowledge and experience in
financial and business matters that he is capable of utilizing the information
made available to him in connection with the offering of the Units, of
evaluating the merits and risks of an investment in the Units, and of making an
informed investment decision with respect to the Units, including assessment of
the risk factors set forth in the Offering Documents.
7.4 Suitability. The Subscriber has carefully
considered, and has, to the extent the Subscriber deems it necessary, discussed
with the Subscriber's own professional legal, tax and financial advisers the
suitability of an investment in the Units for the Subscriber's particular tax
and financial situation, and the Subscriber has determined that the Units are a
suitable investment.
7.5 Private Offering. The offer to sell the Units was
directly communicated to the Subscriber by the Agent. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
7.6 Compliance with Regulation S. The Subscriber
acknowledges that a condition to the sale of the Units to the Subscriber is
that the Company and the Agent must be satisfied that registration under the
Securities Act is not required by virtue of compliance with Regulation S
thereunder.
7.7 No Directed Selling Efforts. The Subscriber is not
aware of any Directed Selling Efforts (as hereinafter defined) having been made
in the United States with respect to the Units by the Company, the Agent, their
respective affiliates, or any person acting on behalf of any of the foregoing.
In addition, the Subscriber, its affiliates, and persons acting on behalf of
the foregoing have not made and will not make, any Directed Selling Efforts in
the United States with respect to the Units. For purposes of this Subscription
Agreement, "Directed Selling Efforts" include any activity undertaken for the
purpose of, or that could reasonably be expected to have the effect of,
conditioning the market in the United States for the Units, including, but not
limited to, the placement of an advertisement in a publication with a general
circulation in the United States that refers to the offering of the Units, the
mailing of promotional materials to persons located in the United States or the
holding of promotional meetings or seminars in the United States.
7.8 Offshore Transaction. The offer and sale of the
Units to the Subscriber qualifies as an Offshore Transaction. For purposes of
this Subscription Agreement, the term "Offshore Transaction" means that:
(1) The Subscriber was outside the United States
at the time the Units were offered for sale to the Subscriber; and
(2) The Subscriber was outside the United States
at the time the Subscriber originated the buy order for the Units,
including, but not limited to, the time when the Subscriber signed and
delivered this Subscription Agreement and otherwise subscribed for or
offered or agreed to purchase the Units.
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In this Subscription Agreement, the term "United States" means the United
States of America, its territories and possessions, any State of the United
States, and the District of Columbia. Notwithstanding the foregoing definition
of "Offshore Transaction," the offer and sale of the Units to the Subscriber
shall not constitute an "Offshore Transaction" if the Subscriber is acquiring
the Units for the account or benefit of any specifically targeted, identifiable
group of U.S. citizens abroad, such as members of the U.S. armed forces serving
overseas, but shall constitute an "Offshore Transaction" if the Subscriber is a
person excluded from the definition of "U.S. Person" pursuant to Section
7.9(2)(f) of this Subscription Agreement or is a person holding an account
excluded from the definition of "U.S. Person" pursuant to Section 7.9(2)(a) of
this Subscription Agreement, solely in its capacity as a holder of such an
account.
7.9 Non-U.S. Person. The Subscriber is not a U.S.
Person, as such term is defined below, and is not acquiring the Shares for the
account or benefit of any U.S. Person.
(1) Definition of U.S. Person. For purposes of
this Subscription Agreement, the term "U.S. Person" means:
(a) Any natural person resident in the
United States;
(b) Any partnership or corporation
organized or incorporated under the laws of the United States;
(c) Any estate of which any executor or
administrator is a U.S. Person;
(d) Any trust of which any trustee is a
U.S. Person;
(e) Any agency or branch of a foreign
entity located in the United States;
(f) Any non-discretionary account or
similar account (other than an estate or trust) held by a
dealer or other fiduciary for the benefit or account of a U.S.
Person;
(g) Any discretionary account or similar
account (other than an estate or trust) held by a dealer or
other fiduciary organized, incorporated, or (if an individual)
resident in the United States; and
(h) Any partnership or corporation if
organized or incorporated under the laws of any foreign
jurisdiction, and formed by a U.S. Person principally for the
purpose of investing in securities not registered under the
Securities Act, unless it is organized or incorporated, and
owned, by accredited investors (as defined in Rule 501(a)
under the Securities Act), who are not natural persons,
estates or trusts.
(2) Exclusions from Definition. Notwithstanding
the foregoing definition of "U.S. Person":
(a) Any discretionary account or similar
account (other than an estate or trust) held for the benefit
or account of a non-U.S. Person by a dealer or other
professional fiduciary organized, incorporated, or (if an
individual) resident in the United States shall not be deemed
a U.S. Person.
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(b) Any estate of which any professional
fiduciary acting as executor or administrator is a U.S. Person
shall not be deemed a U.S. person if an executor or
administrator of the estate who is not a U.S. Person has sole
or shared investment discretion with respect to the assets of
the estate, and the estate is governed by foreign law.
(c) Any trust of which any professional
fiduciary acting as trustee is a U.S. Person shall not be
deemed a U.S. Person if a trustee who is not a U.S. Person has
sole or shared investment discretion with respect to the trust
assets, and no beneficiary of the trust (and no settlor if the
trust is revocable) is a U.S. Person.
(d) An employee benefit plan established
and administered in accordance with the law of a country other
than the United States and customary practices and
documentation of such country shall not be deemed a U.S.
Person.
(e) Any agency or branch of a U.S.
Person located outside the United States shall not be deemed a
U.S. Person if the agency or branch operates for valid
business reasons, and the agency or branch is engaged in the
business of insurance or banking and is subject to substantive
insurance or banking regulation, respectively, in the
jurisdiction where located.
(f) The International Monetary Fund, the
International Bank for Reconstruction and Development, the
Inter-American Development Bank, the Asian Development Bank,
the African Development Bank, the United Nations, and their
agencies, affiliates and pension plans, and any other similar
international organizations, their agencies, affiliates and
pension plans shall not be deemed U.S. Persons.
7.10 No Fairness Determination. The Subscriber
understands that no governmental or other agency has reviewed or approved the
terms of the Subscriber's investment in the Units or the accuracy or adequacy
of the Offering Documents, nor has any such agency made any finding or
determination as to the fairness of an investment in the Units or made any
recommendation or endorsement of the Units.
7.11 Truth and Accuracy. All representations and
warranties made by the Subscriber in this Subscription Agreement are true and
accurate as of the effective date of this Subscription Agreement and shall be
true and accurate as of the Closing Date. If such representations and
warranties shall not be true and accurate in any respect, the Subscriber will,
prior to the Closing, give written notice of such fact to the Company
specifying which representations and warranties are not true and accurate and
the reasons therefor.
7.12 Authority. The individual executing and delivering
this Subscription Agreement on behalf of the Subscriber has been duly
authorized and is duly qualified to execute and deliver this Subscription
Agreement on behalf of the Subscriber in connection with the purchase of the
Units; the signature of such individual is binding upon the Subscriber; the
Subscriber is duly organized and subsisting under the laws of the jurisdiction
in which is was organized; and the Subscriber was not formed for the specific
purpose of acquiring the Units.
7.13 No Violation. The execution and delivery of this
Subscription Agreement and the consummation of the transactions or performance
of the obligations contemplated by this Subscription Agreement do not and will
not violate any term of the Subscriber's charter or bylaws and will not result
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<PAGE> 6
in a breach of any term of, or constitute a default under, any statute,
indenture, mortgage, other agreement or instrument to which the Subscriber is a
party or by which it is bound, or any order, writ, judgment or decree.
7.14 Enforceability. The Subscriber has duly executed and
delivered this Subscription Agreement and (subject to acceptance by the
Company) it constitutes a valid and binding agreement of the Subscriber
enforceable in accordance with its terms against the Subscriber, except as such
enforceability may be limited by principles of public policy, and subject to
laws of general application relating to bankruptcy, insolvency and the relief
of debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies.
7.15 Acceptance by Company Required. The Subscriber
acknowledges that this Subscription Agreement is not enforceable by the
Subscriber unless it has been accepted by the Company.
7.16 Notice of Company's Acceptance Waived. The
Subscriber waives any requirement for the Company to communicate its acceptance
of this Subscription Agreement to the Subscriber.
7.17 Reliance on Own Advisers. In connection with the
Subscriber's investment in the Units, the Subscriber has not relied upon the
Company or the Agent or their respective legal and tax advisers for legal or
tax advice, and has, if desired, in all cases sought the advice of the
Subscriber's own personal legal counsel and tax advisers.
7.18 Confidentiality of Information. The Subscriber
acknowledges and understands that certain information given in the Offering
Memorandum has not yet been disclosed to the public, and the Subscriber agrees
not to disclose such information or to trade in the securities of the Company
until such information has been publicly disclosed by the Company.
8. COMPANY'S REPRESENTATIONS, WARRANTIES AND COVENANTS. The
Company hereby represents, warrants and covenants as of the date of this
Subscription Agreement and at the Closing that, except as otherwise disclosed
in the Offering Documents:
8.1 Organization. The Company has been duly incorporated
and organized and is validly existing in good standing under the laws of the
State of Delaware.
8.2 Good Standing. The Company and its subsidiaries are
duly qualified to do business as foreign corporations in good standing in those
jurisdictions which require such qualification except to the extent that
failure to so qualify would not have a material adverse effect on the Company.
8.3 Authority. The Company has corporate power and
authority to enter into and perform this Subscription Agreement, to own its own
properties and assets, and to carry on its business as it is currently being
conducted. All corporate action on the part of the Company, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Subscription Agreement by the Company and the performance
of all of the Company's obligations hereunder has been duly taken.
8.4 Enforceability. This Subscription Agreement, when
executed and delivered by the Company and duly authorized, executed and
delivered by the Subscriber, will be a binding obligation on the Company,
enforceable in accordance with its terms, except as may be limited by
principles of public policy, and subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
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8.5 No Violation. The execution and delivery of this
Subscription Agreement and the consummation of the transactions or performance
of the obligations contemplated by this Subscription Agreement do not and will
not violate the Company's charter or bylaws and will not result in a breach of
any term of, or constitute a default under, any statute, indenture, mortgage,
other agreement or instrument to which the Company or any of its subsidiaries
is or are a party or by which any of them is or are bound, or any order, writ,
judgment or decree.
8.6 Actions and Claims. To the best of the Company's
knowledge, there are no actions or proceedings of any kind whatsoever
outstanding, pending, contemplated or threatened relating to the bankruptcy or
insolvency of the Company or any of its subsidiaries. Except as set forth in
the Offering Memorandum, to the best of its knowledge, there are no other
claims, actions, suits, judgments, investigations or proceedings of any kind
whatsoever outstanding, pending or threatened against or affecting the Company,
its subsidiaries, or the Company's directors, officers or promoters, at law or
in equity or before or by any federal, state, municipal or other governmental
department, commission, board, bureau or agency of any kind whatsoever which
could materially affect its business or financial condition and, to the best of
its knowledge, there is no basis therefor.
8.7 Disclosure. The Company's Offering Documents do not,
as of the respective dates thereof, contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
made therein, in light of the circumstances under which they have been made,
not misleading.
8.8 Authorized and Validly Issued Shares. The authorized
and issued capital stock of the Company as of the dates set forth in the
Offering Documents is as disclosed in the Offering Documents, and the issued
and outstanding shares of Common Stock of the Company are fully paid and
non-assessable. The Company has sufficient authorized and unissued shares of
Common Stock to provide for the issuance and delivery of the Shares and will
maintain sufficient authorized and unissued shares of Common Stock to provide
for the issuance and delivery of shares of Common Stock upon exercise of the
Warrants ("Warrant Shares"). The Shares and the Warrant Shares, when issued in
the manner contemplated by the provisions of this Subscription Agreement and
the Warrants, will be duly authorized and validly issued and will be fully paid
and non-assessable.
8.9 Convertible Securities. Except as set forth in the
Offering Memorandum, no securities convertible or exchangeable into Common
Stock of the Company or agreements, warrants, options, rights or privileges for
the purchase or other acquisition of any unissued securities of the Company are
outstanding as of the date hereof.
8.10 Intellectual Property Rights. The Company or its
subsidiaries own, possess or have access to adequate rights to use all material
patents, patent rights, inventions, trademarks, service marks, trade names,
copyrights and proprietary rights necessary for the conduct of its business as
described in the Offering Documents; and the Company has no knowledge of any
infringement of or conflict with rights of others, or any claims thereof, with
respect to any patents, patent rights, inventions, trademarks, service marks,
trade names, copyrights or other proprietary rights, the effect of which
infringement, conflict or claims would be materially adverse to the Company.
8.11 Financial Statements. The financial statements
included in the Offering Documents (the "Financial Statements") are true and
correct in all material respects and present fairly and accurately the
financial position and results of the operations of the Company and its
subsidiaries for the periods shown therein, and the Financial Statements have
been prepared in accordance with accounting
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<PAGE> 8
principles generally accepted in the United States applied on a consistent
basis except for normal year-end adjustments.
8.12 Change in Circumstances. Except as disclosed in the
Offering Memorandum, since September 30, 1996 there has not been any adverse
material change of any kind whatsoever in the financial position or condition
of the Company or of any of its subsidiaries, or any damage, loss or other
change of circumstances of any kind whatsoever materially affecting the
business or assets of the Company or of any subsidiaries or the right or
capacity of the Company or of any subsidiaries to carry on their business.
8.13 Defaults. Since September 30, 1996, neither the
Company nor any of its subsidiaries has defaulted, or is currently in default
(i) with respect to the payment of interest or principal on any material
indebtedness of the Company or its subsidiaries, or (ii) under any material
contract to which the Company or any of its subsidiaries is a party.
8.14 Stop Orders. No order prohibiting the sale of the
Company's securities has been issued against the Company or, to Company's
knowledge, its directors, officers or promoters, and no proceedings for this
purpose have been instituted, are pending, or, to its knowledge, contemplated
or threatened.
8.15 Transfer Agent. American Securities Transfer, Inc.,
having its principal office in Lakewood, Colorado, has been duly appointed as
the transfer agent for the Company's Common Stock.
8.16 Domestic Reporting Company. The Company is a
"domestic issuer," as such term is defined in Rule 902 of Regulation S, and has
a class of securities registered pursuant to Section 12(b) or 12(g) of the
United States Securities Exchange Act of 1934, as amended (the "Exchange Act")
or is required to file reports pursuant to Section 15(d) of the Exchange Act.
8.17 Exchange Act Reports. At the time of commencement of
the Private Placement, the Company had filed all the material required to be
filed pursuant to Section 13(a) or 15(d) of the Exchange Act for a period of at
least the twelve months immediately prior thereto, and the Company has since
remained, and continues to remain, current in satisfying such filing
obligations.
8.18 No Directed Selling Efforts. The Company, its
affiliates, and persons acting on behalf of the foregoing have not made and
will not make any Directed Selling Efforts in the United States with respect to
the Shares.
8.19 Use of Proceeds. The Company intends to use the net
proceeds of the Private Placement for working capital purposes, primarily to
assist the Company in the development, marketing and distribution of its
telephone testing and modem products as well as the development of its contract
manufacturing operations as well as other products, as more fully described in
the Offering Memorandum.
8.20 No Stockholder Approval. The Company is not required
under the National Association of Securities Dealers Bylaws to obtain
stockholder approval prior to offering or selling the Shares in the Private
Placement.
9. REGISTRATION RIGHTS. The Company agrees, on the following
terms and subject to the following conditions, to register under the Securities
Act the resale of all of the Shares purchased by the Subscriber in the Private
Placement, and all Shares issuable pursuant to the exercise of the Warrants,
any securities issued or issuable by way of stock dividend or any other
distribution with respect to or in
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exchange for, or in replacement of, such Shares, by stock split, or in
connection with a combination of shares, recapitalization, merger,
consolidation, amalgamation or other reorganization (collectively, the
"Registrable Securities"), at the Company's own expense, with the exception of
any legal and advisory fees or expenses incurred by the Subscriber in
connection with the registration.
9.1 Filing of Registration Statement. The Company shall
prepare and file with the United States Securities and Exchange Commission
("SEC") not later than 60 days after the Closing Date a registration statement
on an appropriate form (the "Registration Statement") for registration under
the Securities Act of the resale of the Registrable Securities.
9.2 Information. In connection with the preparation of
the Registration Statement:
(1) The Subscriber shall furnish to the Company
all information reasonably requested by the Company (including, for
example, information regarding the Subscriber's intended method of
disposition of the Registrable Securities) for inclusion in the
Registration Statement and response to SEC comments and questions.
(2) As the Subscriber may be deemed a statutory
underwriter of any Shares sold by the Subscriber under the
Registration Statement, the Company shall give the Subscriber and its
legal counsel and accountants such access to copies of the Company's
records and documents and such opportunities to discuss the business
of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be
reasonably necessary, in the opinion of the Subscriber or its legal
counsel, to conduct a reasonable investigation within the meaning of
the Securities Act.
9.3 Effectiveness of Registration Statement. The Company
shall use its best efforts to cause the Registration Statement to become
effective within 150 days after the Closing Date (but if not effective within
such period, the Company shall continue to use its best efforts to cause the
Registration Statement to become effective as soon as possible thereafter) and
to keep the Registration Statement effective thereafter until the earlier of
(i) the date on which all Registrable Securities have been resold pursuant to
the Registration Statement or otherwise resold without restriction under the
Securities Act, or (ii) the date on which is ended the two-year period
referenced in Rule 144(k) under the Securities Act or any successor rule or
subsection relating to the resale of "restricted securities" by "non-
affiliates" of an issuer, as such terms are defined in the Securities Act and
the rules and regulations promulgated thereunder.
9.4 Amendments and Supplements. The Company shall
prepare and file with the SEC such amendments and supplements to the
Registration Statement and the prospectus used in connection with the
Registration Statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of the Registrable Securities.
9.5 Copies of Prospectuses. The Company shall furnish to
the Subscriber such numbers of copies of prospectuses or prospectus documents
conforming with the requirements of the Securities Act as the Subscriber may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by the Subscriber.
9.6 Blue Sky Registrations. The Company shall use its
best efforts to register and qualify the Registrable Securities under the state
securities or Blue Sky laws ("State Laws") of such jurisdictions as the
Subscriber reasonably requests.
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9.7 Quiet Periods. The Subscriber agrees that, upon its
receipt of any notice from the Company of the happening of any event which
makes any statement made in the Registration Statement, the prospectus or any
document incorporated therein by reference, untrue in any material respect or
which requires the making of any changes in the Registration Statement, the
prospectus or any document incorporated therein by reference, in order to make
the statements therein not misleading in any material respect, the Subscriber
will forthwith discontinue disposition of Registrable Securities under the
prospectus related to the Registration Statement until the Company provides the
Subscriber with copies of the supplemented or amended prospectus or prospectus
documents, or until the Subscriber is advised in writing by the Company that
the use of the prospectus may be resumed. The Company agrees to provide the
Subscriber with such copies of the supplemented or amended prospectus or
prospectus documents, or notice that use of the prospectus may be resumed, as
soon as reasonably practicable.
9.8 Trading Market. The Company covenants to use its
best efforts to maintain a continuous trading market for its Common Stock on
the Nasdaq SmallCap Market or National Market System or a United States
national securities exchange throughout the period that the registration rights
afforded by this Section 9 remain in effect.
9.9 Compliance with Anti-Manipulation Rules. The
Subscriber agrees that, with respect to the offering for resale of the
Registrable Securities, the Subscriber will comply with Rules 10b-6 and 10b-7
promulgated under the Exchange Act and such other or additional
anti-manipulation rules then in effect (the "Anti-Manipulation Rules") until
such offering has been completed. The Company also agrees to comply with the
Anti-Manipulation Rules with respect to the offering for resale of the
Registrable Securities until such offering has been completed.
9.10 Indemnification. To the extent permitted by law, the
Company agrees to indemnify and hold harmless the Subscriber and its affiliates
and agents, and the Subscriber agrees to indemnify and hold harmless the
Company and its affiliates and agents:
(1) against any losses, claims, damages and
liabilities and any legal or other costs and expenses reasonably
incurred by such indemnified parties in connection with investigating
or defending any such loss, claim, damage liability, or action to
which such parties may become subject under the Securities Act or
other federal or state law, insofar as such losses, claims, damages,
liabilities, costs or expenses (or actions in respect thereof) did not
arise out of and were not based upon written information furnished by
such parties expressly for use in the Registration Statement; and
(2) for amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is
effected by the indemnifying party without the prior written consent
of the other party to this Subscription Agreement, which consent shall
not be unreasonably withheld.
9.11 Enforcement. In the event of a material breach of
the terms of this Section 9 by the Company, the Subscriber will be entitled to
enforce its rights under this Section 9 specifically (without posting a bond or
other security), to recover damages by reason of any breach of any provision
hereof, and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach by the Company of the provisions hereof, and that the Subscriber
may in its sole discretion apply to a court of competent jurisdiction for
specific performance and/or injunctive relief in order to enforce or prevent
any violation of the provisions hereof. In addition, upon the occurrence of a
material breach by the Company or by the Subscriber of this Section 9, the
breaching party shall pay all costs and expenses (including the prevailing
party's attorney's fees and
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expenses) reasonably incurred in connection with the preservation and
enforcement of such party's rights hereunder.
9.12 Subsequent Holders. Any person who acquires
Registrable Securities from the Subscriber in a transaction that is permitted
under Section 10 of this Subscription Agreement and that does not result in
such person receiving securities which are free of restrictions on transfer in
the United States and to U.S. Persons, such person shall be entitled to the
benefit of all of the rights and privileges set forth in this Section 9,
provided that such person agrees in a writing to the Company to undertake all
of the obligations of the Subscriber under this Section 9.
10. RESTRICTIONS ON TRANSFER.
10.1 Securities Act Restrictions and Legend. The
Subscriber acknowledges and agrees that:
(1) The offer and sale of the Units to the
Subscriber have not been registered under the Securities Act or under
any State Laws, and therefore may not be transferred without
registration under the Securities Act unless an exemption from such
registration requirements is available or registration is not required
pursuant to Regulation S under the Securities Act.
(2) The Subscriber will not offer, sell or
otherwise transfer any of the Shares, Warrants or Warrant Shares
directly or indirectly except:
(a) pursuant to an effective
registration statement filed under the Securities Act, as
contemplated by Section 9 of this Subscription Agreement; or
(b) upon delivery to the Company of an
opinion of U.S. counsel reasonably satisfactory to the Company
that the Shares may be transferred without registration
pursuant to (i) Rule 144, Rule 144A, or Rule 904 of Regulation
S promulgated under the Securities Act (which will not be
available unless the Company is in default with respect to its
obligations pursuant to section 9 hereof) or (ii) any other
available exemption from the registration and prospectus
delivery requirements of the Securities Act.
10.2 Restrictive Legends. The Subscriber understands and
agrees that, although Regulation S does not expressly require the placement of
a restrictive legend on the certificates representing the Units, a legend will
be placed on the Certificates noting the restrictions on transfer set forth in
Subsection 10.1 of this Subscription Agreement in order to help ensure
compliance with certain requirements of Regulation S that continue to apply
during the applicable restricted period following the Closing. Such legend
shall read substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS")
OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES,
AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE
UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT
COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN
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OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A)
RULE 144, RULE 144A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE
SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES
ACT."
11. RELIANCE. The Subscriber understands and agrees that the
Company and the Agent and their respective officers, directors, employees and
professional advisers may, and will, rely on the accuracy of the Subscriber's
representations and warranties in this Subscription Agreement to establish
compliance with applicable securities laws. The Subscriber agrees to indemnify
and hold harmless all such parties against all losses, claims, costs, expenses
and damages or liabilities which they may suffer or incur caused or arising
from their reliance on such representations and warranties.
12. APPOINTMENT OF THE AGENT.
12.1 Related Agreements. The Subscriber hereby
irrevocably authorizes the Agent to negotiate and settle the form of any other
document or agreement to be entered into in connection with this transaction.
12.2 Agency Agreement. The Subscriber hereby acknowledges
and agrees that the Agent and the Company may vary, amend, alter or waive, in
whole or in part, any provisions of the Agency Agreement in such manner and on
such terms and conditions as they may determine, acting reasonably, without
affecting in any way the Subscriber's obligations hereunder; provided, however,
that the Agent and the Company shall not vary, amend, alter or waive any
provision where to do so would result in a material change to any of the
material terms of the Private Placement.
12.3 Closing; Termination. The Subscriber hereby
acknowledges and agrees that the Agent may waive, in whole or in part, or
extend the time for compliance with, any of the conditions for Closing in such
manner and on such terms and conditions as the Agent may determine, acting
reasonably, without in any way affecting the Subscriber's obligations, and may
terminate this Subscription Agreement on behalf of the Subscriber in the event
that any condition for Closing has not been satisfied.
13. MISCELLANEOUS.
13.1 Survival. The representations, warranties, covenants
and agreements made in this Subscription Agreement shall survive the Closing
and shall continue in full force and effect notwithstanding the completion of
the issuance of the Units to the Subscriber and notwithstanding any subsequent
disposition by the Subscriber of any of Shares or Warrants.
13.2 Assignment. This Subscription Agreement is not
transferable or assignable.
13.3 Execution and Delivery of Subscription Agreement.
The Company and the Agent shall be entitled to rely on delivery by facsimile
machine of an executed copy of this Subscription Agreement, and acceptance by
the Company of such facsimile copy shall be equally effective to create a valid
and binding agreement between the Subscriber and the Company in accordance with
the terms hereof.
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13.4 Execution and Delivery of Other Documents. The
Subscriber agrees that it will execute and deliver such other documents as may
be necessary or desirable to complete the transactions contemplated hereby.
13.5 Titles and Subtitles. The titles and subtitles of
the sections and subsections of this Subscription Agreement are for the
convenience of reference only and are not to be considered in construing this
Subscription Agreement.
13.6 Severability. The invalidity or unenforceability of
any particular provision of this Subscription Agreement shall not affect or
limit the validity or enforceability of the remaining provisions of this
Subscription Agreement.
13.7 Termination. If, prior to Closing, the Agent
exercises its right of termination as contained in the Agency Agreement, this
Subscription Agreement and the obligations of the parties hereto (other than
the terms of Subsection 6.2 governing the return to the Subscriber of
subscription funds, exclusive of interest) are deemed to have terminated as at
the effective date of such termination.
13.8 Entire Agreement. This Subscription Agreement
constitutes the entire agreement and understanding between the parties with
respect to the subject matters herein, and supersedes and replaces any prior
agreements and understandings, whether oral or written, between them with
respect to such matters. Except as otherwise provided herein, the provisions
of this Subscription Agreement may be waived, altered, amended or repealed, in
whole or in part, only upon the mutual written agreement of the Company and the
Subscriber.
13.9 Counterparts. This Subscription Agreement may be
executed in any number of counterparts, each of which shall be an original, but
all of which together shall constitute one and the same instrument.
13.10 Governing Law. This Subscription Agreement is
governed by and shall be construed in accordance with the laws of the State of
California, except that the authority to award damages (including punitive
damages) shall be interpreted under New York law.
IN WITNESS WHEREOF, the Subscriber has duly executed this Subscription
Agreement as of the date first above mentioned.
Total Purchase Price:
$______________________ _____________________________________________
Name of Subscriber (please type or print)
_____________________________________________
Signature and, if applicable, office
_____________________________________________
Street address of Subscriber
_____________________________________________
City, state/province, country and postal code
of Subscriber
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REGISTRATION AND DELIVERY INSTRUCTIONS
(TO BE COMPLETED BY SUBSCRIBER)
1. REGISTRATION. Please register the Subscriber's Share Certificates and
Warrants as follows:
Name:_________________________________________________________________
Address:______________________________________________________________
2. DELIVERY. Please deliver the Subscriber's Share Certificates and
Warrants to the following address:
______________________________________________________________________
______________________________________________________________________
ACCEPTANCE
The above subscription is hereby accepted by MICROTEL INTERNATIONAL,
INC. at San Jose, California on the ___________ day of _____________, 1997.
MICROTEL INTERNATIONAL, INC.
By:__________________________________
Authorized signing officer
14
<PAGE> 1
Exhibit 10.18
HENRY MOURAD'S EMPLOYMENT ARRANGEMENT
The following represents the agreement in principle between Henry A. Mourad and
MicroTel International, Inc., which is to be memorialized in a definitive
employment agreement as soon as possible hereafter.
1) Henry's EMPLOYMENT AGREEMENT dated April 12, 1994 is amended and
superceded in its entirety by this arrangement.
2) The new agreement will be between Henry A. Mourad and MicroTel
International, Inc. and will employ him as President of CXR Telcom
Corporation.
3) The form and substance of the previous agreement (dated April 12,
1994) shall be retained with the following exceptions:
a) All references to his service as a member of the Board of
Directors (of any company) will be deleted.
b) His incentive compensation package will be equivalent to that
of other current XIT Corporation subsidiary/division managers.
c) The agreement will be inclusive of all benefits Henry will
receive and therefore it will be addended to include a $600
per month car allowance that he currently and will continue to
receive, and the 'supplemental' medical care benefits Henry
has received in past years is discontinued and therefore will
be absent from the agreement. The all-inclusive nature of the
arrangement will be specifically stated as a provision of the
contract.
4) Henry will receive a signing bonus of options to acquire 180,368
shares of the common stock of Microtel at an exercise price of $2.375.
The options will be non-qualified, vest immediately, and be
exerciseable for a period of 3 years.
5) Incorporated in the determination of the signing bonus are two
previously unrecognized (i.e. not given accounting recognition)
arrangements between Henry and the Company, and therefore both of
these arrangements will be formally voided and cancelled.
Specifically,
a) that Convertible Promissory Note dated as of June 7, 1993 in
the amount of $37,500, and
b) that Stock Option Agreement under the CXR Corporation 1986
Incentive Stock Option Plan dated August 23, 1990.
Attached are the Employment Agreement dated April 12, 1994 and the 2 agreements
noted in item 5) above for reference.
<TABLE>
<S> <C> <C>
AGREED:
/s/ Henry A. Mourad /s/ Jack Talan /s/ Carmine T. Oliva
- ------------------- ----------------------- --------------------
Henry A. Mourad Jack Talan Carmine T. Oliva
Chairman and CEO Chairman and CEO
MicroTel International, XIT Corporation
Inc.
</TABLE>
<PAGE> 1
Exhibit 10.19
BARRY E. REIFLER'S EMPLOYMENT ARRANGEMENT
The following represents the agreement in principle between Barry E. Reifler
and MicroTel International, Inc., which is to be memorialized in a definitive
agreement(s) as soon as possible hereafter.
1) Barry's EMPLOYMENT AGREEMENT dated February 9, 1996, as amended on
August 15, 1996 (the "Amended Agreement"), will remain in full force
and effect as amended by this letter agreement, with the proviso that
he has up to 3 months after the consummation of the merger with XIT
Corporation (the "Merger") in which to make a determination as to
whether he deems the change in control to be an adverse change in
employment circumstances.
2) Barry will serve MicroTel International, Inc. as its Chief Financial
Officer under the same conditions and terms of the Amended Agreement
with the following amendments and understandings:
a) Base compensation will be increased to $150,000 per year
effective with the date of the Merger.
b) The severance provisions will be amended to provide the
benefits provided for in paragraph 15 of the Amended Agreement
as if he had triggered the provision immediately upon the
change in control (i.e. based on an annual salary of $125,000
and covering his current equity position prior to this new
employment arrangement).
c) Although no contractual revision is necessary regarding the
following, it is expressly understood that expenses will be
paid for or reimbursed explicitly for items of the same nature
as were provided during Barry's tenure as CFO pre-merger when
corporate headquarters were located in San Jose, CA.,
including (by way of illustration and not limited to) a
corporate apartment and operating costs of his personal
vehicle located in California used for travel while at
corporate headquarters.
3) Barry will receive a signing bonus of non-qualified options to acquire
150,000 shares of common stock of MicroTel International, Inc. at an
exercise price $2.375 per share. The options will be issued pursuant
to the Company's S-8, if amended to be used for resale purposes, or
the underlying shares will be accorded piggyback registration rights.
The options will vest ratably on a monthly basis over a six (6) month
period beginning six (6) months and one day after the effective date
of the merger, will be exercisable for a period of 3 years, and those
vested will survive termination.
Attached are the Employment Agreement dated February 9, 1996 and Amendment No.
1 thereto dated August 15, 1996 for reference.
<TABLE>
<S> <C> <C>
AGREED:
/s/ Barry E. Reifler /s/ Jack Talan /s/ Carmine T. Oliva
- -------------------- -------------------- ---------------------
Barry E. Reifler Jack Talan Carmine T. Oliva
Chairman and CEO Chairman and CEO
MicroTel International, XIT Corporation
Inc.
</TABLE>
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
MICROTEL INTERNATIONAL, INC.
1. XIT Corporation
4290 E. Brickell Street
Ontario, CA 91761-1571
2. XCEL Arnold Circuits, Inc.
4290 E. Brickell Street
Ontario, CA 91761-1571
3. HyComp, Inc.
165 Cedar Hill Street
Marlborough, MA 01752
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MicroTel International, Inc.
San Jose, California
We hereby consent to the incorporation by reference in the Prospectuses
constituting a part of the Registration Statement Nos. 33-22518, 333-12567 and
33-77926 on Form S-8 of our report dated April 14, 1997 relating to the
consolidated financial statements and schedule of MicroTel International, Inc.
(formerly CXR Corporation) appearing in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
BDO Seidman, LLP
San Francisco, California
April 15, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-22518, 333-12567 and 33-72926 of MicroTel International, Inc. on Form S-8 of
our report dated August 31, 1994 (November 18, 1994 as to paragraphs two through
four in Note 2), appearing in this Annual Report on Form 10-K of MicroTel
International, Inc. (formerly CXR Corporation) for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
San Jose, California
March 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MICROTEL INTERNATIONAL, INC.
FINANCIAL DATA SCHEDULE
YEAR ENDED DECEMBER 31, 1996
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 271
<SECURITIES> 0
<RECEIVABLES> 3,122
<ALLOWANCES> 186
<INVENTORY> 3,004
<CURRENT-ASSETS> 6,698
<PP&E> 2,787
<DEPRECIATION> 2,261
<TOTAL-ASSETS> 9,319
<CURRENT-LIABILITIES> 6,000
<BONDS> 36
0
0
<COMMON> 10
<OTHER-SE> 2,766
<TOTAL-LIABILITY-AND-EQUITY> 9,319
<SALES> 16,303
<TOTAL-REVENUES> 16,303
<CGS> 10,819
<TOTAL-COSTS> 10,819
<OTHER-EXPENSES> 1,817
<LOSS-PROVISION> (175)
<INTEREST-EXPENSE> 319
<INCOME-PRETAX> (4,682)
<INCOME-TAX> (85)
<INCOME-CONTINUING> (4,597)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,597)
<EPS-PRIMARY> (1.65)
<EPS-DILUTED> (1.65)
</TABLE>
