<PAGE> 1
As filed with the Securities and Exchange Commission on September 23, 1997
Registration No. 333-29925
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
(Amendment No. 1)
MICROTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
3679
(Primary Standard Industrial
Classification Code Number)
77-0226211
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
4290 E. BRICKELL STREET
ONTARIO, CALIFORNIA 91761
(909) 391-4321
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CARMINE T. OLIVA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROTEL INTERNATIONAL, INC.
4290 E. BRICKELL STREET
ONTARIO, CALIFORNIA 91761
(909) 391-4321
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
THOMAS P. GALLAGHER, ESQ.
MARTIN J. CONROY, ESQ.
SUZETTE N. BERRIOS, ESQ.
GALLAGHER, BRIODY & BUTLER
212 CARNEGIE CENTER
SUITE 402
PRINCETON, NEW JERSEY 08540
(609) 452-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================
Proposed Proposed
Amount Maximum Maximum
Title of each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share (1) Offering Price Registration
Fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.0033 par value...... 12,682,260 shares $2.125 $26,949,802.50 $8166.61 (2)
=========================================================================================================
</TABLE>
(1) Based upon the average of the bid and asked prices reported by the
National Association of Securities Dealers Automated Quotation System on
September 19, 1997.
(2) $7580.16 registration fee previously paid when S-1 originally filed on
June 24, 1997. Pursuant to Rule 457, only an additional fee of $112.69, based
on the 175,000 additional shares being registered, is due and not the entire
$8166.61.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
MICROTEL INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING THE
LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
Item
Number Caption Prospectus Caption or Location
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<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus...... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors
4. Use of Proceeds............................... Use of Proceeds
5. Determination of Offering Price............... Outside Front Cover Page
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Selling Security Holders
8. Plan of Distribution.......................... Plan of Distribution
9. Description of Securities to be Registered.... Securities to be Registered
10. Interests of Named Experts and Counsel........ Experts
11. Information with Respect to the Registrant.... Business; Description of Property; Legal
Proceedings; Market Information; Financial
Statements; Selected Financial Data;
Management Discussion and Analysis of
Financial Condition and Results of
Operations; Directors and Executive
Officers; Executive Compensation; Security
Ownership of Certain Beneficial Owners
and Management; Certain Relationships and
Related Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE> 3
PROSPECTUS
12,682,260 SHARES OF COMMON STOCK
OF
MICROTEL INTERNATIONAL, INC.
This Prospectus is being used in connection with the offering, from time
to time, by certain stockholders of MicroTel International, Inc. (the "Company")
of shares of Common Stock, $0.0033, par value per share ("Common Stock") which
have been issued by the Company, or which are issuable by the Company upon the
exercise of certain warrants and options. The shares of Common Stock registered
hereby consist of: (i) 2,000,000 outstanding shares held by certain persons who
purchased shares of Common Stock in a transaction exempt from the registration
requirements of the Securities Act (the "Yorkton Shares"); (ii) 6,119,130 shares
of Common Stock issued in connection with a merger between a wholly-owned
subsidiary of the Company and XIT Corporation ("XIT" or "XIT Corporation")
pursuant to which XIT became a wholly-owned subsidiary of the Company (the
"Merger Shares"); (iii) 1,579,783 shares of Common Stock issuable upon the
exercise of Common Stock purchase options (the "Option Shares"); (iv)
2,157,879 shares of Common Stock issuable upon the exercise of Common Stock
purchase warrants (the "Warrant Shares"); and (v) 825,468 shares of Common Stock
held by certain shareholders who have agreements with the Company for the
registration of such shares (the "Other Shares") (the Yorkton Shares, Merger
Shares, Option Shares, Warrant Shares and Other Shares are collectively referred
to herein as the "Shares").
The Shares may be offered from time to time by the Selling Shareholders
identified herein. See "Selling Shareholders." Except for the cash proceeds, if
any, that the Company will receive upon issuance of the Option Shares and the
Warrant Shares, the Company will not receive any of the proceeds from the sale
of the Shares. All expenses of the offering, other than commissions or discounts
of broker-dealers, will be borne by the Company. See "Plan of Distribution"
herein for a description of the manner in which the securities covered by this
Prospectus may be sold.
-----------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGES 7 TO 13.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
The date of this Prospectus is September 23, 1997
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<PAGE> 4
TABLE OF CONTENTS
PROSPECTUS SUMMARY.......................................................5
THE COMPANY..............................................................5
RISK FACTORS.............................................................6
USE OF PROCEEDS.........................................................13
SELLING SECURITY HOLDERS................................................13
PLAN OF DISTRIBUTION....................................................28
SECURITIES TO BE REGISTERED.............................................29
EXPERTS.................................................................31
BUSINESS................................................................32
DESCRIPTION OF PROPERTY.................................................46
LEGAL PROCEEDINGS.......................................................48
MARKET INFORMATION......................................................49
SELECTED FINANCIAL DATA.................................................50
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............52
DIRECTORS AND EXECUTIVE OFFICERS........................................74
EXECUTIVE COMPENSATION..................................................76
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................................80
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS....................................................83
DISCLOSURE OF COMMISSION
POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES..........................................85
FINANCIAL STATEMENTS...................................................F-1
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, or at its regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Commission by mail at prescribed rates.
Requests should be directed to the Commission's Public Reference Section, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site (http://www.sec.gov) that contains certain of
the Company's reports which were filed after the Company became an electronic
filer.
The Company's Common Stock is quoted on the Nasdaq SmallCap Market and
material filed by the Company can be inspected at the offices of the National
Association of Securities Dealers, Inc. 1735 K Street N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-1 under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Securities being offered by this Prospectus (including
all exhibits and amendments hereto, the "Registration Statement"). This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to summarize the material provisions
of such documents, but are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved. Copies of the Registration Statement and the
exhibits thereto may be inspected, without charge, at the offices of the
Commission, at the addresses set forth above.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective purchasers of the Securities should carefully read the entire
Prospectus and should consider, among other things, the matters set forth in
"Risk Factors."
As used in this Prospectus, the term "Company" refers to MicroTel
International, Inc. and, unless the context otherwise requires, its direct and
indirect subsidiaries. As used in this Prospectus, "CXR" shall refer to the
Company as it existed prior to the Merger. Because XIT is treated as the
acquiror in the Merger for financial accounting purposes, the historical
financial information of the Company presented herein is that of XIT
Corporation.
When used anywhere in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "should," "believe"
and similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, operating costs and
financial position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors.
THE COMPANY
The Company, through its various direct and indirect operating
subsidiaries, designs, manufactures and distributes a wide range of electronics
hardware products and provides related services.
Prior to March 26, 1997, the Company designed, manufactured and marketed
electronic telecommunication test equipment and data communication equipment
(modems) primarily to the major long distance companies, the regional Bell
operating companies ("RBOCs"), international telephone companies and private
communications networks. On March 26, 1997, the Company was acquired by XIT
Corporation, a New Jersey corporation, in a reverse acquisition pursuant to
which XIT became a wholly-owned subsidiary of the Company and the holders of XIT
common stock became the owners of approximately 65% of the Company's common
stock (the "Merger"). XIT designs, manufactures and markets information
technology products, including displays and input components, subsystem
assemblies, printed circuits, and hybrid microelectronic circuits for the
international telecommunications, medical, industrial, and military/aerospace
markets. Following the Merger, the Company has been organized along three
product line sectors --Instrumentation and Test Equipment, Circuits, and
Components and Subsystem Assemblies. In connection with the Merger, the Company
has agreed to register under the Securities Act the Common Stock issued to the
XIT shareholders, as well as the Common Stock underlying certain options and
warrants held by the XIT shareholders which were converted into warrants and
options to acquire the Company's Common Stock effective as of the Merger, in
order to permit the public resale of the Common Stock by the XIT shareholders.
On April 14, 1997, the Company sold Investment Units consisting of one
share of its common stock and one-quarter of a warrant to purchase its common
stock (the "Units") pursuant to an exemption from registration under Regulation
S of the Securities Act (the "Yorkton Offering"). Yorkton Securities, Inc.
("Yorkton") acted as Placement Agent. The Company sold 2,000,000 Units,
resulting in net proceeds to the Company of $4,258,000. In connection
with the Yorkton Offering, the Company has agreed to register under the
Securities Act the Common Stock issued to the purchasers, the Common Stock
underlying the warrants issued to the purchasers, and the Common Stock and
Common Stock underlying warrants granted to Yorkton and an unaffiliated third
party intermediary in order to permit the public resale of the Common Stock held
or to be acquired pursuant to the exercise of such warrants.
The Company has also included in this Prospectus certain shares of Common
Stock and shares of Common Stock underlying warrants and options pursuant to
various registration rights agreements between the Company and third parties.
The Company's principal executive offices are located at 4290 E. Brickell
Street, Ontario, California 91761, and its telephone number is (909) 391-4321.
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<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Securities Offered 12,682,260 Shares of Common Stock, comprised of
2,000,000 Yorkton Shares, 6,119,130 Merger Shares,
1,579,783 Option Shares, 2,157,879 Warrant Shares,
and 825,468 Other Shares.
Use of Proceeds There will be no proceeds to the Company from the
sale of the Shares by the Selling Shareholders. The
Company will use the proceeds from the exercise of the
warrants and Options for working capital, business
development and general corporate purposes.
</TABLE>
NASDAQ Symbol MCTL
RISK FACTORS
In addition to the other information contained elsewhere in this Prospectus,
prospective investors should consider carefully the factors set forth below
prior to purchasing any of the Shares offered hereby.
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<PAGE> 8
RISK FACTORS
WHEN USED ANYWHERE IN THE DISCUSSION OF RISK FACTORS BELOW, THE WORDS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934
REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE
COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND
FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN
CONTINUING LOSSES; WRITE-DOWNS; LIQUIDITY AND CAPITAL REQUIREMENTS; NEED FOR
ADDITIONAL FINANCING; DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING
OF THE INDUSTRY; DEPENDENCE ON PROPRIETARY TECHNOLOGY. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
INTEGRATION OF OPERATIONS. On March 26, 1997, CXR merged with XIT
Corporation. The success of the Merger will be determined by various factors,
including management's ability to integrate effectively the operations of the
Company and CXR and the financial performance of the companies' operations
after the Merger. Factors which will affect management's ability to integrate
successfully the operations of the Company and CXR include the ability to
implement management systems that take advantage of marketing and cost saving
opportunities and to minimize the financial impact of expenses associated with
such integration. There can be no assurance that management will be able to
successfully integrate the operations of the Company and CXR or that the
anticipated benefits of the Merger will be realized. See "Business."
COMPETITION; TECHNOLOGICAL OBSOLESCENCE. Competition in the electronics
hardware industry is intense with a large number of companies developing
technology and products similar to the Company's products and technology. The
industry consists of development stage companies and major domestic and
international companies, many of which have financial, technical, marketing,
sales, manufacturing, distribution and other resources significantly greater
than those of the Company. There can be no assurance that the Company will be
successful in competing with such entities. Furthermore, there can be no
assurance that competitors will not succeed in developing products or
technologies that would render the Company's products and technologies obsolete
or in obtaining market acceptance of products more rapidly than the Company. See
"Business-Competition."
DEPENDENCE UPON MAJOR CUSTOMER. The Company has one customer, Motorola,
to which it sells printed circuit boards, which accounted for 41% of XIT's sales
for the year ended September 30, 1996 and 22% of XIT's sales for the six
months ended June 30, 1997. The loss of Motorola as a customer would have a
material adverse effect on the Company.
In fiscal 1996 and in the first half of 1997, the Company's product
orders from Motorola declined significantly. Moreover, during the first quarter
of 1997 the Company was unable to timely ship the lower level of orders
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<PAGE> 9
received in the first quarter of 1997 as a result of material sourcing problems
caused by cash flow constraints (see "Liquidity and Capital Requirements; Need
for Additional Financing" below). The Company's delivery performance has
improved and sales demand from Motorola has increased in the third quarter of
1997. There can be no assurance, however, that sales to Motorola will continue
to rebound or that they will not decline again in the future. Any such decline
could have a material adverse affect on the Company.
DEPENDENCE ON KEY PERSONNEL. The Company's future success will to a large
degree be dependent upon the skills of its existing management and other key
personnel. The failure to attract and maintain key personnel could have a
material adverse effect on the Company. The Company maintains key man life
insurance on Carmine T. Oliva, President and Chief Executive Officer, as
follows: a) a $1.5 million policy naming MicroTel International, Inc. as
beneficiary, and b) a $2.0 million policy naming, as 50% beneficiaries, each of
his wife and XIT Corporation.
CONTINUING LOSSES; WRITE-DOWNS.
For the fiscal years ended September 30, 1996 and 1995, the Company
reported net income of approximately $1,083,000 and $337,000 respectively.
However, for the three months ended December 31, 1996 and the six months ended
June 30, 1997, the Company incurred net losses of $(889,000) and $(2,038,000),
respectively, versus earning net income of $151,000 and $825,000, respectively,
in the comparable periods of prior years. Additionally, on a pro forma basis
(including the results of both the Company and the CXR as if they had combined
at the beginning of the respective periods), the Company incurred net losses of
$(4,130,000) and $(3,847,000) for the six months ended June 30, 1997 and the
year ended September 30, 1996, respectively. The decline in actual results of
operations for the three months ended December 31, 1996 versus the three months
ended December 31, 1995 was principally caused by the deterioration of the
Company's Circuits Sector business as discussed above under "Dependence Upon
Major Customer". The decline for the six months ended June 30, 1997 versus the
first half of 1996, was due to the continuing problems in the Circuits Sector as
well as to a decline in sales for the Company's Components and Subsystem
Assemblies Sector. This latter decline in sales for the Company's Components and
Subsystems Assemblies Sector was due to a) the loss in July 1996 of a major
account for display monitors, b) a significant digital switch program in place
in the first two quarters of 1996 which did not repeat in 1997, and c) a general
decline in sector product sales due to the aging of related customer programs
(see "Cyclical Nature of Electronics Industry" below).
In the Components and Subsystems Assemblies Sector, the Company is in
the process of qualifying itself and its products with new prospective
customers for display monitors. If obtained, revenues from such customers
should replace the loss in revenue which resulted from the loss of the major
display monitor account in 1996. Additionally, it is actively seeking new
programs with existing customers and new accounts to replace the decline in
revenues related to the aging of its current customers' programs.
During 1996 and continuing in the first quarter of 1997, domestic sales
of the Instrumentation and Test Equipment Sector (CXR's operating subsidiaries,
CXR Telcom Corporation and CXR S.A.) were negatively impacted by delays in
buying by its principal customers, as a result of the consolidation and/or
restructuring of these companies in the wake of the passage of the
Telecommunications Bill of 1996, and the Sector's European sales were
negatively impacted by a decline in sales to France Telecom during its
pre-privatization reorganization and a generally weak French economy.
Additionally, sales for both operating subsidiaries have been negatively
impacted by the rapid obsolescence of the analog-based components of their
product lines, particularly older transmission products; and further, both sales
and margins have been impacted by extreme price competition for transmission
products in general.
In the fourth quarter of 1996 and in the first quarter of 1997 prior to
the Merger, CXR reduced the carrying value of certain inventory and capitalized
software by $1,006,000 and $209,000, respectively. These write-downs resulted
from its reassessments of the anticipated continuing near-term impact of the
industry and economic factors noted above on asset realizability. The Company
believes based on its current assessment that the write-downs are adequate.
The Company anticipates that it will become profitable in last quarter
1997 as CXR's markets stabilize, demand for printed circuit boards returns to
historical levels, and sales levels for the Components and Subsystem Assemblies
Sector increase due to business development efforts currently in progress.
However, there can be no assurance that these events will occur, that further
write-downs of operating assets, as well as write-downs of the goodwill
originating in the Merger, will not be necessary should actual business
conditions deteriorate, or that the Company will return to profitability in 1997
or thereafter.
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<PAGE> 10
LIQUIDITY AND CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING
Cash of $2,766,000 was used in operations in the first six months of 1997 versus
cash of $374,000 being provided by operations in the first half of 1996. The
principal cause of this reversal in cash flows is the losses incurred by the
Company in 1997 as discussed above under "Continuing Losses; Write-downs".
Lack of working capital has adversely impacted the operations of the Company.
Because the Company owed money to certain key vendors and was unable to secure
funds to bring these vendors current, the Company's Circuits Sector was unable
to procure all of the materials needed to timely ship certain of its sales
orders to Motorola. As a result, Motorola cut-back its orders to the Sector,
and demand has only begun to approach its historical levels in the current
period. (See "Dependence Upon Major Customer" above.) In the other business
sectors of the Company, inventory levels were reduced and trade payables aged
as a result of working capital shortages.
The proceeds from the Company's private placement of its securities in April
1997 alleviated the most immediate working capital problems of the Company,
allowing it to pay down its oldest accounts payable and improve its trade
credit relationships. Additionally, in the third quarter of 1997, the Company
was able to borrow $100,000 from a related party to assist in financing the
production of accelerating orders from Motorola. However, cash flows from
operations during the next twelve months may need to be further supplemented to
support the Company's working capital needs, and will definitely need to be
supplemented for planned business development and acquisition activities. The
specific needs for and timing of any additional financing will depend upon
results of operations, acquisition opportunities, and other unforeseen factors
which cannot be predicted. There can be no assurance that such financing will
be available, or that it will be available on terms and conditions acceptable
to the Company. If available, any additional equity financings may be dilutive
to the Company's stockholders and any debt financing may contain restrictive
covenants and additional debt service requirements which could adversely affect
the Company's operating results. See also, "Exercise of Outstanding Options and
Warrants; Additional Dilution."
CYCLICAL NATURE OF ELECTRONICS INDUSTRY. The segments of the electronics
industry in which the Company operates have, in many instances, historically
been cyclical and subject to significant economic changes and downturns. Such
changes, including in recent years the contraction of military, and commercial
and governmental aerospace spending, have in certain instances been
characterized by diminished product demand, accelerated erosion of average
selling prices, and overcapacity. In addition, the electronics industry is
subject to rapid technological change and product obsolescence. Discontinuance
or modification of products containing printed circuit boards or other
components manufactured by the Company could have a material adverse affect on
the Company as occurred in the first six months of 1997 for the Company's
Components and Subsystem Assemblies Sector (see "Continuing Losses; Write-downs"
above). As a result, the Company may experience substantial period-to-period
fluctuations in future operating results due to general electronic industry
conditions, overall economic conditions or other factors.
DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING OF THE INDUSTRY. The
Company's CXR subsidiaries are largely dependent upon sales to their principal
customers in the telephone industry. CXR Telcom's customers include AT&T,
Sprint, MCI, and the RBOCs. As a result of the consolidation and/or
restructuring of these companies in the wake of the passage of the 1996
Telecommunications Bill, certain anticipated sales to these companies have been
canceled or delayed. Moreover, sales of CXR S.A. have been negatively impacted
by the pre-privatization reorganization of France Telecom, its major customer,
as well as a generally weak French economy. Although the Company believes that
demand for CXR's products will increase in 1997 now that a significant portion
of the consolidation and restructuring is completed, there can be no assurance
that the Company will experience this increased demand.
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<PAGE> 11
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE AND EXTENT OF CUSTOMER
COMMITMENTS ON ORDERS. The level and timing of orders placed by the Company's
customers vary due to customer attempts to manage inventory, changes in the
customers' manufacturing strategies and variation in demand for customer
products due to, among other things, technological change, introduction of new
product life cycles, competitive conditions or general economic conditions. The
Company generally does not obtain long-term purchase orders or commitments. A
certain portion of the Company's backlog may be subject to cancellation or
postponement without a significant penalty or without any penalty.
ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of
environmental regulations relating to the use, storage, discharge and disposal
of hazardous chemicals used during its manufacturing process. A failure by the
Company to comply with present and future regulations could subject it to future
liabilities or the suspension of production. Such regulations could also
restrict the Company's ability to expand its facilities or could require the
Company to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. The Company may also from time to time be
subject to lawsuits with respect to environmental matters. The extent of the
Company's liability under any such suit is indeterminable and may, in certain
circumstances, have a material adverse affect on the Company.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of
the Common Stock is subject to significant fluctuations in response to
variations in quarterly operating results, general conditions in the electronics
industry and other factors. In addition, the stock market is subject to price
and volume fluctuations which affect the market price for many high technology
companies in particular, and which can be unrelated to operating performance.
INCREASED PUBLIC FLOAT. Upon the effectiveness of the Registration
Statement of which this Prospectus is a part, and upon expiration of certain
lock-up agreements applicable to certain shares of the Company's Common Stock
(see "Securities to be Registered; Lock-up Provision"), the number of freely
tradeable shares of the Company's Common Stock held by non-affiliates will
substantially increase. If a significant number of these freely tradeable
shares are sold in the open market in the near term, the price of the Company's
Common Stock may be negatively impacted.
ACQUISITIONS. The Company may from time to time pursue the acquisition of
other companies, assets or product lines that complement or expand its existing
business. Acquisitions involve a number of risks that could adversely affect the
Company's operating results, including the diversion of management's attention,
the assimilation of the operations and personnel of the acquired companies, the
amortization of acquired intangible assets and the potential loss of key
employees. No assurance can be given that any acquisition by the Company will
not materially and adversely affect the Company or that any such acquisition
will enhance the Company's business.
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will
be highly dependent on proprietary technology, particularly in the areas of
instrumentation and test equipment, multilayer high density circuit boards and
microelectronic circuits. The Company presently holds certain limited numbers of
patents but more generally relies upon copyright, trademark and trade secret
laws to establish its proprietary rights in its products. There can be no
assurance that the Company's reliance on these laws will be adequate to protect
its proprietary rights or that its competitors will not independently develop
technologies that are substantially equivalent or superior to its technology. In
the future, the Company may file additional patent applications covering its
products or subsystems. There can be no assurance that any
- 10 -
<PAGE> 12
patents will issue from any such applications or, if patents do issue, that any
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents that may be issued to
the Company will not be challenged, consolidated or circumvented, or that any
rights granted thereunder would provide proprietary protection to the Company.
Although the Company will continue to implement protective measures and intends
to defend its proprietary rights, policing unauthorized use of its technology,
systems and products will be difficult and there can be no assurance that these
measures will be successful. In addition, the laws of certain foreign countries
in which the Company is active may not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of 10,000,000 shares of
"blank check" Preferred Stock, with designations, rights and preferences that
may be determined from time to time by the Board of Directors. None of the
shares of Preferred Stock are issued or outstanding as of the date hereof.
However, the Board of Directors is empowered, without further stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. In addition, such provisions could
limit the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock and may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for distribution
to the holders of Common Stock. Although the Company has no plans to issue any
shares of Preferred Stock, there can be no assurance that the Company will not
issue Preferred Stock at some time in the future.
LACK OF DIVIDENDS. The Company has never paid a cash dividend on any
class of its capital stock and does not anticipate paying any dividends in the
foreseeable future. It is anticipated that future earnings, if any, will be
retained to finance the development and expansion of the Company's business.
EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS; ADDITIONAL DILUTION; SHARES
AVAILABLE FOR SALE. At September 8, 1997, there were outstanding exercisable
stock options to purchase an aggregate of 2,217,839 shares of Common Stock at
exercise prices ranging from $1.625 to $5.00 per share. Additionally, at
September 8, 1997, there were outstanding and exercisable warrants to purchase
2,189,879 shares of Common Stock at exercise prices ranging from $1.21 to $3.79
per share. To the extent that the outstanding stock options and warrants are
exercised, substantial additional dilution to the interests of MicroTel's
stockholders will occur. See "Description of Securities to be Registered."
RISKS OF TECHNOLOGICAL CHANGE. The markets for the Company's products and
services are generally characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new product and service
introductions. There
- 11 -
<PAGE> 13
can be no assurance that the Company can successfully identify new product
opportunities and develop and bring new products and services to market in a
timely manner. The Company's pursuit of necessary technological advances will
require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its businesses to changing technology standards
and customer requirements. The introduction of new products and services could
render the Company's existing products and services obsolete and unmarketable.
There can be no assurance that the announcement or introduction of new products
or services by the Company or its competitors or any change in industry
standards will not cause a decline in existing sales levels of existing products
or services, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF SECURITIES FROM
THE NASDAQ STOCK MARKET; RISKS OF LOW-PRICED STOCKS. The Company's Common Stock
is currently quoted on the Nasdaq. For continued listing, a company, among other
things, must have $2,000,000 in net tangible assets, $1,000,000 in equity and a
minimum bid price of $1.00 per share. On August 25, 1997 the Commission
announced its adoption of stricter listing requirements which have been
approved by the National Association of Securities Dealers, Inc. ("NASD").
The proposed listing requirements include a stricter asset test and a required
$1.00 minimum bid price regardless of net worth. If the Company is unable to
satisfy Nasdaq's maintenance criteria in the future, its securities may be
delisted from Nasdaq. In such event, trading in the Company's securities would
thereafter be conducted in the over-the-counter market in the "pink sheets" or
on the NASD's "Electronic Bulletin Board." As a consequence of such delisting,
an investor would likely find it more difficult to dispose of, or to obtain
quotations as to, the price of the Company's securities.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. The Commission's regulations
generally define a penny stock to be an equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on the Nasdaq or a national securities
exchange and any equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
annual revenue of at least $6,000,000, if such issuer has been in continuous
operation for less than three years. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated therewith.
In addition, if the Company's securities are not quoted on the Nasdaq, or
the Company does not meet the other exceptions to the penny stock regulations
cited above, trading in the Company's securities would be covered by Rule 15g-9
promulgated under the Exchange
- 12 -
<PAGE> 14
Act for non-Nasdaq and non-exchange listed securities. Under such rule,
broker/dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities, in general, also are exempt from this
rule if the market price is at least $5.00 per share.
If the Company's securities become subject to the regulations applicable
to penny stocks, the market liquidity for the Company's securities could be
adversely affected. In such an event, the regulations on penny stocks could
limit the ability of broker/dealers to sell the Company's securities and thus
the ability of purchasers of the Company's securities to sell their securities
in the secondary market.
EFFECT OF ISSUANCE OF SHARES ON NET OPERATING LOSS CARRYFORWARDS. The
Company and CXR have substantial net operating loss carryforwards for Federal
and state tax purposes. For a summary of the NOL's and Expiration dates, see
notes to the Consolidated Financial Statements of the Company and CXR included
herein. However, because of the ownership changes to both entities for tax
purposes resulting from the Merger, the use of these NOL carryforwards to offset
future taxable income will be limited. The Company believes that it will only be
able to use approximately $825,000 of the current NOL carryforwards for Federal
and state tax purposes per year. This limitation of the use of the Company's NOL
carryforwards may have a material adverse effect on the Company's net income
and cash flow, should the Company have taxable income in future years.
USE OF PROCEEDS
Because the Shares offered hereby are being sold by the Selling
Shareholders, the Company will not receive any of the proceeds from any sale of
the Shares by the Selling Shareholders. The Company will receive the proceeds
from the issuance of the Option Shares and Warrant Shares upon the exercise of
the stock options and warrants relating to such shares by the holders thereof.
In the event that all of the stock options and warrants are exercised, the
proceeds to be received by the Company upon such exercise will be $10,027,676
exclusive of the expenses of this Offering. The Company will use these proceeds,
if any, for working capital, business development and general corporate
purposes.
SELLING SECURITY HOLDERS
The following table sets forth as of September 23, 1997, the following
information regarding each Selling Shareholder who is offering Shares pursuant
to this Prospectus: the name of each Selling Shareholder; any position, office,
or other material relationship which the Selling Shareholder has had within the
past three years with the Company or any of its predecessors or affiliates; the
number of shares of Common Stock owned by each Selling Shareholder before the
offering pursuant to this Prospectus, the amount of shares to be offered for
each Selling
- 13 -
<PAGE> 15
Shareholder's account, and the amount and percentage of the Common Stock to be
owned by each Selling Shareholder (assuming the sale of all shares registered
hereby) after the offering pursuant to this Prospectus
is complete.
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Douglas G. Abramson 105 105 0 *
- ----------------------------------------------------------------------------------------
Howard Baldwin 12,822 12,822 0 *
- ----------------------------------------------------------------------------------------
Michael Baldwin 12,822 12,822 0 *
- ----------------------------------------------------------------------------------------
Bank Sal Oppeneheim Jr. & 75,000(4) 75,000 0 *
(i.e.)
- ----------------------------------------------------------------------------------------
Bank of Scotland Nominees 25,000(5) 25,000 0 *
(Unit Trusts/Limited)
- ----------------------------------------------------------------------------------------
Banque Hervet 50,000(6) 50,000 0 *
- ----------------------------------------------------------------------------------------
David A. Barrett(7) 220,237(8) 220,237 0 *
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for Jennifer P
Barrett Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for David A
Barrett, Jr. Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 10,179 10,179 0 *
Trustee for Elizabeth C
Barrett Trust
- ----------------------------------------------------------------------------------------
Laurie Barrett 4,595 4,595 0 *
- ----------------------------------------------------------------------------------------
Andrew Bellak 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
John Billington 4,197 4,197 0 *
- ----------------------------------------------------------------------------------------
Louis Bernat 48,237 48,237 0 *
- ----------------------------------------------------------------------------------------
Bruce J. Bertrand 14,515 14,515 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 14 -
<PAGE> 16
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bertrand Family Trust 595,106 595,106 0 *
- ----------------------------------------------------------------------------------------
Jason Bender 585 585 0 *
- ----------------------------------------------------------------------------------------
Brewin Nominees Ltd. 37,500(9) 37,500 0 *
- ----------------------------------------------------------------------------------------
Kevin M. Briody 32,755(10) 32,755 0 *
- ----------------------------------------------------------------------------------------
James P. Butler (11) 75,000(12) 75,000 0 *
- ----------------------------------------------------------------------------------------
Marshall Butler 15,966 15,966 0 *
- ----------------------------------------------------------------------------------------
Caisse Centrale des Banques 50,000(13) 50,000 0 *
Populaires
- ----------------------------------------------------------------------------------------
Timothy W. Cameron 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Mark C. Carson 2,902 2,902 0 *
- ----------------------------------------------------------------------------------------
Kristen L. Cavallaro 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr 27,578 27,578 0 *
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr., 17,417 17,417 0 *
Trustee f/b/o Arnold B
Chace, III
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr., 2,902 2,902 0 *
Trustee f/b/o Arnold B
Chace, III
- ----------------------------------------------------------------------------------------
Malcolm G. Chace, 2,902 2,902 0 *
Trustee
f/b/o Arnold B. Chace,
III
- ----------------------------------------------------------------------------------------
Malcolm G. Chace III and 40,945 40,945 0 *
Arnold B. Chace, Jr.,
Trustees
f/b/o Arnold B. Chace Jr. et al
- ----------------------------------------------------------------------------------------
Arnold B. Chace, Jr. U/A 24,567 24,567 0 *
10/11/72 Arnold B. Chace, Jr.
and Malcolm G. Chase III,
Trustees
- ----------------------------------------------------------------------------------------
Malcolm G. Chace, 2,902 2,902 0 *
Trustee
f/b/o Sarah E. Chace
- ----------------------------------------------------------------------------------------
Richard Childs 43,359 43,359 0 *
- ----------------------------------------------------------------------------------------
Christiania Markets 50,000(14) 50,000 0 *
- ----------------------------------------------------------------------------------------
Dominic Ciccone 7,257(15) 7,257 0 *
- ----------------------------------------------------------------------------------------
Philip M. Colicchio 5,734 5,734 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 15 -
<PAGE> 17
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John & Virginia 8,189 8,189 0 *
Connolly
- ----------------------------------------------------------------------------------------
Cleveland Cool 6,495 6,495 0 *
- ----------------------------------------------------------------------------------------
John K. Crosby 3,955 3,955 0 *
- ----------------------------------------------------------------------------------------
Frank D. Curley 388 388 0 *
- ----------------------------------------------------------------------------------------
Timothy R. Curtin 627 627 0 *
- ----------------------------------------------------------------------------------------
Bernard S. Davis 280 280 0 *
- ----------------------------------------------------------------------------------------
Aldo DeFrancesco 2,902 2,902 0 *
- ----------------------------------------------------------------------------------------
Den Norske Bank 125,000(16) 125,000 0 *
- ----------------------------------------------------------------------------------------
Salvatore J 29,029 29,029 0 *
Dimicelli, Sr
- ----------------------------------------------------------------------------------------
Dina Partners 81,889 81,889 0 *
- ----------------------------------------------------------------------------------------
Dreadnought Limited 187,500(17) 187,500 0 *
- ----------------------------------------------------------------------------------------
Craig A. Drill 4,839 4,839 0 *
- ----------------------------------------------------------------------------------------
Shermane B. Drill 4,837 4,837 0 *
- ----------------------------------------------------------------------------------------
Daniel Dror(18) 15,000(19) 15,000 0
- ----------------------------------------------------------------------------------------
Robert Dubofsky 5,805 5,805 0 *
- ----------------------------------------------------------------------------------------
Richard B. DuBusc 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Bruce S. Edington 943 943 0 *
- ----------------------------------------------------------------------------------------
Elk International 1,380,000(20) 1,380,000 0 *
- ----------------------------------------------------------------------------------------
entrenet Group, LLC 60,000(21) 60,000 0 *
- ----------------------------------------------------------------------------------------
George and Sandra 79,928(22) 79,928 0 *
Farndell
- ----------------------------------------------------------------------------------------
Sandra Farndell 103,181 103,181 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE> 18
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William D. Fertig 3,628 3,628 0 *
- ----------------------------------------------------------------------------------------
Findenas International
Bank 38,706 38,706 0 *
- ----------------------------------------------------------------------------------------
Laurence P. Finnegan, 127,560(24) 127,560 0 *
Jr.(23)
- ----------------------------------------------------------------------------------------
Laurence P. Finnegan, 4,789 4,789 0 *
Jr. and
Geraldine Finnegan
- ----------------------------------------------------------------------------------------
Finter Bank Zurich 75,000(25) 75,000 0 *
- ----------------------------------------------------------------------------------------
Robert A. Fish IRA 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Fish Family Trust 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Aaron H. Fleck 8,710 8,710 0 *
- ----------------------------------------------------------------------------------------
Albert F. Ford, II 9,675 9,675 0 *
- ----------------------------------------------------------------------------------------
Albert F. Ford, III, 86,803 86,803 0 *
Trustee for
Albert F. Ford II Trust
- ----------------------------------------------------------------------------------------
Albert Ford, II, Trustee 1,451 1,451 0 *
for
Albert Ford, III Trust
- ----------------------------------------------------------------------------------------
David A. Barrett, 6,551 6,551 0 *
Trustee for
Albert F. Ford, III
Trust
- ----------------------------------------------------------------------------------------
Andrew A. Ford 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Andrew A. Ford, Trust 1,638 1,638 0 *
Andrew A. Ford
Trustee
- ----------------------------------------------------------------------------------------
Emily O. Ford 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 17 -
<PAGE> 19
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David A. Barrett, 6,551 6,551 0 *
Trustee for William A. Ford Trust
- ----------------------------------------------------------------------------------------
Albert Ford, II,
Trustee for William A. Ford Trust 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Russell E. Froelich 122,693(26) 122,693 0 *
- ----------------------------------------------------------------------------------------
S. Fujii 52,664(27) 20,006 32,658 *
- ----------------------------------------------------------------------------------------
Gallagher, Briody &
Butler(28) 16,377 16,377 0 *
- ----------------------------------------------------------------------------------------
Thomas P. Gallagher(29) 83,497(30) 83,497 0 *
- ----------------------------------------------------------------------------------------
Dorothy R. Garfield 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
Generio T. Gargiulo 250,278(31) 250,278 0 *
- ----------------------------------------------------------------------------------------
Barbara Gargiulo 4,644 4,644 0 *
- ----------------------------------------------------------------------------------------
Gilbert Gertner 10,000(32) 10,000 0 *
- ----------------------------------------------------------------------------------------
Richard Gesoff 29,405 29,405 0 *
- ----------------------------------------------------------------------------------------
Hugh Gillespie 29,029 29,029 0 *
- ----------------------------------------------------------------------------------------
Mary L. & Hugh 40,944 40,944 0 *
Gillespie
- ----------------------------------------------------------------------------------------
John Francis Gorry 106,000 80,000 26,000 *
- ----------------------------------------------------------------------------------------
Govett American Smaller 677,500(33) 677,500 0 *
Companies Trust PLC
- ----------------------------------------------------------------------------------------
Govett American Strategy Fund 160,000(34) 160,000 0 *
- ----------------------------------------------------------------------------------------
Govett Global Smaller 200,000(35) 200,000 0 *
Companies Investment Trust PLC
- ----------------------------------------------------------------------------------------
William W. Gridley 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Growth International, Ltd. 20,000(36) 20,000 0 *
- ----------------------------------------------------------------------------------------
Harriet Gurski 31,682 31,682 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 18 -
<PAGE> 20
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John B. Hall 2,221 2,221 0 *
- ----------------------------------------------------------------------------------------
Paul Hickey 56,150(37) 56,150 0 *
- ----------------------------------------------------------------------------------------
P.K. Hickey and Co. 75,000(38) 75,000 0 *
- ----------------------------------------------------------------------------------------
P. Randolph Hill 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Donald L. Horton 67,180(39) 16,378 50,802 *
- ----------------------------------------------------------------------------------------
Darby E. Ford Hughes 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Frank A. Hutson 1,552 1,552 0 *
- ----------------------------------------------------------------------------------------
Mark F. Hughes, Jr 1,226 1,226 0 *
- ----------------------------------------------------------------------------------------
Ikans Kapital Forualting AB 25,000(40) 25,000 0 *
- ----------------------------------------------------------------------------------------
Stephen P. Jacobus 50,801 50,801 0 *
- ----------------------------------------------------------------------------------------
Rona Javitch, 6,821 6,821 0 *
Cust. for David Javitch
- ----------------------------------------------------------------------------------------
Jonathan Javitch 6,821 6,821 0 *
- ----------------------------------------------------------------------------------------
Lee Javitch 67,870(41) 67,870 0 *
- ----------------------------------------------------------------------------------------
Lisa Javitch 6,821 6,821 0 *
- ----------------------------------------------------------------------------------------
Graham Jeffries 39,563(42) 3,276 36,287 *
- ----------------------------------------------------------------------------------------
William C. Johnson 14,515(43) 14,515 0 *
- ----------------------------------------------------------------------------------------
Andrea L. Kahn 504 504 0 *
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 3,628 3,628 0 *
Arnold B. Chace, Jr.,
Trustees f/b/o Henry
A.P. Kent
- ----------------------------------------------------------------------------------------
</TABLE>
- 19 -
<PAGE> 21
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Malcolm G. Chace and 2,177 2,177 0 *
Arnold B. Chace, Jr.,
Trustees
f/b/o John D.P. Kent
- ----------------------------------------------------------------------------------------
John D. P. Kent U/A 9/25/59 8,188 8,188 0 *
Malcolm G. Chace III and
Arnold B. Chace, Jr., Trustees
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 1,451 1,451 0 *
Arnold B. Chace, Jr.,
Trustees
f/b/o Malcolm Parks
Kent
- ----------------------------------------------------------------------------------------
Malcolm Parks Kent U/A 9/25/59 8,189 8,189 0 *
Malcolm G. Chace III and Arnold
B. Chace, Jr., Trustees
- ----------------------------------------------------------------------------------------
Malcolm G. Chace and 4,354 4,354 0 *
Arnold B. Chace, Jr.,
Trustees f/b/o Patricia
Kent
- ----------------------------------------------------------------------------------------
Laurence Keen 75,000(44) 75,000 0 *
- ----------------------------------------------------------------------------------------
Stanley Knapp 8,708 8,708 0 *
- ----------------------------------------------------------------------------------------
John L. Kraft 3,348 3,348 0 *
- ----------------------------------------------------------------------------------------
Leigh Fibers Co. 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Leigh Textiles, Inc. 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Robert Lenington 991 991 0 *
- ----------------------------------------------------------------------------------------
Leslie Group, Inc. 97,890 97,890 0 *
- ----------------------------------------------------------------------------------------
Charlotte P. Levine 55,459 55,459 0 *
- ----------------------------------------------------------------------------------------
William Lewisham 26,000 26,000 0 *
- ----------------------------------------------------------------------------------------
Norman B. Lipsett 12,885 12,885 0 *
- ----------------------------------------------------------------------------------------
Lee Javitch 26,433 26,433 0 *
Trustee for the
Indenture of
Trust of Norman B
Lipsett, Trust
- ----------------------------------------------------------------------------------------
</TABLE>
- 20 -
<PAGE> 22
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John Madden 3,090 3,090 0 *
- ----------------------------------------------------------------------------------------
George V. Malone 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
James G. Marquez 5,805 5,805 0 *
- ----------------------------------------------------------------------------------------
Karen L. Martin 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Ralph S. Mason, III 8,189 8,189 0 *
- ----------------------------------------------------------------------------------------
Ralph S. Mason, 8,189 8,189 0 *
Unified Credit Trust
- ----------------------------------------------------------------------------------------
Thomas McCann 18,651(45) 18,651 0 *
- ----------------------------------------------------------------------------------------
Edward J. McManimon, 2,221 2,221 0 *
III
- ----------------------------------------------------------------------------------------
Louis S. Mendez and 14,514 14,514 0 *
Heidi M. Mendez
- ----------------------------------------------------------------------------------------
Metraplex Corp. 208,481 208,481 0 *
- ----------------------------------------------------------------------------------------
H. Scott Miller 966 966 0 *
- ----------------------------------------------------------------------------------------
William J. and Beverly 58,991(46) 8,189 50,802 *
J. Miller
- ----------------------------------------------------------------------------------------
Alvin Mirman, 725 725 0 *
Custodian for
Danny Mirman
- ----------------------------------------------------------------------------------------
Ilene Mirman 4,839 4,839 0 *
- ----------------------------------------------------------------------------------------
Felice Mischel 20,000(47) 20,000 0
- ----------------------------------------------------------------------------------------
Jacques Moisset 62,000(48) 48,000 14,000
- ----------------------------------------------------------------------------------------
Jacques J. Moore 12,090 12,090 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 21 -
<PAGE> 23
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ted Morgan 8,392 8,392 0 *
- ----------------------------------------------------------------------------------------
Henry Mourad(49) 309,368(50) 220,368 89,000
- ----------------------------------------------------------------------------------------
Robert C. Neff 1,019 1,019 0 *
- ----------------------------------------------------------------------------------------
NCL (Nominees) Limited 368,750(51) 368,750 0 *
- ----------------------------------------------------------------------------------------
John J. Oberdorf 562 562 0 *
- ----------------------------------------------------------------------------------------
Maureen M. Oberdorf 36,266 36,266 0 *
- ----------------------------------------------------------------------------------------
William P. Oberdorf 4,079 4,079 0 *
- ----------------------------------------------------------------------------------------
Carmine T. Oliva(52) 1,284,232(53) 1,284,232 0 *
- ----------------------------------------------------------------------------------------
Carmine T. and Georgeann Oliva 497,031(54) 497,031 0 *
- ----------------------------------------------------------------------------------------
Georgeann Oliva 81,889 81,889 0 *
- ----------------------------------------------------------------------------------------
Jason A. Oliva 38,150 38,150 0 *
- ----------------------------------------------------------------------------------------
Ronald P. and Betty J. 166,728(55) 166,728 0 *
Oliva
- ----------------------------------------------------------------------------------------
Rose Oliva 4,355(56) 4,355 0 *
- ----------------------------------------------------------------------------------------
Samuel G. and T. 118,163 118,163 0 *
Michelle Morrison
Oliva
- ----------------------------------------------------------------------------------------
Samuel J. Oliva 705,284(57) 705,284 0 *
- ----------------------------------------------------------------------------------------
J.C. Bradford and Co. Cust. 178,029 178,029 0 *
f/b/o Ronald D. Ordway
IRA RLVR
- ----------------------------------------------------------------------------------------
Henry C. Oskman 49,060(58) 49,060 0 *
- ----------------------------------------------------------------------------------------
Norman S. Palazini 3,842 3,842 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 22 -
<PAGE> 24
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William S. Papazian 5,734 5,734 0 *
- ----------------------------------------------------------------------------------------
James B. Raphalian 14,514 14,514 0 *
- ----------------------------------------------------------------------------------------
Barry Reifler(59) 40,000(60) 40,000 0 *
- ----------------------------------------------------------------------------------------
George Riley 20,071 20,071 0 *
- ----------------------------------------------------------------------------------------
Martin Romm 7,257 7,257 0 *
- ----------------------------------------------------------------------------------------
Romofin AG 200,000(61) 200,000 0 *
- ----------------------------------------------------------------------------------------
The Royal Bank of 118,750(62) 118,750 0 *
Scotland Trust Company
(Jersey) Ltd.
- ----------------------------------------------------------------------------------------
Robert B. Runyon(63) 327,303(64) 327,303 0 *
- ----------------------------------------------------------------------------------------
Catherine Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
George R. Rusk 200,105 200,105 0 *
- ----------------------------------------------------------------------------------------
Terrance Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Samantha Rusk 1,451 1,451 0 *
- ----------------------------------------------------------------------------------------
Jerome M. St. John 4,079 4,079 0 *
- ----------------------------------------------------------------------------------------
St. John & Wayne 5,806(65) 5,806 0 *
- ----------------------------------------------------------------------------------------
Harvey Sandler 14,029 14,029 0 *
- ----------------------------------------------------------------------------------------
M. Alden Siegel 10,160 10,160 0 *
- ----------------------------------------------------------------------------------------
Kathryn A. Silva 1,209 1,209 0 *
- ----------------------------------------------------------------------------------------
Graham Smith 7,257(66) 7,257 0 *
- ----------------------------------------------------------------------------------------
David B. Solomon 43,544 43,544 0 *
- ----------------------------------------------------------------------------------------
David & Sylvia Sorin 3,869 3,869 0 *
- ----------------------------------------------------------------------------------------
David Sorin 5,321 5,321 0 *
- ----------------------------------------------------------------------------------------
Neil Sussman 75,000(67) 75,000 0 *
- ----------------------------------------------------------------------------------------
Mark Suvall 20,320 20,320 0 *
- ----------------------------------------------------------------------------------------
</TABLE>
- 23 -
<PAGE> 25
<TABLE>
<CAPTION>
========================================================================================
Total Number Shares to be Owned
of Shares to Upon Completion of
be Offered Offering(2)(3)
Shares Owned for Selling
Name of Selling Prior to Shareholder's Percentage
Shareholder Offering(1) Account Number of Class
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Talan(68) 166,000(69) 155,000 11,000 *
- ----------------------------------------------------------------------------------------
Gallant Thein 41,779(70) 16,378 25,401 *
- ----------------------------------------------------------------------------------------
John A. Trott 52,324 52,324 0 *
- ----------------------------------------------------------------------------------------
Gerald Unterman 154,258 154,258 0 *
- ----------------------------------------------------------------------------------------
C. Michael Vaughn, Jr. and 7,257 7,257 0 *
Carol Vaughn
- ----------------------------------------------------------------------------------------
Andrew M. Wallerstein 8,189 8,189 0 *
- ----------------------------------------------------------------------------------------
Michael F. Walsh 7,808 7,808 0 *
- ----------------------------------------------------------------------------------------
Hillel Weinberger 96,472(71) 96,472 0 *
- ----------------------------------------------------------------------------------------
Steven Weis 93,548(72) 93,548 0 *
- ----------------------------------------------------------------------------------------
Thomas Wiegand 21,772 21,772 0 *
- ----------------------------------------------------------------------------------------
E. Kenneth Williams, 562 562 0 *
Jr
- ----------------------------------------------------------------------------------------
Bill Y. Wong 37,571(73) 37,571 0 *
- ----------------------------------------------------------------------------------------
Gary Woolley 6,294 6,294 0 *
- ----------------------------------------------------------------------------------------
Word-Tronics 32,756 32,756 0 *
Corporation
- ----------------------------------------------------------------------------------------
Bennett Yanowitz 51,286 51,286 0 *
- ----------------------------------------------------------------------------------------
Yorkton Securities, Inc. 140,000(74) 140,000 0 *
========================================================================================
</TABLE>
- 24 -
<PAGE> 26
(1) Includes shares of Common Stock underlying warrants or stock options
exercisable as of June 9, 1997 or exercisable within 60 days after June
9, 1997, unless otherwise indicated.
(2) Asterisk indicates less that 1%.
(3) Although the Selling Shareholder table assumes the sale of all shares and
all shares underlying warrants and options by each Selling Shareholder,
certain of the Shares being registered hereby are subject to a lock-up
which permits such Shares to be sold gradually until September 26, 1998,
when all such restrictions expire. All of the 6,119,130 Merger Shares,
406,415 of the Option Shares and 1,197,879 of the Warrant Shares are
subject to this lock-up. See "Securities to be Registered; Lock-up
Provision."
(4) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(5) Includes 5,000 shares issuable upon the exercise of outstanding warrants.
(6) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(7) Mr. Barrett is a director of the Company.
(8) Includes 58,060 shares issuable upon the exercise of outstanding options
and 33,747 shares issuable upon the exercise of outstanding warrants.
(9) Includes 7,500 shares issuable upon the exercise of outstanding warrants.
(10) Mr. Briody is a partner of Gallagher, Briody & Butler, the Company's
outside general counsel.
(11) Mr. Butler is the Chief Financial Officer of the Company.
(12) Represents 75,000 shares issuable upon the exercise of outstanding
options.
(13) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(14) Includes 10,000 shares issuable upon the exercise of outstanding
warrants.
(15) Represents 7,257 shares issuable upon the exercise of outstanding
options.
(16) Includes 25,000 shares issuable upon the exercise of outstanding
warrants.
(17) Includes 37,500 shares issuable upon the exercise of outstanding
warrants.
(18) Mr. Dror is the former Chairman and Chief Executive Officer of the
Company; he resigned on November 15, 1996.
(19) Represents 15,000 shares issuable upon the exercise of outstanding stock
options.
(20) Includes 750,000 shares issuable upon the exercise of outstanding stock
options and 90,000 shares issuable upon the exercise of outstanding
warrants. In addition, the exercisability of 250,000 options held by Elk
is subject to certain conditions. Elk may be deemed to have been part of
a "control group" prior to Mr. Dror's resignation as Chairman and Chief
Executive Officer on November 15, 1996. See "Certain Relationships and
Related Transactions."
(21) Represents 60,000 shares issuable upon the exercise of outstanding
warrants.
(22) Includes 3,629 shares issuable upon the exercise of outstanding options
and 14,732 shares issuable upon exercise of outstanding warrants.
(23) Mr. Finnegan is a director of the Company.
(24) Includes 58,060 shares issuable upon the exercise of outstanding options
and 30,118 shares exercisable upon the exercise of outstanding warrants.
(25) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(26) Includes 40,804 shares issuable upon the exercise of outstanding
warrants.
- 25 -
<PAGE> 27
(27) Includes 32,658 shares issuable upon the exercise of outstanding stock
options.
(28) Gallagher, Briody & Butler is the Company's outside counsel.
(29) Mr. Gallagher is a partner of Gallagher, Briody & Butler, the Company's
outside general counsel.
(30) Includes 9,797 shares issuable upon the exercise of outstanding warrants.
(31) Includes 68,510 shares issuable upon the exercise of outstanding
warrants.
(32) Represents 10,000 shares issuable upon the exercise of outstanding
options.
(33) Includes 135,500 shares issuable upon the exercise of outstanding
warrants.
(34) Includes 32,000 shares issuable upon the exercise of outstanding
warrants.
(35) Includes 40,000 shares issuable upon the exercise of outstanding
warrants.
(36) Includes 20,000 shares issuable upon the exercise of outstanding
warrants.
(37) Includes 34,110 shares issuable upon the exercise of outstanding warrants
and 7,257 shares issuable upon the exercise of outstanding options.
(38) Represents 75,000 shares issuable upon the exercise of outstanding
warrants.
(39) Includes 50,802 shares issuable upon the exercise of outstanding options.
(40) Includes 5,000 shares issuable upon the exercise of outstanding warrants.
(41) Includes 19,353 shares issuable upon the exercise of outstanding
warrants.
(42) Includes 36,287 shares issuable upon the exercise of outstanding options.
(43) Represents 14,515 shares issuable upon the exercise of outstanding
warrants.
(44) Includes 15,000 shares issuable upon the exercise of outstanding
warrants.
(45) Includes 5,806 shares issuable upon the exercise of outstanding warrants
and 10,886 shares issuable upon the exercise of outstanding options.
(46) Includes 50,802 shares issuable upon the exercise of outstanding stock
options.
(47) Represents 20,000 shares issuable upon the exercise of outstanding stock
options.
(48) Represents 62,000 shares issuable upon the exercise of outstanding stock
options, 14,000 of which are covered by a separate Registration Statement
filed on Form S-8.
(49) Mr. Mourad is a former director and executive officer of the Company;
he resigned from these positions on March 26, 1997.
(50) Represents 232,368 shares issuable upon the exercise of outstanding stock
options, 12,000 shares of which are covered by a separate Registration
Statement filed on Form S-8.
(51) Includes 73,750 shares issuable upon the exercise of outstanding
warrants.
(52) Mr. Oliva is Chairman, Chief Executive Officer and President of the
Company.
(53) Includes 130,633 shares issuable upon the exercise of outstanding options
and 615,384 shares issuable upon the exercise of outstanding warrants.
- 26 -
<PAGE> 28
(54) Includes 3,629 shares issuable upon the exercise of outstanding options
and 14,732 shares issuable upon the exercise of outstanding warrants.
(55) Includes 3,628 shares issuable upon the exercise of outstanding options,
and 14,730 shares issuable upon the exercise of outstanding warrants.
(56) Represents 4,354 shares issuable upon the exercise of outstanding
warrants.
(57) Includes 25,401 shares issuable upon the exercise of outstanding options,
and 68,655 shares issuable upon the exercise of outstanding warrants.
(58) Includes 11,322 shares issuable upon the exercise of outstanding
warrants.
(59) Mr. Reifler is the former Chief Financial Officer of the Company.
(60) Includes 30,000 shares under option issuable upon Mr. Reifler's
termination of employment on September 19, 1997.
(61) Includes 40,000 shares issuable upon the exercise of outstanding
warrants.
(62) Includes 23,750 shares issuable upon the exercise of outstanding
warrants.
(63) Mr. Runyon is a director of the Company.
(64) Includes 88,664 shares issuable upon the exercise of outstanding warrants
and 58,060 shares issuable upon the exercise of outstanding stock
options.
(65) Represents 5,806 shares issuable upon the exercise of outstanding
warrants.
(66) Represents 7,257 shares issuable upon the exercise of outstanding
options.
(67) Represents 75,000 shares issuable upon the exercise of outstanding
warrants.
(68) Mr. Talan is a director of the Company.
(69) Includes 5,000 shares issuable upon the exercise of outstanding options.
(70) Includes 25,401 shares issuable upon the exercise of outstanding options.
(71) Includes 8,709 shares issuable upon the exercise of outstanding warrants.
(72) Represents 93,548 shares issuable upon the exercise of outstanding
warrants.
(73) Includes 32,658 shares issuable upon the exercise of outstanding stock
options.
(74) Represents 140,000 shares issuable upon the exercise of outstanding
warrants.
- 27 -
<PAGE> 29
PLAN OF DISTRIBUTION
The Shares held by the Selling Shareholders (or to be acquired by the
Selling Shareholders upon exercise of options or warrants) may be sold from time
to time by the Selling Shareholders, subject to a current and effective
prospectus.
The Shares may be sold by the Selling Shareholders from time to time in
one or more transactions (which may involve block transactions) in the
over-the-counter market, in negotiated transactions, or in a combination of such
methods of sale, at fixed prices, at market prices prevailing at the time of
sale, at prices related to the prevailing market prices or at negotiated prices.
The Shares may be sold by one or more of the following methods: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
in order to consummate the transaction; (b) a purchase by a broker or dealer as
principal, and the resale by such broker or dealer for its account pursuant to
this Prospectus, including resale to another broker or dealer; or (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers or dealers engaged by a Selling Shareholder may
arrange for other brokers or dealers to participate. Any such brokers or dealers
will receive commissions or discounts from a Selling Shareholder in amounts to
be negotiated immediately prior to the sale. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be "underwriters" within
the meaning of the Securities Act. Any gain realized by such a broker or dealer
on the sale of shares which it purchases as a principal may be deemed to be
compensation to the broker or dealer in addition to any commission paid to the
broker by a Selling Shareholder.
Some of the Shares covered by the Registration Statement may be sold
under Rule 144 instead of by the Registration Statement. The Company will not
receive any portion of the proceeds of the Shares sold by the Selling
Shareholders. The Selling Shareholders are not required to actually sell any of
the Shares held by the Selling Shareholders.
The Selling Shareholders have been advised that during the time each is
engaged in sales of the Shares covered by this Prospectus, each must comply
with, among other things, Regulation M, promulgated under the Exchange Act, as
amended, and pursuant thereto: (i) shall not engage in any improper
stabilization activity in connection with the Company's securities; (ii) shall
furnish each broker through which securities covered by this Prospectus may be
offered the number of copies of this Prospectus which are required by each
broker; and (iii) shall not bid for or purchase any securities of the Company or
attempt to induce any person to purchase any of the Company's securities other
than as permitted under the Exchange Act.
- 28 -
<PAGE> 30
SECURITIES TO BE REGISTERED
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $0.0033 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share ("Preferred Stock"). At August 18, 1997, there
were 11,392,216 shares of Common Stock outstanding and no shares of Preferred
Stock outstanding.
COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all matters
that are required or otherwise come before a vote of the stockholders of the
Company. The Common Stock carries no preemptive, conversion, redemption or
similar rights. The shares of Common Stock outstanding are fully paid and non-
assessable. The holders of shares of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available. In the event of liquidation,
dissolution or winding up of the Company, the holders of shares of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Company has never paid any dividends.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock from time to time in one or more series as may be designated by the Board
of Directors from time to time. In the event of liquidation, dissolution or
winding up of the Company, the holders of the Preferred Stock will be entitled
to a liquidation preference over the Common Stock. Any Preferred Stock issued in
the future will be entitled to such dividends, redemption rights, liquidation
rights, conversion rights and voting rights as the Board of Directors, in its
discretion, may determine, in a resolution or resolutions providing for the
issuance of any such stock. Preferred Stock can thus be issued without the vote
of the holders of Common Stock. Preferred Stock can be issued in the future with
rights which could reduce the attractiveness of the Company as a potential
takeover target, make the removal of management more difficult, or adversely
impact the rights of holders of Common Stock. Under certain circumstances the
issuance of Preferred Stock containing such rights could have the effect of
decreasing the market price of the Common Stock. The Company has no present
plans to issue Preferred Stock.
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Company's Certificate of Incorporation provides for three classes of
directors, with the number of members in each as nearly equal in number as the
then total number of directors constituting the entire Board. Each class of
directors have terms which expire in consecutive years. The Company's by-laws
require the Board to consist of four (4) or more directors, and require an
eighty (80%) percent affirmative vote of the holders of shares of
- 29 -
<PAGE> 31
Common Stock to reduce the number of directors. Presently, there are five
Directors with terms expiring as follows: David Barrett, 1997; Jack Talan and
Laurence P. Finnegan, Jr., 1998; and Carmine T. Oliva and Robert Runyon, 1999.
Any vacancies in the Board for any reason, or any increase in the number of
directors, may be filled only by an affirmative vote of the majority of
directors then in office, even if less than a quorum, and such incoming director
shall hold office until the expiration date of the class for which such director
has been chosen. In addition, the Certificate of Incorporation provides that
Directors may be removed only for cause. These provisions of the Certificate of
Incorporation concerning the Board members may not be repealed or amended unless
such action is approved by the affirmative vote of the holders of not less than
sixty-seven (67%) percent of the Company's outstanding shares of Common Stock.
STOCKHOLDERS' WRITTEN CONSENTS AND SPECIAL MEETINGS
The Company's Certificate of Incorporation provides that any action
required or permitted to be taken by the stockholders of the Company must be
effected by a duly called annual or special meeting, and may not be effected by
the written consent of stockholders. This provision of the Certificate of
Incorporation may not be repealed or amended unless such action is approved by
the affirmative vote of the holders of not less than sixty-seven (67%) percent
of the Company's outstanding shares of Common Stock. The Company's by-laws
provide that special meetings may be called only by the President, the Board of
Directors or the holders of shares of Common Stock entitled to cast not less
than 10% of the votes at any such meeting.
SECTION 203 OF THE DELAWARE CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless the transaction is approved in a
prescribed manner. An "interested stockholder" is defined as any person who is
(i) the owner of 15% or more of the outstanding voting stock of the corporation
or (ii) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder. This statute could
prohibit or delay a merger, takeover, or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
LIMITATION OF LIABILITY
As permitted by the Delaware General Corporate Law, the Company's
Certificate of Incorporation, as amended, provides that directors of the Company
shall not be personally
- 30 -
<PAGE> 32
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporate Law,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock, or (iv) for any transaction from which the director derives
an improper personal benefit.
WARRANTS AND RIGHTS
Of the 12,682,260 Shares being registered hereby, 2,157,879 shares are
Warrant Shares, and can be sold by the Selling Shareholders only after such
Selling Shareholder has exercised such Common Stock purchase warrant. All of the
warrants are immediately exercisable.
Of the Warrant Shares, 1,657,879 are issuable upon the exercise of
warrants at exercise prices ranging from $1.21 to $3.79, and expire during the
year 2000. The remaining 500,000 Warrant Shares underly warrants issued in
connection with the Yorkton Offering. Pursuant to the terms of these warrants,
if the price of a share of the Company's Common Stock equals or exceeds 150% of
the exercise price ($3.45) for ten consecutive trading days, then the Company
can demand that the warrants be exercised. If such warrants are not exercised
within thirty days of the demand, the warrants can be redeemed by the Company
for $0.50 per warrant. The warrants do not contain provisions for adjustments to
the exercise price, except for stock splits. As of September 23, 1997, there
were outstanding warrants to purchase an additional 32,000 shares of Common
Stock, exercisable at $2.50 per share. The shares underlying these warrants have
not been registered by the Registration Statement of which this Prospectus is a
part.
Another 1,579,783 shares of the 12,682,260 shares being registered hereby
are Option Shares, and can be sold by the Selling Shareholder only after such
Selling Shareholder has exercised the Common Stock purchase option (the
"Option") held by such Selling Shareholder. The Option Shares underlying the
Options are exercisable at prices ranging from $1.625 to $5.00. Substantially
all of the Options are currently exercisable. The Options do not contain
provisions for adjustments to the exercise price, except for stock splits. As of
September 23, 1997, there were outstanding options to purchase an additional
616,556 shares of Common Stock at exercise prices ranging from $1.625 to $5.00.
The shares underlying these options have not been registered by the Registration
Statement of which this Prospectus is a part.
LOCK-UP PROVISION
In connection with the merger by and between a wholly-owned subsidiary of
the Company and XIT, the Company issued the Merger Shares to the former XIT
shareholders. The Company also assumed all outstanding XIT warrants and all
outstanding XIT options. The Merger Shares, the shares underlying the
outstanding XIT warrants and the shares underlying the outstanding XIT options
are subject to certain lock-up agreements preventing the transfer of such shares
until the termination of such lock-up agreements. The lock-up agreements will
terminate with respect to 25% of such shares on each of the following dates: the
later of September 26, 1997 or the date on which the Registration Statement of
which this Prospectus is a part is declared effective; March 26, 1998; June 26,
1998; and September 26, 1998. Of the 12,682,260 shares being registered hereby,
7,723,424 are subject to the aforementioned lock-up agreement. These shares
consist of the 6,119,130 Merger Shares, 1,197,879 of the Warrant Shares, and
406,415 Option Shares. Aditionally, 80,000 shares issued to John Gorry,
pursuant to the Second Amended Agreement of Settlement and Mutual Release,
are subject to lock-up until April 1, 1998.
EXPERTS
The consolidated financial statements and schedule of MicroTel
International, Inc. and subsidiaries (formerly known as XCEL Corporation and
subsidiaries) as of September 30, 1996 and 1995 and for each of the years in
the three-year period ended September 30, 1996, have been included herein and
in the registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements for the six month period ended December 31,
1994, and for the years ended December 31, 1995 and December 31, 1996 for CXR
Corporation (MicroTel International, Inc. pre-Merger) included
- 31 -
<PAGE> 33
in this Prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants, and have been so included in reliance upon the reports given
upon the authority of that firm as experts in auditing and accounting.
The financial statements of CXR Corporation for the year ended June 30,
1994 included in the Prospectus have been audited by Deloitte & Touche LLP,
independent certified accountants, as stated in their report (which expresses an
unqualified opinion and includes an explanatory paragraph concerning certain
factors which raise substantial doubt about CXR's ability to continue as a going
concern) appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
BUSINESS
WHEN USED ANYWHERE IN THE DISCUSSION OF "BUSINESS" BELOW, THE WORDS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND," "SHOULD," "BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS
BELOW: "OVERVIEW"; "INSTRUMENTATION AND TEST EQUIPMENT"; "CIRCUITS"; "COMPONENTS
AND SYBSYSTEM ASSEMBLIES"; PRODUCT DEVELOPMENT AND ENGINEERING; "COMPETITION";
"REGULATION"; "EMPLOYEES"; AND "LEGAL PROCEEDINGS." PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS
MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS.
OVERVIEW
The Company, through its various direct and indirect operating
subsidiaries, designs, manufactures and distributes a wide range of electronics
hardware products and provides related services. Approximately 60% of the
Company's hardware sales are to customers in the telecommunications and
information services industries, including AT&T, the Regional Bell Operating
Companies ("RBOCs"), and Motorola. The remainder of the sales are for various
industrial, medical, military and aerospace applications.
The Company's objective is to become a leader in quality, cost effective
solutions to meet the global requirements of telecommunications and information
technology customers. The Company believes that it can achieve this objective
through customer-oriented product development, superior product solutions, and
excellence in local market service and support.
In 1984, the Company began operations as CXR Telcom Corporation. In 1989,
a holding company, CXR Corporation, a Delaware corporation, was formed with two
operating subsidiaries, CXR Telcom Corporation, based in the United States, and
CXR S.A.,
- 32 -
<PAGE> 34
based in France (collectively, "CXR"). CXR manufactures and distributes
telecommunications testing and transmission equipment. In 1995, CXR Corporation
changed its name to MicroTel International, Inc.
On March 26, 1997, the Company consummated the Merger pursuant to which
XIT became a wholly-owned subsidiary of the Company. Because the Merger was
accounted for as a reverse acquisition, historical financial information
referred to herein as that of the Company shall refer to the historical
financial information of XIT.
Prior to 1991, XIT produced video display products, bare printed circuit
boards, digital switches, keyboards, keypads and other components primarily for
military applications. In 1991, XIT began a fundamental transition of its
business operations by divesting $1.5 million in unprofitable bare printed
circuit board volume and $3.5 million in low margin standard keyboards. During
that year, XIT relocated its corporate headquarters, its Digitran Division's
input and display component business, and its circuit division to California and
focused its manufacturing on low volume, high margin double-sided and
multi-layer circuit boards. Commencing in that year, XIT also began investing
heavily in research and development in order to diversify its product line and
reduce its dependence on military sales.
Commencing in 1994, XIT began to implement a business strategy of
acquiring strategically complementary businesses and product lines. In July
1994, XIT acquired approximately 84% of HyComp, Inc. through a share exchange
with the majority shareholders. HyComp, formed in 1969, designs and manufacture
hybrid circuits, resistor networks, and thin film components. HyComp's products
are for high-reliability applications where they must withstand extremes of
temperature, humidity, or environment. These products have a variety of uses in
military, aerospace, medical, computer, industrial control and communications
electronics. In December 1995 and January 1996, XIT acquired an additional
approximate 7% of HyComp Common Stock through an exchange of XIT Common Stock
for HyComp common shares.
In May of 1995, XIT acquired certain work in process from a bankrupt
printed circuit board operation, XCMD, located in Philadelphia, Pennsylvania.
The Company continues to service certain of the XCMD customers from its Ontario
facility.
In July 1995, XIT sold its Computron Display Systems Division
("Computron") based in Forest Park, Illinois, a manufacturer of higher cost
custom color and monochrome display monitors, for $1.8 million. Computron was
sold based on XIT management's determination that the demand for its product
lines was declining. Further, XIT's growth in the monitor product area is
expected to be derived from its low cost standard color cathode ray tube ("CRT")
product line, branded XCEL-Lite, as well as a full range of flat panel products
manufactured at its Digitran Division.
- 33 -
<PAGE> 35
In September 1995, through a newly established wholly-owned subsidiary
XCEL Arnold Circuits, Inc. ("XCEL Arnold"), XIT completed the acquisition of
Arnold Circuits, Inc., a LaHabra, California manufacturer of complex
multi-layer, surface mount circuit boards used in sophisticated electronic
equipment for the computer, communications, instrumentation and industrial
controls industries. XCEL Arnold's circuit boards are currently used principally
in cellular telephone infrastructure, but can also be used in workstations,
desktop and notebook computers, computer networking products, storage devices
and medical equipment.
In April 1996, XCEL Arnold completed the acquisition of Etch-Tek, Inc.
("Etch-Tek"), a manufacturer of quick turn and prototype quantities of double
sided and high layer count multilayer printed circuit boards. Etch-Tek has been
established as a division of XCEL Arnold, and operates as XCEL Etch Tek.
Etch-Tek is located in Concord, California and maintains a direct sales office
in San Jose, California.
In September 1996, XCEL Corporation, Ltd. ("XCEL UK"), the Company's
United Kingdom subsidiary, acquired Abbott Electronics, Ltd. ("Abbott"). XCEL UK
operates Abbott as a wholly-owned subsidiary of XCEL UK trading as XCEL Power
Supplies, Ltd. Abbott designs and manufactures high and low voltage, high
specification, compact and micro-electronic power supplies to meet rugged
environmental and high tolerance electrical requirements.
In the fall of 1996, XIT began negotiations with respect to the Merger
which was consummated on March 26, 1997. Management believes that the Merger
will enhance the Company's ability to service its telecommunications and
information technology customers, create additional marketing opportunities both
geographically and across product lines, and provide some cost savings by the
internal sourcing of components formerly purchased from third party vendors.
Within the electronics industry, the Company manufactures and distributes
three product lines which are discussed as follows below.
INSTRUMENTATION AND TEST EQUIPMENT
The Company's Instrumentation and Test Equipment products are
manufactured by CXR. In addition, CXR S.A. performs network integration
services. Their customers include AT&T, the RBOCS, interconnect carriers,
independent telephone operating companies, private communications networks,
banks, brokerage firms and Government agencies.
TELECOM TEST INSTRUMENTS. The CXR line of test instruments measure the
transmission characteristics of telephone circuits. The market for this test
equipment has expanded as a result of the AT&T divestiture of the RBOCS and the
trend towards user ownership of equipment. As a result of the AT&T divestiture,
local telephone operating
- 34 -
<PAGE> 36
companies have been forced to develop their own internal capacity to identify
and isolate troubles in the network transmission facilities in both telephone
company owned or subscriber owned equipment.
The current line of test equipment manufactured and sold by CXR is as
follows:
The Model 100 Series Responders allow telephone companies and end users
to remotely and automatically monitor, and actively test, the quality of
transmission facilities. These products are compatible with the AT&T Centralized
Automatic Reporting on Trunk (CAROT) testing system and are used by common
carriers and private network operators to test their circuit interfaces to the
AT&T toll network.
The basic components of the Model 100 Series testing systems are a Near
End responder (NER), a Far End responder (FER) and an access Switch. An NER is a
device that acts as the master in a master slave concept. An NER initiates a
test by transmitting a test message to the FER at the other end of the circuit.
A series of tests are coordinated through a routine sequence controlled by a PC
based "Autoroutining System" software program usually located at the master site
or the control center. The system program generates reports for all the test
data, exception reports, trouble tickets, and marginal performance lines.
The 700 Series of Transmission test sets are used principally by
telephone companies to perform analog measurements on voice grade and wide band
circuits applications involving Digital Data Service (DDS) and High Capacity
Digital Subscriber Loops (HDSL). The primary use of this product line is in
metallic telephone loop qualification testing.
The Model 5200 Universal Transmission Analyzer incorporates Digital
Signal Processing (DSP) measurement technology and has replaced the LES 8000
Test Set formerly marketed by the Company. This product is marketed to the
maintenance organizations of telephone companies and private network operators
and performs all the functions of a Data Transmission Impairment Analyzer, a DS1
BERT Tester, a VF Signaling Network Access Unit, a T-1 Channel access Test Unit,
and a DDS private line and switched digital service test product.
The Model 5200 is designed for qualifying, commissioning and maintaining
digital baseband leased lines, mono and stereo radio channels and basic and
primary rate voice, and soon will be enhanced to service Integrated Services
for the Digital Network (ISDN) subscriber loops. It is capable of making
at very high transmission speeds all of the necessary measurements according to
the international CCITT recommendations.
The Model 5200 covers the specialized installation and maintenance of all
circuits involving voice, signalling transmission, 64Kb/s data, and 1.5Mb/s
data, and shortly will cover ISDN circuits. The Model 5200 is the first product
of its kind to offer all these testing capabilities within one package. An added
feature is the use
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<PAGE> 37
of an internal battery power source in order to accommodate special
hard-to-reach environments. The Model 5200 constituted approximately 70% of
CXR's instrument sales for the year ended December 31, 1996.
DATACOM TEST INSTRUMENTS. Datacom test instruments are used to test and
monitor the performance of computers and communications equipment to insure
proper function in receiving or transmitting data over wide area or local area
networks. Datacom instruments monitor, emulate and perform digital tests on
protocol, code and transmission functions of computers, terminals, modems,
multiplexers, front-end processors and other computer and communications
equipment.
The Datacom instruments manufactured and sold by CXR for testing wide
area networks are the CXR Telcom 840A and 841A Network Signalling Analyzers. The
804A is a hand-held field service instrument having limited emulation capability
and full monitor capability. The 841A is an easy-to-use field service tool used
primarily by telecommunications carriers for installation and maintenance of the
new ISDN. The 841A also tests and monitors the Common Channel Signalling System
7 (CCSS7) which is a worldwide standard protocol developed for the purpose of
transmitting information between digital central office switches.
TRANSMISSION PRODUCTS. CXR develops, manufactures, and sells a broad
line of Anderson Jacobson ("AJ") modem products. These include modem models
operating at data rates from 2400 bits per second (bps) through 33,600 bps.
These are sold as rackmount modems for use at central communication/computer
sites, stand-alone modems at central communication/computer sites, or as
stand-alone modems for use at remote sites. All of the AJ models are "feature
rich" modems that generally offer more capabilities and flexibility than
competing products.
The ability to transmit digital data to and from computers is an
important element in the computer industry. Communications and data interconnect
capabilities are fundamental requirements for maximization of computer systems
uses. The large volume of information to be exchanged between computer networks
in geographically disperse locations require rapid, accurate and economical
communications capabilities and the AJ product line is designed to meet and
satisfy such needs.
The market for V.34 bis dialup 33,600 bps products is believed to be a
major growth area and much of CXR's modem development effort is being
concentrated on the V.34 bis, V.32ter and V.34 protocol, which include a 33,600
bps product line of modems with integral time division channels multiplexer
ports.
The AJ 14,400/19,200 series is a true V.32 bis/V.32ter compatible
product line, with full duplex operation on standard dial-up lines or on 2-wire
or 4-wire leased lines. The series features trellis coded modulation and local
and remote echo cancellation, with
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<PAGE> 38
capabilities to cope with satellite delay of multiple hops in long distance
transmission. Also, the series is equipped with multiple number storage capacity
via a V.25 bis synchronous dialer for computer controlled application. In leased
line operation the series features unattended automatic dial backup using the
dial-up network in the event of lease line failures. The series is also
available in either stand alone desktop applications or as a card for chassis
rackmount configuration.
The AJ Smart Rack is a modem management enclosure that accommodates 16
modular card modems that allow the data center managers to keep track of
configurations, diagnostics, alarms and system status at all times through a
menu driven user interface. The main advantage of the Smart Rack is the
simplicity of keeping track of all activities with real time monitoring and
reporting using simple easy to read display screens. Also an on-board modem
allows access from remote locations and the ability to dial a predefined
sequence of numbers for alarm reporting.
The AJ 5900 series offers intelligent T-1 Channel Service Units which
provide access to D4 and Extended Super Frame (ESF) on High Capacity Digital
Service (HCDS), in either a single line or rack mount configuration. The AJ 5900
series offers a single termination interface to the Data Terminal Equipment
(DTE), providing continuous monitoring for bipolar violations and multiple error
events. The user can select thresholds for error rates, with separate levels for
the network and the equipment. The series provide complete access to both the
network side and the user side, along with the appropriate diagnostic tests in
order to maintain network integrity.
In March 1997, CXR introduced a new product line, the AJ 6900 series
for T1 and fractional T1 CSU-DSU application. These newly introduced products
provide for the direct interface between the customer's equipment and the T1
facilities. The AJ 6900 series operates at any multiple 56K or 64K b/s,
including current Frame Relay data rates. Built-in multiplexer ports allow
simultaneous connections to a PBX or channel bank which shares the same T1
facility. The AJ 6900 series has an integrated Simple Network Management
Protocol (SNMP) and therefore can easily be used by any network management
system using SNMP.
NETWORKING SYSTEMS. In 1996, CXR S.A. formed a new business unit to
market several lines of products used to build data and voice networks. All of
these products are sourced from third-party vendors under distributorship or OEM
arrangements. The "product" marketed to its customers is a turn-key solution
using these products and includes network design, installation and maintenance.
The product lines marketed consist of four primary types as follows: a)
multiplexing equipment used to transport data, voice and local area network
traffic over point-to-point leased lines and frame relay networks; b)
statistical multiplexers, terminal servers and routers for local area network
interconnections; c) data compression equipment used to
- 37 -
<PAGE> 39
compress and encrypt data streams prior to network access to maximize
transmission speed and secure the transmission and to decompress and decipher
upon transmission receipt; and d) ISDN routers used to link remote offices to
corporate office local area networks.
CXR ANDERSON JACOBSON LTD. Following the Merger, the Company has
established a new United Kingdom subsidiary, CXR Anderson Jacobson, Ltd., for
the purpose of marketing the products and services offered by CXR S.A. in the
United Kingdom.
CIRCUITS
The Company's printed circuit boards are produced by XCEL Arnold
Circuits, Inc. ("XCEL Arnold"), a wholly-owned subsidiary of XIT based in
LaHabra, California and Concord, California, XCEL Circuits, a division of XIT
based in Monrovia, California and HyComp, Inc. ("HyComp"), an approximately 89%
owned subsidiary based in Marlborough, Massachusetts.
Printed circuit boards are essential components in virtually all
sophisticated electronic products. The circuit board is the basic platform used
to interconnect and mount electronic components such as microprocessors,
resistor networks and capacitors. Circuit boards consist of copper traces on an
insulating (dielectric) base, which provide electrical interconnections for
electronic components. The development of more sophisticated electronic
equipment by OEMs combining higher performance and reliability with reduced size
and cost has created a demand for increased complexity, miniaturization and
density in the circuit traces. In response to this demand, multi-layer boards
have been developed in which several layers of circuitry are laminated together
to form a single board with both horizontal and vertical electrical
interconnections.
The technology required to manufacture electronic products is becoming
increasingly costly and complex. Traditionally, manufacturers used the so-called
"through-hole" technology in assembling printed circuit boards. However, a newer
technology, known as "surface-mount" technology ("SMT") has gained acceptance in
the manufacture of these products.
The Company has invested in new manufacturing equipment to accommodate
the increased business for SMT equipment. SMT allows for production of a smaller
circuit board, with greater component and circuit density, resulting in
increased performance. Management believes that SMT will continue to constitute
an increasing percentage of printed circuit board production and assembly.
- 38 -
<PAGE> 40
The circuit boards produced at XIT's La Habra, California facility (known as
"Arnold Circuits") are high density, multi-layer printed circuit boards of up
to 12 layers. The majority of the Arnold Circuits' multi-layer rigid circuit
boards are manufactured on a standard base laminate material. Arnold Circuits
also produces high performance circuit boards constructed from speciality
materials. Arnold Circuits gained ISO 9002 certification in 1995.
XCEL Etch-Tek is a division of XCEL Arnold located in Concord,
California. Etch-Tek is a manufacturer of sophisticated high multi-layer, quick
turn, and prototype printed circuit boards.
HyComp manufactures hybrid circuit products which must, because of the
applications in which they are used, endure extreme environmental conditions.
HyComp's hybrid circuits combine components, such as resistors, capacitors and
integrated circuit chips, into one functional unit in a single sealed package.
HyComp also has a line of thick film hybrid circuits which are
manufactured by HyComp's strategic partner SIMESA in its automated cassette to
cassette production facility located in Vitoria, Spain.
COMPONENTS AND SUBSYSTEM ASSEMBLIES
The Components and Subsystem Assemblies products are produced and/or
sold by XIT's Digitran Division, based in Ontario, California, XCEL Corp. Ltd.
and XCEL Power Supplies Ltd., wholly-owned subsidiaries of XIT based in England,
and XCEL Japan, Ltd.
Components
XIT's Digitran Division manufactures and sells digital switch products
serving aerospace, communications, industrial and commercial applications.
Thumbwheel, push button, and lever modules, together with assemblies, are
manufactured in 16 different model families. The Digitran Division also offers a
wide variety of custom keypads and keyboards.
The Digitran Division also produces the XCEL-Lite display color monitor
product. Each monitor is customized to meet the needs of OEMs or sold "off the
shelf" as lower cost color standard XCEL-Lite models. The monitors also come
with a range of options, including: a wide range of phosphors, customer headers,
video to all standard formats or customized, front access controls for
brightness, contrast, and power, ruggedized exteriors, EMI/RFI shielding, low
energy power and universal power supplies. The predominant
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<PAGE> 41
market segments for these displays are medical, test instruments and rugged
continuous use ATMs. Color and monochrome monitors (including XCEL-Lite) are
sold in Europe through XCEL UK, Ltd.
Subsystems
Based on industry data, the Company believes that OEMs are
increasingly relying upon independent manufacturers of complex electronic
interconnect products rather than on in-house production. The Company believes
that the current trend towards increased reliance by OEMs on independent
manufacturers reflects the OEMs' recognition that, for complex electronic
interconnect products, independent manufacturers can provide greater
specialization, expertise, responsiveness and flexibility and can offer shorter
delivery cycles than can be achieved by internal production.
In addition, the use of independent manufacturers allows OEMs to focus
their efforts and resources on other areas such as product research and
development and marketing. Other factors which lead OEMs to utilize contract
manufacturers include:
Reduced Time-to-Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product
life-cycles and therefore have a growing need to reduce the time required to
bring a product to market. OEMs can reduce their time-to-market by using a
contract manufacturer's established manufacturing expertise and infrastructure.
Reduced Capital Investment Requirements. As electronic products have
become more technologically advanced, the manufacturing process has become
increasingly sophisticated and automated, requiring a greater level of
investment in capital equipment. By using contract manufacturers, OEMs can
reduce their overall capital equipment requirements while maintaining access to
advanced manufacturing facilities.
Focused Resources. Because the electronics industry is experiencing
greater levels of competition and rapid technological change, many OEMs
increasingly are seeking to focus their resources on activities and technologies
in which they add the greatest value. By offering comprehensive electronic
assembly and turnkey manufacturing services, contract manufacturers allow OEMs
to focus on core technologies and activities such as product development,
marketing and distribution.
Access to Leading Manufacturing Technology. Electronic interconnect
products and electronic interconnect product manufacturing technology have
become increasingly sophisticated and complex, making it difficult for OEMs to
maintain the necessary technological expertise in process development and
control. OEMs are motivated to work
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<PAGE> 42
with a contract manufacturer in order to gain access to the contract
manufacturer's process expertise and manufacturing know-how.
Improves Inventory Management and Purchasing Power. Electronics
industry OEMs are faced with increasing difficulties in planning, procuring and
managing their inventories efficiently due to frequent design changes, short
product life-cycles, large investments in electronic components, component price
fluctuations and the need to achieve economies of scale in materials
procurement. OEMs can reduce production costs by using a contract manufacturer's
volume procurement capabilities. By utilizing a contract manufacturer's
expertise in inventory management, OEMs can better manage inventory costs and
increase their return on assets.
The Company offers complete manufacturing solutions to OEMs, including
concurrent engineering, assembly of printed circuit boards incorporating its
input and display components, assembly of subsystems, test engineering, software
development and accessory packaging. The Company believes that its ability to
manufacture various electronic components, combined with its engineering
integration capability, provides it with a number of competitive advantages in
providing custom subsystem assemblies that can enable it to capture a
significant portion of this growing market. In addition, the Company's
manufacturing technologies and processes now include, in addition to SMT, tape
automated binding full grid arrays, and chip on board chip in flux.
By integrating the Company's printed circuit boards and components, the
Company is able to engineer and manufacture communications equipment, medical
testing equipment, industrial machine controllers, and military weapons
subsystems. Medical equipment, gasoline service point of sales terminals, and
machine tools use the Company's proprietary PF-Shield, a thin, tough PolyFilm
which provides environmental protection from dust and most fuels, solvents and
petroleum-based products without detracting from the equipment's cosmetic
appearance or performance. Furthermore, the shield is highly resistant to
puncture, is flame retardant and remains flexible from -75 degrees Celsius to
150 degrees Celsius. XIT's industrial machine controller products eliminate
interference and cross-talk between adjacent monitors, utilize high grade
plastics (Digidome) that will not deteriorate when exposed to petrochemicals,
and offer custom panels and keycaps that withstand the abusive industrial
environment. XIT's military products utilize the highest quality materials to
withstand nuclear, biological, and chemical contamination and extreme
environmental conditions encountered in worldwide military deployment including
rigorous shock and vibration.
CUSTOMERS AND MARKETING
Customers for the Company's Instrumentation and Test product line
include AT&T, the RBOCS, international telephone companies (including France
Telecom), and private communications networks. Datacom test equipment and modem
equipment are purchased
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<PAGE> 43
by telecommunications equipment manufacturers and used in the design,
manufacture, installation and maintenance of the electronic equipment they
provide. Telecom test instruments are purchased by the major long distance
carriers.
The principal customer for the Circuits Sector is the Cellular
Infrastructure Group of Motorola. Substantially all manufacturing for Motorola
is done at Arnold Circuits. During the year ended September 30, 1996, and the
six months ended June 30, 1997, sales to Motorola accounted for 41% and 22%,
respectively, of the Company's sales. The Company has commenced efforts to
market its products to other customers to reduce its reliance on Motorola and
has commenced sales to other customers who it believes will become significant
customers. The loss of Motorola as a customer, or a significant reduction in
the dollar amount of orders from Motorola, would have a material adverse
affect on the Company. See "Risk Factors; Dependence on Major Customer."
The principal customers for Components and Subsystems are OEMs in the
electronics industry, including manufacturers of communications equipment,
industrial and business computers, automatic teller machines, medical devices,
industrial instruments and test equipment, and aerospace and military products.
The Company markets its products through a combination of direct sales
engineers, distributors and independent sales representatives primarily in the
United States, Europe and Japan.
BACKLOG
The Company's business is not generally seasonal, with the exception
that the printed circuit board industry generally slows in the last calendar
quarter of each year. The Company's backlog of firm, unshipped orders was as
follows by business sector at June 30, 1997 and September 30, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
( in thousands )
June 30, 1997 Sept 30, 1996 Sept 30, 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Circuits $ 4,720 $ 11,019 $ 14,087
Components and Subsystem
Assemblies 7,770 9,187 2,937
Instrumentation and Test
Equipment 3,079 - 0 - - 0 -
--------------- --------------- ---------------
$ 15,569 $ 20,206 $ 17,024
=============== =============== ===============
</TABLE>
The decline in backlog for the Circuits Sector is principally the
result of Arnold Circuit's major customer, Motorola, changing its ordering
pattern, compounded in 1997 by a deferral of orders by the customer pending
correction of late delivery problems. Motorola as
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<PAGE> 44
a matter of policy has reduced its order quantities from a 12 month supply
in the September 30, 1995 time frame to a 3 to 6 month supply beginning in the
September 30, 1996 time frame and forward. The increase in backlog for the
Components and Subsystem Assemblies Sector beginning at September 30, 1996 is
due to the backlog of Abbott, acquired in September 1996, of $5,217,000 and
$5,992,000 at June 30, 1997 and September 30, 1996, respectively. Order backlog
for Abbott is volatile and the decline from September 30, 1996 to June 30, 1997
is not indicative of an adverse trend. The remainder of the decline in backlog
for the sector from September 30, 1996 to June 30, 1997 of approximately
$642,000 is due to a general decline in orders for the rest of the Sector's
products resulting from the aging of related customer programs. The backlog for
the Instrumentation and Test Equipment Sector at June 30, 1997 is that of CXR,
acquired on March 26, 1997. Backlog for CXR is not deemed a significant measure
of its business, as its customers generally order on a just-in-time basis;
however, at June 30, 1997, CXR had one significant order which had been placed
on an extended contract basis. The order backlog at June 30, 1997 is expected
to be shipped during the year ended December 31, 1997, with the exception of
approximately $2,600,000 of Abbott orders whose fulfillment extends beyond that
date.
MANUFACTURING
The Company purchases the electronic components required for the
manufacture of its various product lines from a number of vendors and has
experienced no significant difficulties in obtaining timely delivery of
components. In addition, the Company has begun internal sourcing of certain
electronic components following the Merger. Management has determined that there
would be little, if any, cost savings from outside manufacturing.
PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering is critical in view
of rapid technological innovation in the electronics hardware industry. Current
research and development efforts are concentrated in the Instrumentation and
Test Equipment Sector (CXR) and at HyComp. For the years ended September 30,
1996, September 30, 1995, and September 30, 1994, product development costs of
XIT were approximately $309,000, $328,000 and $639,000, respectively.
The product development costs of CXR were $2,612,000 and $2,373,000
during the years ended December 31, 1996 and December 31, 1995, respectively.
These product development costs were related primarily to development of new
telecommunications test equipment, trunk testing system products and data
communications equipment. Current research expenditures are directed principally
towards enhancements to the current test instrument product line and development
of increased band width (faster speed) transmission products. These expenditures
are intended to improve market share and gross margins, although no assurances
may be given that such improvements will be achieved.
CXR also makes use of the latest CAD (Computer Aided Design) equipment
to design and package its products. This puts CXR in the position to take full
advantage of the latest CAE (Computer Aided Engineering), and EDA workstation
tools (Engineering Design Automation) to design, simulate and test its advanced
product features or product enhancements
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<PAGE> 45
for custom circuits and miniaturization purposes. With the above mentioned
tools, product developments are turned around very quickly, keeping the highest
quality and reliability integrated as part of the overall development process.
This kind of capability also allows CXR to offer custom featured designs for the
potentially expanding Original Equipment Manufacturers (OEM) customers, whose
needs require the integration of CXR's products with their own.
In 1992, HyComp began investigating the feasibility of a lower cost
alternative flip chip assembly process than that developed by IBM in the 1980s.
The HyComp process called "adhesive flip chip" uses conductive adhesives as
interconnections, instead of deposited metals. The adhesive flip chip process
promises all the benefits of the flip chip, but with substantially lower capital
investment and manufacturing costs. In 1995, HyComp received a contract from the
Advanced Research Projects Agency of the Department of Defense ("ARPA") to study
the feasibility of commercializing flip chip technology. In 1996, HyComp
received a contract continuation in the amount of $750,000 from the ARPA to set
up and operate an adhesive flip chip assembly line.
In microelectronic applications, packaging has become a primary focus.
As chips approach the limits of on-chip densities, packaging which spaces chips
closely becomes key to increasing performance while decreasing size. Flip chip
technology gives the highest chip density of any packaging method. Instead of
placing chips in space wasting individual packages, they are assembled face down
onto matching connections on a substrate or board. Since the connections are
under the chip, no additional space is required for bonded wires or leads.
Company management believes that adhesive flip-chip has significant
potential size, performance and cost advantages for hybrid circuit manufacture.
It is expected that the two year ARPA program will make HyComp the only hybrid
company experienced in adhesive flip chip assembly, a significant market
advantage. Management believes that over the next five years, flip chip will be
the microelectronic packaging of choice for high performance circuits. As of
June 1997, a prototype production process has been implemented and initial
commercial samples have been produced for potential customers.
PATENTS AND TRADEMARKS
The Company regards its software, hardware and manufacturing processes
as proprietary and relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions,
including employee and third-party nondisclosure agreements, to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford some
limited protection. The laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The
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<PAGE> 46
Company requires that its employees enter into confidentiality agreements as a
condition of employment.
COMPETITION
The Instrumentation and Test Equipment Sector has numerous competitors
with greater technological, financial and marketing resources than those
possessed by the Company. The ability of the Company to compete in the
Instrumentation and Test product lines is dependent on several factors including
price, technology, product performance, service and its ability to attract and
retain qualified management and technical personnel.
The market for printed circuit boards in the United States is
fragmented and very competitive. The Company believes there are over 700
companies producing circuit boards in the United States. XIT competes primarily
against other independent manufacturers. There are no dominant manufacturers in
the segment of the industry served by XIT. XIT believes that relatively few
producers in the United States have the technological competence, manufacturing
processes, and facilities to produce complex multi-layer surface mount circuit
boards in commercial volumes.
The Company also faces competition in this sector from certain captive
circuit board manufacturers. These manufacturers may seek orders in the open
market to fill excess capacity, thereby increasing price competition. A number
of the Company's competitors are larger than the Company and have greater
financial, marketing and other resources. The Company believes that competition
in circuits manufacturing is based on product quality, technological capability,
responsiveness to customers in delivery and service, and price.
The Company's Components and Subsystem Assemblies Sector competes in a
highly fragmented market composed of a diverse group of U.S. based
manufacturers. The Company believes that the primary bases of competition in
this market segment are capability, price, manufacturing quality, advanced
manufacturing technology, and reliable delivery. The Company believes that by
focusing on low to medium-volume production, and by manufacturing subsystems
using its inhouse manufactured components, the Company can compete effectively.
Additionally, by taking on a wider range of systems than its larger competitors
and by having access to a diversified customer base, the Company believes it is
able to diversify its workload and is not as dependent as some of its
competitors on individual contracts, customers or industries.
REGULATION
The Federal Communication Commission ("FCC") has adopted regulations
with respect to the interconnection of communications equipment with telephone
lines and radiation emanations of certain equipment. CXR has complied with these
regulations and received all necessary FCC approvals for its line of trunk
testing equipment. As additional products require certification, CXR believes it
will be able to satisfy all such future requirements. CXR believes it complies
with environmental regulations since it assembles, rather than manufactures,
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<PAGE> 47
electronic components and therefore discharges into the environment are believed
to be negligible.
XIT's product lines are subject to certain federal and state statutes
governing safety and environmental protection. XIT believes that it is in
substantial compliance with all such regulations and XIT is not aware of any
proposed or pending safety or environmental rule or regulation which, if
adopted, would have a material impact on its business or financial condition.
EMPLOYEES
As of August 31, 1997, the Company employed 427 persons. Of these
employees, 314 employees are employed in the United States and 113 are employed
in Europe and Japan.
None of the Company's employees are represented by unions and there
have not been any work stoppages at any of the Company's facilities. The Company
believes that its relationship with its employees is good.
DESCRIPTION OF PROPERTY
The Company leases or owns approximately 250,000 square feet
of administrative, production, storage and shipping space. All of these
facilities are leased other than the Melbourne, UK and Abondant, France
facilities. The Ontario facility is owned by Capital Source Partners, a
California real estate partnership in which XIT holds a 50% ownership interest.
<TABLE>
<CAPTION>
Business Unit Location Function
------------- -------- --------
<S> <C> <C>
Digitran Division (Components and Ontario, Corporate
Subsystem Assemblies) California headquarters/
Manufacturing
XCEL Circuit Division (Circuits) Monrovia, Administrative/
California Manufacturing
XCEL Corp. Ltd. Melbourne, Administrative
(Components and Subsystem Assemblies) United
Kingdom
XCEL Power Supplies Ashford, Administrative/
(Components and subsystem United Manufacturing
assemblies) Kingdom
</TABLE>
- 46 -
<PAGE> 48
<TABLE>
<S> <C> <C>
XCEL Japan, Ltd. (Components and Higashi- Administrative/
Subsystem Assemblies) Gotanda, Assembly
Tokyo, Japan
Arnold Circuits (Circuits) La Habra, Administrative/
California Manufacturing
HyComp, Inc. (Circuits) Marlborough, Administration/
Massachusetts Manufacturing
CXR S.A. (Instrumentation and test Paris, France Administrative
equipment)
CXR Fremont, Administrative/
(Instrumentation and California Manufacturing
test equipment)
CXR, S.A. Abondant, Manufacturing
(Instrumentation France
and Test Equipment)
</TABLE>
The lease for the Fremont facility will expire in or about September
of 2002, with one five year renewal option. The lease for the Paris, France
facility expires in May 1998. The Ontario facility is covered by a lease that
expires in September 2000, with options to extend until September 2010. The
Monrovia facility is covered by a lease that expires on October 31, 1997,
with an option to renew until October 31, 1998. The LaHabra facility is leased
from four separate property owners pursuant to leases, each of which terminates
in March 2000. Each of these leases may be extended for five years subject to
agreement on a minimum monthly rental. The Concord facility is subject to a
lease that expires in September 2001, with options to renew until April 2016.
The Marlborough facility is subject to a lease which expires in October 2000,
and the Tokyo facility is subject to a lease which expires in March 1998. The
Ashford facility is subject to a fifteen year lease which expires on September
6, 2011, subject to the right of the Company to terminate the lease after five
years, and the rights of the Company or the landlord to terminate the lease
after ten years.
The Company believes that these facilities are adequate for the
current business operations.
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<PAGE> 49
LEGAL PROCEEDINGS
In September 1994, Raymond Jacobson, a former officer and director of
the Company and a participant in the Company's deferred compensation plan,
brought an action against the Company in the California Superior Court, Santa
Clara County, alleging that the Company had breached its contract to pay Mr.
Jacobson $3,495 bi-weekly for life under his deferred compensation agreement
dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August
1994. The 1993 Agreement superseded a previous deferred compensation agreement
dated April 1, 1977 (the "1977 Agreement") which had provided for twice the
level of payments. Mr. Jacobson was claiming damages of approximately
$1,200,000, which he purported to be the present value of all payments to be
made under the 1993 Agreement. In June 1995, the Company paid Mr. Jacobson all
amounts past due under the contract plus interest and reinstated the bi-weekly
payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit
against Mr. Jacobson in the District Court for Galveston County, Texas alleging
damages arising from DDC's investment of more than $2,000,000 for the purchase
of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr.
Jacobson, through his attorney, demanded that the Company indemnify him, hold
him harmless and pay for the cost of defense, including reasonable attorney's
fees and costs in connection with the litigation instituted against him by DDC.
This suit was subsequently dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice
to the Company that he believed that the litigation instituted against him by
DDC provided a basis for him to rescind the 1993 Agreement and assert his rights
to full payment under the 1977 Agreement. A motion for leave to amend the
claim against the Company to include this assertion has been filed with the
court.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company believes that
an enforceable settlement was reached on January 22, 1997. Mr. Jacobson
apparently disclaims this agreement based on the actions noted above. On
February 28, 1997 the Company filed a motion for leave to file a cross-claim
asserting that the January 22, 1997 agreement supersedes all previous agreements
with Mr. Jacobson. A motion for leave to amend the claim against the Company to
include this assertion has been filed with the court.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the settlement was
subject to fulfillment of a number of conditions subsequent which did not occur
and therefore was not binding on either party. Subsequent thereto, several
alternative settlement offers have been proposed by Mr. Jacobson's counsel,
none of which are acceptable to the Company.
Currently, both the Company's motion for leave to cross-claim and Mr.
Jacobson's motion for leave to amend his complaint have been granted, and a
trial date has been set for February 9, 1998.
- 48 -
<PAGE> 50
The Company does not believe that the value of a settlement of the
above matter or alternatively a trial judgment will be materially in excess of
the amount already recorded by the Company for the deferred compensation
arrangement, which approximates $1,000,000 at June 30, 1997. The recorded
amount approximates the value of the tentative settlement reached on March 26,
1997.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary damages
in the amount of $300,000 allegedly sustained by the failure of the Company, its
stock transfer agent and its counsel to timely deliver and register 30,000
shares of Common Stock for which payment had been made. The Company was informed
by Mr. Scheinfeld that in order to settle his claims, the Company would have to
issue him unrestricted shares of common stock. Since the Company cannot issue
unrestricted shares (absent registration), the Company answered Mr.
Scheinfeld's motion and sought to compel him to serve a complaint upon the
defendants. On June 30, 1997, the complaint was served. The Company has
subsequently answered, denying the material allegations of the complaint, and
discovery is proceeding in the case.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material adverse
affect on the consolidated results of operations, financial position or cash
flows.
MARKET INFORMATION
Since September 11, 1996, the Company's Common Stock has been trading on the
NASDAQ SmallCap Market under the symbol MCTL. Prior to that date, the shares of
the Company's Common Stock had been listed on the American Stock Exchange under
the symbol MOL. Accordingly, the tables below reflect the high and low sales
prices for a share of the Company's Common Stock during the period they were
listed on the AMEX, and the high and low bid information for the period during
which they were listed on the NASDAQ SmallCap Market. The quotations below for
dates commencing September 11, 1996 reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
- 49 -
<PAGE> 51
On August 15, 1996, the shareholders of the Company ratified a one-for-five
reverse stock split effective for holders of record on August 29, 1996. The
sales prices below have been restated to give effect to the reverse split.
<TABLE>
<CAPTION>
1997 High Low
- ---- ---- ---
<S> <C> <C>
September 19, 1997 $ 2.1875 $ 2.0625
Second Quarter 2.8125 1.875
First Quarter 3.4375 1.4375
1996
- ----
Fourth Quarter $ 3.25 $ 1.0625
Third Quarter 5.625 3.125
Second Quarter 8.75 4.6875
First Quarter 9.375 5.3125
1995
- ----
Fourth Quarter $ 6.5625 $ 4.0625
Third Quarter 7.50 5.3125
Second Quarter 6.25 3.75
First Quarter 4.375 3.125
</TABLE>
(b) Shareholders:
As of September 18, 1997, the Company had approximately 3,850 shareholders of
record.
(c) Dividends:
The Company has not declared or paid any cash dividend since its inception. It
has been the general policy of the Board of Directors to retain all earnings in
the Company to support the expansion and development of new products.
SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for
the Company for the five years ended September 30, 1996; the three month periods
ended December 31, 1996 and 1995 respectively and the six month periods ended
June 30, 1997 and 1996. The data has been derived from and should be read in
conjunction with the Company's Consolidated Financial Statements and
Consolidated Condensed Financial Statements and the related Notes thereto.
Management's Discussion and Analysis of Financial Condition and Results of
Operations for these periods which follows. The financial data as of and for the
three month periods ended December 31, 1996 and 1995 and six months ended June
30, 1997 and 1996 are unaudited, but have been prepared on the same basis as
the audited Consolidated Financial Statements and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
accruals, necessary
- 50 -
<PAGE> 52
for the fair presentation of the data presented. Results of operations for the
six months ended June 30, 1997 are not necessarily indicative of results that
may be expected for the full year. All amounts are in thousands, except per
share data.
MicroTel International, Inc. and Subsidiaries
Selected Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
June 30 December 31 Year Ended September 30
---------------------- ---------------------- -----------------------------------------------------------
1997 1996 1996 1995 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $19,736 $15,973 $7,887 $6,796 $31,249 $19,602 $14,237 $13,766 $15,993
Net income (Loss) $(2,038) $825 $(889) $151 $1,083 $337 $(672) $1,430 $382
Net income (Loss) $(.24) $.13 $(.15) $.02 $.17 $.07 $(.14) $.33 $.13
per share
Total Assets $32,148 $17,193 $20,564 $15,298 $19,613 $15,955 $11,137 $10,716 $10,631
Long Term $4,556 $3,523 $4,343 $2,288 $3,453 $2,358 $740 $762 $4,027
Obligations
Stockholders' $12,742 $5,678 $5,062 $4,572 $5,846 $4,464 $3,263 $3,769 $1,245
Equity
Shares Outstanding 11,392 5,885 6,063 5,814 6,063 5,814 4,886 4,659 3,004
at Period End
</TABLE>
No cash dividends were declared during any of the periods presented.
Shares outstanding and net income (loss) per share have been restated to give
effect to the recapitalization of XIT Corporation (the accounting acquiror) in
the "reverse acquisition" of MicroTel International, Inc. by XIT Corporation on
March 26, 1997.
As discussed previously, the financial data above is that of XIT
Corporation (the "Accounting Acquiror"). In conjunction with the reverse
acquisition accounting treatment, XIT changed its fiscal year end from
September 30 to December 31 to adopt the fiscal year end of MicroTel
International, Inc. The three month period ended December 31, 1996 represents
the "transition" period between XIT's year ended September 30, 1996 and the
beginning of its new fiscal year, January 1, 1997.
- 51 -
<PAGE> 53
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING
STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW: RESULTS OF ACQUIRED
COMPANIES IN THE SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30,
1996 UNDER RESULTS OF OPERATIONS-THE COMPANY, LIQUIDITY AND CAPITAL
RESOURCES-THE COMPANY, THE THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS
ENDED MARCH 31, 1996 UNDER RESULTS OF OPERATIONS-CXR, OUTLOOK FOR THE COMPANY,
AND NEW ACCOUNTING PRONOUNCEMENTS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY
THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.
As discussed previously and in the notes to the accompanying consolidated
financial statements, the consolidated financial statements presented are those
of XIT Corporation because of the reverse acquisition by XIT of MicroTel
International, Inc.(the Registrant) and its subsidiaries in a merger on March
26, 1997. The pre-merger company and "accounting acquiree" is described as CXR
in the discussion below. XIT Corporation is referred to as "XIT" or "the
Company".
The Company conducts its operations out of various facilities in the U.S.,
France, England, and Japan and organizes itself in three product line sectors-
Circuits, Components and Subsystem Assemblies, and Instrumentation and Test
Equipment. The Circuits Sector operates principally in the Company's U.S.
market, the Components Sector operates in its U.S., European and Asian markets,
and the Intrumentation and Test Equipment Sector operates principally in its
U.S. and European markets. The Components and Subsystems Assembly Sector is
referred to as "the Components Sector" in the discussion below for brevity.
In conjunction with the merger of XIT and CXR, XIT changed its fiscal year end
from September 30 to December 31 to conform to CXR's. Consequently, its
financial statements discussed herein are for each of the three years ended
September 30, 1996, the three months ended December 31, 1996 (the transition
period), and the six months ended June 30, 1997 (its post-change first half).
The Company's Instrumentation and Test Equipment Sector business is conducted
solely by CXR and therefore its results of operations are not included in the
results of operations for the years ended September 30, 1996, 1995 and 1994 or
the three months ended December 31, 1996. Due to the relative significance of
CXR to the new merged entity, however, a discussion and analysis of its
financial condition and results of operations for the two years ended December
31, 1996 and 1995 and the two months and twenty-six days ended March 26, 1997 is
included later herein.
- 52 -
<PAGE> 54
RESULTS OF OPERATIONS-THE COMPANY
YEAR ENDED SEPTEMBER 30, 1996 VERSUS YEAR ENDED SEPTEMBER 30, 1995 AND YEAR
ENDED SEPTEMBER 30, 1995 VERSUS YEAR ENDED SEPTEMBER 30, 1994
SALES
Consolidated net sales grew by $11,647,000 or 59.4% in 1996 over 1995 and by
$5,365,000 or 37.7% in 1995 over 1994. The growth in sales was due in large part
to the net effects of acquisition and disposition activity during the respective
periods. The table below depicts the composition of consolidated net sales by
business sector, separately identifying operations which were acquired or
disposed of during the three year period ended September 30, 1996.
<TABLE>
<CAPTION>
( in thousands)
1996 1995 1994
------- ------- -------
Circuits Sector
<S> <C> <C> <C>
HyComp (acquired 7/6/94) $ 3,027 $ 2,696 $ 752
Arnold Circuits(acquired 8/1/95) 13,586 2,827
Etch-Tek (acquired 5/1/96) 1,648
Other 605 469 318
------- ------- -------
18,866 5,992 1,070
Components Sector
Computron (disposed of 5/31/95) 2,905 4,273
XCMD (established 5/95) 365 343
Abbott (acquired 9/1/96) 328
Other 11,690 10,362 8,894
------- ------- -------
12,383 13,610 13,167
------- ------- -------
Total Sales $31,249 $19,602 $14,237
======= ======= =======
</TABLE>
Net sales in 1996 for the Circuits Sector increased by $12,874,000 or 214.9% and
net sales for the Components Sector declined by $1,227,000 or 9% from the
respective sales levels in 1995. The growth in Circuits Sector sales was
comprised principally of the incremental sales of $12,407,000 from the inclusion
in 1996 of Arnold Circuits' full year results, versus two months in 1995, and
five months of operations for Etch-Tek. The remaining growth of $467,000 was
comprised of market share gains by HyComp and XCEL Circuits. The sales volume
for Arnold Circuits for 1996 of $13,586,000 is lower than that expected by
annualizing the two months' sales of $2,827,000 in 1995, due not only to normal
seasonal softness in the circuits industry in the last calendar quarter of each
year, but also to a significant decline in product demand from its major
customer, Motorola. Sales for Arnold Circuits in 1996 declined by approximately
$1,008,000 from its sales for the entire year ended September 30, 1995,
including the two months its operations were included in the Company's
consolidated results.
The decline in net sales in 1996 for the Components Sector was the net result
of the loss of revenues from Computron, which had sales of $2,905,000 in 1995
prior to its disposal, being partially offset by the incremental sales from the
acquisition of Abbott in 1996 of $328,000 and sales gains by the other Sector
operations of $1,350,000. The sales gains for the other Sector operations in
1996 were comprised of a) an increase in sales of XCEL-
- 53 -
<PAGE> 55
Lite display monitors of approximately $1,177,000, principally to the Sector's
one major account for this product line, and b) a net improvement in sales for
other Sector products of $173,000. The latter improvement was also the combined
result of several factors, with a general decline in sales in the Sector's Asian
markets due to price competition being more than offset by an increase in sales
in the Sector's U.S. and European markets due principally to a favorable product
mix shift to higher priced digital switches than those sold in 1995.
Net sales in 1995 for the Circuits Sector increased by $4,922,000 or 460% over
those in 1994. This growth resulted principally from the incremental sales of
$4,771,000 from the inclusion in 1995 of a full year's operations for HyComp,
versus three months in 1994, and two months of Arnold Circuits' operations
subsequent to its acquisition. Net sales in 1995 for the Components Sector
improved by $443,000 or 3.4% over those in 1994, with a decline in revenues from
Computron of $1,368,000, which was sold on May 31, 1995, being more than offset
by the incremental revenues of the start-up operations of XCMD of $343,000 and
gains of $1,468,000 for the remainder of the Sector's operations in all of its
geographic markets. The latter gains were comprised principally of an increase
in sales of XCEL-Lite display monitors of $1,123,000, as a result of a major new
account, and to both improved pricing and market share gains for the Sector's
subsystem manufacturing businesses.
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales (in parentheses) are as follows for the three
years ended September 30, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
(dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Circuits Sector $3,570 (18.9%) $1,445 (24.1%) $ 163 (15.2%)
Components Sector 4,622 (37.3%) 3,825 (28.1%) 4,051 (30.8%)
------ ------ ------
Total Gross Profit $8,192 (26.2%) $5,270 (26.9%) $4,214 (29.6%)
====== ====== ======
</TABLE>
Consolidated gross profit as a percentage of sales declined by .7% from 26.9% in
1995 to 26.2% in 1996, as the effects of a 9.2% improvement in gross profit
percentage for the Components Sector was more than offset by the effects of a
5.2% decline for the Circuits Sector due to the Circuits Sector's greater
weighting in the consolidated sales mix. The improvement for the Components
Sector was the combined result of a) the favorable product mix shift to higher
priced (and higher margin) switches noted above under SALES, b) improved
absorption of fixed manufacturing costs and material pricing resulting from the
increase in sales and production of XCEL-Lite monitors, c) relatively higher
margins for products sold by Abbott (acquired in 1996), than those historically
achieved for Sector products, and d) the inclusion in 1995 of product sales by
Computron, prior to its disposition, at lower margins than the average for the
Sector. The decline in gross profit for the Circuits Sector was caused by a)
higher costs for Arnold Circuits' product sales due to the underabsorption of
fixed manufacturing costs related to declining sales levels and manufacturing
inefficiencies from a product mix change to higher technical content circuit
boards, and b) relatively lower margins on 1996 Etch-Tek product sales, after
its acquisition, than historically achieved by the Sector.
- 54 -
<PAGE> 56
Consolidated gross profit as a percentage of sales declined by 2.7% from 29.6%
in 1994 to 26.9% in 1995, as an increase of 8.9% for the Circuits Sector was
outweighed by a 2.7% decline for the Components Sector due to the Components
Sector's greater weighting in the consolidated sales mix. The improvement for
the Circuits Sector in 1995 versus 1994 was due principally to the inclusion in
1995 of a full year of HyComp's sales and two months of Arnold Circuits'
operations, as both of these unit's sales have higher margins than the average
achieved by the Sector in 1994. The decline in the Components Sector was due
principally to the replacement of lost Computron sales with lower margin
XCEL-Lite product sales.
OPERATING EXPENSES
Operating expenses for the years ended September 30, 1996, 1995 and 1994 were
comprised of the following:
<TABLE>
<CAPTION>
( in thousands)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Commissions $1,438 $ 517 $ 149
Other Selling 971 974 1,106
------ ------ ------
Total Selling Expense 2,409 1,491 1,255
General & Administrative Expense 3,970 3,379 2,831
------ ------ ------
Total Selling, General & Administrative $6,379 $4,870 $4,086
====== ====== ======
Engineering, research & development $ 309 $ 328 $ 639
====== ====== ======
</TABLE>
Total selling expense as a percentage of net sales was 7.7%, 7.6% and 8.8% for
the years ended September 30, 1996, 1995 and 1994, respectively. Commissions as
a percentage of sales increased from 1.1% in 1994 to 2.6% in 1995 and to 4.6% in
1996, as a result of and in direct relation to the increase in Circuits Sector
sales during these periods. In contrast to Components Sector sales which are
primarily achieved through direct selling, substantially all Circuits Sector
sales are made through manufacturer representatives. Other selling expense,
which consists of sales and marketing departmental costs, was comparable between
1996 and 1995, with the incremental costs of acquired operations being offset by
the elimination of Computron's costs after its disposal in May 1995. The
reduction in other selling expense of $132,000 from 1994 to 1995 was the
combined result of a) a $104,000 increase in costs representing the net effects
of acquired operations and the disposal of Computron on the periods, and b) a
$236,000 reduction in costs due to cutbacks in sales administration and direct
sales personnel.
General and administrative expense increased by $591,000 in 1996 versus 1995,
and by $548,000 in 1995 versus 1994. Excluding the incremental effects of
acquired operations net of the disposal of Computron of $836,000 and $439,000 in
1996 and 1995, respectively, general and administrative expense declined by
$245,000 in 1996 versus 1995, and increased by $109,000 in 1995 versus 1994. The
decline in 1996 was the combined result of reversals of accruals of $399,000
related to the favorable disposition in 1996 of certain long-disputed
administrative costs, offset by a general increase of $154,000 in administrative
expense levels, principally in personnel costs. The increase in 1995 was due to
incremental legal fees related to acquisition and disposition activities.
Engineering, research and development costs originated solely from the research
and product development activities of HyComp in 1996 and 1995 and were
relatively comparable between the periods. Such costs in 1994 included
- 55 -
<PAGE> 57
the activities of a Components Sector project engineering group which was
discontinued in that year and product development activities at Computron to
develop a lower cost monitor, which were also discontinued in 1994. The costs of
these latter activities of $541,000, less the effects of only a partial year of
HyComp's research and development activities being included in 1994, resulted in
a $311,000 decline in engineering, research and development costs in 1995 versus
1994.
OTHER INCOME AND EXPENSE
The increase in interest expense of approximately $102,000 in 1996 compared to
1995, and of approximately $67,000 in 1995 compared to 1994, resulted
principally from increased average borrowings during the respective periods.
Fluctuations in other income(expense),net resulted principally from differences
in foreign currency exchange gains and losses incurred during the respective
periods. Other income in 1995 also includes as a separate line item the gain on
the sale of the Computron Division of $479,783.
INCOME TAXES
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for U.S. Federal tax purposes, as well as in most foreign
jurisdictions.
THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995
EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED DECEMBER 31, 1996
The consolidated results of operations for the three months ended December 31,
1996 include the results of operations of two companies acquired since December
31, 1996. They include the full quarterly results of both Etch-Tek, a
manufacturer of printed circuit boards acquired on May 1, 1996, and Abbott, a
British manufacturer of power supplies acquired on September 1, 1996. The table
below separates the results of the acquired entities from the consolidated
totals for the three months ended December 31, 1996 in order to provide a more
meaningful basis for a comparative discussion of these results versus the three
months ended December 31, 1995.
- 56 -
<PAGE> 58
<TABLE>
<CAPTION>
( in thousands )
Three Months Ended December 31
1996 1995
-------------------------------------------- -------
Consolidated Acquisitions Comparative
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 7,887 $ 2,200 $ 5,687 $ 6,796
Cost of sales 6,524 1,668 4,856 5,073
------- ------- ------- -------
Gross profit 1,363 532 831 1,723
Selling expense (693) (105) (588) (554)
General & administrative (1,282) (425) (857) (817)
Engineering & product development (68) (68) (76)
Interest expense (183) (72) (111) (98)
Other income (expense) (12) 1 (13) (27)
Income taxes (14) (14)
------- ------- ------- -------
Net income (loss) $ (889) $ (69) $ (820) $ 151
======= ======= ======= =======
</TABLE>
As can be seen from the table, the consolidated results of operations for the
three months ended were significantly impacted by the results of the acquired
companies. Net sales, gross profit, and operating expenses (selling, general and
administrative, and engineering and product development) of these companies
represented 27.9%, 39%, and 25.9%, respectively, of the consolidated totals.
The table following summarizes by company the incremental results related to the
acquired companies for the three months ended December 31, 1996:
<TABLE>
<CAPTION>
(in thousands)
Etch-Tek Abbott Total
-------- ------ -----
<S> <C> <C> <C>
Net sales $ 1,013 $ 1,187 $ 2,200
------- ------- -------
Gross profit $ 124 $ 408 $ 532
Operating expenses (182) (348) (530)
Other income (expense) 1 1
Interest expense (16) (56) (72)
------- ------- -------
Net income(loss) $ (73) $ 4 $ (69)
======= ======= =======
</TABLE>
COMPARATIVE RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS
THREE MONTHS ENDED DECEMBER 31, 1995
The following discussion relates to the comparison of the results of operations
for the three months ended December 31, 1996, excluding the results of the
acquired companies, to the results for the same period of the prior year (see
the first table above under EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED
DECEMBER 31, 1996).
Net sales for the three months ended December 31, 1996 declined by $1,109,000 or
16.3% from those in the same period of the prior year. The decline was
principally in the Components Sector, whose sales were down by $1,183,000 or
37%. Approximately $640,000 of the decline in the Sector's sales was due to the
loss of a major account for display monitors, and the remaining decline
- 57 -
<PAGE> 59
resulted principally from the timing of orders from a significant subsystem
assembly customer.
Gross profit, as a percentage of sales, declined from 25.4% in the three months
ended December 31, 1995 to 14.6% for the three months ended December 31, 1996.
This decline was the combined result of (a) the lower sales volume for the
Components Sector noted above and the consequential decline in absorption of
fixed manufacturing costs and (b) manufacturing inefficiencies incurred by the
Circuits Sector because of a product mix change to higher technical content
circuit boards.
Operating expenses (selling, general and administrative, and engineering and
product development) increased by $66,000 in total from $1,447,000 in the three
months ended December 31, 1995 to $1,513,000 in the three months ended December
31, 1996. Selling expense, as a percentage of sales, was 10.8% in 1996 versus
9.4% in 1995. Selling expense consists principally of commissions for Circuits
Sector sales and fixed departmental costs for Components Sector sales. The
increase in percentage in 1996 is consequently due to the decline in sales for
the Components Sector noted above. General and administrative and engineering
and product development expenses were relatively comparable between the periods.
The apparent flat level of general and administrative expenses, however, was the
combined result of the positive effects in 1996 of the streamlining of the
administrative structure in the Circuits Sector being offset by the inclusion in
1995 of a reversal of an accrual of $176,000 related to the favorable
disposition of certain long-disputed administrative costs.
Interest expense increased by only $13,000, as a result of significantly higher
average borrowings in 1996 being mitigated by lower interest rates due to the
refinancing of the Company's bank facilities in January 1996. Other income
(expense) is principally comprised of foreign currency exchange gains and losses
incurred during the respective periods, and in 1996, includes equity in the loss
of a real estate partnership of $13,000.
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for Federal income tax purposes.
SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996
EFFECTS OF ACQUISITIONS ON THE SIX MONTHS ENDED JUNE 30, 1997
The consolidated results of operations for the six months ended June 30, 1997
include the full or partial results of operations of two companies acquired
since June 30, 1996. They include the full results of Abbott and the results of
CXR since its acquisition on March 26, 1997. The table below separates the
results of the acquired entities from the consolidated totals ("the comparative
results") for the six months ended June 30, 1997 in order to provide a more
meaningful basis for a comparative discussion of these results with that of the
prior year periods.
- 58 -
<PAGE> 60
<TABLE>
<CAPTION>
( in thousands )
Six Months Ended June 30
------------------------
1997 1996
-------------------------------------------- --------
Consolidated Acquisitions Comparative
------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 19,736 $ 7,311 $ 12,425 $ 15,973
Cost of sales 14,972 4,231 10,741 11,541
-------- -------- -------- --------
Gross profit 4,764 3,080 1,684 4,432
Selling expense (2,174) (1,009) (1,165) (1,207)
General & administrative (3,381) (1,187) (2,194) (2,048)
Engineering & product development (792) (667) (125) (157)
Interest expense (460) (125) (335) (244)
Other income (expense) 7 (11) 18 81
Income taxes (2) 6 (8) (32)
-------- -------- -------- --------
Net income (loss) $ (2,038) $ 87 $ (2,125) $ 825
======== ======== ======== ========
</TABLE>
Additionally, the Company acquired Etch-Tek, Inc.("Etch-Tek"), a manufacturer of
printed circuit boards on May 1, 1996. The effects of the inclusion of its
results of operations for only the two months ended June 30, 1996 in the
comparative prior periods is discussed in explanation of the fluctuations in the
comparative results from the related prior period.
COMPARATIVE RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX
MONTHS ENDED JUNE 30, 1996
The following discussion relates to the comparison of the results of operations
for the six months ended June 30, 1997, excluding the results of the acquired
companies, to the results for the same period of the prior year.
Net sales for the six months ended June 30, 1997 declined by $3,548,000 or 22.2%
from those in the same period of the prior year. This decline was comprised of
lower net sales for the Company's Circuits and Components Sectors of $1,688,000
and $1,860,000, respectively. The decrease for the first half of 1997 in the
Circuits Sector was comprised of a) an increase in Sector sales of $377,000 due
to the inclusion of Etch-Tek's operations for the entire second quarter in 1997
versus two months in the 1996 second quarter subsequent to its acquisition on
May 1, 1996, and b) a decline in sales for the remainder of the Sector of
$2,065,000. This latter decline was due principally to lower demand from the
major customer of the group, Motorola. Lower demand in the first quarter of 1997
was based on reduced customer requirements and the effects on the Sector were
compounded by an inability to ship the lower level of orders received as a
result of material sourcing problems. Due to strained trade credit and lack
of available borrowing in the first quarter of 1997, this Sector was unable to
procure all the materials needed in time to ship all of its sales orders to
Motorola in accord with related delivery requirements. Although management
believes customer requirements increased in the second quarter of 1997, the
Sector continued to experience lower demand due to order cutbacks by Motorola
precipitated by the previous shipment performance problems. The decrease in the
Components Sector was due to a) the loss in July 1996 of a major account for
display monitors, b) a significant digital switch program in place in the first
two quarters of 1996 which did not repeat in 1997, and c) a general decline in
sector product sales, which accelerated in the second quarter of 1997, due to
the aging of related customer programs.
Gross profit, as a percentage of sales, declined from 27.7% in the first six
months of 1996 to 13.6 % for the first six months of 1997. This decline was
- 59 -
<PAGE> 61
due primarily to the lower sales volume noted above and the consequential
decline in absorption of the Company's fixed manufacturing costs, and
secondarily to higher than average margins on the 1996 digital switch program
that did not repeat in 1997.
Operating expenses (selling, general and administrative, and engineering and
product development) increased by only $72,000 in total from $3,412,000 in the
first half of 1996 to $3,484,000 in the first half of 1997. Selling expenses as
a percentage of sales increased from 7.6% in 1996 to 9.4% in 1997, although they
include a significant commissions component and are therefore largely variable.
The increase was due to a higher mix of house account to manufacturer's
representative sales, principally in the second quarter of 1996 versus the
second quarter of 1997, and to the effects on the 1997 percentage of spreading
fixed departmental costs over the lower sales volume for the first half. General
and administrative expenses increased by $146,000 or 7.1% in 1997 over 1996 as
the positive effects of the streamlining of the administrative structure in the
Circuits Sector in the second half of 1996, which approximated $247,000 for the
first six months of 1997, were more than outweighed by higher corporate
administrative costs. The latter corporate cost increases relate principally to
incremental legal fees associated with public reporting and integration matters
following and resulting from the merger of XIT and the Company, and secondarily
to higher personnel costs and the implementation of a new computer system in
1997. Engineering and product development expenses declined by $32,000 from 1996
to 1997 due principally to an increase in the amount of such costs billable to
specific contracts.
Interest expense increased by $91,000 in the first six months of 1997 versus the
first six months of 1996 principally reflecting higher average borrowings during
the second quarter of the respective periods. Other income (expense) is
principally comprised of foreign currency exchange gains and losses incurred
during the respective periods.
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for Federal income tax purposes.
RESULTS OF ACQUIRED COMPANIES
The table following summarizes by company the incremental results related to the
acquired companies for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
( in thousands )
Abbott CXR Total
------ --- -----
<S> <C> <C> <C>
Net sales $ 2,153 $ 5,158 $ 7,311
======= ======= =======
Gross profit $ 857 $ 2,223 3080
======= ======= =======
Operating expenses (689) (2174) (2863)
Other expenses (94) (36) (130)
======= ======= =======
Net income (loss) $ 74 $ 13 $ 87
======= ======= =======
</TABLE>
Abbott's results of operations for the six months ended June 30, 1997 are
reasonably comparable to those achieved in the six months ended June 30, 1996
prior to its acquisition by the Company.
During 1996 and continuing through the second quarter of 1997, domestic sales
for CXR were negatively impacted by delays in buying by its principal
- 60 -
<PAGE> 62
customers, as a result of the consolidation and/or restructuring of these
companies in the wake of the passage of the Telecommunications Bill of 1996, and
European sales were negatively impacted by a decline in sales to France Telecom
during its pre-privatization reorganization and a generally weak French economy.
Additionally, sales for both operating subsidiaries have been negatively
impacted by the rapid obsolescence of the analog-based components of their
product lines, particularly older transmission products; and further, both sales
and margins have been impacted by extreme price competition for transmission
products in general.
CXR's results of operations above consist of the three months and five days
ended June 30, 1997 subsequent to its acquisition on March 26, 1997. In addition
to CXR's results of operations for the second quarter of 1997 discussed
previously, CXR results above include net earnings of $105,000 on net sales of
$500,000 for the five day period ended March 31, 1997, including amortization of
goodwill originating in the merger of $5,000. For the entire three months ended
March 31, 1997, however, CXR incurred a net loss of $(1,909,000) on net sales of
$3,496,000. Included in these quarterly results prior to March 26, 1997, CXR
incurred certain significant unusual charges totalling $749,000. Even
considering these charges, CXR's results for the first quarter of 1997 exhibited
a significant deterioration from the first quarter of 1996, in which it incurred
a net loss of $715,000 on net sales of $4,134,000. This deterioration resulted
from the continuing and worsening impact on CXR of the industry and economic
factors noted above. (See the Discussion and Analysis of Financial Condition and
Results of Operations of CXR following for additional commentary on its results
for the first quarter of 1997.) In the second quarter of 1997, CXR's results of
operations have, however, improved from those of its prior year quarter and
significantly from those of its first quarter of 1997. It incurred a loss from
operations (gross profit less operating expenses) for the three months ended
June 30, 1997 of $56,000 on net sales of $4,658,000 versus a loss from
operations of $201,000 on net sales of $3,960,000 in the comparable prior year
quarter. The results for the 1997 quarter also included $83,000 of amortization
of the goodwill originating in the merger with XIT Corporation.
Although revenues for CXR Telcom, CXR's U.S. operating subsidiary, remained flat
between the respective second quarters of 1996 and 1997, its gross profit
improved in 1997 contributing to CXR's improvement in results. CXR Telcom's
margins were favorably impacted by initial shipments of a high margin product on
an order received from AT&T in April 1997 and also to the positive effects of
personnel cutbacks made in the first quarter of 1997. Of the total AT&T order of
$2,340,000, CXR Telcom shipped approximately $241,000 in the second quarter. It
is expected that the remainder of the order will be shipped in the fourth
quarter of 1997.
To overcome the negative factors impacting CXR S.A., CXR's European operation,
it has implemented several changes to its business strategy. It has introduced a
new line of ISDN Terminal Adapters to its transmission product line, diversified
its test equipment offerings, begun a new business unit which provides
networking solutions to the business user utilizing O.E.M. products, and
refocused its marketing to expand its markets outside of France, including the
establishment of a subsidiary in England. The revenue improvement for CXR S.A.
in the second quarter of 1997 over the prior year are the result of these
efforts, with the profit on the increased volume also contributing to the
reduction in the 1997 operating loss from that incurred in 1996.
- 61 -
<PAGE> 63
Combining the results of operations for its first two quarters in 1997, CXR
incurred a net loss of $2,001,000 on net sales of $8,154,000 for the six months
ended June 30, 1997 versus a net loss of $812,000 on net sales of $8,094,000 in
the first half of 1996.
Although not necessarily indicative of the results that would have occurred or
of results which may occur in the future, Note 2 to the consolidated condensed
financial statements for the six months ended June 30, 1997 presents summary
pro forma results as if the merger had taken place at the beginning of 1997.
LIQUIDITY AND CAPITAL RESOURCES-THE COMPANY
Cash provided by operations was approximately $793,000, $282,000 and $908,000
for the years ended September 30, 1996, 1995 and 1994, respectively. The
principal non-cash item contributing to these cash flows is depreciation and
amortization which was approximately $589,000, $278,000 and $212,000 in 1996,
1995 and 1994, respectively, with the increasing trend due principally to
acquired operations. The increase in cash provided by operations of $511,000 in
1996 versus 1995 was due principally to the positive effects of the improvement
in results of operations, the increase in depreciation and amortization, and the
inclusion in 1995 of the non-cash gain on the sale of Computron, offset by a
decrease in accrued expenses in 1996 related principally to the accrual
reversals discussed above under Results of Operations. Cash provided by
operations in 1995 decreased by $626,000 from 1994, although results of
operations improved. This was due to the non-cash gain on Computron in 1995, and
to a greater extent, a decline in 1994 of the level of accounts receivable at
year-end caused by a significant decline in sales by Computron and XCEL Japan in
the fourth quarter of that year versus the comparable period of the prior year.
Cash of $660,000 was used in operations in the three months ended December 31,
1996 versus cash of $197,000 being provided by operations in the same period of
1995. The increase in cash use was caused by the decline in results of
operations, coupled with changes in working capital management during the
respective periods. During the three months ended December 31, 1995, the Company
had reduced inventory levels and elongated its payables cycle due to cash flow
constraints. During the three months ended December 31, 1996 and again due to
cash flow difficulties, the Company also reduced its inventory levels and its
payables generally aged, but it borrowed $225,000 from a related party to bring
certain vendors more current to insure availability of material supply for
pending orders.
Cash of $2,766,000 was used in operations in the first half of 1997 versus cash
of $374,000 being provided by operations in the first half of 1996. The increase
in cash use was caused by the decline in results of operations, coupled with
changes in working capital management during the respective periods.
In the first half of 1996, the Company had refinanced its bank borrowings on
more favorable terms and had obtained a $750,000 bank term loan secured by the
assets of Etch-Tek, acquired on May 1, 1996. The net proceeds of these
borrowings were used principally for the cash consideration paid for the
Etch-Tek acquisition and to pay down older accounts payable. Subsequently in the
first half of 1996, the Company used the trade credit availability from
- 62 -
<PAGE> 64
paying down the accounts payable to fund the increase in accounts receivable and
inventories accompanying the growth during the period.
In the first quarter of 1997, the Company reduced its inventory levels and
elongated its payables cycle due to lack of available borrowings. In the second
quarter of 1997, the Company further reduced its inventories to respond to the
decline in business volume and used a portion of the proceeds of the Yorkton
private placement (discussed below) to pay down the aging payables and to repay
its related party borrowings. The increase in accounts receivable which resulted
principally from CXR's increased business volume in the second quarter was also
financed by the proceeds of the private placement. In the third quarter of
1997, the Company reborrowed $100,000 from the above noted related party to
assist in financing the production of accelerating orders from Motorola.
Cash used for the acquisitions of Arnold Circuits in 1995 and Etch-Tek in 1996
was obtained from additional bank borrowings, collaterallized by their assets,
and the acquisition of Abbott in 1996 was financed by cash from operations.
Proceeds from the sale of Computron were used principally to retire bank debt.
The Company's investment in and loan to a real estate partnership in December
1996 (see Note 5 to the Consolidated Condensed Financial Statements for the
Three Months Ended December 31, 1996 and 1995) was financed by a $100,000 loan
from its partner as to the investment and a bank loan of $750,000 as to the loan
to the partnership.
Capital expenditures were approximately $23,000, $155,000, $786,000, $94,000 and
$165,000 in the first half of 1997, the three months ended December 31, 1996,
and the fiscal years ended September 30, 1996, 1995 and 1994, respectively, with
the substantial increase in fiscal 1996 and the three months ended December 31,
1996 due principally to purchases by the capital intensive Circuits Sector.
There are currently no formal commitments for future capital expenditures,
however, planned expenditures, again principally for the Circuits Sector,
approximate $800,000.
All of the Company's banking facilities are asset-based borrowing arrangements,
with substantially all availability borrowed at any given time. Further, as
discussed in Note 4 to the consolidated condensed financial statements for the
six months ended June 30, 1997, the bank lines of credit for both XIT
Corporation and one of its subsidiaries were to expire under current extension
arrangements on August 30, 1997. The lines of credit were renewed on August 11,
1997 with more favorable advance rates against related collateralized assets and
with less restrictive financial covenants, with which XIT Corporation and its
subsidiary are in compliance. Based on the collateral base as of the renewal
date, the new terms provided approximately $473,000 in additional available
borrowings.
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. 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 $4,258,000. The Units
were issued to European institutional investors pursuant to the exemption
afforded by Regulation S under the Securities Act of 1933, as amended. The
offering, which was structured to
- 63 -
<PAGE> 65
accommodate multiple closings, would terminate on the earlier of i) the date the
maximum offering of $10,000,000 is contracted or ii) the currently extended
termination date of May 31, 1997. The offering expired on May 31, 1997 with no
additional closings.
The proceeds of the closing of the Yorkton private placement have alleviated the
most immediate cash flow problems of the Company, however management believes
that future cash flows from operations for the next twelve months may need to
be supplemented to support its future working needs and will definitely need to
be supplemented for planned business development and acquisition activities.
Management is actively seeking additional funds through an additional private
placement of debt or equity securities. There can be no assurance, however,
that alternative financing will be available, or if available, that it will be
on terms favorable to the Company.
There are two significant legal proceedings pending against the Company (see
Note 5 to the Consolidated Condensed Financial Statements for the Three and Six
Months ended June 30, 1997 and 1996). Management believes that the outcome of
these pending litigations will not have a material adverse effect on the results
of operations or financial position of the Company.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CXR
As discussed previously, the merger of XIT and CXR has been accounted for as a
purchase of CXR by XIT in a "reverse acquisition" because the existing
shareholders of CXR 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
and Consolidated Condensed Financial Statements discussed below will not appear
in future filings 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.
The financial statements of CXR discussed below are referred to as "Pre-Merger"
financial statements. The Pre-Merger Consolidated Financial Statements and the
Pre-Merger Consolidated Condensed Financial Statements are the Consolidated
Financial Statements for MicroTel International, Inc. (Pre-merger) for the Years
Ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994, and
the Year Ended June 30, 1994 and the Consolidated Condensed Financial Statements
for MicroTel International, Inc. (Pre-merger) for the Two Months and Twenty-six
Days Ended March 26, 1997, respectively, included in the Financial Statement
section of this Prospectus.
RESULTS OF OPERATIONS-CXR
As revenues for CXR have historically been higher towards the end of each
quarter due to the buying patterns of its principal customers, results of
operations for the two months and twenty-six days ended March 26, 1997 are not
considered representative of its quarterly results. Therefore, CXR's results of
operations for the three months ended March 31, 1997 are presented
- 64 -
<PAGE> 66
below for comparison to the first quarter of 1996. For the two months and
twenty-six days ended March 26, 1997, CXR incurred a net loss of $2,014,000 or
$.66 per share on net sales of $2,996,000.
The condensed consolidated statements of operations data below include financial
data derived for the three months ended March 31, l997 and 1996 from the
financial records of CXR, and for the years ended December 31, 1996 and 1995,
from the Pre-Merger Consolidated Financial Statements. The data for the three
months ended March 31, 1997 is comprised of the results of operations included
in the Pre-Merger Consolidated Condensed Financial Statements combined with the
five days of operations included in the post-merger consolidated results of
operations of XIT and CXR. The weighted average number of shares outstanding
used in the net loss per share computation for the quarter ended March 31, 1997
does not include the shares issued in conjunction with the merger on March 26,
1997.
Consolidated statements of operations data (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Quarter Ended Year Ended
March 31, December 3l,
(Unaudited)
1997 1996 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 3,496 $ 4,134 $ 16,303 $ 18,352
-------- -------- -------- --------
Cost of Sales 2,663 2,527 10,819 11,322
Engineering and Product
Development 552 543 1,817 1,674
Marketing and Selling 896 1,038 3,715 3,928
Administration 1,172 793 3,115 2,211
Severance & Related Settlement Costs 78 1,567
Other (Income) Expense - Net 38 (52) (48) 35
-------- -------- -------- --------
5,399 4,849 20,985 19,170
-------- -------- -------- --------
Loss before
Income Tax
(Benefit) (1,903) (715) (4,682) (818)
Income Tax (Benefit) 6 (85) (151)
-------- -------- -------- --------
Net Loss $ (1,909) $ (715) $ (4,597) $ (667)
======== ======== ======== ========
loss per Share $ (.63) $ (.26) $ (1.65) $ (.25)
======== ======== ======== ========
Weighted Average Number of
Shares Outstanding 3,038 2,763 2,783 2,678
======== ======== ======== ========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
OVERVIEW
CXR incurred a net loss of $4,597,000 in 1996 versus a net loss of $667,000 in
1995 and net sales declined by 11% in 1996 from those in 1995. The loss in 1996
included significant fourth quarter charges totaling $3,048,000 as described
below.
- 65 -
<PAGE> 67
SIGNIFICANT FOURTH QUARTER 1996 ADJUSTMENTS
In the fourth quarter of 1996, CXR 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 Pre-Merger Consolidated Financial Statements).
CXR 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
CXR's reassessment of the anticipated continuing near-term impact of industry
and economic factors which effected its 1996 operations. Net realizable value
was based on estimated undiscounted future cash flows from the related assets.
As discussed previously, sales for CXR Telcom 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 sales for CXR SA 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.
Additionally, CXR 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 related
Pre-Merger Consolidated Financial Statements.
SALES
Consolidated sales for the years ended December 31, 1996 and 1995 were comprised
of the following for CXR Telcom and CXR S.A.(in thousands):
<TABLE>
<CAPTION>
1996 l995
---- ----
<S> <C> <C>
CXR Telcom $ 6,825 $ 8,255
CXR S.A. 9,478 10,097
------- -------
$16,303 $18,352
======= =======
</TABLE>
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.
- 66 -
<PAGE> 68
GROSS PROFIT
Consolidated gross profit and its percentage of sales for the years ended
December 31, 1996 and 1995 was $5,484,000 or 34% and $7,030,000 or 38%,
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.
EXPENSES
Engineering and product development costs for the years ended December 31, 1996
and 1995 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
</TABLE>
Engineering and product development costs relate to both the development and
maintenance of CXR'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 two 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. The increase in 1996 over 1995 is due principally to the decline in
sales levels, with approximately the same level of fixed departmental expenses.
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.
- 67 -
<PAGE> 69
OTHER INCOME AND EXPENSE
Other (income) expense is comprised of the following for the years ended
December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Interest income $(371) $(117)
Interest expense 319 164
Other 4 (12)
----- -----
$ (48) $ 35
===== =====
</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 Pre-Merger Consolidated Financial Statements). Interest
expense is comprised principally of interest related to deferred compensation
liabilities and to short-term borrowings. Fluctuations between the periods is
related primarily to the level of borrowings during the respective periods.
"Other" (income) expense relates principally to foreign currency exchange gains
and losses.
INCOME TAXES
The income tax benefit for 1996 and 1995 are due to recovery of prior year taxes
in France resulting from research tax credits.
CXR has gross deferred tax assets of $9,841,000 and $8,017,000 at December 31,
1996 and 1995, respectively. The most substantial portion of the gross deferred
tax assets represent the future benefits of net operating loss carryforwards
which expire as detailed in Note 7 to the Pre-Merger Consolidated Financial
Statements. A valuation allowance has been provided to reduce recorded total
possible future tax benefits to zero as CXR'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 CXR'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 CXR 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 net operating loss carryforwards arising from the
ownership change for tax purposes accompanying the merger with XIT.
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
During the three months ended March 31, 1997, CXR's results of operations were
significantly effected by certain significant charges as follows:
<TABLE>
<S> <C>
Stock-based compensation $462,000
Write-down of assets 209,000
Severance costs 78,000
--------
$749,000
========
</TABLE>
- 68 -
<PAGE> 70
The stock-based compensation is comprised of restricted stock grants to certain
officers and directors whose corporate capacities would terminate or change at
the date of the merger with XIT.
The write-down of assets consists of reductions of $97,000 and $112,000 in the
carrying value of certain inventory and capitalized software development costs,
respectively, to their net realizable value. These write-downs were charged to
cost of sales and net realizable value was based on estimated undiscounted
future cash flows from the related assets. The severance costs relate to
personnel cutbacks at both CXR Telcom and CXR S.A. Both the write-downs and the
cutbacks resulted from CXR's reassessment of the anticipated near-term impact of
the adverse industry and economic factors discussed previously for the year
ended December 31, 1996, which continue to effect the Company's operations.
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.
Consolidated sales and gross margins for the quarters ended March 31, 1997 and
1996, respectively, were comprised of the following results for CXR Telcom and
CXR S.A. (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
Sales
<S> <C> <C>
CXR Telcom $ 761 $1,796
CXR S.A 2,735 2,338
------ ------
Total $3,496 $4,134
====== ======
Gross Margins
CXR Telcom $ (152) $ 645
CXR S.A 985 962
------ ------
Total $ 833 $1,607
====== ======
</TABLE>
Consolidated sales for the three months ended March 31, 1997 declined by
$638,000 or 15% as compared to the first quarter of l996. A severe decline in
CXR Telcom's sales of $1,025,000 was partially offset by an increase in sales
for CXR S.A. of $397,000. The decline in sales for CXR Telcom resulted from the
continuing and worsening impact of the industry and economic factors discussed
previously for the year ended December 31, 1996. CXR S.A.'s improvement is the
result of growth in its new networking business unit (begun in 1996) and in test
equipment sales, due to new product introductions, outpacing the continuing
decline in transmission product sales caused by the factors discussed
previously.
Consolidated gross margins declined from 39% in the three months ended March
31,1996 to 24% in the first quarter of 1997. Excluding the effects of the asset
write-downs noted above, the gross profit percentage for 1997 would have been
30%. The write-downs effected only CXR Telcom and excluding their impact, its
margins declined from 36% in 1996 to (20)% in 1997. This decline resulted
principally from the underabsorption of fixed manufacturing costs due to the
decline in sales volume. CXR's margins also declined, from 41% in 1996 to 36% in
1997. This decline was due to the combined result of the continuing pricing
pressures in the transmission product market and to relatively lower margins
achieved on sales in its growing businesses, test equipment
- 69 -
<PAGE> 71
and networking, than historically achieved on the transmission product sales
that they are replacing. The latter effect results from the growth in test
equipment and networking sales relating to O.E.M. product sales versus higher
margin manufactured transmission products.
Net engineering and product development costs decreased were comparable between
the respective quarters of 1997 and 1996. Gross engineering and product
development costs, prior to capitalization of software development costs, were
also comparable at $669,000 and $652,000 for the three months ended March 31,
1997 and 1996, respectively.
Selling and marketing costs, which are largely variable due to a significant
commissions component, were comparable as a percentage of sales at 26% in 1997
and 25% in 1996. Administrative expenses increased by $379,000 due principally
to the stock-based compensation costs incurred in 1997, as discussed above.
Other (income) expense is comprised of the following for the quarters ended
March 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income $(88)
Interest expense $ 47 66
Other (9) (30)
---- ----
$ 38 $(52)
==== ====
</TABLE>
Interest income in the first quarter of 1996 related to interest and/or
extension fees on the promissory note taken in payment of the stock subscription
from Elk International Corporation Ltd., which note was discharged in settlement
in the fourth quarter of 1996. Interest expense declined by $19,000 in the first
quarter of 1997 compared to the first quarter of 1996 due to lower average
borrowings during the current quarter. Other income is comprised principally of
net foreign currency exchange gains and losses.
LIQUIDITY AND CAPITAL RESOURCES-CXR
Cash provided by operations was $687,000 for the two months and twenty-six days
ended March 26, 1997 compared to cash used in operations of $201,000 for the
year ended December 31,1996 and cash provided by operations of $145,000 for the
year ended December 31,1995.
CXR had $190,000, $519,000 and $540,000 in depreciation and amortization expense
which did not require cash outlay for the two months and twenty-six days ended
March 26, 1997 and for the years ended December 31, l996 and 1995, respectively.
In addition, during the two months and twenty-six days ended March 26, 1997, CXR
incurred non-cash charges totaling $755,000, including $749,000 related to
stock-based compensation and certain asset write-downs and severance accruals as
discussed above. In the 1996 year, CXR 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. The remaining fluctuations in
cash provided (used) in operations between the periods relates principally to
the changes in operating results, changes in working capital elements arising
from business levels immediately preceding the respective period ends, and to
the collection in the two months
- 70 -
<PAGE> 72
and twenty-six days ended March 26, 1997 of approximately $592,000 of a foreign
tax receivable.
CXR's cash uses during 1996 were 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. During the two months and twenty-six days
ended March 26, 1997, CXR 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. At December 31, 1996 and March 26, 1997, CXR had no significant
commitments for future capital expenditures.
On February 20, 1997, CXR 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. On April
14, 1997 subsequent to CXR's merger with XIT, a closing occurred on 2,000,000
investment units, for gross proceeds of $5,000,000. Net proceeds to the Company
were $4,258,000.
Refer to the previous LIQUIDITY AND CAPITAL RESOURCES - THE COMPANY of
this Management's Discussion and Analysis and the OUTLOOK section following for
additional information concerning the liquidity and capital resources of and
prospects for CXR in the context of the new merged entity.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on the
financial condition or results of operations of either the Company or CXR.
OUTLOOK FOR THE COMPANY
In the Circuits Sector, the Company's delivery performance has improved and
sales demand for product from Motorola has increased in the subsequent period,
although still not to historical levels. Further, sales efforts for the Sector
have been intensified, with initial success, to both increase sales volume and
to dilute the Sector's concentration in and consequential dependence on
Motorola. The Company has also implemented yield improvement measures,
reductions in overtime and outsourcing, and improved cost controls in the
Sector's operations. Further, the Sector has obtained higher pricing in the
subsequent period for certain digital products sold to Motorola as expiring
contracts are renewed and will continue to seek price increases as current
contracts are renewed. There can be no assurance, however, that the Sector will
retain business that comes up for renewal. The combination of the above factors
and the positive effects of anticipated increased volume on absorption of fixed
manufacturing costs is expected to improve gross profit margins in the future.
In the Components Sector, the Company is in the process of qualifying itself and
its products with new prospective customers for display monitors. If obtained,
revenues from such customers should replace the loss in revenue which resulted
from the loss of the major display monitor account in 1996.
- 71 -
<PAGE> 73
Additionally, it is actively seeking new programs with existing customers and
new accounts to replace the decline in revenues related to the aging of its
current customers' programs. In August 1997, the Sector implemented a partial
layoff of both administrative and factory personnel, pending an increase in
business volume. Estimated quarterly savings in personnel costs related to these
layoffs is $165,000.
In the Test Equipment Sector, the negative impact of the reorganizations of the
Sector's domestic customers 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 as the RBOC's compete for long distance services.
Final implementation guidance on the deregulation provided for in the
Telecommunications Bill of 1996 was released in late August 1996 by the federal
government, allowing the local and long distance telephone companies to begin
entering each others' markets. CXR Telcom has been working with its customers to
prepare for their future needs in the expansion of their markets. The first
major order received in support of such expansion was the previously discussed
$2,340,000 order from AT&T for equipment to support AT&T's expansion into the
local markets.
In the fourth quarter of 1996 and in the first quarter of 1997 prior to the
merger, CXR reduced the carrying value of certain inventory and capitalized
software by $1,006,000 and $209,000, respectively. These write-downs resulted
from its reassessments of the anticipated continuing near-term impact of the
industry and economic factors noted previously on asset realizability. Although,
the Company believes based on its current assessment that the write-downs are
adequate, there can be no assurance that further write-downs of operating
assets, as well as write-downs of the goodwill originating in the merger, will
not be necessary should actual business conditions deteriorate.
At September 30, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $7,800,000 available to reduce
future taxable income. Additionally, at December 31, 1996, CXR had net operating
loss carryforwards for Federal and state tax purposes of approximately
$19,900,000 and $4,800,000, respectively. The expiration of these net operating
loss carryforwards is detailed in the notes to the applicable financial
statements included elsewhere herein. As a result of the merger, both entities
have undergone a change in control for tax purposes, which will limit the use of
these domestic net operating loss carryforwards to approximately $825,000 per
year until their expiration.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 is effective for fiscal years beginning
after December 15, 1995 and encourages, but does not require, a fair market
based method of accounting for employee stock options or similar equity
instruments. SFAS No. 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures
of net earnings and earnings per share as if the fair value based method of
accounting had been applied. The Company has adopted SFAS No. 123 in fiscal
1997, electing to continue to measure compensation costs under
- 72 -
<PAGE> 74
APBO No. 25 and to comply with the pro forma disclosure requirements.
Consequently, SFAS No. 123 had no effect on the Company's financial position or
results of operations.
In February 1997 the FASB issued SFAS No. 128 "Earnings per Share", which will
become effective for the Company for its year ending December 31, 1997,
requiring restatement of quarterly and prior year financial information, if
applicable. This pronouncement provides a different method of presenting and
calculating earnings per share (EPS) than is currently used in accordance with
APBO No. 15 "Earnings per Share" and modifies existing disclosure requirements.
The principal difference is that SFAS No. 128 provides for the calculation and
presentation of Basic and Diluted EPS. Basic EPS includes no dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share of APB No. 15. As common
stock equivalents have historically been antidilutive, implementation is
expected to have no effect on previously reported EPS. However, based on the
current trading value of the Company's common stock and assuming the Company is
profitable, it is expected that future presentations of EPS will include
differing values for Basic and Diluted EPS due to the effects of common stock
equivalents.
- 73 -
<PAGE> 75
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of MicroTel are as
follows:
<TABLE>
<CAPTION>
Name Age Titles
- ---- --- ------
<S> <C> <C>
Carmine T. Oliva 54 Chairman of the Board of
Directors, President and
Chief Executive Officer
David Barrett 45 Director
Laurence P. Finnegan, Jr. 59 Director
James P. Butler 49 Chief Financial Officer
Robert Runyon 71 Secretary and Director
Jack Talan 72 Director
</TABLE>
CARMINE T. OLIVA was appointed Chairman of the Board, President and
Chief Executive Officer of MicroTel upon consummation of the Merger on March 26,
1997. He has been the Chairman, President and Chief Executive Officer of XIT
since its founding in 1983. From 1980 to 1983, he was Senior Vice President and
General Manager, ITT Asia Pacific Inc. Prior to that position, Mr. Oliva held a
number of executive positions with ITT Corporation and its subsidiaries over an
eleven-year period. Mr. Oliva is the founder of XIT. Mr. Oliva attained the rank
of Captain in the United States Army and is a veteran of the Vietnam War.
DAVID BARRETT was appointed as a Director of MicroTel upon consummation
of the Merger on March 26, 1997. He has been a partner at Baldwin Brothers,
Inc., of Marion, Massachusetts, an investment advisory firm, since January 1982.
He also serves as Chairman of the Finance Committee of Tobey Health Systems,
Inc., as a member of the Board of Advisors of Pell Rodman Venture Partners LP of
Boston, Massachusetts; as Trustee and Treasurer of Friends Academy and on the
Investment Committee of Tabor Academy.
LAURENCE P. FINNEGAN, JR. was appointed as a Director of MicroTel
upon consummation of the Merger on March 26, 1997. In addition to being a
director of XIT since 1985, Mr. Finnegan joined XIT as its Chief Financial
Officer on a part-time basis in 1994. Mr. Finnegan has held positions with ITT
(1970-74) as controller of several divisions, Narco Scientific (1974-1983) as
Vice President Finance, Chief Financial Officer and Executive Vice President,
and Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial
Officer and Treasurer. Since 1994, he has been a principal of Gwyn Allen
Partners, Bethlehem, Pennsylvania, an executive management consulting firm, and
President of GA Pipe, Inc., a manufacturing company based in Langhorne,
Pennsylvania.
- 74 -
<PAGE> 76
JAMES P. BUTLER was appointed Chief Financial Officer of MicroTel on
August 18, 1997. From 1996 to such appointment in 1997, Mr. Butler was the Chief
Financial Officer and Chief Operating Officer of Peritronics Medical, Inc., a
publicly-traded provider of turnkey clinical computer systems to hospitals. From
1995 through 1996, Mr. Butler was the Chief Financial Officer of InnoServ
Technologies, Inc., a publicly-traded supplier of products and services in the
high-tech diagnostic imaging marketplace. From 1994 to 1995, Mr. Butler was the
Chief Financial Officer of InnerSpace, Inc., a public company which manufactured
and distributed electronic monitoring devices to the hospital critical-care
environment. From 1989 to 1994, Mr. Butler was the Chief Financial Officer of
Corus Medical Corporation, a provider of specialty blood products and services.
Since 1986, Mr. Butler has been a member of the State Bar of California.
ROBERT RUNYON was appointed as a Director and Secretary of MicroTel
upon consummation of the Merger on March 26, 1997. He is the owner and principal
of Runyon and Associates, a human resources and business advisor firm since
1990. Prior to the Merger, Mr. Runyon served XIT both as a director and as
consultant in the areas of strategic development and business planning,
organization, human resources, and administrative systems. He also consults for
companies in environmental products, marine propulsion systems and architectural
services sectors in these same areas. From 1970 to 1978, Mr. Runyon held various
executive positions with ITT Corporation including Vice President,
Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to
1970, Mr. Runyon held executive positions at BP Oil including Vice President,
Corporate Planning and Administration of BP Oil Corporation, and director,
organization and personnel for its predecessor, Sinclair Oil Corporation. Mr.
Runyon was Senior Vice President, Human Resources at the Great Atlantic &
Pacific Tea Company from 1978 to 1980.
JACK TALAN has been a director of MicroTel since 1995 and was the
interim Chairman and Chief Executive Officer of MicroTel from November 15, 1996
until the appointment of Mr. Oliva as Chairman, President and Chief Executive
Officer on March 26, 1997. Since March 1993, Mr. Talan has been a Director of
World Wide Collectibles, a public company which markets a system designed to
assure and protect the integrity of limited edition collectibles, and was the
President of that company until his resignation in December 1996. Since 1990,
Mr. Talan has been the Principal and President of Jack Talan, Inc., a sales and
marketing consulting company. Additionally, Mr. Talan was the co-founder, major
shareholder, director and Senior Vice President of Arista Corp., a publisher and
distributor of educational materials until it was sold in 1985.
- 75 -
<PAGE> 77
EXECUTIVE COMPENSATION
The cash compensation paid by the Company during the year ended December 31,
1996 to its Chief Executive Officers and other executive officers earning salary
and bonus exceeding $100,000 is presented in the Summary Compensation Table
below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name and Principal Year Salary Other Restricted Options/SARs All Other
Position Annual Stock Shares Compensation
Compensation Awards $
$ $(5)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jack Talan, Ended 12/31/96 (1) -0- 10,000 155,000
CEO, from 11/15/96
to 3/26/97
--------------------------------------------------------------------------------------------
Ended 12/31/95 -0- 10,000 15,625 5,000
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Daniel Dror, CEO, Ended 12/31/96 -0- (2)
Until 11/15/96
--------------------------------------------------------------------------------------------
Ended 12/31/95 174,417 78,125 25,000 966,846
(3)
--------------------------------------------------------------------------------------------
Six Months Ended 11,077 (2)
12/31/94
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Henry Mourad, Ended 12/31/96 150,000 82,000
President
until 3/26/97
--------------------------------------------------------------------------------------------
Ended 12/31/95 150,000 15,625 5,000
--------------------------------------------------------------------------------------------
Six Months Ended 72,263 40,000
12/31/94
--------------------------------------------------------------------------------------------
Ended 6/30/94 150,000 20,000
--------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Jacques Moisset, VP Ended 12/31/96 173,106 12,000
(4)
--------------------------------------------------------------------------------------------
Ended 12/31/95 181,132 48,000
--------------------------------------------------------------------------------------------
Six Months Ended 76,478
12/31/94
--------------------------------------------------------------------------------------------
Ended 6/30/94 139,132
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Jack Talan became Chairman and Chief Executive Officer on 11/15/96, upon
Daniel Dror's resignation. At that time, Mr. Talan was authorized $3,000
in fees for previous Board service and $2,500 per month in compensation to
serve as Chairman and Chief
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<PAGE> 78
Executive. Mr. Talan received both the back fees of $3,000 and two months
of compensation totaling $5,000 in restricted stock issued at a 20%
discount to the market on the date of issuance (for a value of $10,000).
(2) The Board of Directors awarded Daniel Dror $144,000 per year beginning
July 1, 1994. In 1994, Mr. Dror received four weeks payment of $11,077 and
waived the remaining payments. In 1996, Mr. Dror waived all salary
payments.
(3) Upon his resignation on November 15, 1996, Mr. Dror was awarded a
severance package which included a) 50,000 shares of restricted stock with
a market value of $118,750, (b) options to acquire 250,000 shares of
common stock at an exercise price of $2.375 per share, and (c) options to
acquire 300,000 shares of common stock at $.01 per share. The fair market
value of the two option grants is estimated at $848,096 using the
Black-Scholes Model as a computation methodology.
(4) Jacques Moisset is paid in French Francs, which are translated hereon at
annual average exchange rates.
(5) At 12/31/96, the number and value of the aggregate restricted stock awards
for the above named executives was Mr. Talan-5,000 shares valued at
$7,500; Mr. Dror-75,000 shares (including those noted in footnote 3 above)
valued at $112,500; and Mr. Mourad-5,000 shares valued at $7,500. The
shares of Messrs. Talan and Mourad vest ratably over three years beginning
March 16, 1995, and Mr. Dror's shares all vested immediately upon his
resignation on 11/15/96.
The following two tables depict stock option grants and exercises by
named executives for the year ended December 31, 1996 and the status of
outstanding stock options to them at December 31, 1996.
OPTIONS/SAR GRANTS GRANTED DURING THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
===================================================================================================
(a) (b) (c) (d) (e) (f)
- ---------------------------------------------------------------------------------------------------
Name Options/SARs % of Total Exercise or Expiration Date Grant Date
Granted (#) Options/SARs Base Price Present Value
Granted to ($/Sh) ($) (3)
Employees in
Fiscal Year
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack Talan CEO 5,000 .3% 3.125 3-16-98 4,512
50,000 3.4% 2.00 12-31-96 23,474
100,000 6.7% 1.80 12-31-96 47,440
- ---------------------------------------------------------------------------------------------------
Daniel Dror, 25,000(1) 1.7% 3.125 11-14-99 18,878
Former CEO 250,000(2) 16.8% 2.375 11-14-01 288,236
300,000(1) 20.1% .01 12-3-99 559,860
- ---------------------------------------------------------------------------------------------------
Henry Mourad 4,000 .3% 3.125 5-14-01 4,993
President 8,000 .5% 3.125 5-2-02 10,843
20,000 1.3% 3.125 7-1-98 16,216
50,000 3.4% 1.80 12-31-96 23,798
- ---------------------------------------------------------------------------------------------------
Jacques Moisset, 2,000 .1% 3.125 8-23-00 2,439
VP 4,000 .3% 3.125 5-14-01 5,214
6,000 .4% 3.125 5-2-02 1,895
===================================================================================================
</TABLE>
(1) 10,000 options of the 25,000 option repricing and all of the 300,000
option grant were assigned to others by Mr. Dror.
(2) This option is exercisable only after Mr. Dror repays a certain
indebtedness to the Company approximating $211,000, which amount is due in
5 annual installments and which may be repaid by surrendering the options
for value equivalent to the lesser of the future appreciation of the
underlying stock over the exercise price or $.50 per share.
(3) Grant date value was determined using a modified Black-Scholes pricing
model assuming no dividend yield, expected volatility of approximately
56%, risk-free rate of return 6.6%, and time of exercise generally at 2/3
of the remaining exercise period.
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<PAGE> 79
AGGREGATED OPTION/SAR EXERCISES IN 1996
AND OPTION/SAR VALUES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
==================================================================================================================
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------
Name Shares Acquired on Value Realized ($) Number of Securities Value of Unexercised
Exercise (#) Underlying Unexercised In-the-money
Options/SARs at 12/31/96 Options/SARs at
(#) 12/31/96 ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack Talan CEO 105,556 43,750 5000/0 0/0
- ------------------------------------------------------------------------------------------------------------------
Daniel Dror Former 265,000/0 0/0
CEO (1)
- ------------------------------------------------------------------------------------------------------------------
Henry Mourad 50,000 22,500 72,000/0 0/0
President
- ------------------------------------------------------------------------------------------------------------------
Jacques Moisset VP 60,000/38,400 0/0
==================================================================================================================
</TABLE>
(1) Does not include options assigned by Mr. Dror to others; of the options
assigned to others, 300,000 options were exercised in 1996 for value
realized of $484,500.
COMPENSATION OF DIRECTORS.
During the year ended December 31, 1996, there were no standard arrangements for
compensation of directors. However, on November 15, 1996, the Board authorized
the payment of $3,000 in fees for past service on the Board of Directors to Mr.
Talan and $2,500 per month to serve as Chairman and Chief Executive Officer.
Additionally, on that date the Board authorized the payment of $15,000 to Mr.
Lewisham for past Board service and $4,000 in expense reimbursement. Mr. Talan
received his total fees for 1996 of $8,000 in restricted stock of the Company
issued at a 20% discount to market (4,445 shares), and Mr. Lewisham received his
in cash. Since the Merger, the Compensation Committee has been considering the
issue of non-employee director compensation but no policy has yet been adopted.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Pursuant to the employment agreement dated April 12, 1994, as amended
between the Company and Henry A. Mourad (the "Mourad Agreement"), Mr. Mourad is
employed as President of CXR Telcom. The Mourad Agreement provides for an annual
salary of $150,000. The Mourad Agreement is for a rolling term of two years,
such that on April 1 of each year it shall have an unexpired term of two years.
In the event of the termination of Mr. Mourad's employment by the Company
without cause, or by Mr. Mourad for cause (which does not include a change of
control), Mr. Mourad shall be entitled, until the expiration date of the
employment agreement (or up to two years), to receive his salary, at an annual
amount equal to the average of the three highest annual incentive compensation
payments made to Mr. Mourad by the company prior to such termination, medical
care, pension and similar benefits.
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<PAGE> 80
In the event of a termination for cause, Mr. Mourad is entitled to salary and
benefits only through the date of termination.
Pursuant to the employment agreement dated July 1, 1995 between the
Company and Jacques Moisset, Mr. Moisset is employed as President of CXR S.A.
for a term of three years at an annual salary of 885,000 French Francs. There
are no provisions in Mr. Moisset's employment agreement for payments upon
termination of employment or upon a change in control.
Pursuant to the employment agreement between the Company and Barry E.
Reifler, dated February 9, 1996, as amended (the "Reifler Agreement"), Mr.
Reifler was employed as Chief Financial Officer at an annual salary of $150,000.
The Reifler Agreement contains a change-in-control arrangement such that within
three months of a change-in-control, Mr. Reifler can elect to terminate the
Reifler Agreement and receive the following benefits: (i) payments based on an
annual salary of $125,000 plus current employee benefits payable for a period of
two years; (ii) the issuance of 30,000 shares of common stock pursuant to a
stock option Mr. Reifler holds, the Company deeming such exercise price paid;
(iii) the issuance of 10,000 shares of common stock pursuant to a restricted
stock award and (iv) the payment by the Company to Mr. Reifler of all income tax
liabilities associated with such stock issuance. The merger between a
wholly-owned subsidiary of the Company and XIT Corporation constituted a
change-in-control as defined in the Reifler Agreement.
Mr. Reifler exercised his right to terminate the Reifler Agreement and
his employment terminated on September 19, 1997. On August 18, 1997, Mr. Butler
was employed as the Chief Financial Officer of the Company, replacing Mr.
Reifler.
Pursuant to the employment agreement dated January 1, 1996 between the
Company and XIT Corporation (the "Oliva Agreement"), Carmine T. Oliva is
employed as Chairman, President and Chief Executive Officer of XIT Corporation
for a term of five years at an annual salary of $250,000. On May 6, 1997, the
Board of Directors of the Company voted to assume the obligations of XIT under
this Agreement in light of the appointment of Mr. Oliva to the positions of
Chairman of the Board, President and Chief Executive Officer of the Company. The
Agreement is subject to automatic renewal for three successive two year terms
commencing on January 1, 2001, unless, during the required notice periods as
provided therein, either party gives written notice of its desire not to renew.
Mr. Oliva had deferred $104,000 in salary prior to the effective date of the
Oliva Agreement. This and any other Deferred Salary shall be due and payable
upon any Redesignation, as defined in the Oliva Agreement, of Mr. Oliva by the
Board, to offices or positions other than, or in addition to, Chairman,
President and Chief Executive Officer and a subsequent resignation by Mr. Oliva
due to such Redesignation. If any such Redesignation occurs during the initial
term of the Oliva Agreement, XIT shall pay Mr. Oliva his annual salary for three
years following the effective date of such resignation or until January 1, 2001,
whichever is longer. In the event of Mr. Oliva's termination for cause, the
Company's obligation to pay any compensation, severance allowance, or other
amounts payable under the Agreement terminates on the date of such termination.
In the event of a termination without cause, Mr. Oliva shall be paid his annual
salary for two and one-half years following the effective date of such
termination or until January 1, 2001, whichever is longer. If such termination
occurs during a renewal period, Mr.
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<PAGE> 81
Oliva shall be paid his annual salary through the expiration of that particular
renewal period as well as any and all other amounts payable pursuant to the
Agreement, including deferred salary. XIT may terminate the Agreement upon
thirty days written notice in the event of a merger or reorganization of XIT in
which the shareholders of XIT immediately prior to such reorganization receive
less than fifty percent of the outstanding voting shares of the successor
corporation. The Merger did not trigger the application of that termination
provision, since, pursuant to the Merger, the former shareholders of XIT were
issued approximately 6,119,130 shares of common stock of the Company or
approximately 65% of the issued and outstanding common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
During the fiscal year ended December 31, 1996, the Compensation Committee
of the Board of Directors consisted of William Lewisham and Jack Talan. From
November 15, 1996 through the end of the fiscal year, Mr. Talan also served as
President and Chief Executive Officer of the Company. See "Compensation of
Directors" and "Certain Relationships and Related Transactions" for a
description of certain transactions between the Company and Messrs. Talan and
Lewisham.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of September 23, 1997 by
the following: (i) each person who is beneficial owner of more than five percent
(5%) of the Company's outstanding common stock; (ii) each Director; (iii) each
of the named executive officers of the Company; and (iv) all Directors and
executive officers as a group.
<TABLE>
<CAPTION>
==================================================================================
Name and Address Number of Shares
of Beneficial Owner Beneficially Percent of Class(1)
Owned(1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
The Bertrand Family Trust 595,106 5.22%
c/o Robert J. Bertrand and
Docas L. Bertrand, Trustees
851 Arbolando Drive
Fullerton, CA 92835
- ----------------------------------------------------------------------------------
Carmine T. Oliva 1,863,422(2) 16.36%
c/o MicroTel International,
Inc.
4290 East Brickell Street
Ontario, CA 91761
- ----------------------------------------------------------------------------------
Samuel J. Oliva 705,284(3) 6.19%
80 Brandywyne Drive
Florham Park, NJ 07932
- ----------------------------------------------------------------------------------
</TABLE>
-80-
<PAGE> 82
<TABLE>
<CAPTION>
==================================================================================
Name and Address Number of Shares
of Beneficial Owner Beneficially Percent of Class(1)
Owned(1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Laurence P. Finnegan, Jr. 132,349(4) 1.16%
3 Woods Lane
Ambler, PA 19002
- ----------------------------------------------------------------------------------
Robert Runyon 327,302(5) 2.87%
10 Eagle Claw Drive
Hilton Head, SC
29926
- ----------------------------------------------------------------------------------
David A. Barrett 268,471(6) 2.36%
7 Barnabas Road
Marion, MA 02738
- ----------------------------------------------------------------------------------
Jack E. Talan 166,000(7) 1.47%
26 E. 63rd, #11E
New York, NY 10021
- ----------------------------------------------------------------------------------
James P. Butler 75,000(8) *
7716 E. Fieldcrest Lane
Orange, CA 92869
- ----------------------------------------------------------------------------------
Elk International 1,395,000(9) 12.25%
Corporation Limited
Post Office Box No.
3247
Nassau, Bahamas
- ----------------------------------------------------------------------------------
Daniel Dror 1,395,000(10) 12.25%
1412 North Blvd.
Houston, TX 77006
- ----------------------------------------------------------------------------------
All executive 2,832,544 24.86%
officers and
directors as a group
(6 persons)
==================================================================================
</TABLE>
*(less than 1%)
(1) Includes shares of MicroTel Common Stock underlying the warrants, options
and convertible securities outstanding and held by the beneficial owner
with respect to whom the calculation is made, but does not include shares
of Common Stock that may be acquired within more than 60 days after
September 1, 1997 upon the exercise or conversion of such warrants,
options or convertible securities.
-81-
<PAGE> 83
(2) Includes 478,670 shares held jointly by Mr. Oliva and his wife, as well as
81,889 shares held individually by Mr. Oliva's wife. Also includes
764,378 shares, which will be issuable to Mr. Oliva upon the exercise of
MicroTel options and warrants.
(3) Includes 94,056 shares which will be issuable to Mr. Oliva upon the
exercise of MicroTel options and warrants.
(4) Includes 4,789 shares held jointly by Mr. Finnegan and his wife, and
88,178 shares which will be issuable to Mr. Finnegan upon the exercise of
MicroTel options and warrants.
(5) Includes 147,217 shares which will be issuable to Mr. Runyon upon the
exercise of MicroTel options and warrants.
(6) Includes 91,807 shares which will be issuable to Mr. Barrett upon the
exercise of MicroTel options and warrants; 43,639 shares held by various
trusts of which Mr. Barrett is the trustee, and members of Mr. Barrett's
immediate family are beneficiaries; and 4,595 shares held by Mr. Barrett's
wife.
(7) Includes 5,000 shares issuable to Mr. Talan upon the exercise of MicroTel
options and warrants, 5,000 shares authorized on March 16, 1995 to Mr.
Talan as an incentive award to be earned for continuing services over a
three-year period.
(8) Represents 75,000 shares which will be issuable to Mr. Butler upon the
exercise of MicroTel options.
(9) Includes 540,000 shares owned by Elk International Corporation Limited,
and 750,000 shares issuable upon the exercise of MicroTel warrants. Also
includes 15,000 shares issuable upon the exercise of MicroTel stock
options owned by Mr. Dror and 90,000 shares issuable to Elk upon the
exercise of warrants owned by Elk. See footnote 10 below.
(10) Includes 15,000 shares issuable upon the exercise of MicroTel stock
options, and the shares and shares underlying options and warrants of Elk
International Corporation Limited as set forth in footnote (9) above.
Elkana Faiwuszeiwicz, the President and control person of Elk
International Corporation Ltd. ("Elk"), is the brother of Mr. Dror. Based
upon information contained in Elk's Schedule 13D filed with the Securities
and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a
"control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC")
and Elk may be deemed to constitute a "group" as those terms are defined
under the Securities Act and Exchange Act and the rules and regulations
promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial
ownership in Elk and in stock of the Company owned by Elk.
-82-
<PAGE> 84
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Daniel Dror was the Company's Chairman and Chief Executive Officer from
1994 until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the
President and control person of Elk, is the brother of Mr. Dror. Based upon
information contained in Elk's Schedule 13D filed with the Securities and
Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control"
person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be
deemed to constitute a "group" as those terms are defined under the Securities
Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim
any beneficial ownership in Elk and in stock of the Company owned by Elk.
Pursuant to an agreement dated January 5, 1994, the Company issued 300,000
shares of the Company's common stock to the designees of DDC for $600,000 (or
$2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the
agreement, the Company issued to Elk warrants to purchase 100,000 shares for
$2.50 per share, exercisable at any time prior to December 25, 1995. The Company
also entered into a common stock purchase agreement with DDC on March 10, 1994
whereby DDC, or its designee, was to acquire 1,260,000 shares of the Company's
common stock for an aggregate of $2,520,000 (or $2.00 per share), payable in
cash, or at the option of the Company, in cash, cash equivalents, or marketable
securities or any combination thereof. The stockholders of the Company approved
the common stock purchase agreement (the Agreement) on April 16, 1994. The
Agreement provided for a closing by June 30, 1994 contingent upon all conditions
to closing being fulfilled.
As permitted under the terms of the Agreement, the Board of Directors on
July 27, 1994 amended the Agreement, following claims by DDC and its designee
raised prior to June 30, 1994 that certain closing conditions had not been
satisfied. The amended Agreement required the Company to issue and sell 911,484
shares to Elk as designee of DDC, for an aggregate purchase price of $1,882,967
(based on the previously agreed price of $2.00 per share), in cash, cash
equivalents or marketable securities. In September 1994, Elk tendered the
assignment of an interest-free promissory note in the amount of $805,555 secured
by shares of another public company and transferred a brokerage account to the
Company consisting of cash and common stock of $1,077,412 amounting to an
aggregate of $1,882,967 (the Company assumed the liability for certain financial
instruments amounting to $506,250 which were secured by the cash and common
stock investments in the brokerage account). Subsequent to this transfer, a loan
of $226,000 was made from the brokerage account to another entity controlled by
DDC which loan was payable with 15% interest on December 31, 1995. Although no
formal agreements were signed, DDC indicated its intent to reimburse the Company
for any loss resulting from the settlement of the financial instruments and
indebtedness from the related party. The acceptance of the consideration
received and subsequent loan were authorized by Daniel Dror in his capacity as
Chairman of the Company's investment committee prior to formal review by the
Board of Directors.
The Board of Directors subsequently reviewed the consideration tendered
under the amended Agreement and determined that it would be in the best
interests of the Company to accept payment from Elk with securities less likely
to experience significant fluctuations in value. On November 8, 1994 the Company
executed a second amendment to the Agreement dated October 16, 1994 with DDC
whereby the transactions under the previous amendment
-83-
<PAGE> 85
were effectively rescinded and the Company agreed to issue and sell 668,725
shares to Elk as designees of DDC, for the aggregate purchase price of
$1,337,449 (or $2.00 per share) on or before December 31, 1994.
In payment of the purchase price under the second amendment to the
Agreement, the Company accepted assignment of a promissory note payable to Elk
from a limited partnership in the aggregate amount of $1,444,444 payable on
December 31, 1995. The face amount of the promissory note includes the purchase
price of $1,337,449 plus $106,995, representing interest on the purchase price
at an interest rate of 8% per annum for the period commencing on December 31,
1994, through December 31, 1995. At a board meeting held in December 1995 the
Company agreed to accept $250,000 to extend the note to December 15, 1996 and
$100,000 as prepaid interest for the extension period. The $350,000 was
recognized as income in 1996 over the extension period of the note. As a result
of this agreement the Board extended the option period of the remaining 90,000
Elk warrants for two years. Payment of the promissory note was secured by
escrowed shares of another public company and the shares issued to Elk were
being held in escrow and were to be delivered to Elk when the promissory note
had been fully satisfied.
In June 1996, Elk was given the right to make alternative cash payment to
the Company for the stock subscription through December 15, 1996 releasing
shares from escrow at the price of $2.00 per share, and to receive a
corresponding assignment of proceeds from the promissory note when collected.
Elk made payments against the stock subscription aggregating $380,000 through
November 14, 1996, releasing 190,000 shares of common stock from the escrow.
On November 15, 1996, the Company and Elk entered into an agreement
pursuant to which Elk received (i) an option exercisable for a period of three
years to purchase 500,000 shares of Common Stock at an exercise price of $2.375
per share, (ii) the extension of an outstanding warrant to purchase 90,000
shares of Common Stock for three years, and (iii) the return to Elk of the
$1,444,444 promissory note. In exchange for the foregoing, the remaining shares
held in escrow by the Company and the subscription right were cancelled. The
costs of this settlement totalling $807,000, including the valuation of the
option grant of $700,000, was recorded in the fourth quarter of 1996.
Also on November 15, 1996, Mr. Daniel Dror resigned as Chairman and Chief
Executive Officer of the Company in anticipation of the pending merger with XIT.
Mr. Jack Talan, a director of the Company, was appointed interim Chairman and
Chief Executive Officer until consummation of the transaction.
Upon his resignation, Mr. Dror (or his designee) received as a severance
award for past service: (a) 350,000 shares of the Company's common stock; (b) an
extension of the exercise period to November 14, 1999 on options he currently
holds to purchase 25,000 shares of the Company's common stock; and (c) options
to purchase 250,000 shares of the Company's common stock at a price of $2.375
per share. The latter options are exercisable for a period of 5 years, but only
after Mr. Dror repays a certain indebtedness to the Company of approximately
$211,000, which amount is due in 5 annual installments and which may be repaid
by surrendering the options for value equivalent to the lesser of the future
appreciation of the Company's common stock over the exercise price or $.50 per
option. On December 3,
-84-
<PAGE> 86
1996, it was mutually agreed between the Company and Mr. Dror to substitute an
option to acquire 300,000 shares of the Company's Common stock at an exercise
price of $.01 per share for 300,000 shares of the previous award and on December
23, 1996 these options were exercised. The compensation expense associated with
this grant of $560,000, as well as the value of the 50,000 shares awarded of
$119,000 and other costs totaling $82,000 related to the immediate vesting of
previous stock based deferred compensation to Mr. Dror and the settlement of
certain amounts due the Company by Mr. Dror, were recognized in the fourth
quarter of 1996.
Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000
shares, respectively, as incentive stock awards principally to certain directors
and officers, which vest generally over a three-year period. The total value of
these shares based on the market price of the Company's common stock on the date
of grant totalled $192,000. Compensation expense recognized by the Company for
the awards totalled $106,000 and $46,000 for 1996 and 1995, including
amortization of related deferred compensation.
In October and November of 1996, the Company granted non-qualified stock
options to acquire approximately 156,000 shares of the Company's Common Stock to
certain officers at an exercise price equal to 80% of the market value on the
date of the grant. Compensation expense associated with these grants
approximated $48,000.
On February 19, 1997, in recognition of past and future services to the
Company, Mr. Talan was granted 150,000 restricted shares of the Company's common
stock with a market value as of that date of $337,500 ($2.25 per share).
On February 25, 1997 through March 5, 1997, Mr. Talan loaned the Company
an aggregate of $500,000. Such loans bear interest at the rate of 6% per annum
and were repaid in full in April 1997.
In September, 1997, Robert Bertrand, the Trustee of The Bertrand Family
Trust, a beneficial owner of more than five percent (5%) of the Company's
outstanding common stock, loaned the Company an aggregate of $100,000, on a
demand basis, to assist the Company in financing the production of accelerating
orders from Motorola.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
There are no indemnification provisions for directors, officers or
controlling persons of the Company against liability under the Securities Act.
However, as permitted by Section 145 of the Delaware General Corporation Law
(the "DGCL"), Article XI of the Company's By-laws provides for the
indemnification of officers, directors and certain other persons acting on
behalf of the Company (a) against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person by reason of the fact
that such person was or is and authorized representative of the company, in
connection with a threatened, pending or completed third-party proceeding,
whether civil or criminal, administrative or investigative, if such individual
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Company, and, if the action was a
criminal proceeding, if such person had no reasonable cause to believe that such
person's conduct was unlawful; and (b) against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of a
threatened, pending or completed corporate proceeding, by reason of the fact
such person was or is an authorized representative of the
-85-
<PAGE> 87
Company, if such person acted under the standards set forth in section (a) above
and if such person was not found liable for negligence or misconduct in the
performance of a duty to the Company (or if so found liable, if a proper court
found such person to be fairly and reasonably entitled to indemnification). The
Company's By-laws further provide for mandatory indemnification of authorized
representatives of the Company who have been successful in defense of any
third-party or corporate proceeding or in defense of any claim, issue or matter
therein, against expenses actually and reasonably incurred in connection with
such defense.
In addition, Article Fifth of the Company's Certificate of Incorporation
provides that, to the fullest extent permitted by the DGCL, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duties. Section 102(b)(7) of the DGCL allows for
the elimination or limiting of the personal liability of a director for monetary
damages for breaches of fiduciary duties as a director except for situations
involving: (i) breach of the duty of loyalty; (ii) bad faith or misconduct;
(iii) unlawful dividends; or (iv) transactions were directors received an
improper personal benefit. As a result of this provision, the Company and its
stockholders may be unable to obtain monetary damages from a director for breach
of his duty of care. Although stockholders may continue to seek injunctive or
other equitable relief for any alleged breach of fiduciary duty by a director,
stockholders may not have any effective remedy against the challenged conduct if
equitable remedies are unavailable.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted against the
Company by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
-86-
<PAGE> 88
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of MicroTel International, Inc.
(Registrant)
Independent Auditors' Report (KPMG Peat Marwick LLP) F-2
Independent Auditors' Report (Hardcastle Burton) F-3
Consolidated Balance Sheets at September 30, 1996 and 1995 F-4
Consolidated Statements of Operations for the Years ended
September 30, 1996, 1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended September 30, 1996, 1995 and 1994 F-6
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements for the Years
Ended September 30, 1996, 1995 and 1994 F-8
Consolidated Financial Statement Schedule II-
Valuation and Qualifying Accounts for the Years Ended
September 30, 1996, 1995 and 1994 F-26
Consolidated Condensed Balance Sheets at December 31, 1996
and September 30, 1996 (Unaudited) F-27
Consolidated Condensed Statements of Operations for the
Three Months Ended December 31, 1996 and 1995 (Unaudited) F-28
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended December 31, 1996 and 1995 (Unaudited) F-29
Notes to Consolidated Condensed Financial Statements (Unaudited) F-30
Consolidated Condensed Balance Sheets at June 30, 1997
and December 31, 1996 (Unaudited) F-36
Consolidated Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) F-37
Consolidated Condensed Statements of Cash Flows for the
Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) F-38
Notes to Consolidated Condensed Financial Statements (Unaudited) F-39
Consolidated Financial Statements of MicroTel International, Inc. (Pre-merger)
Report of Independent Certified Public Accountants
(BDO Seidman, LLP) F-45
Independent Auditors' Report (Deloitte & Touche LLP) F-46
Consolidated Balance Sheets at December 31, 1996 and 1995 F-47
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-48
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-49
Consolidated Statements of Cash Flows for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994 F-50
Notes to Consolidated Financial Statements for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994 F-51
Consolidated Financial Statement Schedule II-
Valuation and Qualifying Accounts for the Years ended
December 31, 1996 and 1995, the Six Months Ended
December 31, 1994 and the Year ended June 30, 1994 F-71
Consolidated Condensed Balance Sheets at March 26, 1997
and December 31, 1996 (Unaudited) F-72
Consolidated Condensed Statements of Operations for the
Two Months and Twenty-Six Days Ended March 26, 1997 (Unaudited) F-73
Consolidated Condensed Statements of Cash Flows for the
Two Months and Twenty-Six Days Ended March 26, 1997 (Unaudited) F-74
Notes to Consolidated Condensed Financial Statements (Unaudited) F-75
Unaudited Pro Forma Combined Condensed Financial Statements
Explanatory Description F-79
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Year Ended September 30, 1996 F-80
Unaudited Pro Forma Combined Condensed Statement of Operations
for the Six Months Ended June 30, 1997 F-81
Notes to Unaudited Pro Forma Combined Condensed
Financial Statements F-82
F-1
<PAGE> 89
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MicroTel International, Inc.:
We have audited the accompanying consolidated balance sheets of MicroTel
International, Inc. and subsidiaries (formerly known as XCEL Corporation and
subsidiaries) as of September 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated financial
statements of XCEL Corporation Ltd. and subsidiaries, which statements reflect
total assets constituting 20% and 7% in 1996 and 1995, respectively, and total
revenues constituting 7%, 8% and 10% in 1996, 1995 and 1994, respectively, of
the related consolidated totals. Those consolidated financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for XCEL Corporation Ltd.
and subsidiaries, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of MicroTel International, Inc. and
subsidiaries (formerly known as XCEL Corporation and subsidiaries) as of
September 30, 1996 and 1995 and the results of their operations and their cash
flows for each of the years in the three-year period then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
December 13, 1996, except as to
Note 13, which is as
of June 18, 1997
F-2
<PAGE> 90
XCEL CORPORATION LIMITED
REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF
XCEL CORPORATION LIMITED
We have audited the financial statements on pages four to fifteen which have
been prepared under the historical cost convention, as modified by the
revaluation of certain fixed assets, and the accounting policies set out on
page seven.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page two the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements.
It also includes an assessment of the significant estimates and judgments made
by the directors in the preparation of the financial statements, and of whether
the accounting policies are appropriate to the company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 30 September 1996 and of its profit for the year
then ended and have been properly prepared in accordance with the provisions of
the Companies Act 1985 applicable to small companies.
/s/ Hardcastle Burton
Hardcastle Burton
Chartered Accountants
Registered Auditor
Lake House
Market Hill
Royston
Herts SGB 9JN Dated: 22 November 1996
F-3
<PAGE> 91
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Balance Sheets
September 30, 1996 and 1995
ASSETS (NOTES 5 AND 7) 1996 1995
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 785,149 978,112
Accounts receivable, net of allowance for doubtful accounts of $46,585 in 1996
and $57,091 in 1995 4,568,308 3,448,215
Inventories (note 2) 6,504,736 4,620,682
Prepaids and other current assets 555,979 688,826
------------ -----------
Total current assets 12,414,172 9,735,835
Goodwill, net of accumulated amortization of $2,330,485 in 1996 and $2,120,066 in
1995 1,903,130 2,113,543
Property, plant and equipment, net (note 3) 5,059,920 3,868,773
Other assets 236,244 236,543
------------ -----------
$ 19,613,466 15,954,694
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,143,445 3,923,386
Accrued expenses 1,331,720 1,756,733
Notes payable to institutional lenders (note 5) 2,837,220 1,750,200
Notes payable to officers, directors and stockholders (note 6) 27,000 287,181
Current portion of long-term debt (note 7) 911,875 1,003,315
------------ -----------
Total current liabilities 10,251,260 8,720,815
Long-term debt, less current portion (note 7) 2,677,617 1,523,392
Minority interest (note 4) 63,839 411,937
------------ -----------
Total liabilities 12,992,716 10,656,144
Series A redeemable preferred stock, no par value. Authorized, issued and
outstanding 1,000 shares (aggregate liquidation preference of $390,000 in
1996)(notes 4 and 9) 332,185 357,688
Series B redeemable preferred stock, no par value. Authorized, issued and
outstanding 1,000 shares (aggregate liquidation preference of $520,000 in 1996)
(notes 4 and 9) 442,914 476,917
Stockholders' equity:
Common stock, no par value. Authorized 10,000,000 shares; issued and
outstanding 4,177,417 and 4,005,591 shares in 1996 and 1995, respectively
(note 9) 9,018,077 8,551,264
Accumulated deficit (3,200,679) (4,203,097)
Equity adjustment from foreign currency translation 28,253 115,778
------------ -----------
Total stockholders' equity 5,845,651 4,463,945
Commitments and contingencies (note 11)
------------ -----------
$ 19,613,466 15,954,694
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 92
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Operations
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Net sales $31,248,596 19,602,271 14,237,032
Cost of sales 23,056,559 14,332,550 10,023,203
----------- ---------- ----------
Gross profit 8,192,037 5,269,721 4,213,829
----------- ---------- ----------
Operating expenses:
Selling, general and administrative 6,378,797 4,870,245 4,085,633
Engineering, research and development 309,151 327,844 639,319
----------- ---------- ----------
Operating income (loss) 1,504,089 71,632 (511,123)
Other income (expense):
Interest expense (506,591) (404,554) (337,282)
Gain from sale of asset (note 8) -- 479,783 --
Minority interest in net income of
consolidated subsidiary (4,072) (2,857) (4,005)
Other, net 111,623 202,126 180,628
----------- ---------- ----------
Income (loss) before income taxes 1,105,049 346,130 (671,782)
Income taxes (note 10) 22,137 9,251 --
----------- ---------- ----------
Net income (loss) $ 1,082,912 336,879 (671,782)
=========== ========== ==========
Net income (loss) per common share $ .17 .07 (.14)
=========== ========== ==========
Weighted-average common shares 5,841,394 4,995,374 4,713,501
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 93
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Stockholders' Equity
Years ended September 30, 1996, 1995 and 1994
FOREIGN
COMMON STOCK CURRENCY
------------------------- ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENTS TOTAL
--------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1993 3,210,131 $ 7,531,125 (3,858,399) 95,860 3,768,586
Stock issued in connection with HyComp
acquisition 156,275 156,111 -- -- 156,111
Foreign currency translation adjustment -- -- -- 10,429 10,429
Net loss -- -- (671,782) -- (671,782)
--------- ------------ ---------- ------- ---------
Balance at September 30, 1994 3,366,406 7,687,236 (4,530,181) 106,289 3,263,344
Stock issued in connection with
Arnold Circuits, Inc. acquisition 440,000 656,281 -- -- 656,281
Stock issued for debt conversion (note 9) 199,185 207,747 -- -- 207,747
Accretion of preferred stock -- -- (9,795) -- (9,795)
Foreign currency translation adjustment -- -- -- 9,489 9,489
Net income -- -- 336,879 -- 336,879
--------- ------------ ---------- -------- ---------
Balance at September 30, 1995 4,005,591 8,551,264 (4,203,097) 115,778 4,463,945
Stock issued in connection with acquisition
of minority interest 48,760 343,747 -- -- 343,747
Stock issued for debt conversion (note 9) 123,066 123,066 -- -- 123,066
Accretion of preferred stock -- -- (80,494) -- (80,494)
Foreign currency translation adjustment -- -- -- (87,525) (87,525)
Net income -- -- 1,082,912 -- 1,082,912
--------- ------------ ---------- ------- ---------
Balance at September 30, 1996 4,177,417 $ 9,018,077 (3,200,679) 28,253 5,845,651
========= ============ ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 94
<TABLE>
<CAPTION>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Consolidated Statements of Cash Flows
Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,082,912 336,879 (671,782)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 589,681 277,969 211,603
Amortization of goodwill 210,413 210,413 204,233
Gain on sale of Computron -- (479,783) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 11,898 (140,629) 772,443
(Increase) decrease in inventory (210,217) 217,293 (2,826)
(Increase) decrease in prepaids and other assets 145,772 (85,231) 156,785
Increase (decrease) in accounts payable (296,166) 118,307 234,278
Increase (decrease) in accrued expenses (740,046) (172,816) 3,582
----------- ---------- --------
Net cash provided by operating activities 793,247 282,402 908,316
----------- ---------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (785,810) (94,260) (165,485)
Cash paid for purchase of Arnold Circuits, Inc. -- (1,026,720) --
Cash paid for purchase of Etch-Tek (428,493) -- --
Cash paid for purchase of Abbott Electronics (734,429) -- --
Cash paid for purchase of HyComp, Inc. -- -- (90,745)
Proceeds from sale of Computron -- 1,157,210 --
Minority interest (4,072) 27,857 4,005
----------- ---------- --------
Net cash provided by (used in) investing
activities (1,952,804) 64,087 (252,225)
----------- ---------- --------
Cash flows from financing activities:
Net increase (decrease) in notes payable to institutional
lenders 248,735 (216,481) (218,797)
Proceeds from other borrowings 2,000,000 1,333,693 606,646
Payments on other borrowings (1,054,616) (710,811) (980,140)
Redemption of preferred stock (140,000) -- --
----------- ---------- --------
Net cash provided by financing activities 1,054,119 406,401 (592,291)
----------- ---------- --------
Effects of exchange rate changes on cash (87,525) 9,489 10,429
----------- ---------- --------
Net increase (decrease) in cash (192,963) 762,379 74,229
Cash at beginning of year 978,112 215,733 141,504
----------- ---------- --------
Cash at end of year $ 785,149 978,112 215,733
=========== ========== ========
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Interest $ 490,091 410,839 337,282
Income taxes 12,097 4,579 3,763
=========== ========== ========
Supplemental disclosures of noncash investing and financing
activities:
Issuance of common stock, preferred stock and notes in
connection with acquisitions $ 195,095 1,681,091 429,078
Issuance of common stock in conversion of debt to equity
123,066 207,747 --
========== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 95
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements
September 30, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 26, 1997, as more fully discussed in note 13, publicly-traded
MicroTel International, Inc. (MicroTel) merged with privately-held XIT
Corporation (XIT), formerly XCEL Corporation prior to its name change
on November 25, 1996. The merger was accounted for as a purchase of
MicroTel by XIT in a "reverse acquisition" because the existing
shareholders of MicroTel prior to the merger do not have voting control
of the combined entity after the merger. In a reverse acquisition, the
accounting treatment differs from the legal form of the transaction, as
the continuing legal parent company, MicroTel, is not assumed to be the
acquiror and the financial statements of the combined entity are those
of the accounting acquiror (XIT), including any comparative prior year
financial statements presented by the combined entity after the
business combination. Consequently, the accompanying consolidated
financial statements include the accounts of XIT and its wholly and
majority-owned subsidiaries, collectively referred to herein as the
Company. Significant intercompany accounts and transactions have been
eliminated in consolidation.
In conjunction with this first issuance of the accompanying
consolidated financial statements as the historical financial
statements of a publicly-traded company, the Company is presenting
earnings per share information and has retroactively revised the period
over which previously recorded goodwill is amortized from 30 years to
20 years. The revision in amortization period is based on the Company's
current assessment of the estimated useful life of the goodwill and all
prior periods have been restated to reflect the revised amortization
period to be consistent with the amortization policy to be used in
future periods. Certain reclassifications and disclosures have also
been made in the accompanying consolidated financial statements to
conform the statements to expected future presentations, including
conformance to the requirements of Regulation S-X of the Securities and
Exchange Commission, with no effect on previously reported results of
operations.
In accord with the reverse acquisition accounting treatment, the
capital accounts of XIT are recapitalized as of the acquisition date to
give effect to the merger exchange ratio (1.451478 common shares of
MicroTel for each common share of XIT) and to convert XIT's no par
value common stock to $.0033 par value common stock of MicroTel. Net
income (loss) per share computations give retroactive effect to the
recapitalization.
BUSINESS
The Company is a manufacturer of discrete components for data input and
displays, including digital switches, keyboards and keypads, color and
monochrome video displays, and flat panel displays. The Company also
produces subsystem engineered and manufactured products (SEM) which are
assembled in custom configurations from two or more of the Company's
discrete data input and display components, and micro-electronic power
supplies. Additionally, the Company manufactures bare printed circuit
boards for its own use and for outside customer applications, and
hybrid microelectronic circuits for outside customer applications.
F-8
<PAGE> 96
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed principally using the straight-line method over the estimated
useful lives of the assets (or lease term, if shorter) as follows:
Buildings 50 years
Machinery, equipment
and fixtures 3-7 years
Leasehold improvements 5 years
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired through business combinations accounted for as
purchases. Goodwill is amortized on a straight-line basis over 20
years.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," during fiscal
1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell. Adoption of SFAS No. 121 did not have a material impact on the
Company's financial position, results of operations or liquidity.
NET INCOME (LOSS) PER SHARE
Net income (loss) per common share for the years ended September 30,
1996, 1995 and 1994 was computed based on the weighted-average number
of common shares outstanding. Common stock equivalents (shares assumed
issued based on outstanding stock options and warrants) were
anti-dilutive and therefore not included in the computations for all
periods presented. The accretion of the excess of the redemption value
over the carrying value of redeemable preferred stock (see note 9) of
$80,494 and $9,795 have been deducted from net income for 1996 and
1995, respectively, in arriving at net income applicable to common
stockholders used in the calculations of net income per share in those
years.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
is effective for fiscal years beginning after December 15, 1995 and
encourages, but does not require, a fair market based method of
accounting for employee stock options or similar equity instruments.
SFAS No. 123 allows an entity to elect to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25
(APBO No. 25), "Accounting for Stock Issued to Employees," but requires
pro forma disclosures of net earnings and earnings per share as if the
fair value based method of accounting had been applied. The Company
will adopt SFAS No. 123 in fiscal 1997. While the
F-9
<PAGE> 97
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Company is still evaluating SFAS No. 123, the Company currently expects
to elect to continue to measure compensation costs under APBO No. 25,
and comply with the pro forma disclosure requirements. If the Company
makes this election, SFAS No. 123 will have no impact on the Company's
financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 specifies new standards designed to improve the earnings
per share (EPS) information provided in financial statements by
simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on
an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being
that common stock equivalents are not considered in computing basic
EPS, (b) eliminating the modified treasury stock method and the 3%
materiality provision and (c) revising the contingent share provisions
and the supplemental EPS data requirements. SFAS No. 128 also makes a
number of changes to existing disclosure requirements. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company does not
believe the implementation of SFAS No. 128 will have a material effect
on net income (loss) per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 requires all entities to
disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines
fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. As of September 30, 1996, the fair value of all financial
instruments approximated carrying value.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
USE OF ESTIMATES
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 (Statement No. 109),
"Accounting for Income Taxes." Under the asset and liability method of
Statement No. 109, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured, using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The Company records a valuation allowance for
certain temporary differences for which it cannot make the
F-10
<PAGE> 98
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
determination that realization of the related benefits is more likely
than not. Under Statement No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
Foreign assets and liabilities in the consolidated balance sheets have
been translated at the current rate of exchange on the balance sheet
date. Sales and expenses are translated at the average exchange rate
for the year presented. Unrealized translation adjustments do not
affect the results of operations and are reported as a separate
component of stockholders' equity. The transaction gains and losses
included in operations are not material.
MAJOR CUSTOMERS
In 1996, there were sales to one customer which accounted for
approximately 41% of net sales during the year and 24% of accounts
receivable at September 30, 1996. In 1995, there were sales to one
customer which accounted for approximately 13% of net sales during the
year and 15% of accounts receivable at September 30, 1995. In 1994,
there were no sales to any individual customers which accounted for 10%
or more of net sales.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods
of generally one year. Estimated warranty costs are recognized at the
time of the sale.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Raw materials $3,071,931 2,604,511
Work-in-process 2,950,217 1,647,966
Finished goods 482,588 368,205
---------- ---------
$6,504,736 4,620,682
========== =========
</TABLE>
F-11
<PAGE> 99
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Land and buildings $ 224,439 227,931
Machinery, equipment and fixtures 7,172,176 5,416,694
Leasehold improvements 575,716 547,877
---------- ---------
7,972,331 6,192,502
Less accumulated depreciation and amortization 2,912,411 2,323,729
---------- ---------
$5,059,920 3,868,773
========== =========
</TABLE>
(4) ACQUISITIONS
On May 1, 1996, the Company acquired all of the assets and assumed all of
the liabilities of Etch-Tek, Inc. (Etch-Tek) for $460,000 in cash and a
$195,095 promissory note. Etch-Tek is a manufacturer of quick turn
prototype quantity and medium production printed circuit boards. The
acquisition of Etch-Tek has been accounted for as a purchase, and
accordingly, the results of operations of Etch-Tek for the five months
ended September 30, 1996 are included in the Company's consolidated
statement of income for the year ended September 30, 1996. Supplementary
information related to the acquisition of Etch-Tek for the September 30,
1996 consolidated statement of cash flows is as follows:
<TABLE>
<S> <C>
Assets acquired $1,400,879
Liabilities assumed (745,784)
Promissory note (195,095)
----------
Cash paid to sellers 460,000
Cash acquired (31,507)
----------
Net cash paid $ 428,493
==========
</TABLE>
On September 1, 1996, the Company acquired all of the common stock of
Abbott Electronics Ltd. (Abbott), a British manufacturer of power
supplies, for approximately $734,429, including transaction expenses.
On August 1, 1995, the Company acquired all of the assets and assumed
all of the liabilities of Arnold Circuits, Inc. (Arnold Circuits) for
$1.2 million in cash, a $200,000 promissory note, 440,000 shares of
XCEL common stock and 1,000 shares each of Series A and B redeemable
preferred stock (note 9). Arnold Circuits is a manufacturer of printed
circuit boards. The acquisition of Arnold Circuits has been accounted
for as a purchase, and accordingly, the results of operations of Arnold
Circuits for the two months ended September 30, 1995 are included in
the
F-12
<PAGE> 100
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Company's consolidated statements of income for the year ended
September 30, 1995. The 440,000 shares of XCEL common stock were valued
at $656,281 based on the net book value of the assets acquired, which
approximated fair value, less the preferred stock and the promissory
note.
Supplementary information related to the acquisition of Arnold Circuits
for the September 30, 1995 consolidated statement of cash flows is as
follows:
<TABLE>
<S> <C>
Assets acquired $ 5,665,346
Liabilities assumed (2,784,255)
Promissory note (200,000)
Series A preferred stock (353,490)
Series B preferred stock (471,320)
Common stock (656,281)
----------
Cash paid to sellers 1,200,000
Cash acquired (173,280)
----------
Net cash paid $ 1,026,720
===========
</TABLE>
Summarized below are the unaudited pro forma results of operations of
the Company as though Arnold Circuits had been acquired at the
beginning of the years ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Net sales $31,369,303 25,718,863
=========== ==========
Net income $ 585,291 (417,196)
============ ==========
</TABLE>
On July 6, 1994, the Company acquired 84.6% of the common shares
outstanding of HyComp, Inc. (HyComp), a public company, by means of an
exchange of the Company's common stock for HyComp common stock held by
Metraplex Corporation and various other officers and directors of
HyComp. HyComp is a manufacturer of thin film hybrid circuits for
industrial, medical and military customers. The total purchase price
was $306,521 (including acquisition costs of $150,410). The Company
financed the acquisition through cash of $150,410, and 156,275 shares
of the Company's common stock valued at $156,111 based on the net book
value of assets acquired, which approximated fair value. In May 1996,
the Company acquired an additional percentage of the common shares
outstanding of HyComp, which increased the Company's ownership
percentage to 90.7%. Also in May 1996, the Company acquired 96.1% of
the preferred shares outstanding of HyComp. Each of these transactions
was an exchange of the Company's common stock for the respective HyComp
stock at recorded amounts that approximate fair value.
F-13
<PAGE> 101
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The acquisition of HyComp has been accounted for as a purchase and
accordingly, the results of operations of HyComp for the three months
ended September 30, 1994 are included in the Company's consolidated
statements of operations for the year ended September 30, 1994.
For financial reporting purposes, HyComp's assets, liabilities and
earnings are consolidated with those of the Company. Ownership interest
in HyComp, other than that of the Company's, is included in the
Company's financial statements as minority interest, and includes
amounts applicable to HyComp's preferred stock of $6,123 and $157,000
at September 30, 1996 and 1995, respectively. Dividends on the
preferred stock are cumulative at 8% per year, and minority interest at
September 30, 1996 and 1995 includes cumulative dividends in arrears of
$7,715 and $185,260, respectively.
Supplementary information related to the acquisition of HyComp for the
September 30, 1994 consolidated statement of cash flows is as follows:
<TABLE>
<S> <C>
Assets acquired $ 1,582,912
Liabilities assumed (1,276,391)
Acquisition costs (150,410)
Common stock issued (156,111)
-----------
Cash paid to sellers --
Acquisition costs 150,410
Less cash acquired (59,665)
-----------
Net cash paid $ 90,745
===========
</TABLE>
(5) NOTES PAYABLE TO INSTITUTIONAL LENDERS
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Line of credit with Foothill Capital Corporation, with interest payable
monthly at prime plus 4%, collateralized $ -- 1,444,700
Line of credit with Imperial Bank, with interest payable
monthly at prime plus 1%, collateralized 1,998,935 305,500
Foreign subsidiary line of credit with bank, with interest at
6%, collateralized 784,230 --
Foreign subsidiary line of credit with bank, with interest at
2%, collateralized 54,055 --
---------- ---------
$2,837,220 1,750,200
========== =========
</TABLE>
F-14
<PAGE> 102
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Company has a line of credit with Imperial Bank which provides for
maximum borrowings of $4,750,000. The line of credit was to expire
January 15, 1997, was extended to June 30, 1997, and is collateralized
by certain assets of the Company. Borrowings of a domestic subsidiary
are also guaranteed by an officer of the Company. The Imperial Bank
line of credit bears interest at the bank's prime (8.25% at September
30, 1996) plus 1% and is payable on demand.
The line of credit agreement requires maintenance of certain financial
ratios and contains other restrictive covenants. The Company was in
compliance with, or had obtained waivers for, all debt covenants at
September 30, 1996. However, subsequent to September 30, 1996, the
Company remained in violation of certain covenants. The Company intends
to renew the line of credit under terms similar to the existing
agreement with covenants with which they will be in compliance.
(6) OBLIGATIONS TO OFFICERS, DIRECTORS AND STOCKHOLDERS
The Company has obligations to various officers and stockholders which
totaled $27,000 and $287,181 as of September 30, 1996 and 1995,
respectively. The obligations are established as promissory notes with
interest rates of 8% to 13.5% and are payable on demand. Included in
the obligations are short-term, non-interest bearing advances from a
related entity. Also, included in accrued expenses are obligations
which total $35,000 as of September 30, 1995. The obligations were the
result of consulting services performed by various officers and
stockholders relating to the acquisition of Arnold Circuits, Inc.
(7) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Term note payable to Imperial Bank (a) $ 700,000 --
Term note payable to Imperial Bank (a) 1,125,000 --
Term note payable to Imperial Bank (b) 816,663 1,000,000
Term note payable to Foothill Capital Corporation (c) -- 510,333
Term notes payable (d) 193,823 367,977
Promissory notes 238,702 199,607
Capitalized lease obligations (e) (note 11) 515,304 448,790
----------- ----------
3,589,492 2,526,707
Less current portion (911,875) (1,003,315)
----------- ----------
$ 2,677,617 1,523,392
=========== ==========
</TABLE>
(a) The term note to Imperial Bank bears interest at the bank's prime
(8.25% at September 30, 1996) plus 1.25%. The note matures
serially through fiscal 2001.
(b) The term note to Imperial Bank is collateralized by all the assets
of XCEL Arnold Circuits, Inc. This note bears interest at the
bank's prime (8.25% at September 30, 1996) plus 1.25%. The note
matures serially through fiscal 2001.
F-15
<PAGE> 103
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(c) The term note to Foothill Capital Corporation was collateralized
by all the assets of the Company and was repaid in fiscal 1996.
(d) The Company has agreements with several foreign banks which
include term borrowings which mature serially through fiscal 2001.
Interest rates on the borrowings range from 2.7% to 11.25% and is
payable monthly. Included in the other term notes is a $72,072
note, which is guaranteed by Tokyo Credit Guarantee Corporation on
behalf of the Company's Japanese subsidiary. The term borrowings
are collateralized by the assets of the subsidiary. Borrowings are
also guaranteed by an officer of the subsidiary.
(e) Capital lease agreements are calculated using interest rates
appropriate at the inception of the lease and range from 10.53% to
12.31%. Lease liabilities are amortized over the lease term using
the effective interest method. The leases all contain bargain
purchase options and expire through 2001.
(8) SALE OF COMPUTRON
On May 31, 1995, XCEL sold its Computron Display System Division of
Mount Prospect, Illinois to LPI Acquisition Corp. of Forest Park,
Illinois. The principal terms of the sale include a cash purchase price
of approximately $1.2 million, and the assumption of approximately
$694,000 of the Computron Division's liabilities. The sale resulted in
a gain of $479,783.
(9) STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
In connection with the Arnold Circuits, Inc. acquisition, XCEL Arnold
Circuits, Inc. issued 1,000 shares each of Series A redeemable
preferred stock (Series A) and Series B redeemable preferred stock
(Series B). In preference to common shares of stock, each Series A and
Series B share is entitled to a cumulative cash dividend of $120 and
$160 per year, respectively. The Series A and B shares have a
liquidation preference of and are subject to mandatory redemption by
the Company on December 15, 1999 at a value of $30 and $40 per share,
respectively, plus all accrued and unpaid dividends, whether or not
declared, to the date of redemption. As of September 30, 1996, the
accumulated dividends in arrears were $197,820. The redeemable
preferred stock was recorded at fair value on the date of issuance
using an imputed market rate dividend of 9.5%. The excess of the
redemption value over the carrying value is being accreted by periodic
charges to retained earnings over the original life of the issue.
F-16
<PAGE> 104
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The following table reflects the redeemable preferred stock activity
since August 1, 1995:
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK
---------------------------------- ----------------------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1994 -- $ -- -- $ --
Preferred stock issued in connection
with Arnold Circuits, Inc. 1,000 353,490 1,000 471,320
Accretion of preferred stock -- 4,198 -- 5,597
------- -------- -------- --------
Balance at September 30, 1995 1,000 357,688 1,000 476,917
Accretion of preferred stock -- 34,497 -- 45,997
Redemption of preferred stock -- (60,000) -- (80,000)
------- -------- -------- --------
Balance at September 30, 1996 1,000 $332,185 1,000 $442,914
====== ======== ======== ========
</TABLE>
STOCK OPTIONS AND WARRANTS
Options granted under the 1987 Employee Stock Option Plan (the Plan)
may be either qualified or nonqualified stock options and are required
to be granted at fair market value at the date of grant (depending upon
the number of voting shares owned). Subject to termination of
employment, options expire either five or ten years from the date of
grant (depending upon the number of voting shares owned) and are
nontransferable other than in the event of death. The Board of
Directors adopted a resolution increasing the number of shares of the
Company's common stock that may be granted pursuant to the Plan to a
maximum of 750,000 shares.
F-17
<PAGE> 105
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Plan's qualified stock options consist of the following:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance outstanding, September 30, 1994 and
1993 198,000 $5.00 to 6.05 1,069,750
Options canceled (198,000) 5.00 to 6.05 (1,069,750)
Options granted 412,500 2.75 1,134,375
--------- ------------- ----------
Balance outstanding, September 30, 1995 412,500 2.75 1,134,375
Options canceled -- -- --
Options granted -- -- --
--------- ------------- ----------
Balance outstanding, September 30, 1996 412,500 $ 2.75 1,134,375
========= ============= ==========
</TABLE>
The Plan's nonqualified stock options consist of the following:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- -------------- --------
<S> <C> <C> <C>
Balance outstanding, September 30, 1994 and
1993 77,500 $5.00 to 5.50 402,500
Options canceled (77,500) 5.00 to 5.50 (402,500)
Options granted 190,000 2.75 522,500
--------- ------------- --------
Balance outstanding, September 30, 1995 190,000 2.75 522,500
Options canceled -- -- --
Options granted -- -- --
--------- ------------- --------
Balance outstanding, September 30, 1996 190,000 $ 2.75 522,500
========= ============= ========
</TABLE>
At September 30, 1996, all of the above stock options were exercisable
and options for 147,500 were available for future grant.
F-18
<PAGE> 106
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Board of Directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key
employees and other parties as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
NUMBER OF ---------------------------------
SHARES PER SHARE TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance outstanding, September 30, 1993 450,281 $2.00 to 5.50 1,991,321
Warrants issued 185,000 2.75 to 5.00 621,250
-------- ----------
Balance outstanding, September 30, 1994 635,281 2.00 to 5.50 2,612,571
Warrants issued 17,700 1.75 to 2.75 45,975
-------- ----------
Balance outstanding, September 30, 1995 652,981 1.75 to 5.50 2,658,546
Warrants issued 250,000 5.00 1,250,000
Warrants canceled (50,333) 5.00 to 5.50 (251,832)
-------- ----------
Balance outstanding, September 30, 1996 852,648 1.75 to 5.50 $3,656,714
======== ==========
</TABLE>
At September 30, 1996, the total number of shares reserved for issuance
upon exercise of stock options and warrants or direct grants was
1,402,981 shares.
DEBT TO EQUITY CONVERSION
On September 30, 1996, the Company converted $123,066 in various
promissory notes to 123,066 shares of common stock. On September 28,
1995, the Company converted $207,747 in various promissory notes to a
current stockholder to 199,185 shares of common stock.
(10) INCOME TAXES
Income (loss) before income taxes for the years ended September 30,
1996, 1995 and 1994 were taxed under the following jurisdictions:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------- --------
<S> <C> <C> <C>
Domestic $ 869,906 398,461 (228,310)
Foreign 235,143 (52,331) (443,472)
---------- ------- --------
Total $1,105,049 346,130 (671,782)
========== ======= ========
</TABLE>
F-19
<PAGE> 107
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Income tax expense consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- -------- ------
<S> <C> <C> <C>
1996:
Federal $ 6,000 -- 6,000
State 10,843 -- 10,843
Foreign 5,294 -- 5,294
------- -------- ------
$22,137 -- 22,137
======= ======== ======
1995:
Federal $ -- -- --
State 5,000 -- 5,000
Foreign 4,251 -- 4,251
------- -------- ------
$ 9,251 -- 9,251
======= ======== ======
</TABLE>
Actual income tax expense differs from the amount obtained by applying
the statutory Federal income tax rate of 34% to income (loss) before
income taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Computed provision for taxes based on
income at the statutory rate $ 295,768 135,477 (77,625)
State taxes, net of Federal income tax
benefit 7,156 5,000 --
Foreign income taxes 5,294 4,251 --
Net operating losses utilized (62,293) (191,081) --
Current benefit of deferred tax assets (307,129) -- --
Permanent differences 53,920 53,142 55,900
Other 29,421 2,462 21,725
--------- -------- -------
$ 22,137 9,251 --
========= ======== =======
</TABLE>
As of September 30, 1996, the Company had net operating loss
carryforwards of approximately $7,839,468 for Federal income tax
purposes expiring at various dates between 2002 and 2008.
F-20
<PAGE> 108
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 20,172 13,879
Inventory reserves and uniform capitalization 237,706 290,542
Depreciation -- 82,888
Accrued vacation 136,878 128,986
Warranty reserve 3,102 6,928
Other accrued liabilities 8,142 62,940
Net operating loss carryforwards 2,788,599 2,838,567
----------- ----------
Total deferred tax assets 3,194,599 3,424,730
Valuation allowance for deferred tax assets (2,985,753) (3,424,730)
----------- ----------
208,846 --
Deferred tax liabilities - depreciation (208,846) --
----------- ----------
Net deferred taxes $ -- --
=========== ==========
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through September
30, 2001. The leases generally require the Company to pay all
maintenance, insurance and property tax costs and contain provisions
for rent increases. Total rent expense for the years ended September
30, 1996 and 1995 was $1,134,548 and $643,313, respectively.
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one
year as of September 30, 1996 are listed below.
F-21
<PAGE> 109
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
The Company leases production equipment under long-term leases and has
the option to purchase the equipment for a nominal cost at the
termination of the lease. Capitalized lease agreements are calculated
using interest rates appropriate at the inception of the lease and
range from 10% to 12%.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1997 $271,286 1,152,149
1998 181,408 1,084,070
1999 74,606 989,985
2000 74,606 844,673
2001 54,275 93,643
-------- ----------
Total minimum lease payments 656,181 $4,164,520
==========
Less amount representing interest 140,877
--------
Present value of minimum lease
payments 515,304
Less current installments of obligations
under capital leases 209,309
--------
Long-term obligations $305,995
========
</TABLE>
PENSION PLAN
The Company sponsors a defined contribution pension plan (401(k)
Savings Plan) covering substantially all of its U.S. domestic
employees. Participants may make voluntary pretax contributions to the
plan up to the limit as permitted by law. The annual contribution to
the plan by the Company is discretionary. No contribution by the
Company has been made to the plan to date.
F-22
<PAGE> 110
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
(12) FOREIGN OPERATIONS
A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $27,853,736 1,210,979 2,183,881 -- 31,248,596
Transfers between
geographical areas
1,528,818 2,267 -- (1,531,085) --
----------- --------- --------- ----------- ------------
Net sales $29,382,554 1,213,246 2,183,881 (1,531,085) 31,248,596
=========== ========= ========= ========== ============
Operating income (loss)
$ 1,046,898 (53,717) 510,908 -- 1,504,089
=========== ========= ========= ========== ============
Identifiable assets $14,847,867 937,242 3,828,357 -- 19,613,466
=========== ========= ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1995
-------------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $16,118,474 1,858,935 1,624,862 -- 19,602,271
Transfers between
geographical areas
2,414,696 295,548 -- (2,710,244) --
----------- --------- --------- ---------- ------------
Net sales $18,533,170 2,154,483 1,624,862 (2,710,244) 19,602,271
=========== ========= ========= ========== ============
Operating income (loss)
$ (104,950) 47,662 128,920 -- 71,632
=========== ========= ========= ========== ============
Identifiable assets $14,035,754 1,062,032 856,908 -- 15,954,694
=========== ========= ========= ========== ============
</TABLE>
F-23
<PAGE> 111
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994
--------------------------------------------------------------------------------------
NORTH
AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED
----------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales from
unaffiliated
customers $11,498,175 1,371,678 1,367,179 -- 14,237,032
Transfers between
geographical areas
2,367,190 552,548 14,184 (2,933,922) --
----------- --------- --------- ------------ ------------
Net sales $13,865,365 1,924,226 1,381,363 (2,933,922) 14,237,032
=========== ========= ========= ============ ============
Operating loss $ (197,016) (155,907) (158,200) -- (511,123)
=========== ========= ========= ============ ============
Identifiable assets $ 9,399,968 1,008,809 728,041 -- 11,136,818
=========== ========= ========= ============ ============
</TABLE>
In determining operating income (loss) for each geographic area, sales
and purchases between geographic areas have been accounted for on the
basis of prices set between the geographic areas, generally at cost
plus 5%. Identifiable assets by geographic area are those assets that
are used in the Company's operations in each location.
Export sales included in the North America amounts shown in the summary
table by geographic area above were not significant.
(13) SUBSEQUENT EVENTS
On December 19, 1996, XIT Corporation formed an equal partnership with
P & S Development, a California general partnership. The partnership,
"Capital Source Partners, A Real Estate Partnership," obtained
ownership rights to a 93,000 square foot facility at 4290 East Brickell
Street, Ontario, California. XIT Corporation presently occupies 63,000
square feet of this facility as a corporate headquarters and as an
administrative and factory facility for its Digitran Division. Going
forward, XIT will lease the same 63,000 square feet from the
partnership under a long-term lease.
On March 26, 1997, privately-held XIT merged with a wholly owned, newly
formed subsidiary of MicroTel, a publicly-traded company, with XIT as
the surviving subsidiary. Pursuant to the transaction, the former
shareholders of XIT were issued approximately 6,119,000 shares of
common stock of MicroTel, or approximately 66% of the issued and
outstanding common stock. In addition, holders of XIT stock options and
warrants at the date of the merger collectively had the right to
acquire an additional 2,153,240 shares of common stock. Collectively,
then the former XIT shareholders owned, or had the right to acquire,
approximately 65% of the common stock of MicroTel on a fully-diluted
basis as of the date of the transaction.
F-24
<PAGE> 112
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Notes to Consolidated Financial Statements, Continued
As described in note 1, the merger has been accounted for as a purchase
of MicroTel by the Company. Accordingly, the purchase price consists of
the value of the common stock outstanding of MicroTel at the date of
the merger of $5,011,000 plus estimated direct costs of the acquisition
of $636,000 and the acquired assets and liabilities of MicroTel will be
recorded at their estimated fair values at the date of the merger. The
excess of $4,904,000 of the purchase price over the preliminary
valuation of the net assets acquired will be recorded as goodwill and
will be amortized on a straight-line basis over 15 years. The
preliminary purchase price allocation is subject to change when
additional information concerning assets and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the Company's year
ended September 30, 1996 and combines the Company's results of
operations for that year with MicroTel's results of operations for the
year ended December 31, 1996, with adjustments to reflect amortization
of the estimated excess purchase price over the fair value of the net
assets acquired.
<TABLE>
<CAPTION>
(In thousands,
except per share amounts)
<S> <C>
Net sales $47,552
=======
Net loss $(3,841)
=======
Net loss per common share $ (.42)
=======
</TABLE>
The pro forma results of operations above do not purport to be indicative
of the results that would have occurred had the merger taken place at the
beginning of the period presented or of results which may occur in the
future.
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share
of restricted common stock and one quarter of a warrant to purchase one
share of restricted common stock. The pricing of the units is based on a
20% discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit
of $2.50 and maximum price of $3.50. The investors warrants have an
exercise price of 130% of the Average Reported Price. Additionally,
Yorkton and one other intermediary earn an aggregate commission of 10% of
the gross proceeds and warrants to acquire 10% of the shares purchased in
the offering at an exercise price of the lesser of the Average Reported
Price or $3.50 per share, and Yorkton further is reimbursed for
accountable expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment units
at $2.50 per unit, for gross proceeds of $5,000,000. Net proceeds to the
Company approximated $4,258,000 after $600,000 for commissions and
Yorkton's expenses noted above and $142,000 for other expenses incurred.
The offering, which was structured to accommodate multiple closings,
would terminate on the earlier of i) the date the maximum offering of
$10,000,000 is contracted or ii) the extended termination date of May
31, 1997. The offering expired on May 31, 1997 with no additional
closings.
F-25
<PAGE> 113
Schedule II
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
(Formerly known as XCEL Corporation
and Subsidiaries)
Valuation and Qualifying Accounts
Years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO COSTS DEDUCTIONS WRITE BALANCE AT END
DESCRIPTION PERIOD AND EXPENSES OFFS OF ACCOUNTS OF PERIOD
----------- ------------ ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended September 30, 1996 $ 57,091 17,247 (27,753) 46,585
Year ended September 30, 1995 123,479 40,968 (107,356) 57,091
Year ended September 30, 1994 131,500 105,512 (113,533) 123,479
Allowance for inventory obsolescence:
Year ended September 30, 1996 419,060 210,905 (307,865) 322,100
Year ended September 30, 1995 677,234 265,000 (523,174) 419,060
Year ended September 30, 1994 812,250 81,233 (216,249) 677,234
======== ======= ======== =======
</TABLE>
F-26
<PAGE> 114
PART 1-FINANCIAL INFORMATION
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30,
1996 1996
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 886 $ 785
Accounts receivable 4,734 4,568
Inventories 6,297 6,505
Other current assets 714 556
------------------ --------------------
Total current assets 12,631 12,414
Plant and equipment-net 5,006 5,060
Goodwill-net 1,836 1,903
Other assets 1,091 236
------------------ --------------------
$ 20,564 $ 19,613
================== ====================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 352 $ 27
Notes payable to institutional lenders 3,140 2,837
Current portion of long term debt 1,073 912
Accounts payable and accrued expenses 6,526 6,475
------------------ --------------------
Total current liabilities 11,091 10,251
Long term debt 3,549 2,678
Minority interest 68 64
------------------ ---------------------
Total long-term liabilities 3,617 2,742
Redeemable preferred stock 794 775
Stockholders' equity:
Common stock 9,018 9,018
Accumulated deficit (4,109) (3,201)
Foreign currency translation adjustments 153 28
------------------ --------------------
Total stockholders' equity 5,062 5,845
------------------ --------------------
$ 20,564 $ 19,613
================== ====================
</TABLE>
See notes to consolidated condensed financial statements.
F-27
<PAGE> 115
MicroTel International, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1996 1995
---- ----
(in thousands except
per share amounts)
<S> <C> <C>
Net sales $ 7,887 $ 6,796
Cost of sales 6,524 5,073
------------------ ------------------
Gross profit 1,363 1,723
Operating expenses:
Selling, general and administrative 1,975 1,371
Engineering and product development 68 76
------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (680) 276
Other income (expense)
Interest expense (183) (98)
Other (12) (27)
------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (875) 151
Income taxes 14
------------------ ------------------
NET INCOME (LOSS) $ (889) $ 151
================== ==================
NET INCOME (LOSS) PER COMMON SHARE $ (0.15) $ 0.02
================== ==================
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATING
NET INCOME (LOSS) PER SHARE 6,063 5,814
================== ==================
</TABLE>
See notes to consolidated condensed financial statements.
F-28
<PAGE> 116
MicroTel International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (889) $ 151
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 209 134
Amortization of intangible assets 67 67
Minority interest 4 (5)
Equity in loss of real estate partnership 13
Changes in operating assets and liabilities:
Accounts receivable (166) (34)
Inventories 208 329
Other assets (157) (333)
Accounts payable and accrued expenses 51 (112)
------------ ---------------
Cash provided by (used in) operations (660) 197
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (155) (92)
Investment in and loan to real estate partnership (868)
------------ ---------------
Cash used in investment activities (1,023) (92)
------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) related parties 325 (4)
Net borrowings (repayments) of other short-term debt 303 (279)
Net borrowings (repayments) of long-term debt 1,032 (384)
------------ ---------------
Cash provided by (used in) financing activities 1,660 (667)
------------ ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 124 (24)
------------ ---------------
NET INCREASE (DECREASE) IN CASH 101 (586)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 785 978
------------ ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 886 $ 392
============ ===============
</TABLE>
See notes to consolidated condensed financial statements.
F-29
<PAGE> 117
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 2,4, AND 6
HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS
AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE
INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the Company) is a holding company for its
three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and,
effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation
and CXR S.A.(collectively "CXR") design, manufacture and market
electronic telecommunication test equipment and data communications
equipment. XIT designs, manufactures, and markets information
technology products, including displays and input components, subsystem
assemblies, printed circuits, and hybrid microelectronic circuits. The
Company conducts its operations out of various facilities in the U.S.,
France, England, and Japan and organizes itself in three product line
sectors- Circuits, Components and Subsystem Assemblies, and
Instrumentation and Test Equipment. The Company's Instrumentation and
Test Equipment Sector business is conducted solely by CXR and therefore
its results of operations are not included in the accompanying
consolidated condensed financial statements for the three months ended
December 31, 1996 and 1995.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all
information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. The unaudited
consolidated condensed financial statements do, however, reflect all
adjustments, consisting of only normal recurring adjustments, which are,
in the opinion of management, necessary to state fairly the Company's
financial position as of December 31, 1996 and September 30, 1996 and
its results of operations and cash flows for the three months ended
December 31, 1996 and 1995. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with
the Company's Consolidated Financial Statements for the three years
ended September 30, 1996, 1995 and 1994 included in its Registration
Statement on Form S-1 (No. 333-29925) filed on June 24, 1997.
F-30
<PAGE> 118
As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by
XIT in a "reverse acquisition" because the existing shareholders of the
Company prior to the merger did not have voting control of the combined
entity after the merger. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the
continuing legal parent company, the Company, is not assumed to be the
acquiror and the financial statements of the combined entity are those of
the accounting acquiror (XIT), including any comparative prior year
financial statements presented by the combined entity after the business
combination. Consequently,the consolidated condensed financial
statements include the accounts of XIT and its wholly and majority-owned
subsidiaries, and beginning March 26, 1997, will include the Company and
its other subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former
Company). XIT's 50% investment in a real estate partnership (see Note 5)
is accounted for using the equity method.
Intercompany balances and transactions are eliminated in consolidation
and the currencies of the countries in which foreign subsidiaries are
located are considered their functional currencies. Cumulative
translation adjustments result from converting from these functional
currencies to U.S. dollars.
FISCAL YEAR END CHANGE
In connection with the reverse acquisition accounting treatment described
above, XIT changed its fiscal year end from September 30 to December 31
to adopt the fiscal year end of the Former Company. This report provides
the financial information for XIT for the transition period between its
fiscal year ended September 30, 1996 and the beginning of its new fiscal
year, January 1, 1997.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In accord with the reverse acquisition accounting treatment, the capital
accounts of XIT will be restated at the merger date to give effect to the
merger exchange ratio (1.451478 common shares of the Company for each
common share of XIT) and to convert XIT's no par value common stock to
$.0033 par value common stock of the Company. Weighted average shares
used in the net income (loss) per share computations presented have been
restated to reflect the exchange.
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. Common stock equivalents
were antidilutive and therefore not part of the shares used in
calculating net income (loss) per share for the three months ended
December 31, 1996 and 1995, respectively. The accretion of the excess of
the redemption value over the carrying value of redeemable preferred
stock of $19,000 and $20,000 have been deducted from net income (loss)
for the three months ended December 31, 1996 and 1995, respectively, in
arriving at net income (loss) applicable to common stockholders used in
the calculations of net income (loss) in those periods.
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 ending December 31, 1997, requiring restatement of
quarterly and prior year financial information, if applicable. This
pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APBO 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
F-31
<PAGE> 119
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. As common stock equivalents have
historically been antidilutive, implementation is expected to have no
effect on previously reported EPS. However, based on the current trading
value of the Company's common stock and assuming the Company is
profitable, it is expected that future presentations of EPS will include
differing values for Basic and Diluted EPS due to the effects of common
stock equivalents.
(2) MERGER WITH XIT
On March 26, 1997, XIT of Ontario, California merged with a wholly-owned,
newly formed subsidiary of the Company, with XIT as the surviving
subsidiary. Pursuant to the transaction, the former shareholders of XIT
were issued approximately 6,119,000 shares of common stock of the
Company, or approximately 66% of the issued and outstanding common stock.
In addition, holders of XIT stock options and warrants collectively have
the right to acquire an additional 2,153,240 shares of common stock.
Collectively, then the former XIT shareholders own, or have the right to
acquire,approximately 65% of the Common Stock of the Company on a
fully-diluted basis as of the date of the transaction.
As noted above, the merger is accounted for as a purchase of the Former
Company by XIT. Accordingly, the purchase price consists of the value of
the common stock outstanding of the Former Company at the date of the
merger of $5,011,000 plus estimated direct costs of the acquisition of
$636,000 and the acquired assets and liabilities of the Former Company
have been recorded at their estimated fair values at the date of the
merger. The excess of $4,904,000 of the purchase price over the
preliminary valuation of the net assets acquired was recorded as goodwill
and is being amortized on a straight-line basis over 15 years. The
preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations as
if the merger had occurred at the beginning of the periods indicated and
combines the Former Company's results of operations for the year ended
December 31, 1996 and the three months ended December 31, 1996 with
those of XIT's for its year ended September 30, 1996 and the three months
ended December 31, 1996, respectively, with adjustments to reflect
amortization of the estimated excess price over the fair value of the net
assets acquired.
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
3 Months Year
Ended Ended
Dec 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Net sales $12,151 $47,552
======= =======
Net loss $(4,627) $(3,841)
======= =======
Net loss per common share $ (.50) $ (.42)
======= =======
</TABLE>
The pro forma results of operations above do not purport to be indicative
of the results that would have occurred had the merger taken place at the
beginning of the periods presented or of results which may occur in the
future.
F-32
<PAGE> 120
(3) INVENTORIES
Inventories consist of the following at December 31, 1996 and
September 30, 1996:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
December 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Raw materials $2,718 $3,072
Work-in-process 2,642 2,950
Finished goods 1,289 805
Reserves (352) (322)
---- ----
$6,297 $6,505
====== ======
</TABLE>
(4) BANKING ARRANGEMENTS
Both XIT and a subsidiary have bank lines of credit which expired
originally on January 15, 1997, and which were to expire under extension
arrangements on August 30, 1997. Additionally, both XIT and the
subsidiary are in violation of certain covenants under the related loan
agreements. Although the bank has not waived these defaults, it has
agreed to forbear from taking any action with respect to same until the
extended expiration date. On August 11, 1997 these lines were renewed
with more favorable advance rates against related collateralized assets
and with less restrictive financial covenants, with which XIT and the
subsidiary are in compliance. Outstanding borrowings under these lines
of credit were $2,027,000 and $1,999,000 at December 31, 1996 and
September 30, 1996, respectively.
(5) INVESTMENT IN PARTNERSHIP
On December 19, 1996, XIT Corporation formed an equal partnership with
P&S Development, a California general partnership. The partnership,
"Capital Source Partners, A Real Estate Partnership," obtained ownership
rights to the 93,000 square foot facility at 4290 East Brickell Street,
Ontario, California, 63,000 square feet of which the Company presently
leases as its corporate headquarters and as an administrative and factory
facility for the Digitran Division of XIT. The lease term currently
expires in September 2000, but may be extended to September 2010; and the
monthly rent is approximately $36,000.
XIT's investment in the partnership totalled $118,000 and it has loaned
the partnership $750,000, which is due in varying monthly installments
through 2001. XIT's 50% ownership in the net assets of the partnership
was $768,000 at the date of formation. The $650,000 excess of this amount
over XIT's cost of $118,000 (negative goodwill) is netted against the
recorded percentage ownership in the net assets of the partnership, such
that the net carrying value of the investment at the date of formation of
the partnership is XIT's cost. Equity in the loss of the partnership from
the date of formation to December 31, 1996 approximated $13,000 and is
included in other income(expense) in the consolidated condensed statement
of operations for the three months ended December 31, 1996.
F-33
<PAGE> 121
(6) LITIGATION
In September, 1994 Raymond Jacobson, a former officer and director of the
Company and a participant in the Company's deferred compensation plan,
brought an action against the Company in the California Superior Court,
Santa Clara County, alleging that the Company has breached its contract
to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred
compensation agreement dated May 11, 1993 (the "1993 Agreement"), by
discontinuing payment in August 1994. The 1993 Agreement superseded a
previous deferred compensation agreement dated April 1, 1977 (the "1977
Agreement") which had provided for twice the level of payments. Mr.
Jacobson was claiming damages of approximately $1,200,000, which he
purported to be the present value of all payments to be made under the
1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts
past due under the contract plus interest and reinstated the bi-weekly
payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit
against Mr. Jacobson in the District Court for Galveston County, Texas
alleging damages arising from DDC's investment of more than $2,000,000
for the purchase of 1,072,000 shares of the Company's common stock. On
February 11, 1997, Mr. Jacobson, through his attorney, demanded that the
Company indemnify him, hold him harmless and pay for the cost of defense,
including reasonable attorney's fees and costs in connection with the
litigation instituted against him by DDC. This suit was subsequently
dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to
the Company that he believed that the litigation instituted against him
by DDC provided a basis for him to rescind the 1993 Agreement and assert
his rights to full payment under the 1977 Agreement. A motion for leave
to amend the claim against the Company to include this assertion has been
filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company
believes that an enforceable settlement was reached on January 22, 1997.
Mr. Jacobson apparently disclaims this agreement based on the actions
noted above. On February 28, 1997 the Company filed a motion for leave
to file a cross-claim asserting that the January 22, 1997 agreement
supersedes all previous agreements with Mr. Jacobson. A motion for leave
to amend the claim against the Company to include this assertion has
been filed with the court.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the
settlement was subject to fulfillment of a number of conditions
subsequent which did not occur and therefore was not binding on either
party. Subsequent thereto, several settlement offers have been proposed
by plaintiff's counsel, none of which are acceptable to the Company.
Currently, both the Company's motion for leave to cross-claim and Mr.
Jacobson's motion for leave to amend his complaint have been granted and
a trial date has been set for February 9, 1998.
The Company does not believe that the value of a settlement of the above
matter or alternatively a trial judgement will be materially in excess of
the amount already recorded by the Company for the deferred compensation
arrangement, which approximates $1,010,000 at December 31, 1996. The
recorded amount approximates the value of the tentative settlement
reached on March 26, 1997.
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
F-34
<PAGE> 122
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 answered Mr. Scheinfeld's
motion, seeking to compel him to serve a complaint upon the defendants.
On June 30, 1997, the complaint was served. The Company has subsequently
answered, denying the material allegations of the complaint, and
discovery is proceeding in the case.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material
adverse affect on the consolidated results of operations, financial
position, or cash flows.
(7) PRIVATE PLACEMENT
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share
of restricted common stock and one quarter of a warrant to purchase one
share of restricted common stock. The pricing of the units is based on a
20% discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit
of $2.50 and maximum price of $3.50. The investors warrants have an
exercise price of 130% of the Average Reported Price. Additionally,
Yorkton and one other intermediary earn an aggregate commission of 10% of
the gross proceeds and warrants to acquire 10% of the shares purchased in
the offering at an exercise price of the lesser of the Average Reported
Price or $3.50 per share, and Yorkton further is reimbursed for
accountable expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment
units, for gross proceeds of $5,000,000. Net proceeds to the Company
were $4,258,000 after $600,000 for commissions and Yorkton's expenses
noted above and $142,000 for other related expenses incurred. The
offering, which was structured to accommodate multiple closings, would
terminate on the earlier of i) the date the maximum offering of
$10,000,000 was contracted or ii) the extended termination date of May
31, 1997. The offering expired on May 31, 1997 with no additional
closings.
F-35
<PAGE> 123
PART 1-FINANCIAL INFORMATION
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,304 $ 886
Accounts receivable 7,721 4,734
Inventories 8,011 6,297
Other current assets 1,031 714
------- -------
Total current assets 18,067 12,631
Plant and equipment-net 5,134 5,006
Software development costs-net 726
Goodwill-net 6,655 1,836
Other assets 1,566 1,091
------- -------
$32,148 $20,564
======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 100 $ 352
Notes payable to institutional lenders 3,336 3,140
Current portion of long term debt 998 1,073
Accounts payable and accrued expenses 9,360 6,526
Deferred compensation 982
------- -------
Total current liabilities 14,776 11,091
Long term debt 3,213 3,549
Deferred compensation liability 657
Minority interest 74 68
------- -------
Total long-term liabilities 3,944 3,617
Redeemable preferred stock 686 794
Stockholders' equity:
Common stock 38 9,018
Additional paid-in capital 18,730
Accumulated deficit (6,179) (4,109)
Foreign currency translation adjustments 153 153
------- -------
Total stockholders' equity 12,742 5,062
------- -------
$32,148 $20,564
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
F-36
<PAGE> 124
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 12,029 $ 8,637 $ 19,736 $ 15,973
Cost of sales 8,875 6,170 14,972 11,541
-------- -------- -------- --------
GROSS PROFIT 3,154 2,467 4,764 4,432
Operating expenses:
Selling, general and administrative 3,643 1,760 5,555 3,255
Engineering and product development 694 78 792 157
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (1,183) 629 (1,583) 1,020
Other income (expense)
Interest expense (262) (116) (460) (244)
Other 8 59 7 81
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (1,437) 572 (2,036) 857
Income taxes (benefit) (2) 29 2 32
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,435) $ 543 $ (2,038) $ 825
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE $ (0.13) $ 0.09 $ (0.24) $ 0.13
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATING
NET INCOME (LOSS) PER SHARE 11,005 5,873 8,638 5,844
======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-37
<PAGE> 125
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
1997 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES;
Net income (loss) $(2,038) $ 825
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 356 288
Amortization of intangibles 287 91
Other noncash items 46 28
Changes in operating assets and liabilities:
Accounts receivable (1,177) (422)
Inventories 1,265 (329)
Other assets (62) 111
Accounts payable and accrued expenses (1,443) (218)
------------ ------------
Cash provided by (used in) operations (2,766) 374
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of
property, plant and equipment (23) (279)
Cash paid for purchase of Etch-Tek (428)
Cash acquired in reverse acquisition 264
------------- -------------
Cash provided by (used) in investment activities 241 (707)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) related parties (752) (44)
Net borrowings (repayments) of other short-term debt 53 (322)
Net borrowings (repayments) of long-term debt (476) 1,086
Redemption of preferred stock (140)
Private placement of common stock 4,258
------------- --------------
Cash provided by financing activities 2,943 720
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (21)
------------- --------------
NET INCREASE IN CASH 418 366
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 886 392
------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $1,304 $758
============= ==============
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE> 126
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 2,4, AND 5
HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED
WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the Company) is a holding company for its
three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and,
effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation
and CXR S.A. design, manufacture and market electronic telecommunication
test equipment and data communications equipment. XIT designs,
manufactures, and markets information technology products, including
displays and input components, subsystem assemblies, printed circuits, and
hybrid microelectronic circuits. The Company conducts its operations out
of various facilities in the U.S., France, England, and Japan and
organizes itself in three product line sectors- Circuits, Components and
Subsystem Assemblies, and Instrumentation and Test Equipment.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all
information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity
with generally accepted accounting principles. The unaudited consolidated
condensed financial statements do, however, reflect all adjustments,
consisting of only normal recurring adjustments, which are, in the opinion
of management, necessary to state fairly financial position as of June 30,
1997 and December 31, 1996 and results of operations and cash flows for
the related interim periods ended June 30, 1997 and 1996. Results of
operations for the six months ended June 30, 1997 are not necessarily
indicative of results that may be expected for the full year. It is
suggested that the accompanying consolidated condensed financial
statements be read in conjunction with the Company's Consolidated
Financial Statements for the three years ended September 30, 1996, 1995
and 1994 included in its Registration Statement on Form S-1 (No.
333-29925) filed on June 24, 1997.
As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by XIT
in a "reverse acquisition" because the existing shareholders of the
Company prior to the merger did not have voting control of the combined
entity after the merger. In a reverse acquisition, the accounting
F-39
<PAGE> 127
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. Consequently,the consolidated condensed financial statements
include the accounts of XIT and its subsidiaries, and beginning March 26,
1997, include the Company and its other subsidiaries, CXR Telcom
Corporation and CXR S.A. (the Former Company). XIT has a 50% interest in a
real estate partnership which was formed in December 1996 and is accounted
for using the equity method. Equity in the income(loss) of the partnership
of $nil and $(22,000) for the three and six months ended June 30, 1997,
respectively, is included in other income (expense) in the accompanying
consolidated condensed statements of operations.
Intercompany balances and transactions are eliminated in consolidation and
the currencies of the countries in which foreign subsidiaries are located
are considered their functional currencies. Cumulative translation
adjustments result from converting from these functional currencies to
U.S. dollars.
Certain 1996 amounts and certain first quarter 1997 amounts included in
the results for the six months ended June 30, 1997, have been
reclassified to conform to the current quarter presentation with no
impact or the net income (loss) for those periods.
FISCAL YEAR END CHANGE
In connection with the reverse acquisition accounting treatment described
above, XIT changed its fiscal year end from September 30 to December 31 to
adopt the fiscal year end of the Former Company.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In accord with the reverse acquisition accounting treatment, the capital
accounts of XIT have been restated to give effect to the merger exchange
ratio (1.451478 common shares of the Company for each common share of XIT)
and to convert XIT's no par value common stock to $.0033 par value common
stock of the Company. Weighted average shares used in the net income
(loss) per share calculations presented have been restated to reflect the
exchange.
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. Common stock equivalents
were antidilutive and therefore not part of the shares used in calculating
net income (loss) per share for the three and six months ended June 30,
1997 and 1996, respectively. The accretion of the excess of the redemption
value over the carrying value of redeemable preferred stock has been
deducted from net income (loss) in arriving at net income (loss)
applicable to common stockholders used in the calculations of net income
(loss) per share. Accretion of $16,000 and $21,000 have been deducted from
net income (loss) for the three months ended June 30, 1997 and 1996,
respectively, and $32,000 and $41,000 have been deducted from net income
(loss) for the six months ended June 30, 1997 and 1996, respectively.
On March 3, 1997 the Financial Accounting Standards Board issued FAS No.
128 "Earnings per Share" (FAS 128), which will become effective for the
Company for its year ending December 31, 1997, requiring restatement of
quarterly and prior year financial information, if applicable. This
pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APBO 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
F-40
<PAGE> 128
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. As common stock equivalents have
historically been antidilutive, implementation is expected to have no
effect on previously reported EPS. However, based on the current trading
value of the Company's common stock and assuming the Company is
profitable, it is expected that future presentations of EPS will include
differing values for Basic and Diluted EPS due to the effects of common
stock equivalents.
(2) MERGER WITH XIT
On March 26, 1997, XIT of Ontario, California merged with a wholly-owned,
newly formed subsidiary of the Company, with XIT as the surviving
subsidiary. Pursuant to the transaction, the former shareholders of XIT
were issued approximately 6,115,000 shares of common stock of the Company,
or approximately 66% of the issued and outstanding common stock. In
addition, holders of XIT stock options and warrants collectively have the
right to acquire an additional 2,153,240 shares of common stock.
Collectively, then the former XIT shareholders own, or have the right to
acquire,approximately 65% of the Common Stock of the Company on a
fully-diluted basis as of the date of the transaction.
As noted above, the merger is accounted for as a purchase of the Former
Company by XIT. Accordingly, the purchase price consists of the value of
the common stock outstanding of the Former Company at the date of the
merger of $5,011,000 plus estimated direct costs of the acquisition of
$636,000 and the acquired assets and liabilities of the Former Company
have been recorded at their estimated fair values at the date of the
merger. The excess of $4,904,000 of the purchase price over the
preliminary valuation of the net assets acquired was recorded as goodwill
at the acquisition date and an additional $94,000 was recorded in the
second quarter of 1997 upon the resolution of a preacquistion contingency.
The goodwill is being amortized on a straight-line basis over 15 years.
The preliminary purchase price allocation is subject to change as
additional information concerning asset and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations as
if the merger had occurred at the beginning of the periods indicated and
combines the Former Company's results of operations for the year ended
December 31, 1996 and the two months and 25 days ended March 25, 1997 with
those of XIT's for its year ended September 30, 1996 and the six months
ended June 30, 1997, respectively, with adjustments to reflect
amortization of the estimated excess price over the fair value of the net
assets acquired.
F-41
<PAGE> 129
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
6 Months Year
Ended Ended
June 30, September 30,
1997 1996
<S> <C> <C>
Net sales $22,732 $47,552
======= =======
Net loss $(4,130) $(3,847)
======= =======
Net loss per common share $ (.41) $ (.42)
======= =======
</TABLE>
The pro forma results of operations above do not purport to be indicative
of the results that would have occurred had the merger taken place at the
beginning of the periods presented or of results which may occur in the
future.
(3) INVENTORIES
Inventories consist of the following at June 30, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
June 30, December 31,
1997 1996
<S> <C> <C>
Raw materials $4,396 $2,718
Work-in-process 3,199 2,642
Finished goods 2,245 1,289
Reserves (1,829) (352)
------ ------
$8,011 $6,297
====== ======
</TABLE>
(4) BANKING ARRANGEMENTS
Both XIT and a subsidiary have bank lines of credit which expired
originally on January 15, 1997, and which were to expire under extension
arrangements on August 30, 1997. Additionally, both XIT and the subsidiary
were in violation of certain financial covenants under the related loan
agreements. Although the bank had not waived these defaults, it had agreed
to forbear from taking any action with respect to same until the extended
expiration date. On August 11, 1997 these lines were renewed with more
favorable advance rates against related collateralized assets and with
less restrictive financial covenants, with which XIT and the subsidiary
are in compliance. Outstanding borrowings under these lines of credit
were $2,208,000 and $2,027,000 at June 30, 1997 and December 31, 1996,
respectively.
(5) LITIGATION
In September, 1994 Raymond Jacobson, a former officer and director of the
Company and a participant in the Company's deferred compensation plan,
brought an action against the Company in the California Superior Court,
Santa Clara County, alleging that the Company has breached its contract to
pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation
agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing
payment in August 1994. The 1993 Agreement superseded a previous deferred
compensation agreement dated April 1, 1977 (the "1977 Agreement") which
had provided for twice the level of payments. Mr. Jacobson was claiming
damages of approximately $1,200,000, which he purported to be the present
value of all payments
F-42
<PAGE> 130
to be made under the 1993 Agreement. In June 1995 the Company paid Mr.
Jacobson all amounts past due under the contract plus interest and
reinstated the bi-weekly payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against
Mr. Jacobson in the District Court for Galveston County, Texas alleging
damages arising from DDC's investment of more than $2,000,000 for the
purchase of 1,072,000 shares of the Company's common stock. On February
11, 1997, Mr. Jacobson, through his attorney, demanded that the Company
indemnify him, hold him harmless and pay for the cost of defense,
including reasonable attorney's fees and costs in connection with the
litigation instituted against him by DDC. This suit was subsequently
dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to
the Company that he believed that the litigation instituted against him by
DDC provided a basis for him to rescind the 1993 Agreement and assert his
rights to full payment under the 1977 Agreement. A motion for leave to
amend the claim against the Company to include this assertion has been
filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company believes
that an enforceable settlement was reached on January 22, 1997. Mr.
Jacobson apparently disclaims this agreement based on the actions noted
above. On February 28, 1997 the Company filed a motion for leave to file a
cross-claim asserting that the January 22, 1997 agreement supersedes all
previous agreements with Mr. Jacobson. A motion for leave to amend the
claim against the company to include this assertion has been filed with
the court.
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 by the Company of a number of
conditions subsequent which did not occur and therefore was not binding on
either party. Subsequent thereto, several alternative settlement offers
have been proposed by plaintiff's counsel, none of which are acceptable to
the Company.
Currently, both the Company's motion for leave to cross-claim and Mr.
Jacobson's motion for leave to amend his complaint have been granted and
a trial date has been set for February 9, 1998.
The Company does not believe that the value of a settlement of the above
matter or alternatively a trial judgement will be materially in excess of
the amount already recorded by the Company for the deferred compensation
arrangement, which approximates $1,000,000 at June 30, 1997. The recorded
amount approximates the value of the tentative settlement reached on March
26, 1997.
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 answered Mr. Scheinfeld's
F-43
<PAGE> 131
motion and sought to compel him to serve a complaint upon the defendants.
On June 30, 1997, the complaint was served. The Company has
subsequently answered, denying the material allegations of the complaint,
and discovery is proceeding in the case.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material
adverse affect on the consolidated results of operations, financial
position, or cash flows.
(6) PRIVATE PLACEMENT
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share of
restricted common stock and one quarter of a warrant to purchase one share
of restricted common stock. The pricing of the units is based on a 20%
discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit of
$2.50 and maximum price of $3.50. The investors warrants have an exercise
price of 130% of the Average Reported Price. Additionally, Yorkton and one
other intermediary earn an aggregate commission of 10% of the gross
proceeds and warrants to acquire 10% of the shares purchased in the
offering at an exercise price of the lesser of the Average Reported Price
or $3.50 per share, and Yorkton further is reimbursed for accountable
expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment units,
for gross proceeds of $5,000,000. Net proceeds to the Company approximated
$4,258,000, after $600,000 for commissions and Yorkton's expenses noted
above and $142,000 for other expenses incurred. The offering, which was
structured to accommodate multiple closings, would terminate on the
earlier of i) the date the maximum offering of $10,000,000 was contracted
or ii) the extended termination date of May 31, 1997. The offering expired
on May 31, 1997 with no additional closings.
F-44
<PAGE> 132
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 included on page
F-71. These financial statements and the schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 and
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 its
operations and its 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-45
<PAGE> 133
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-46
<PAGE> 134
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 1996 and December 1995
(in thousands)
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271 $ 432
Investments in marketable securities 152
Accounts receivable, less allowance
for doubtful accounts:
Dec. 1996, $186
Dec. 1995, $425 2,936 3,582
Inventories 3,004 4,148
Other current assets 487 283
-------- --------
Total current assets 6,698 8,597
-------- --------
Plant and equipment-net 526 709
Software development costs-net 1,027 1,209
Foreign tax receivable 830 790
Other assets 238 20
-------- --------
$ 9,319 $ 11,325
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 1,142 $ 759
Current portion long term debt 44 170
Accounts payable 2,580 2,184
Accrued payroll and related expenses 748 922
Other accrued liabilities 749 748
Current portion-deferred compensation 737 161
Deferred income 350
-------- --------
Total current liabilities 6,000 5,294
-------- --------
Long term debt 36 54
Deferred compensation liability 507 803
Other long-term liabilities 218
-------- --------
Total liabilities 6,543 6,369
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 10 45
Additional paid-in capital 23,560 22,293
Accumulated deficit (21,371) (16,774)
Stockholder's note receivable (1,337)
Deferred compensation (40) (88)
Cumulative translation adjustments 617 817
-------- --------
Stockholders' equity 2,776 4,956
-------- --------
$ 9,319 $ 11,325
======== ========
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE> 135
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-48
<PAGE> 136
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-49
<PAGE> 137
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTHS YEAR
FOR THE YEARS ENDED ENDED ENDED
Dec. 31, Dec. 31, Dec. 31, June 30,
1996 1995 1994 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,597) ($ 667) $ 298 ($ 639)
Reconciliation to net cash provided
by (used in) operations:
Depreciation 221 274 153 387
Amortization of intangible assets 298 266 63 282
Deferred compensation 358 46
Stock-based compensation and expense 1,754
Write-down of assets 1,006
Changes in assets and liabilities net of
sale of NAMS and LAN product lines:
Investments in marketable securities (152)
Accounts receivable 646 1,316 (1,084) (1,061)
Inventories 768 (412) 463 766
Other current assets (52) 4 31 97
Other non-current assets (218)
Accounts payable 396 (361) (701) 1,097
Other current liabilities (523) (262) (74) (252)
Foreign taxes receivable (40) (144) 2
Other noncurrent liabilities (218) 237 31 (513)
------- ------- ------- -------
Net cash provided by (used in) operations (201) 145 (820) 166
------- ------- ------- -------
Cash flows from investing activities:
Certificate of deposit 650 (650)
Additions to plant and equipment (71) (148) (43) (171)
Capitalized software (795) (879) (490)
Collection of other receivables 1,025
------- ------- ------- -------
Net cash provided by (used in) investing
activities (866) (377) (158) (171)
------- ------- ------- -------
Cash flows from financing activities:
Notes payable-net 383 (184) 943 (737)
Term debt
Additions 91
Repayments (135) (95) (63) (174)
Fee for note receivable extension 250
Proceeds from common stock transactions 827 221 716
Costs relating to stock split (43)
------- ------- ------- -------
Net cash provided by (used in) financing
activities 1,032 192 880 (104)
------- ------- ------- -------
Effect of exchange rate changes on cash (126) 175 49 114
------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents (161) 135 (49) 5
Cash and cash equivalents
at beginning of period 432 297 346 341
------- ------- ------- -------
Cash and cash equivalents
at end of period $ 271 $ 432 $ 297 $ 346
======= ======= ======= =======
Non cash investing and financing activities:
Issuance of equity securities for
compensation and expenses $ 1,754
=======
Cancellation of stock subscription $ 957
=======
Issuance of common stock for debt settlement $ 80
=======
Sale of common stock for note receivable $ 1,337
=======
Sale of NAMS and LAN product lines for a
note receivable $ 1,025
=======
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE> 138
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-51
<PAGE> 139
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 ending 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-52
<PAGE> 140
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-53
<PAGE> 141
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-54
<PAGE> 142
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-55
<PAGE> 143
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-56
<PAGE> 144
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-57
<PAGE> 145
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-58
<PAGE> 146
<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-59
<PAGE> 147
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-60
<PAGE> 148
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-61
<PAGE> 149
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-62
<PAGE> 150
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-63
<PAGE> 151
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, 1977 (the "1977
Agreement") which had provided for twice the level of payments. Mr. Jacobson was
claiming damages of approximately $1,200,000, which he purported to be the
present value of all payments to be made under the 1993 Agreement. In June 1995
the Company paid Mr. Jacobson all amounts past due under the contract plus
interest and reinstated the bi-weekly payments.
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 the amount already recorded by the Company for the
deferred compensation arrangement, which approximates $1,000,000 at December 31,
1996.
F-64
<PAGE> 152
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-65
<PAGE> 153
The following table shows activity in the outstanding options.
<TABLE>
<CAPTION>
Six Months
Year Ended Year Ended Ended Year Ended
December 31, Weighted December 31, December June 30,
1996 Average 1995 31, 1994 1994
-------- Exercise --------- --------- ----------
Shares Price Shares Shares Shares
--------- ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 401,510 $3.27 128,910 74,843 112,626
Granted 1,319,900 1.79 296,600 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>
Options exercisable as of December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Exercisable 1,088,072 100,243 113,476
========= ======= ========
Weighted Average
Exercise Price $ 2.65 $ 3.41 $ 3.40
========= ======= ========
</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 and the weighted average remaining
contractual life for these options was 4.7 years. The fair value of options
granted during 1995 was $667,000, at a weighted average price of $2.25 per
share.
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-66
<PAGE> 154
for any year; expected volatility for 1996 and 1995 grants of approximately 56%
and 61%, based on historical results; risk-free interest rates of 6.6% and 6.65%
for 1996 and 1995 grants; and average expected lives of approximately three
years for both 1996 and 1995. The following table shows net loss and loss per
share for 1995 and 1996 as if the Company had elected the fair value method of
accounting for stock options.
<TABLE>
<CAPTION>
(in thousands except per-share amounts)
1996 1995
---- ----
<S> <C> <C>
Net Loss, as Reported $ (4,597) $ (667)
Additional Incremental Compensation Expense (557) (336)
----- -----
Net Loss, as Adjusted $ (5,154) $ (1,003)
======= =======
Net Loss per Share, as Reported $ (1.65) $ (0.25)
Additional Incremental Compensation Expense (0.20) (0.13)
------ ------
Net Loss per Share, as Adjusted $ (1.85) $ (0.38)
====== ======
</TABLE>
Additional incremental compensation expense includes the excess of fair values
of options granted during the year over any compensation amounts recorded for
options whose exercise prices were less than the market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification
date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. The
above calculations include only the effects of 1995 and 1996 grants. Because
options often vest over several years and additional awards are made each year,
the results shown above may not be representative of the effects on net earnings
or losses in future years.
In addition, at December 31, 1996, the Company has outstanding 122,000 warrants
to purchase stock at $2.50 per share, expiring in varying amounts through 2003.
During 1996, 18,000 warrants were exercised at $2.50 per share.
The Company has an Employee Stock Purchase Plan allowing eligible employees to
purchase shares of the Company's common stock at 85% of market value. At
December 31, l995, 6,180 shares had been issued pursuant to the plan with 38,820
shares reserved for future issuance.
The Company has a 401(k) tax deferred saving plan whereby eligible employees may
elect to contribute a portion of their salaries. Company contributions are made
at the discretion of the Board of Directors. The Company's contributions to the
plan were $35,000, $41,000, $20,000, and $49,000 for 1996, 1995, the six months
ended December 3l, l994 and the fiscal year ended June 30, l994, respectively.
12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
For the three months ended December 31, 1996, the Company reported a net loss of
$(3,656,000) or $(1.32) per share. These results were impacted by the following
adjustments:
F-67
<PAGE> 155
<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. Net
realizable value was based on estimated undiscounted future cash flows from the
related assets. 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-68
<PAGE> 156
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 Company's year ended December 31,
1996 and combines the Company's results of operations for that year with those
of XIT's for its year ended September 30, 1996, 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)
<S> <C>
Net sales $ 47,552
Net loss $ (3,841)
========
Net loss per common share $ (.42)
========
</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 period 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-69
<PAGE> 157
$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 approximated
$4,258,000 after $600,000 for commissions and Yorkton's expenses noted above and
$142,000 for other expenses incurred. 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-70
<PAGE> 158
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-71
<PAGE> 159
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 26, DEC. 31,
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 264 $ 271
Accounts receivable 1,810 2,936
Inventories 2,979 3,004
Other current assets 255 487
-------- --------
Total current assets 5,308 6,698
Plant and equipment-net 461 526
Software development costs-net 913 1,027
Foreign tax receivable 238 830
Other assets 180 238
-------- --------
$ 7,100 $ 9,319
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 500
Notes payable to banks 143 $ 1,142
Current portion of long term debt 29 44
Accounts payable 2,452 2,580
Accrued expenses 1,539 1,497
Deferred compensation 738 737
-------- --------
Total current liabilities 5,401 6,000
Long term debt 36 36
Deferred compensation liability 490 507
-------- --------
Total long-term liabilities 526 543
Stockholders' equity:
Common stock 10 10
Additional paid-in capital and other 24,548 24,137
Accumulated deficit (23,385) (21,371)
-------- --------
Total stockholders' equity 1,173 2,776
-------- --------
$ 7,100 $ 9,319
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
F-72
<PAGE> 160
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWO MONTHS AND
TWENTY-SIX DAYS ENDED
MARCH 26, 1997
(In thousands except
per share amounts)
<S> <C>
Net sales $ 2,996
Cost of sales 2,375
-------
GROSS PROFIT 621
Operating expenses:
Selling, general and administrative 2,071
Engineering and product development 521
-------
LOSS FROM OPERATIONS (1,971)
Other income (expense)
Interest expense (47)
Other 10
-------
LOSS BEFORE INCOME TAXES (2,008)
Income taxes 6
-------
NET LOSS $(2,014)
=======
LOSS PER COMMON SHARE $ (0.66)
=======
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATING
LOSS PER SHARE 3,038
=======
</TABLE>
See notes to consolidated condensed financial statements.
F-73
<PAGE> 161
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE TWO MONTHS AND
TWENTY-SIX DAYS ENDED
MARCH 26, 1997
(in thousands)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,014)
Reconciliation to cash provided by operations
Depreciation and amortization 71
Amortization of intangible assets 119
Write-down of assets and severance 287
Stock-based compensation 462
Other 6
Changes in operating assets and liabilities:
Accounts receivable 1,126
Inventories (72)
Accounts payable and accrued expenses (164)
Other assets and liabilities 866
-------
Cash provided by operations 687
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (6)
Capitalized software (117)
-------
Cash used in investment activities (123)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from related parties 500
Net borrowings (repayments) of other short-term debt (999)
Repayments) of long-term debt (15)
Exercise of stock options 114
-------
Cash used in financing activities (400)
-------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (171)
-------
NET DECREASE IN CASH (7)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 271
-------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 264
=======
</TABLE>
See notes to consolidated condensed financial statements.
F-74
<PAGE> 162
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTE 5 HEREOF.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the Company) is a holding company for its
three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and,
effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom Corporation
and CXR S.A. design, manufacture and market electronic telecommunication
test equipment and data communications equipment. XIT designs,
manufactures, and markets information technology products, including
displays and input components, subsystem assemblies, printed circuits, and
hybrid microelectronic circuits.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared to present financial information for the Company for
the interim period prior to its merger with XIT on March 26, 1997 (see
Note 2 below). These financial statements do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The unaudited consolidated condensed financial
statements do, however, reflect all adjustments, consisting of only normal
recurring adjustments, which are, in the opinion of management, necessary
to state fairly financial position as of March 26, 1997 and December 31,
1996 and results of operations and cash flows for the two months and
twenty-six days ended March 26, 1997. It is suggested that these interim
consolidated condensed financial statements be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31,
l996.
Intercompany balances and transactions are eliminated in consolidation and
the French Franc is considered the functional currency of CXR S.A.
Cumulative translation adjustments result from converting the functional
currency of CXR S.A. to U.S. dollars and are included in Additional
Paid-in Capital and Other in the accompanying consolidated condensed
balance sheets.
EARNINGS PER SHARE
Net 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.
F-75
<PAGE> 163
(2)MERGER WITH XIT
On March 26, 1997, XIT of Ontario, California merged with a wholly-owned,
newly formed subsidiary of the Company, with XIT as the surviving
subsidiary. Pursuant to the transaction, the former shareholders of XIT
were issued approximately 6,115,000 shares of common stock of the Company,
or approximately 66% of the issued and outstanding common stock. In
addition, holders of XIT stock options and warrants collectively have the
right to acquire an additional 2,153,240 shares of common stock.
Collectively, then the former XIT shareholders own, or have the right to
acquire, approximately 65% of the Common Stock of the Company on a
fully-diluted basis as of the date of the transaction.
The merger was accounted for as a purchase of the Company by XIT in a
"reverse acquisition" because the existing shareholders of the Company
prior to the merger did not have voting control of the combined entity
after the merger. In a reverse acquisition, the accounting treatment
differs from the legal form of the transaction, as the continuing legal
parent company, the Company, is not assumed to be the acquiror and the
financial statements of the combined entity are those of the accounting
acquiror (XIT), including any comparative prior year financial statements
presented by the combined entity after the business combination.
(3)INVENTORIES
Inventories consist of the following at March 26, 1997 and December 31,
1996:
<TABLE>
<CAPTION>
(in thousands)
March 26, December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials $1,462 $2,369
Work-in-process 808 683
Finished goods 2,554 1,653
Reserves (1,844) (1,701)
------ ------
$2,979 $3,004
====== ======
</TABLE>
(4)CERTAIN TRANSACTIONS
During the two months and twenty-six days ended March 26, 1997, the
Company incurred certain significant charges as follows:
<TABLE>
<S> <C>
Stock-based compensation $462,000
Write-down of assets 209,000
Severance costs 78,000
--------
$749,000
========
</TABLE>
The stock-based compensation is comprised of restricted stock grants to
certain officers and directors whose corporate capacities would terminate
or change at the date of the merger with XIT.
The write-down of assets consists of reductions of $97,000 and $112,000 in
the carrying value of certain inventory and capitalized software
development costs, respectively, to their net realizable value. These
write-downs were charged to cost of sales and net realizable value was
based on estimated undiscounted future cash flows from the related assets.
The severance costs relate to personnel cutbacks at both CXR Telcom and
CXR S.A. Both the write-downs and the cutbacks 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
F-76
<PAGE> 164
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 S.A.'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.
(5)LITIGATION
In September, 1994 Raymond Jacobson, a former officer and director of the
Company and a participant in the Company's deferred compensation plan,
brought an action against the Company in the California Superior Court,
Santa Clara County, alleging that the Company has breached its contract to
pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation
agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing
payment in August 1994. The 1993 Agreement superseded a previous deferred
compensation agreement dated April 1, 1977 (the "1977 Agreement") which
had provided for twice the level of payments. Mr. Jacobson was claiming
damages of approximately $1,200,000, which he purported to be the present
value of all payments to be made under the 1993 Agreement. In June 1995
the Company paid Mr. Jacobson all amounts past due under the contract plus
interest and reinstated the bi-weekly payments, which have continued to
date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against
Mr. Jacobson in the District Court for Galveston County, Texas alleging
damages arising from DDC's investment of more than $2,000,000 for the
purchase of 1,072,000 shares of the Company's common stock. On February
11, 1997, Mr. Jacobson, through his attorney, demanded that the Company
indemnify him, hold him harmless and pay for the cost of defense,
including reasonable attorney's fees and costs in connection with the
litigation instituted against him by DDC. This suit was subsequently
dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to
the Company that he believed that the litigation instituted against him by
DDC provided a basis for him to rescind the 1993 Agreement and assert his
rights to full payment under the 1977 Agreement. A motion for leave to
amend the claim against the Company to include this assertion has been
filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company believes
that an enforceable settlement was reached on January 22, 1997. Mr.
Jacobson apparently disclaims this agreement based on the actions noted
above. On February 28, 1997 the Company filed a motion for leave to file a
cross-claim asserting that the January 22, 1997 agreement supersedes all
previous agreements with Mr. Jacobson.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the
settlement was subject to fulfillment by the Company of a number of
conditions subsequent which did not occur and therefore was not binding on
either party. Subsequent thereto, several alternative settlement offers
have been proposed by plaintiff's counsel, none of which are acceptable to
the Company.
F-77
<PAGE> 165
Currently, both the Company's motion for leave to cross-claim and Mr.
Jacobson's motion for leave to amend his complaint have been granted and a
trial date has been set for February 9, 1998.
The Company does not believe that the value of a settlement of the above
matter or alternatively a trial judgement will be materially in excess of
the amount already recorded by the Company for the deferred compensation
arrangement, which approximates $1,007,000 at March 26, 1997. The recorded
amount approximates the value of the tentative settlement reached on March
26, 1997.
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 answered Mr. Scheinfeld's motion and sought to
compel him to serve a complaint upon the defendants. On June 30, 1997, the
complaint was served. The Company has subsequently answered, denying the
material allegations of the complaint, and discovery is proceeding in the
case.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material
adverse affect on the consolidated results of operations, financial
position, or cash flows.
(6)PRIVATE PLACEMENT
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share of
restricted common stock and one quarter of a warrant to purchase one share
of restricted common stock. The pricing of the units is based on a 20%
discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit of
$2.50 and maximum price of $3.50. The investors warrants have an exercise
price of 130% of the Average Reported Price. Additionally, Yorkton and one
other intermediary earn an aggregate commission of 10% of the gross
proceeds and warrants to acquire 10% of the shares purchased in the
offering at an exercise price of the lesser of the Average Reported Price
or $3.50 per share, and Yorkton further is reimbursed for accountable
expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment units,
for gross proceeds of $5,000,000. Net proceeds to the Company approximated
$4,258,000, after $600,000 for commissions and Yorkton's expenses noted
above and $142,000 for other expenses incurred. The offering, which was
structured to accommodate multiple closings, would terminate on the
earlier of i) the date the maximum offering of $10,000,000 was contracted
or ii) the extended termination date of May 31, 1997. The offering expired
on May 31, 1997 with no additional closings.
F-78
<PAGE> 166
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The accompanying pro forma combined condensed financial statements
assume a business combination between MicroTel International, Inc. (MicroTel)
and XIT Corporation (XIT), which is accounted for as a purchase of MicroTel by
XIT in a "reverse acquisition". Treatment as a reverse acquisition is based on
the the fact that the shareholders of MicroTel have less than a majority of
voting control of the combined entity. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the continuing
legal parent company (MicroTel) is not assumed to be the acquiror and the
financial statements of the combined entity are those of the accounting acquiror
(XIT), including any comparative prior year financial statements presented by
the combined entity after the business combination.
The Unaudited Pro Forma Combined Condensed Statement of Operations for
the Year Ended September 30, 1996 combines XIT's results of operations for its
fiscal year ended September 30, 1996 with MicroTel's results of operations for
its fiscal year ended December 31, 1996. The Unaudited Pro Forma Combined
Condensed Statement of Operations for the six months ended June 30, 1997
combines XIT's results of operations for the six months ended June 30, 1997,
which includes three months and 5 days of MicroTel's results after the merger on
March 26, 1997, and MicroTel's results of operations for the 2 month and 26 day
period ended March 26, 1997. The Unaudited Pro Forma Combined Condensed
Statements of Operations assume that the acquisition had occurred at the
beginning of each of the periods presented.
The Unaudited Combined Condensed Financial Statements are based on the
historical financial statements of Microtel and XIT and notes thereto included
elsewhere herein and should be read in conjunction therewith. MicroTel's
historical financial statements are included as the Consolidated Financial
Statements of Microtel International, Inc. (Pre-merger) for the years ended
December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the year
ended June 30, 1994 and the Consolidated Condensed Financial Statements of
MicroTel International, Inc. (Pre-merger) for the two months and twenty-six days
ended March 26, 1997. XIT's historical financial statements are included in the
Consolidated Financial Statements of MicroTel International, Inc. for the three
years ended September 30, 1996, 1995 and 1994 and the Consolidated Condensed
Statements of MicroTel International, Inc. for the three and six months ended
June 30, 1997 and 1996.
The Unaudited Pro Forma Combined Condensed Financial Statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
acquisition had been in effect on the dates indicated, nor are they necessarily
indicative of future operating results or financial position of the combined
entity. The statements do not give effect to any cost savings or other
synergistic affects which may result from the combination of MicroTel and XIT.
F-79
<PAGE> 167
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
XIT MICROTEL ADJUSTMENTS COMBINED
-------- -------- ----------- --------
DR (CR)
<S> <C> <C> <C> <C>
Net sales $ 31,249 $ 16,303 $ 47,552
Cost of sales 23,057 10,819 33,876
-------- -------- --------
Gross profit 8,192 5,484 13,676
--------
Operating expenses:
Selling, general and administrative 6,379 8,397 $ 333 15,109
Engineering, research and development 309 1,817 2,126
-------- -------- -------- --------
Operating income (loss) 1,504 (4,730) $ (333) (3,559)
--------
Other income (expense)
Interest expense (506) (319) (825)
Other 107 367 474
-------- -------- -------- --------
Income (loss) before taxes 1,105 (4,682) (333) (3,910)
--------
Income taxes (benefit) 22 (85) (63)
-------- -------- -------- --------
Income (loss) $ 1,083 $ (4,597) $ (333) $ (3,847)
======== ======== ======== ========
Net income (loss) per common share $ 0.17 $ (0.42)
======== ========
Weighted average number of common
shares outstanding 5,841 9,037
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
F-80
<PAGE> 168
UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
------------------------
XIT MICROTEL ADJUSTMENTS COMBINED
-------- -------- ----------- -------
DR (CR)
<S> <C> <C> <C> <C>
Net sales $ 19,736 $ 2,996 $ 22,732
Cost of sales 14,972 2,375 17,347
-------- -------- -------
Gross profit 4,764 621 5,385
-------
Operating expenses:
Selling, general and administrative 5,555 2,071 $ 78 7,704
Engineering, research and development 792 521 1,313
-------- -------- -------- -------
Operating loss (1,583) (1,971) (78) (3,632)
-------
Other income (expense)
Interest expense (460) (47) (507)
Other 7 10 17
-------- -------- -------- -------
Loss before taxes (2,036) (2,008) (78) (4,122)
Income taxes 2 6 8
-------- -------- -------- -------
Net loss $ (2,038) $ (2,014) $ (78) $(4,130)
======== ======== ======== =======
Net loss per common share $ (.24) $ (.41)
======== =======
Weighted average number of common
shares outstanding 8,638 10,139
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS
F-81
<PAGE> 169
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
1. The pro forma financial statements are based on the reverse acquisition of
MicroTel by XIT in a purchase transaction and the pro forma financial statements
are therefore those of the accounting acquiror or XIT. In accord with this
accounting treatment, the purchase price is the fair value of the shares of
common stock of MicroTel outstanding immediately prior to the effective date of
the transaction plus transaction costs.
The purchase price of MicroTel includes 3,186,027 shares of common
stock valued at $5,011,000 and estimated transaction costs of $636,000. A
portion of the broker's fees included in the transaction costs includes 10,000
shares of restricted common stock valued at $31,000 and warrants to acquire
150,000 shares of common stock valued at $223,000. The number of shares used is
that outstanding on March 26, 1997, the date of acquisition, and the value per
share used of $1.5729 is based on the average closing sale price of MicroTel
common stock for the fifteen day period preceding the announcement on January 7,
1997 of the execution of the definitive merger agreement related to the
acquisition.
The only adjustment in the preliminary purchase price allocation to the
historical values of the assets acquired and liabilities assumed was the accrual
of $430,000 for certain change-in-control payments to an executive officer of
MicroTel. Otherwise, the historical values were believed to approximate
estimated fair value. The excess of the purchase price over the preliminary
valuation of the net assets acquired of $4,904,000 was recorded as goodwill at
the acquisition date, and an additional $94,000 was recorded in the second
quarter of 1997 upon the resolution of a preacquisition contingency. The
preliminary purchase price allocation is subject to change when additional
information concerning asset and liability valuations is obtained.
2. The pro forma adjustments are to record amortization of the goodwill
originating from the acquisition as if the transaction had occurred at the
beginning of the periods presented. The goodwill is assumed amortized on a
straight line basis over fifteen years.
3. Net income (loss) per common share computations are based on the following:
a) Pro forma net income (loss) per common share is based on the
weighted average outstanding shares of XIT for the respective
period, plus the number of shares assumed to be issued to MicroTel
shareholders.
b) Common stock equivalents based on the assumed exercise of options
and warrants are not included in the computations of net
income(loss) per share as the effects would be antidilutive.
c) The accretion of the excess of the redemption value over the
carrying value of redeemable preferred stock is deducted from net
income (loss) in arriving at income (loss) applicable to common
shareholders in the computations of income (loss) per share.
F-82
<PAGE> 170
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
registration of the Shares is as follows:
<TABLE>
<S> <C>
SEC Registration ........................ $ 7,693
-------------
NASD Fees ............................... $ 0
-------------
Accounting Fees and Expenses ............ $ 50,000
-------------
Legal Fees and Expenses, Including
Blue Sky Fees and Expenses ............ $ 100,000
-------------
Printing Costs .......................... $ 35,000
-------------
Miscellaneous Expenses .................. $ 5,000
-------------
TOTAL ............................. $ 197,693
-------------
</TABLE>
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
As the Company is a Delaware corporation, reference is made to the Delaware
General Corporation Law (the "DGCL"). Section 145 of the DGCL provides, in part,
that a Company may indemnify any person who was or is a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that such person is or was
a director, officer, employee or agent of the corporation against expenses
(including attorneys' fees), judgments, liens and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful. The DGCL further provides
that a corporation may indemnify such officer or director in an action by or in
the right of the corporation under the same conditions, except that in
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where such officer or
director is successful on the merits in the defense of any action referred to
above, the corporation must indemnify such officer or director against expenses
actually and reasonably incurred. Article IX of the Company's By-laws parallels
Section 145 of the DGCL and provides for indemnification of officers and
directors in similar circumstances.
-87-
<PAGE> 171
Section 102(b)(7) of the DGCL enables a corporation in its certificate of
incorporation to eliminate or limit the personal liability of a director for
monetary damages for violations of the director's fiduciary duty, except (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit. Article
Fifth of the Company's By-laws parallels this language and provides that to the
fullest extent permitted by the DGCL, no director shall be liable to the Company
or its stockholders for monetary damages for breach of fiduciary as a director.
(See "Disclosure of Commission position or Indemnification for Securities Act
Liabilities").
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
a) April 1997 Yorkton Placement
On April 14, 1997, the Company sold $5.0 million of investment units
consisting of one share of Common Stock and one-quarter of a warrant to purchase
one share of Common Stock. The number of investment units sold was 2,000,000 and
the Company realized net proceeds of $4,258,000 from the sale. Accordingly,
2,000,000 shares of Common Stock and 500,000 warrants to purchase Common Stock
were issued in connection with this sale. In connection with the Yorkton
Offering, warrants to purchase an additional 200,000 shares of the Company's
Common Stock were issued to certain placement agents. The shares, and the shares
underlying these warrants, are being registered hereby. No underwriter was used
in the sale of the investment units. The securities were sold to non-U.S.
investors who were primarily European institutional investors.
The investment units were sold pursuant to Rule 903 of Regulation S and
qualified for such exemption based upon the following: (i) the investment unit
purchasers were represented to the Company in the Subscription Agreements that
they were non-U.S. Persons; (ii) the Company is a Reporting Issuer (as defined
in Rule 902(l) of Regulation S); (iii) the Company has not made any Directed
Selling Efforts (as defined in Rule 902(b) of Regulation S); (iv) the Company
has implemented Offering restrictions (as defined in Rule 902(h) of Regulation
S); (v) the Company has not made any offer of sale to any U.S. person or the
account or benefit of any U.S. person; (vi) the offer and sale of the investment
units were made in Offshore Transactions (as defined in Rule 902(i) of
Regulation S).
b) The XIT Merger
On March 26, 1997, in a merger by and between a wholly-owned subsidiary of
the Company and XIT Corporation, the Company issued 6,119,130 shares of Common
Stock (previously defined herein as the Merger Shares) and agreed to assume all
of the outstanding XIT Warrants and XIT Options and convert them into options
and warrants to purchase the Company's Common Stock. The Company will be
required to issue an additional 2,153,240 shares of Common Stock if such
warrants and options are exercised. Of the total 8,151,608 shares and shares
underlying warrants and options, 7,723,424 shares are being registered hereby
consisting of: (i) the 6,119,130 Merger Shares; (ii) 1,197,879 shares underlying
XIT Warrants; and (iii) 406,415 shares underlying XIT options. The issuance of
the Merger Shares and assumption of
-88-
<PAGE> 172
the XIT options and warrants were in consideration for all of the outstanding
common stock of XIT Corporation. The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act. No underwriter was
used in connection with the Merger.
c) Other Sales of Unregistered Securities
Since June 1994, the Company has issued certain other unregistered
securities in reliance upon the exemption from registration provided by Section
4(2) of the Securities Act, relating to sales by an issuer not involving any
public offering. These transactions are summarized below. No Underwriter was
used for any of these sales. In addition, the issuance of securities in
connection with the Company's reverse stock split in August 1996, by which
shareholders received one share of common stock for every five shares held, was
exempt under the Securities Act because such issuance was not a "sale" as such
term is defined in Section 2(3) of the Securities Act. All numbers of shares of
Common Stock of the Company, and all exercise prices of Warrants and options to
purchase shares of Common Stock of the Company, have been adjusted to reflect
this reverse stock split.
i) Non-Qualified Stock Options
Since June 1994, the Company has granted 2,139,368 Non-qualified stock
options to various officers, directors and consultants in consideration for
past and/or future services rendered to the Company. The Company has also
repriced or extended 100,000 of such options. In addition, the Company has
assumed 834,599 Common Stock Options in connection with the Merger, and
shares underlying 406,415 of such options are being registered hereby.
ii) Common Stock Issuances
Since June 1994, the Company has issued 1,156,164 shares of restricted
Common Stock, 668,725 shares of which were issued in connection with an
investment in the Company by Elk in December 1994. The remaining 487,439
shares were issued as follows: i) 151,000 shares for legal fees and
settlements, ii) 40,494 shares for consulting and other professional
services and iii) 295,945 for incentive and/or severance awards to certain
officers, directors and employees. Of the latter shares 75,000, 176,945,
26,000 and 5,000 of such shares were issued to Mssrs. Dror, Talan,
Lewisham and Mourad, respectively, and 13,000 to others.
iii) Warrants.
Since June 1994, the Company has granted 150,000 warrants to purchase
shares of the Company's common stock as a finders' fee in connection with
the Merger, granted 20,000 warrants in payment for professional services,
and in addition extended certain warrants to purchase 90,000 shares of
Common Stock twice. In addition, the Company has assumed an additional
1,197,879 warrants in connection with the Merger all of which are being
registered hereby.
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<PAGE> 173
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
Exhibit Description
Number -----------
-------
2. Merger Agreement dated December 31, 1996 between XIT
Corporation, XIT Acquisition, Inc. and MicroTel
International, Inc.(1)
3.1 Certificate of Incorporation of MicroTel
International, Inc. as amended to date.(2)
3.2 Bylaws of MicroTel International, Inc.(3)
3.3 Certificate of Amendment of Certificate of
Incorporation of MicroTel International, Inc.(7)
10.1 Lease for 2040 Fortune Dr., San Jose, CA 95131.(4)
10.2 1986 Incentive Stock Option Plan.(3)
10.3 Form of Officers Deferred Compensation Agreement by
and between Raymond E. Jacobson and CXR
Corporation.(5)
10.4 Agreement from San Jose National Bank for CXR Telcom
Corporation dated May 19, 1995.(2)
10.5 Qualified Employee Stock Purchase Plan.(3)
10.6 1993 Incentive Stock Option Plan.(6)
10.7 Stock Purchase Agreement with DDC.(4)
10.8 First Amendment to Stock Purchase Agreement with
DDC.(4)
10.9 Second Amendment to Stock Purchase Agreement with
DDC.(4)
10.10 Warrant to Purchase Common Stock of MicroTel
International, Inc. Issued to DDC.(4)
10.11 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Yorkton Securities,
Inc.(7)
10.12 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to entrenet Group,
L.L.C.(7)
-90-
<PAGE> 174
Exhibit
Number Description
------ -----------
10.13 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to various
subscribers.(7)
10.14 Agreement between MicroTel International, Inc. and
Elk International Corporation, Ltd. dated November
15, 1996 (without Exhibits).(8)
10.15 Settlement Agreement between MicroTel International,
Inc. and Daniel Dror dated December 3, 1996 (without
Exhibits).(8)
10.16 Agency Agreement between MicroTel International,
Inc. and Yorkton Securities, Inc.(7)
10.17 Form of Subscription Agreement between MicroTel
International, Inc. and various subscribers.(7)
10.18 Employment Arrangement between Henry Mourad and
Registrant (without Exhibits).(7)
10.19 Employment Arrangement between Barry Reifler and
Registrant (without Exhibits).(7)
10.20 Employment Agreement between Registrant and Jacques
Moisset dated July 1, 1995.(8)
10.21 Employment Agreement dated January 1, 1996 between
XIT and Carmine T. Oliva.(8)
10.22 XIT Corporation Note and Credit Agreement re:
Imperial Bank Revolver Loan #0070000702700003.(8)
10.23 XIT Corporation Note and Credit Agreement re:
Imperial Bank Term Loan #0070000702700004.(8)
10.24 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Revolver Loan
#0070000702600003.(8)
10.25 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Term Loan #0070000702600004.(8)
10.26 XCEL Arnold Circuits, Inc. Note and Credit Agreement
re: Imperial Bank Term Loan #0070000702600005.(8)
-91-
<PAGE> 175
Exhibit
Number Description
------ -----------
10.27 Lease Agreement between XIT Corporation and P&S
Development.(8)
10.28 Lease Agreement between XIT Corporation and Don
Mosco.(8)
10.29 General Partnership Agreement between XIT
Corporation and P&S Development.(8)
10.30 Lease Agreement between XCEL Arnold Circuits, Inc.
and Frances I. Peters.(8)
10.31 Lease Agreement between XCEL Arnold Circuits, Inc.
and Don Wilson and Zenna N. Wilson.(8)
10.32 Lease Agreement between XCEL Arnold Circuits, Inc.
and Ellis Wesson.(8)
10.33 Lease Agreement between XCEL Arnold Circuits, Inc.
and Roland E. Hay and Doris L. Hay.(8)
10.34 Lease Agreement between XCEL Arnold Circuits, Inc.
and RKR Associates.(8)
10.35 Option Agreement between MicroTel International,
Inc. and Elk International Corporation dated
November 15, 1996.(8)
10.36 Amendment to Option Agreement between MicroTel
International, Inc. and Daniel Dror dated November
15, 1996.(8)
10.37 Option Agreement between MicroTel International,
Inc. and Elk International Corporation dated
December 3, 1996.(8)
10.38 Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Elk International
Corporation.(8)
10.39 Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry
dated June 28, 1996.(8)
10.40 Amended Agreement of Settlement and Mutual Release
between MicroTel International, Inc. and Francis
John Gorry dated November 30, 1996.(8)
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<PAGE> 176
10.41 Promissory Note between MicroTel International,
Inc. and Jack Talan dated February, 1997.(8)
10.42 XCEL Arnold Circuits, Inc. Note re: Imperial Bank
Loan Dated July 22, 1997. #
10.43 Continuing Guarantee of MicroTel International,
Inc. in favor of Imperial Bank Dated
July 22, 1997. #
10.44 Continuing Guarantee of Hy Comp, Inc. in favor of
Imperial Bank Dated July 22, 1997. #
10.45 Continuing Guarantee of XIT Corporation in favor of
Imperial Bank Dated July 22, 1997. #
10.46 Security and Loan Agreement between XCEL Arnold
Circuits, Inc., XIT Corporation and Imperial Bank
Dated July 22, 1997. #
10.47 Lease Agreement between SCI Limited Partnership-I
and CXR Telcom Corporation, Dated July 28, 1997. #
21.1 List of Subsidiaries of MicroTel International,
Inc.(7)
23.1 Consent of BDO SEIDMAN, LLP. #
23.2 Consent of KPMG Peat Marwick LLP. #
23.3 Consent of Deloitte & Touche, LLP. #
23.4 Consent of Hardcastle Burton. #
27. Financial Data Schedule. #
99.1 Undertakings to be Incorporated by Reference to
Forms S-8 33-27454 and 33-77926.(4)
99.2 Undertakings to be Incorporated by Reference to Form
S-8 333-12567.
---------------
# Filed herewith.
(1) Incorporated by reference to MicroTel International, Inc.
report on Form 8-K filed as Exhibit 1 to Item 2 of the
Report on January 21, 1997 (File No. 1-10346).
(2) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December
31, 1995 (File No. 1-10346).
(3) Incorporated by reference to CXR Corporation Registration
Statement on Form S-4 No. 33-30818.
(4) Incorporated by reference to CXR Corporation annual
report on Form 10-K for the year ended June 30, 1994
(File No. 1-10346).
(5) Incorporated by reference to CXR Telecom Corporation
annual report on Form 10-K for the year ended June 30,
1993 (File No. 1-10346).
(6) Incorporated by reference to CXR Corporation Registration
Statement on Form S-8 No. 33-77926.
(7) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December
31, 1996 (File No. 1-10346).
(8) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K/A for the year ended December
31, 1996 (File No. 1-10346).
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<PAGE> 177
ITEM 17 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above in Item 14, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement;
and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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<PAGE> 178
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Ontario, California, on this 23rd day of September,
1997.
MicroTel International Inc.
By: /s/ Carmine T. Oliva
-------------------------------------
Carmine T. Oliva
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by or on behalf of the following
persons in the capacities and on the dates indicated.
Each person, in so signing, also makes, constitutes and appoints Carmine
T. Oliva, Chairman and Chief Executive Officer, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, and to do and perform each and every act and
thing necessary to effectuate the same.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Carmine T. Oliva President September 23, 1997
- ----------------------------- and Chief Executive
Carmine T. Oliva Officer and Director
(Principal Executive Officer)
/s/ David A. Barrett Director September 23, 1997
- -----------------------------
David A. Barrett
/s/ Laurence P. Finnegan, Jr. Director September 23, 1997
- -----------------------------
Laurence P. Finnegan, Jr.
/s/ Robert B. Runyon Director September 23, 1997
- -----------------------------
Robert B. Runyon
/s/ Jack R. Talan Director September 23, 1997
- -----------------------------
Jack R. Talan
/s/ James P. Butler Chief Financial Officer September 23, 1997
- ----------------------------- (Principal Accounting and
James P. Butler Financial Officer)
</TABLE>
<PAGE> 1
EXHIBIT 10.42
[IMPERIAL BANK LOGO]
NOTE
$737,500.00 Los Angeles, California July 22, 1997
On April 30, 2001, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Los Angeles Regional office, the principal sum of
$737,500.00 or such sums up to the maximum if so stated, as the Bank may now or
hereafter advance to or for the benefit of the undersigned in accordance with
the terms hereof, together with interest from date of disbursement or N/A,
whichever is later, on the unpaid principal balance [ ] at the rate of %
per year [X] at the rate of 1.250% per year in excess of the rate of interest
which Bank has announced as its prime lending rate (the "Prime Rate"), which
shall vary concurrently with any change in such Prime Rate, or $250.00,
whichever is greater. Interest shall be computed at the above rate on the basis
of the actual number of days during which the principal balance is outstanding,
divided by 360, which shall, for interest computation purposes, be considered
one year.
Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal
[X] in addition to principal [ ] beginning August 30, 1997, and if not so paid
shall become a part of the principal. All payments, shall be applied first to
interest, and the remainder, if any, on principal. [X] (if checked). Principal
shall be payable in installments of $15,000.00, or more, each installment on the
30th day of each month, beginning August 30, 1997. Advances not to exceed any
unpaid balance owing at any one time equal to the maximum amount specified
above, may be made at the option of the Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal or
interest when due, or in the performance or observance, when due, of any item,
covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the
maker(s) to pay principal or interest when due; the filing as to each person
obligated hereon, whether as maker, co-maker, endorser or guarantor
(individually or collectively referred to as the "Obligor") of a voluntary or
involuntary petition under the provisions of the Federal Bankruptcy Act; the
issuance of any attachment or execution against any asset of any Obligor; the
death of any Obligor; or any deterioration of the financial condition of any
Obligor which results in the holder hereof considering itself, in good faith,
insecure.
[X] If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the
holder of this note to accept payment of any installment past due or less than
the total unpaid principal balance after maturity.
If this note is not paid when due, such Obligor promises to pay all
costs and expenses of collection and reasonable attorney's fees incurred by the
holder hereof on account of such collection, plus interest at the rate
applicable to principal, whether or not suit is filed hereon. Each Obligor
shall be jointly and severally liable hereon and consents to renewals,
replacements and extensions of time for payment hereof, before, at, or after
maturity; consents to the acceptance, release or substitution of security for
this note; and waives demand and protect and the right to assert any statute of
limitations. Any married person who signs this note agrees that recourse may be
had against separate property for any obligations hereunder. The indebtedness
evidenced hereby shall be payable in lawful money of the United States. In any
action brought under or arising out of this note, each Obligor, including
successor(s) or assign(s) hereby consents to the application of California law,
to the jurisdiction of any competent court within the State of California, and
to service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed
of trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect
to any of the security. Any delay or omission on the part of the holder hereof
in exercising any right hereunder, or under any deed of trust, security
agreement or other agreement, shall not operate as a waiver of such right, or
of any other right, under this note or any deed of trust, security agreement or
other agreement in connection herewith.
Default by Borrower under any obligation to Bank shall be a default hereunder.
XCEL ARNOLD CIRCUITS, INC.
__________________________________ ______________________________________
__________________________________ BY ___________________________________
<PAGE> 1
EXHIBIT 10.43
[IMPERIAL BANK LOGO]
CONTINUING GUARANTEE
ORIGINATING OFFICE:
Name of Office:
Los Angeles Regional
Street Address:
201 N. Figueroa Street
City, State, Zip Code:
Los Angeles, California 90012
The undersigned (hereinafter referred to as "Guarantor") hereby
requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank")
to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION
Corporations
(Designate type of entity)
(hereinafter referred to as "Debtor"), and in consideration of the granting of
such credit by the Bank to Debtor, Guarantor agrees as follows:
1. The words "indebtedness" and "credit" are used herein in their most
comprehensive sense and include any and all advances, debts, obligations and
liabilities, including interest thereon, of Debtor heretofore, now or hereafter
made, incurred or created, with or without notice to Guarantor, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, whether
assumed by Debtor's successors, heirs or assigns by operation of law or
otherwise, and whether Debtor is liable individually or jointly with others,
and whether recovery upon any such indebtedness or credit is or hereafter
becomes barred by any statute of limitations or is or hereafter becomes
otherwise unenforceable.
2. Credit may be granted from time to time at the request of Debtor
and without further authorization from or notice to Guarantor, even though
Debtor's financial condition may have deteriorated since the date hereof. If
Debtor is a corporation or a partnership, the Bank need not inquire into the
power of Debtor or the authority of its officers, directors, partners or agents
acting or purporting to act in its behalf. Each credit heretofore or hereafter
granted to Debtor shall be considered to have been granted at the special
instance and request of Guarantor and in consideration of and in reliance upon
this guarantee.
3. Guarantor hereby unconditionally guarantees and promises to pay the
Bank or its order any and all indebtedness of Debtor to the Bank and to perform
any and all obligations of Debtor under the terms of any agreement or
instrument evidencing, securing or executed in connection with any such
indebtedness ("Credit Documents"). The liability of Guarantor shall not at any
time exceed the sum of the amount set forth below, plus the interest thereon in
accordance with the Credit Documents and the costs, attorneys' fees and other
expenses provided for in Paragraph 15 hereof. If no amount is set forth below,
the liability of the Guarantor hereunder shall be unlimited. The Bank may
permit Debtor's indebtedness to exceed any maximum liability without impairing
the obligations of Guarantor hereunder. No payments made by or on behalf of
Guarantor to the Bank shall reduce any such maximum liability unless written
notice to that effect is received by the Bank at or prior to the time such
payment is made. If Guarantor has executed more than one guarantee of the
indebtedness of Debtor to the Bank, the guarantees shall be cumulative.
4. Either before or after revocation hereof and in such manner, upon
such terms and at such times as it considers best and with or without notice to
Guarantor, the Bank may alter, compromise, accelerate, extend or change the time
or manner for the payment of any indebtedness hereby guaranteed, increase or
reduce the rate of interest thereon, release or add any one or more guarantees
or endorsers, accept additional or substituted security therefor, or release or
subordinate any security therefor. No exercise or nonexercise by the Bank of
any right hereby given it, no dealing by the Bank with Debtor or any other
person, and no change, impairment or suspension of any right or remedy of the
Bank shall in any way affect any of the obligations of Guarantor hereunder or
any security furnished by Guarantor or give Guarantor any recourse against the
Bank.
5. In addition to all liens upon and rights of offset given to the
Bank by law against any property of Debtor or of Guarantor, Guarantor hereby
grants a security interest in all property of Guarantor now or hereafter in the
possession of or on deposit with the Bank, whether held in a general or special
account or for safekeeping or otherwise. Each such security interest may be
exercised without demand upon or notice to Guarantor, shall continue in full
force unless specifically waived or released by the Bank in writing and shall
not be considered waived by any conduct of the Bank or by any failure of the
Bank to exercise any right of offset or to enforce any such security interest
or by any neglect or delay in so doing.
Page 1 of 4
<PAGE> 2
6. Guarantor waives and agrees not to assert or take advantage of (a) any
right to require the Bank to proceed against the Debtor or any other person,
firm or corporation or to proceed against or exhaust any security held by it at
any time or to pursue any other remedy in its power; (b) the defense of the
statute of limitations in any action hereunder or for the collection of any
indebtedness or the performance of any obligation guaranteed hereby; (c) any
defense that may arise by reason of the incapacity, lack of authority, death or
disability of, or revocation hereof by, any other or others or the failure of
the Bank to file or enforce a claim against the estate (either in
administration, bankruptcy, or other proceeding) of any other or others; (d)
demand, protest and notice of any kind including, without limiting the
generality of the foregoing, notice of the existence, creation or incurring of
new or additional indebtedness or of any action or non-action on the part of the
Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or
any other instrument, or any other person whomsoever, in connection with any
obligation or evidence of indebtedness hereby guaranteed; (e) any defense based
upon an election of remedies by the Bank, including without limitation, an
election to proceed by nonjudicial rather than judicial foreclosure, which
election destroys or otherwise impairs subrogation rights of Guarantor or the
right of Guarantor to proceed against Debtor for reimbursement, or both,
including, without limitation, the impairment of subrogation rights arising by
virtue of California Civil Code 580(b) and 580(d); (f) any defense or right
based upon the fair value deficiency protections and provisions of California
Civil Code 580(a) and California Civil Procedure Code 726; and (g) any defense
or right based upon the acceptance by the Bank or any affiliate of the Bank of a
deed in lieu of foreclosure, without extinguishing the indebtedness, even if
such acceptance destroys, alters or otherwise impairs subrogation rights of
Guarantor or the right of Guarantor to proceed against Debtor for reimbursement,
or both.
7. Guarantor, by execution hereof, represents to the Bank that the
relationship between Guarantor and Debtor is such that Guarantor has access to
all relevant facts and information concerning the indebtedness and Debtor and
that the Bank can rely upon Guarantor having such access. Guarantor waives and
agrees not to assert any duty on the part of the Bank to disclose to Guarantor
any facts that the Bank may now or hereafter know about Debtor, regardless of
whether the Bank has reason to believe that any such facts materially increase
the risk beyond that which Guarantor intends to assume, or has reason to
believe that such facts are unknown to Guarantor, or has a reasonable
opportunity to communicate such facts to Guarantor. Guarantor is fully
responsible for being and keeping informed of the financial condition of Debtor
and all circumstances bearing on the risk of non-payment of the indebtedness
guaranteed hereby.
8. Until all indebtedness of Debtor to the Bank has been paid in full,
even though such indebtedness is in excess of the liability of Guarantor,
Guarantor shall have no right of subrogation and waives any right to enforce
any remedy which the Bank now has or may hereafter have against Debtor and any
benefit of and any right to participate in any security now or hereafter held
by the Bank.
9. Except as otherwise provided in this paragraph, all existing or
future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any
right to withdraw any capital of Guarantor invested in Debtor, is hereby
subordinated to all indebtedness hereby guaranteed and, without the prior
written consent of the Bank, shall not be paid or withdrawn in whole or in part
nor will Guarantor accept any payment of or on account of any such indebtedness
or as a withdrawal of capital while this guarantee is in effect. At the Bank's
request, Debtor shall pay to the Bank all or any part of subordinated
indebtedness and any capital which Guarantor is entitled to withdraw. Each
payment by Debtor to Guarantor in violation of this paragraph shall be received
in trust for the Bank and shall be paid to the Bank immediately on account of
the indebtedness of Debtor to the Bank. No such payment shall reduce or affect
in any manner Guarantor's liability under any of the provisions of this
guarantee. Guarantor reserves the right to receive from Debtor payment of any
salary for personal services at the same monthly rate as that at which
Guarantor has been paid during the preceding twelve months, it being expressly
understood that such amount shall not be subordinated to the indebtedness
guaranteed hereby.
10. Guarantor will file all claims against Debtor in any bankruptcy or
other proceeding in which the filing of claims is required by law upon any
indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank
all of the Guarantor's rights thereunder. If Guarantor does not file any such
claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so
in Guarantor's name or, in the Bank's discretion, to assign the claim and to
cause proof of claim to be filed in the name of the Bank's nominee. In all such
cases, whether in administration, bankruptcy or otherwise, the person or
persons authorized to pay such claims shall pay to the Bank the full amount
thereof and, to the full extent necessary for the purpose, Guarantor hereby
assigns to the Bank all of the Guarantor's rights to any and all such payments
or distributions to which Guarantor would otherwise be entitled. If the amount
so paid is greater than the guaranteed indebtedness then outstanding, the Bank
will pay the amount of the excess to the person entitled thereto.
11. With or without notice to Guarantor, the Bank, in its sole
discretion and at any time and from time to time either before or after
delivery of any notice of revocation hereunder and in such manner and upon such
terms as it considers fit, may (a) apply any or all payments or recoveries from
Debtor, from Guarantor or from any other guarantor under this or any other
instrument or realized from any security, in such manner and order or priority
as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not
such indebtedness is guaranteed hereby or is otherwise secured or is due at the
time of such application; and (b) refund to Debtor any payment received by the
Bank upon any indebtedness hereby guaranteed and payment of the amount refunded
shall be fully guaranteed hereby. Any recovery realized from any other
guarantor under this or any other instrument shall be first credited upon that
portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's
maximum liability, if any, hereunder.
12. The amount of Guarantor's liability and all rights, powers and
remedies of the Bank hereunder and under the Credit Documents and any other
agreements now or at any time hereafter in force between the Bank and Guarantor
shall be cumulative and not alternative, and such rights, powers and remedies
shall be in addition to all rights, powers and remedies given to the Bank by
law.
13. Guarantor's obligations hereunder are independent of the obligations
of Debtor and, in the event of any default hereunder, a separate action or
actions may be brought and prosecuted against Guarantor whether action is
brought against Debtor or whether Debtor is joined in any such action or
actions. The Bank may maintain successive actions for other defaults. The Bank's
rights hereunder shall not be exhausted by its exercise of any of its rights
or remedies or by any such action or by any number of successive actions until
and unless all indebtedness and obligations hereby guaranteed have been paid
and fully performed.
Page 2 of 4
<PAGE> 3
14. This is a continuing guarantee and Guarantor agrees that it shall
remain in full force until and unless Guarantor delivers to the Bank written
notice that it has been revoked as to credit granted subsequent to the effective
time of revocation as herein provided. Delivery of such notice shall be
effective by personal service upon an officer of the Bank at the originating
office of the Bank designated on the first page hereof or by mailing such notice
by certified or registered mail, return receipt requested, postage prepaid and
addressed to the Bank at the originating office designated on the first page
hereof. Regardless of how notice of revocation is given, it shall not be
effective until twelve o'clock noon Pacific Standard or Daylight Savings Time,
as the case may be, on the next succeeding Bank business day following the day
such notice is delivered, but delivery of such notice shall not affect any of
Guarantor's obligations hereunder with respect to credit granted prior to the
effective date of such revocation, nor shall it affect any of the obligations of
any other guarantor for the credit granted to Debtor hereunder. If the
originating office of the Bank designated above is not in existence at the time
notice of revocation is desired to be given, then such notice may be given in
the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920
South La Cienega Boulevard, Inglewood, California, 90301.
15. Guarantor agrees to pay to the Bank without demand reasonable
attorneys' fees and all costs and other expenses which the Bank expends or
incurs in collecting or compromising any indebtedness of the Debtor, in
protecting the Bank's security under the Credit Documents or in enforcing this
guarantee against Guarantor or any other guarantor of any indebtedness hereby
guaranteed whether or not suit is filed, including, without limitation,
attorney's fees, costs and other such expenses incurred in any bankruptcy
proceeding. Guarantor warrants and represents that it is fully authorized by law
to execute this guarantee.
16. This guarantee shall benefit the Bank, its successors and assigns,
including the assignees of any indebtedness hereby guaranteed, and binds
Guarantor's successors and assigns. This guarantee is assignable by the Bank
with respect to all or any portion of the indebtedness and obligations
guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the
assignees under this guarantee without in any manner affecting Guarantor's
liability hereunder with respect to any indebtedness or obligations retained by
the Bank. No delegation or assignment of this guarantee by any Guarantor shall
be of any force or effect or release Guarantor from any obligation hereunder.
17. No provision of this guarantee or right of the Bank hereunder can be
waived, nor can any Guarantor be released from his/her obligations hereunder,
except by a writing duly executed by an authorized officer of the Bank. Should
any one or more provisions of this guarantee be determined to be illegal or
unenforceable, all other provisions nevertheless shall be governed by and
construed in accordance with the laws of California, and Guarantor agrees to
submit to the jurisdiction of the Courts of California.
18. If more than one guarantor signs this guarantee, the obligation of
all such guarantors shall be joint and several. When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and the masculine shall include the feminine and neuter.
Any married person who signs this guarantee agrees that recourse may be had
against separate property for all obligations under this guarantee.
19. Except as provided in any other written agreement now or at any time
hereafter in force between the Bank and Guarantor, this guarantee shall
constitute the entire agreement of Guarantor with the Bank with respect to the
subject matter hereof and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon the Bank unless
expressed herein. Any notice to Guarantor shall be considered to have been duly
given when delivered personally or forty-eight hours after being mailed, postage
prepaid, to the address(es) set forth below or to such other address(es) as
Guarantor may from time to time designate by giving notice in the same manner of
notice to the Bank set forth in Paragraph 14 hereof.
20. Each of the undersigned Guarantors hereby acknowledges the receipt
of a true copy of this guarantee.
21. [ ] This guarantee is secured by a deed of trust dated ,
19 , to Imperial Bancorp, as Trustee.
GUARANTEE AMOUNT $5,116,684.00
Executed by or on behalf of Guarantor(s) on July 22, 1997.
<TABLE>
<CAPTION>
Signature of Guarantor(s) Address
<S> <C>
MICROTEL INTERNATIONAL, INC. 4290 Brickell Street, Ontario, CA 91761
BY
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
</TABLE>
Page 3 of 4
<PAGE> 1
EXHIBIT 10.44
[IMPERIAL BANK LOGO]
CONTINUING GUARANTEE
ORIGINATING OFFICE:
Name of Office:
Los Angeles Regional
Street Address:
201 N. Figueroa Street
City, State, Zip Code:
Los Angeles, California 90012
The undersigned (hereinafter referred to as "Guarantor") hereby
requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank")
to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION
Corporations
(Designate type of entity)
(hereinafter referred to as "Debtor"), and in consideration of the granting of
such credit by the Bank to Debtor, Guarantor agrees as follows:
1. The words "indebtedness" and "credit" are used herein in their most
comprehensive sense and include any and all advances, debts, obligations and
liabilities, including interest thereon, of Debtor heretofore, now or hereafter
made, incurred or created, with or without notice to Guarantor, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, whether
assumed by Debtor's successors, heirs or assigns by operation of law or
otherwise, and whether Debtor is liable individually or jointly with others,
and whether recovery upon any such indebtedness or credit is or hereafter
becomes barred by any statute of limitations or is or hereafter becomes
otherwise unenforceable.
2. Credit may be granted from time to time at the request of Debtor
and without further authorization from or notice to Guarantor, even though
Debtor's financial condition may have deteriorated since the date hereof. If
Debtor is a corporation or a partnership, the Bank need not inquire into the
power of Debtor or the authority of its officers, directors, partners or agents
acting or purporting to act in its behalf. Each credit heretofore or hereafter
granted to Debtor shall be considered to have been granted at the special
instance and request of Guarantor and in consideration of and in reliance upon
this guarantee.
3. Guarantor hereby unconditionally guarantees and promises to pay the
Bank or its order any and all indebtedness of Debtor to the Bank and to perform
any and all obligations of Debtor under the terms of any agreement or
instrument evidencing, securing or executed in connection with any such
indebtedness ("Credit Documents"). The liability of Guarantor shall not at any
time exceed the sum of the amount set forth below, plus the interest thereon in
accordance with the Credit Documents and the costs, attorneys' fees and other
expenses provided for in Paragraph 15 hereof. If no amount is set forth below,
the liability of the Guarantor hereunder shall be unlimited. The Bank may
permit Debtor's indebtedness to exceed any maximum liability without impairing
the obligations of Guarantor hereunder. No payments made by or on behalf of
Guarantor to the Bank shall reduce any such maximum liability unless written
notice to that effect is received by the Bank at or prior to the time such
payment is made. If Guarantor has executed more than one guarantee of the
indebtedness of Debtor to the Bank, the guarantees shall be cumulative.
4. Either before or after revocation hereof and in such manner, upon
such terms and at such times as it considers best and with or without notice to
Guarantor, the Bank may alter, compromise, accelerate, extend or change the time
or manner for the payment of any indebtedness hereby guaranteed, increase or
reduce the rate of interest thereon, release or add any one or more guarantees
or endorsers, accept additional or substituted security therefor, or release or
subordinate any security therefor. No exercise or nonexercise by the Bank of
any right hereby given it, no dealing by the Bank with Debtor or any other
person, and no change, impairment or suspension of any right or remedy of the
Bank shall in any way affect any of the obligations of Guarantor hereunder or
any security furnished by Guarantor or give Guarantor any recourse against the
Bank.
5. In addition to all liens upon and rights of offset given to the
Bank by law against any property of Debtor or of Guarantor, Guarantor hereby
grants a security interest in all property of Guarantor now or hereafter in the
possession of or on deposit with the Bank, whether held in a general or special
account or for safekeeping or otherwise. Each such security interest may be
exercised without demand upon or notice to Guarantor, shall continue in full
force unless specifically waived or released by the Bank in writing and shall
not be considered waived by any conduct of the Bank or by any failure of the
Bank to exercise any right of offset or to enforce any such security interest
or by any neglect or delay in so doing.
Page 1 of 4
<PAGE> 2
6. Guarantor waives and agrees not to assert or take advantage of (a)
any right to require the Bank to proceed against the Debtor or any other person,
firm or corporation or to proceed against or exhaust any security held by it at
any time or to pursue any other remedy in its power; (b) the defense of the
statute of limitations in any action hereunder or for the collection of any
indebtedness or the performance of any obligation guaranteed hereby; (c) any
defense that may arise by reason of the incapacity, lack of authority, death or
disability of, or revocation hereof by any other or others or the failure of the
Bank to file or enforce a claim against the estate (either in administration,
bankruptcy, or other proceeding) of any other or others; (d) demand, protest and
notice of any kind including, without limiting the generality of the foregoing,
notice of the existence, creation or incurring of new or additional indebtedness
or of any action or non-action on the part of the Debtor, the Bank, any
endorser, creditor of Debtor or Guarantor under this or any other instrument, or
any other person whomsoever, in connection with any obligation or evidence of
indebtedness hereby guaranteed; (e) any defense based upon an election of
remedies by the Bank, including without limitation, an election to proceed by
nonjudicial rather than judicial foreclosure, which election destroys or
otherwise impairs subrogation rights of Guarantor or the right of Guarantor to
proceed against Debtor for reimbursement, or both, including, without
limitation, the impairment of subrogation rights arising by virtue of California
Civil Code 580(b) and 580(d); (f) any defense or right based upon the fair value
deficiency protections and provisions of California Civil Code 580(a) and
California Civil Procedure Code 726 and (g) any defense or right based upon the
acceptance by the Bank or any affiliate of the Bank of a deed in lieu of
foreclosure, without extinguishing the indebtedness, even if such acceptance
destroys, alters or otherwise impairs subrogation rights of Guarantor or the
right of Guarantor to proceed against Debtor for reimbursement, or both.
7. Guarantor, by execution hereof, represents to the Bank that the
relationship between Guarantor and Debtor is such that Guarantor has access to
all relevant facts and information concerning the indebtedness and Debtor and
that the Bank can rely upon Guarantor having such access. Guarantor waives and
agrees not to assert any duty on the part of the Bank to disclose to Guarantor
any facts that the Bank may now or hereafter know about Debtor, regardless of
whether the Bank has reason to believe that any such facts materially increase
the risk beyond that which Guarantor intends to assume, or has reason to
believe that such facts are unknown to Guarantor, or has a reasonable
opportunity to communicate such facts to Guarantor. Guarantor is fully
responsible for being and keeping informed of the financial condition of Debtor
and all circumstances bearing on the risk of non-payment of the indebtedness
guaranteed hereby.
8. Until all indebtedness of Debtor to the Bank has been paid in full,
even though such indebtedness is in excess of the liability of Guarantor,
Guarantor shall have no right of subrogation and waives any right to enforce
any remedy which the Bank now has or may hereafter have against Debtor and any
benefit of and any right to participate in any security now or hereafter held
by the Bank.
9. Except as otherwise provided in this paragraph, all existing or
future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any
right to withdraw any capital of Guarantor invested in Debtor, is hereby
subordinated to all indebtedness hereby guaranteed and, without the prior
written consent of the Bank, shall not be paid or withdrawn in whole or in part
nor will Guarantor accept any payment of or on account of any such indebtedness
or as a withdrawal of capital while this guarantee is in effect. At the Bank's
request, Debtor shall pay to the Bank all or any part of subordinated
indebtedness and any capital which Guarantor is entitled to withdraw. Each
payment by Debtor to Guarantor in violation of this paragraph shall be received
in trust for the Bank and shall be paid to the Bank immediately on account of
the indebtedness of Debtor to the Bank. No such payment shall reduce or affect
in any manner Guarantor's liability under any of the provisions of this
guarantee. Guarantor reserves the right to receive from Debtor payment of any
salary for personal services at the same monthly rate as that at which
Guarantor has been paid during the preceding twelve months, it being expressly
understood that such amount shall not be subordinated to the indebtedness
guaranteed hereby.
10. Guarantor will file all claims against Debtor in any bankruptcy or
other proceeding in which the filing of claims is required by law upon any
indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank
all of the Guarantor's rights thereunder. If Guarantor does not file any such
claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so
in Guarantor's name or, in the Bank's discretion, to assign the claim and to
cause proof of claim to be filed in the name of the Bank's nominee. In all such
cases, whether in administration, bankruptcy or otherwise, the person or
persons authorized to pay such claims shall pay to the Bank the full amount
thereof and, to the full extent necessary for the purpose, Guarantor hereby
assigns to the Bank all of the Guarantor's rights to any and all such payments
or distributions to which Guarantor would otherwise be entitled. If the amount
so paid is greater than the guaranteed indebtedness then outstanding, the Bank
will pay the amount of the excess to the person entitled thereto.
11. With or without notice to Guarantor, the Bank, in its sole
discretion and at any time and from time to time either before or after
delivery of any notice of revocation hereunder and in such manner and upon such
terms as it considers fit, may (a) apply any or all payments or recoveries from
Debtor, from Guarantor or from any other guarantor under this or any other
instrument or realized from any security, in such manner and order or priority
as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not
such indebtedness is guaranteed hereby or is otherwise secured or is due at the
time of such application; and (b) refund to Debtor any payment received by the
Bank upon any indebtedness hereby guaranteed and payment of the amount refunded
shall be fully guaranteed hereby. Any recovery realized from any other
guarantor under this or any other instrument shall be first credited upon that
portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's
maximum liability, if any, hereunder.
12. The amount of Guarantor's liability and all rights, powers and
remedies of the Bank hereunder and under the Credit Documents and any other
agreements now or at any time hereafter in force between the Bank and Guarantor
shall be cumulative and not alternative, and such rights, powers and remedies
shall be in addition to all rights, powers and remedies given to the Bank by
law.
13. Guarantor's obligations hereunder are independent of the obligations
of Debtor and, in the event of any default hereunder, a separate action or
actions may be brought and prosecuted against Guarantor whether action is
brought against Debtor or whether Debtor is joined in any such action or
actions. The Bank may maintain successive actions for other defaults. The Bank's
rights hereunder shall not be exhausted by its exercise of any of its rights
or remedies or by any such action or by any number of successive actions until
and unless all indebtedness and obligations hereby guaranteed have been paid
and fully performed.
Page 2 of 4
<PAGE> 3
14. This is a continuing guarantee and Guarantor agrees that it shall
remain in full force until and unless Guarantor delivers to the Bank written
notice that it has been revoked as to credit granted subsequent to the effective
time of revocation as herein provided. Delivery of such notice shall be
effective by personal service upon an officer of the Bank at the originating
office of the Bank designated on the first page hereof or by mailing such notice
by certified or registered mail, return receipt requested, postage prepaid and
addressed to the Bank at the originating office designated on the first page
hereof. Regardless of how notice of revocation is given, it shall not be
effective until twelve o'clock noon Pacific Standard or Daylight Savings Time,
as the case may be, on the next succeeding Bank business day following the day
such notice is delivered, but delivery of such notice shall not affect any of
Guarantor's obligations hereunder with respect to credit granted prior to the
effective date of such revocation, nor shall it affect any of the obligations of
any other guarantor for the credit granted to Debtor hereunder. If the
originating office of the Bank designated above is not in existence at the time
notice of revocation is desired to be given, then such notice may be given in
the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920
South La Cienega Boulevard, Inglewood, California, 90301.
15. Guarantor agrees to pay to the Bank without demand reasonable
attorneys' fees and all costs and other expenses which the Bank expends or
incurs in collecting or compromising any indebtedness of the Debtor, in
protecting the Bank's security under the Credit Documents or in enforcing this
guarantee against Guarantor or any other guarantor of any indebtedness hereby
guaranteed whether or not suit is filed, including, without limitation,
attorney's fees, costs and other such expenses incurred in any bankruptcy
proceeding. Guarantor warrants and represents that it is fully authorized by law
to execute this guarantee.
16. This guarantee shall benefit the Bank, its successors and assigns,
including the assignees of any indebtedness hereby guaranteed, and binds
Guarantor's successors and assigns. This guarantee is assignable by the Bank
with respect to all or any portion of the indebtedness and obligations
guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the
assignees under this guarantee without in any manner affecting Guarantor's
liability hereunder with respect to any indebtedness or obligations retained by
the Bank. No delegation or assignment of this guarantee by any Guarantor shall
be of any force or effect or release Guarantor from any obligation hereunder.
17. No provision of this guarantee or right of the Bank hereunder can be
waived, nor can any Guarantor be released from his/her obligations hereunder,
except by a writing duly executed by an authorized officer of the Bank. Should
any one or more provisions of this guarantee be determined to be illegal or
unenforceable, all other provisions nevertheless shall be governed by and
construed in accordance with the laws of California, and Guarantor agrees to
submit to the jurisdiction of the Courts of California.
18. If more than one guarantor signs this guarantee, the obligation of
all such guarantors shall be joint and several. When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and the masculine shall include the feminine and neuter.
Any married person who signs this guarantee agrees that recourse may be had
against separate property for all obligations under this guarantee.
19. Except as provided in any other written agreement now or at any time
hereafter in force between the Bank and Guarantor, this guarantee shall
constitute the entire agreement of Guarantor with the Bank with respect to the
subject matter hereof and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon the Bank unless
expressed herein. Any notice to Guarantor shall be considered to have been duly
given when delivered personally or forty-eight hours after being mailed, postage
prepaid, to the address(es) set forth below or to such other address(es) as
Guarantor may from time to time designate by giving notice in the same manner of
notice to the Bank set forth in Paragraph 14 hereof.
20. Each of the undersigned Guarantors hereby acknowledges the receipt
of a true copy of this guarantee.
21. [ ] This guarantee is secured by a deed of trust dated ,
19 , to Imperial Bancorp, as Trustee.
GUARANTEE AMOUNT $5,116,684.00
Executed by or on behalf of Guarantor(s) on July 22, 1997.
<TABLE>
<CAPTION>
Signature of Guarantor(s) Address
<S> <C>
HYCOMP, INC. 165 Cedar Hill St., Marlborough, MA 01752
BY
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
</TABLE>
Page 3 of 4
<PAGE> 1
EXHIBIT 10.45
[IMPERIAL BANK LOGO]
CONTINUING GUARANTEE
ORIGINATING OFFICE:
Name of Office:
Los Angeles Regional
Street Address:
201 N. Figueroa Street
City, State, Zip Code:
Los Angeles, California 90012
The undersigned (hereinafter referred to as "Guarantor") hereby
requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank")
to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION
Corporations
(Designate type of entity)
(hereinafter referred to as "Debtor"), and in consideration of the granting of
such credit by the Bank to Debtor, Guarantor agrees as follows:
1. The words "indebtedness" and "credit" are used herein in their most
comprehensive sense and include any and all advances, debts, obligations and
liabilities, including interest thereon, of Debtor heretofore, now or hereafter
made, incurred or created, with or without notice to Guarantor, whether
voluntary or involuntary and however arising, whether due or not due, absolute
or contingent, liquidated or unliquidated, determined or undetermined, whether
assumed by Debtor's successors, heirs or assigns by operation of law or
otherwise, and whether Debtor is liable individually or jointly with others,
and whether recovery upon any such indebtedness or credit is or hereafter
becomes barred by any statute of limitations or is or hereafter becomes
otherwise unenforceable.
2. Credit may be granted from time to time at the request of Debtor
and without further authorization from or notice to Guarantor, even though
Debtor's financial condition may have deteriorated since the date hereof. If
Debtor is a corporation or a partnership, the Bank need not inquire into the
power of Debtor or the authority of its officers, directors, partners or agents
acting or purporting to act in its behalf. Each credit heretofore or hereafter
granted to Debtor shall be considered to have been granted at the special
instance and request of Guarantor and in consideration of and in reliance upon
this guarantee.
3. Guarantor hereby unconditionally guarantees and promises to pay the
Bank or its order any and all indebtedness of Debtor to the Bank and to perform
any and all obligations of Debtor under the terms of any agreement or
instrument evidencing, securing or executed in connection with any such
indebtedness ("Credit Documents"). The liability of Guarantor shall not at any
time exceed the sum of the amount set forth below, plus the interest thereon in
accordance with the Credit Documents and the costs, attorneys' fees and other
expenses provided for in Paragraph 15 hereof. If no amount is set forth below,
the liability of the Guarantor hereunder shall be unlimited. The Bank may
permit Debtor's indebtedness to exceed any maximum liability without impairing
the obligations of Guarantor hereunder. No payments made by or on behalf of
Guarantor to the Bank shall reduce any such maximum liability unless written
notice to that effect is received by the Bank at or prior to the time such
payment is made. If Guarantor has executed more than one guarantee of the
indebtedness of Debtor to the Bank, the guarantees shall be cumulative.
4. Either before or after revocation hereof and in such manner, upon
such terms and at such times as it considers best and with or without notice to
Guarantor, the Bank may alter, compromise, accelerate, extend or change the time
or manner for the payment of any indebtedness hereby guaranteed, increase or
reduce the rate of interest thereon, release or add any one or more guarantees
or endorsers, accept additional or substituted security therefor, or release or
subordinate any security therefor. No exercise or nonexercise by the Bank of
any right hereby given it, no dealing by the Bank with Debtor or any other
person, and no change, impairment or suspension of any right or remedy of the
Bank shall in any way affect any of the obligations of Guarantor hereunder or
any security furnished by Guarantor or give Guarantor any recourse against the
Bank.
5. In addition to all liens upon and rights of offset given to the
Bank by law against any property of Debtor or of Guarantor, Guarantor hereby
grants a security interest in all property of Guarantor now or hereafter in the
possession of or on deposit with the Bank, whether held in a general or special
account or for safekeeping or otherwise. Each such security interest may be
exercised without demand upon or notice to Guarantor, shall continue in full
force unless specifically waived or released by the Bank in writing and shall
not be considered waived by any conduct of the Bank or by any failure of the
Bank to exercise any right of offset or to enforce any such security interest
or by any neglect or delay in so doing.
Page 1 of 4
<PAGE> 2
6. Guarantor waives and agrees not to assert or take advantage of (a)
any right to require the Bank to proceed against the Debtor or any other person,
firm or corporation or to proceed against or exhaust any security held by it at
any time or to pursue any other remedy in its power; (b) the defense of the
statute of limitations in any action hereunder or for the collection of any
indebtedness or the performance of any obligation guaranteed hereby; (c) any
defense that may arise by reason of the incapacity, lack of authority, death or
disability of, or revocation hereof by, any other or others or the failure of
the Bank to file or enforce a claim against the estate (either in
administration, bankruptcy, or other proceeding) of any other or others; (d)
demand, protest and notice of any kind including, without limiting the
generality of the foregoing, notice of the existence, creation or incurring of
new or additional indebtedness or of any action or non-action on the part of the
Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or
any other instrument, or any other person whomsoever, in connection with any
obligation or evidence of indebtedness hereby guaranteed; (e) any defense based
upon an election of remedies by the Bank, including without limitation, an
election to proceed by nonjudicial rather than judicial foreclosure, which
election destroys or otherwise impairs subrogation rights of Guarantor or the
right of Guarantor to proceed against Debtor for reimbursement, or both,
including, without limitation, the impairment of subrogation rights arising by
virtue of California Civil Code 580(b) and 580(d); (f) any defense or right
based upon the fair value deficiency protections and provisions of California
Civil Code 580(a) and California Civil Procedure Code 726, and (g) any defense
or right based upon the acceptance by the Bank or any affiliate of the Bank of a
deed in lieu of foreclosure, without extinguishing the indebtedness, even if
such acceptance destroys, alters or otherwise impairs subrogation rights of
Guarantor or the right of Guarantor to proceed against Debtor for reimbursement,
or both.
7. Guarantor, by execution hereof, represents to the Bank that the
relationship between Guarantor and Debtor is such that Guarantor has access to
all relevant facts and information concerning the indebtedness and Debtor and
that the Bank can rely upon Guarantor having such access. Guarantor waives and
agrees not to assert any duty on the part of the Bank to disclose to Guarantor
any facts that the Bank may now or hereafter know about Debtor, regardless of
whether the Bank has reason to believe that any such facts materially increase
the risk beyond that which Guarantor intends to assume, or has reason to
believe that such facts are unknown to Guarantor, or has a reasonable
opportunity to communicate such facts to Guarantor. Guarantor is fully
responsible for being and keeping informed of the financial condition of Debtor
and all circumstances bearing on the risk of non-payment of the indebtedness
guaranteed hereby.
8. Until all indebtedness of Debtor to the Bank has been paid in full,
even though such indebtedness is in excess of the liability of Guarantor,
Guarantor shall have no right of subrogation and waives any right to enforce
any remedy which the Bank now has or may hereafter have against Debtor and any
benefit of and any right to participate in any security now or hereafter held
by the Bank.
9. Except as otherwise provided in this paragraph, all existing or
future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any
right to withdraw any capital of Guarantor invested in Debtor, is hereby
subordinated to all indebtedness hereby guaranteed and, without the prior
written consent of the Bank, shall not be paid or withdrawn in whole or in part
nor will Guarantor accept any payment of or on account of any such indebtedness
or as a withdrawal of capital while this guarantee is in effect. At the Bank's
request, Debtor shall pay to the Bank all or any part of subordinated
indebtedness and any capital which Guarantor is entitled to withdraw. Each
payment by Debtor to Guarantor in violation of this paragraph shall be received
in trust for the Bank and shall be paid to the Bank immediately on account of
the indebtedness of Debtor to the Bank. No such payment shall reduce or affect
in any manner Guarantor's liability under any of the provisions of this
guarantee. Guarantor reserves the right to receive from Debtor payment of any
salary for personal services at the same monthly rate as that at which
Guarantor has been paid during the preceding twelve months, it being expressly
understood that such amount shall not be subordinated to the indebtedness
guaranteed hereby.
10. Guarantor will file all claims against Debtor in any bankruptcy or
other proceeding in which the filing of claims is required by law upon any
indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank
all of the Guarantor's rights thereunder. If Guarantor does not file any such
claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so
in Guarantor's name or, in the Bank's discretion, to assign the claim and to
cause proof of claim to be filed in the name of the Bank's nominee. In all such
cases, whether in administration, bankruptcy or otherwise, the person or
persons authorized to pay such claims shall pay to the Bank the full amount
thereof and, to the full extent necessary for the purpose, Guarantor hereby
assigns to the Bank all of the Guarantor's rights to any and all such payments
or distributions to which Guarantor would otherwise be entitled. If the amount
so paid is greater than the guaranteed indebtedness then outstanding, the Bank
will pay the amount of the excess to the person entitled thereto.
11. With or without notice to Guarantor, the Bank, in its sole
discretion and at any time and from time to time either before or after
delivery of any notice of revocation hereunder and in such manner and upon such
terms as it considers fit, may (a) apply any or all payments or recoveries from
Debtor, from Guarantor or from any other guarantor under this or any other
instrument or realized from any security, in such manner and order or priority
as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not
such indebtedness is guaranteed hereby or is otherwise secured or is due at the
time of such application; and (b) refund to Debtor any payment received by the
Bank upon any indebtedness hereby guaranteed and payment of the amount refunded
shall be fully guaranteed hereby. Any recovery realized from any other
guarantor under this or any other instrument shall be first credited upon that
portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's
maximum liability, if any, hereunder.
12. The amount of Guarantor's liability and all rights, powers and
remedies of the Bank hereunder and under the Credit Documents and any other
agreements now or at any time hereafter in force between the Bank and Guarantor
shall be cumulative and not alternative, and such rights, powers and remedies
shall be in addition to all rights, powers and remedies given to the Bank by
law.
13. Guarantor's obligations hereunder are independent of the obligations
of Debtor and, in the event of any default hereunder, a separate action or
actions may be brought and prosecuted against Guarantor whether action is
brought against Debtor or whether Debtor is joined in any such action or
actions. The Bank may maintain successive actions for other defaults. The Bank's
rights hereunder shall not be exhausted by its exercise of any of its rights
or remedies or by any such action or by any number of successive actions until
and unless all indebtedness and obligations hereby guaranteed have been paid
and fully performed.
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<PAGE> 3
14. This is a continuing guarantee and Guarantor agrees that it shall
remain in full force until and unless Guarantor delivers to the Bank written
notice that it has been revoked as to credit granted subsequent to the effective
time of revocation as herein provided. Delivery of such notice shall be
effective by personal service upon an officer of the Bank at the originating
office of the Bank designated on the first page hereof or by mailing such notice
by certified or registered mail, return receipt requested, postage prepaid and
addressed to the Bank at the originating office designated on the first page
hereof. Regardless of how notice of revocation is given, it shall not be
effective until twelve o'clock noon Pacific Standard or Daylight Savings Time,
as the case may be, on the next succeeding Bank business day following the day
such notice is delivered, but delivery of such notice shall not affect any of
Guarantor's obligations hereunder with respect to credit granted prior to the
effective date of such revocation, nor shall it affect any of the obligations of
any other guarantor for the credit granted to Debtor hereunder. If the
originating office of the Bank designated above is not in existence at the time
notice of revocation is desired to be given, then such notice may be given in
the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920
South La Cienega Boulevard, Inglewood, California, 90301.
15. Guarantor agrees to pay to the Bank without demand reasonable
attorneys' fees and all costs and other expenses which the Bank expends or
incurs in collecting or compromising any indebtedness of the Debtor, in
protecting the Bank's security under the Credit Documents or in enforcing this
guarantee against Guarantor or any other guarantor of any indebtedness hereby
guaranteed whether or not suit is filed, including, without limitation,
attorney's fees, costs and other such expenses incurred in any bankruptcy
proceeding. Guarantor warrants and represents that it is fully authorized by law
to execute this guarantee.
16. This guarantee shall benefit the Bank, its successors and assigns,
including the assignees of any indebtedness hereby guaranteed, and binds
Guarantor's successors and assigns. This guarantee is assignable by the Bank
with respect to all or any portion of the indebtedness and obligations
guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the
assignees under this guarantee without in any manner affecting Guarantor's
liability hereunder with respect to any indebtedness or obligations retained by
the Bank. No delegation or assignment of this guarantee by any Guarantor shall
be of any force or effect or release Guarantor from any obligation hereunder.
17. No provision of this guarantee or right of the Bank hereunder can be
waived, nor can any Guarantor be released from his/her obligations hereunder,
except by a writing duly executed by an authorized officer of the Bank. Should
any one or more provisions of this guarantee be determined to be illegal or
unenforceable, all other provisions nevertheless shall be governed by and
construed in accordance with the laws of California, and Guarantor agrees to
submit to the jurisdiction of the Courts of California.
18. If more than one guarantor signs this guarantee, the obligation of
all such guarantors shall be joint and several. When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and the masculine shall include the feminine and neuter.
Any married person who signs this guarantee agrees that recourse may be had
against separate property for all obligations under this guarantee.
19. Except as provided in any other written agreement now or at any time
hereafter in force between the Bank and Guarantor, this guarantee shall
constitute the entire agreement of Guarantor with the Bank with respect to the
subject matter hereof and no representation, understanding, promise or condition
concerning the subject matter hereof shall be binding upon the Bank unless
expressed herein. Any notice to Guarantor shall be considered to have been duly
given when delivered personally or forty-eight hours after being mailed, postage
prepaid, to the address(es) set forth below or to such other address(es) as
Guarantor may from time to time designate by giving notice in the same manner of
notice to the Bank set forth in Paragraph 14 hereof.
20. Each of the undersigned Guarantors hereby acknowledges the receipt
of a true copy of this guarantee.
21. [ ] This guarantee is secured by a deed of trust dated ,
19 , to Imperial Bancorp, as Trustee.
GUARANTEE AMOUNT $4,887,493.00
Executed by or on behalf of Guarantor(s) on July 22, 1997.
<TABLE>
<CAPTION>
Signature of Guarantor(s) Address
<S> <C>
XIT CORPORATION 4290 Brickell Street, Ontario, CA 91761
BY
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
- -------------------------------- ---------------------------------------
</TABLE>
Page 3 of 4
<PAGE> 1
EXHIBIT 10.46
IMPERIAL BANK
Member FDIC
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between XCEL Arnold Circuits, Inc., XIT
Corporation
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as
may be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance. the following Borrowing Base:
80.000 % of Eligible Accounts
25.000 % of the Value of Inventory $500,000.00
and in no event more than $3,500,000.00
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank on or before the
tenth day of each month, interest on the average daily unpaid balance of
the Loan Account during the immediately preceding month at the rate of One
percent (1.000%) per annum in excess of the rate of interest which Bank has
announced as its prime lending rate ("Prime Rate") which shall vary
concurrently with any change in such Prime Rate. Interest shall be computed
at the above rate on the basis of the actual number of days during which
the principal balance of the loan account is outstanding divided by 360,
which shall for interest computation purposes be considered one year. Bank
at its option may demand payment of any or all of the amount due under the
Loan Account including accrued but unpaid interest at any time. Such notice
may be given verbally or in writing and should be effective upon receipt by
Borrower. The amount of interest payable each month by Borrower shall not
be less than a minimum monthly charge of $ 250.00. Bank is hereby
authorized to charge Borrower's deposit account(s) with Bank for all sums
due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to
be sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and
receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and other
personal property which are held for sale or lease, including those
held for display or demonstration or out on lease or consignment or to
be furnished under a contract of service or are raw materials, work in
process or materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display materials
relating thereto.
C. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding,
however, (1) all Accounts under which payment is not received within
days from any invoice date, (2) all Accounts against which the account
debtor or any other person obligated to make payment thereon asserts
any defense, offset, counterclaim or other right to avoid or reduce
the liability represented by the Account and (3) any Accounts if the
account debtor or any other person liable in connection therewith is
insolvent, subject to bankruptcy or receivership proceedings or has
made an assignment for the benefit of creditors or whose credit
standing is unacceptable to Bank and Bank has so notified Borrower.
Eligible Accounts shall only include such accounts as Bank in its sole
discretion shall determine are eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory
determined in accordance with generally accepted accounting principles
consistently applied excluding, however, the amount of progress
payments, pre-delivery payments, deposits and any other sums received
by Borrower in anticipation of the sale and delivery of Inventory, all
Inventory on consignment or lease to others, and all property on
consignment or lease from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor
and all merchandise giving rise thereto, and hereby grants to Bank a
continuing security interest in all Borrower's Inventory and in all
proceeds and products thereof, whether now owned or hereafter existing or
acquired, including all moneys in the Collateral Account referred to in
Section 6 hereof, as security for any and all obligations of Borrower to
Bank, whether now owing or hereafter incurred and whether direct, indirect,
absolute or contingent. So long as Borrower is indebted to Bank or Bank is
committed to extend credit to Borrower, Borrower will execute and deliver
to Bank such assignments, including Bank's standard forms of Specific or
General Assignment covering individual Accounts, notices, financing
statements, and other documents and papers as Bank may require in order to
affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors
obligated on the Accounts, notice of Bank's interest in Collateral.
6. Until Bank exercises its rights to collect the Accounts and Inventory
proceeds pursuant to paragraph 10, Borrower will collect with diligence all
Borrower's Accounts and Inventory proceeds, provided that no legal action
shall be maintained thereon or in connection therewith without Bank's prior
written consent. Any collection of Accounts or Inventory proceeds by
Borrower, whether in the form of cash, checks, notes, or other instruments
for the payment of money (properly endorsed or assigned where required to
enable Bank to collect same), shall be in trust for Bank, and Borrower
shall keep all such collections separate and apart from all other funds and
property so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash sales,
daily to Bank in the identical form received. The proceeds of such
collections when received by Bank may be applied by Bank directly to the
payment of Borrower's Loan Account or any other obligation secured hereby.
Any credit given by Bank upon receipt of said proceeds shall be conditional
credit subject to collection. Return items at Bank's option may be charged
to Borrower's general account. All collections of the Accounts and
Inventory proceeds shall be set forth on an itemized schedule, showing the
name of the account debtor, the amount of each payment and such other
information as Bank may request.
7. Until Bank exercises its rights to collect the Accounts or Inventory
proceeds pursuant to paragraph 10, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However,
Borrower shall immediately notify Bank of all cases involving returns,
repossessions, and loss or damage of or to merchandise represented by the
Accounts or constituting Inventory and of any credits, adjustments or
disputes arising in connection with the goods or services represented by
the Accounts or constituting Inventory and, in any of such events, Borrower
will immediately pay to Bank from its own funds (and not from the proceeds
of Accounts or Inventory) for application to Borrower's Loan Account or any
other obligation secured hereby the amount of any credit for such returned
or repossessed merchandise and adjustments made to any of the Accounts.
Until payment is made as provided herein or until release by Bank from its
security interest, all merchandise returned to or
Page 1 of 2
<PAGE> 2
repossessed by Borrower shall be set aside and identified as the property
of Bank and Bank shall be entitled to enter upon any premises where such
merchandise is located and take immediate possession thereof and remove
same.
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other
incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is found or affected; (ii)
Borrower is, or at the time the collateral becomes subject to Bank's
security interest will be, the true and lawful owner of and has, or at the
time the Collateral becomes subject to Bank's security interest will have,
good and clear title to the Collateral, subject only to Bank's rights
therein; (iii) Each Account is, or at the time the Account comes into
existence will be, a true and correct statement of a bona fide indebtedness
incurred by the debtor named therein in the amount of the Account for
either merchandise sold or delivered (or being held subject to Borrower's
delivery instructions) to, or services rendered, performed and accepted by,
the account debtor; (iv) That there are or will be no defenses,
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and correct.
9. Borrower will: (1) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon, and reports as to the Inventory and sales thereof;
(iii) Permit representatives of Bank to inspect the Inventory and
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorney's fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location at which the Inventory is or
will be kept, other than for temporary processing, storage or similar
purposes, and of any removal thereof to a new location and of each office
of Borrower at which records of Borrower relating to the Accounts are kept;
(vii) Provide, maintain and deliver to Bank policies insuring the
collateral against loss or damage by such risks and in such amounts, forms
and companies as Bank may require and with loss payable solely to Bank,
and, in the event Bank takes possession of the Collateral, the insurance
policy or policies and any unearned or returned premium thereon shall at
the option of Bank become the sole property of Bank, such policies and the
proceeds of any other insurance covering or in any way relating to the
Collateral, whether now in existence or hereafter obtained, being hereby
assigned to Bank; (viii) Do all acts necessary to maintain, preserve and
protect all Inventory, keep all Inventory in good condition and repair and
not to cause any waste or unusual or unreasonable depreciation thereof, and
(ix) In the event the unpaid balance of Borrower's Loan Account shall
exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, without prior notice to Borrower, collect the
Accounts and Inventory proceeds and may give notice of assignment to any
and all account debtors, and Borrower does hereby make, constitute and
appoint Bank its irrevocable, true and lawful attorney with power to
receive, open and dispose of all mail addressed to Borrower, to endorse the
name of Borrower upon any checks or other evidences of payment that may
come into the possession of Bank upon the Accounts or as proceeds of
Inventory; to endorse the name of the undersigned upon any document or
instrument relating to the Collateral; in its name or otherwise, to demand,
sue for, collect and give acquittances for any and all moneys due or to
become due upon the Accounts; to compromise, prosecute or defend any
action, claim or proceeding with respect thereto; and to do any and all
things necessary and proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell, dispose of or
grant a security interest in any of the Collateral other than to Bank, or
execute any financing statements covering the Collateral in favor of any
secured party or person other than Bank.
12. Should: (i) Default be made in the payment of any obligation, or breach be
made in any warranty, statement, promise, term or condition, contained
herein or hereby secured; (ii) Any statement or representation made for the
purpose of obtaining credit hereunder prove false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commended by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law or
statute; then in any such event, Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) Immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank, and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at its option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any assessment for taxes
against Borrower, other than real property, is made by the Federal or State
government or any department thereof, the obligation of Bank to make loans
to Borrower as provided in Section 1 hereof shall immediately terminate and
the unpaid balance of the Loan Account, all other obligations secured
hereby and all other sums due hereunder shall immediately become due and
payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
*16. Additional Provisions: See Exhibit "A" Addendum to Security and Loan
Agreement attached
Executed this 22nd day of July, 1997
XCEL Arnold Circuits, Inc.
--------------------------
(Name of Borrower)
BY:
-------------------------------
(Authorized Signature and Title)
XIT Corporation
--------------------------
(Name of Borrower)
BY:
-------------------------------
(Authorized Signature and Title)
IMPERIAL BANK
BY: /s/ Nunilo Soler BY:
------------------------------- --------------------------------
Nunilo Soler, Vice President (Authorized Signature and Title)
* If none, Insert "None"
Page 2 of 2
<PAGE> 3
EXHIBIT "A"
ADDENDUM TO SECURITY AND LOAN AGREEMENT
("Security and Loan Agreement")
BETWEEN XIT CORPORATION AND XCEL ARNOLD CIRCUITS, INC.
AND IMPERIAL BANK
DATED: July 22, 1997
This Addendum is made and entered into July 15, 1997, between XIT CORPORATION &
XCEL ARNOLD CIRCUITS, INC. (individually and collectively "Borrower") and
Imperial Bank ("Bank"). This Addendum amends and supplements the Security and
Loan Agreement. In the event of any inconsistency between the terms herein and
the terms of the Security and Loan Agreement, the terms herein shall in all
cases govern and control. All capitalized terms herein, unless otherwise defined
herein, shall have the meaning set forth in the Security and Loan Agreement.
1. A. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts shall expire on June 25,
1998, subject to Bank's right to renew said commitment at its sole discretion.
Any renewal of the commitment shall not be binding upon the Bank unless it is in
writing and signed by an officer of the Bank.
B. In addition to Bank's commitment to make advances against Eligible
Accounts, the Bank has made certain loans to XCEL Arnold Circuits, Inc. The
terms and conditions of the Security and Loan Agreement and this Addendum, as
either is amended, replaced, or otherwise revised will apply to all of those
loans until repaid in full and any other loans made by the Bank to either
Borrower in the future and shall survive even if commitment to make advances
against Eligible Accounts and Inventory has expired, has been terminated or is
not in effect for any reason.
2. Definitions:
a. Eligible Accounts. Eligible Accounts as defined in the Security and
Loan Agreement is amended to include, in addition to Borrower's Accounts,
Accounts of Hycomp, Inc. (subsidiary of XIT Corporation) and Accounts of Etch-
Tek, Inc. (division of Xcel Arnold Circuits, Inc.) meeting the criteria set
forth therein and herein.
b. Value of Inventory. Value of Eligible Inventory as defined in the
Security and Loan Agreement is amended to represent only raw material inventory
located at main premises at 4290 East Brickell Street, Ontario, Ca. belonging
to XIT Corporation, and is to include raw material inventory of Hycomp, Inc.
located in Marlborough, Ma. meeting the criteria set forth therein and herein.
<PAGE> 4
EXHIBIT A
Page 2
3. Borrower represents and warrants that:
a. Litigation. Except as previously disclosed in writing to Bank, there
is no litigation or other proceeding pending or threatened against or affecting
Borrower, and Borrower is not in default with respect to any order, writ,
injunction, decree or demand of any court or other governmental or regulatory
authority.
b. Financial Condition. The balance sheet of Borrower as of June 30,
1997, and the related profit and loss statement on that date, a copy of which
has heretofore been delivered to Bank by Borrower, and all other statements and
data submitted in writing by Borrower to Bank in connection with this request
for credit are true and correct, and said balance sheet and profit and loss
statement truly present the financial condition of Borrower as of the date
thereof and the results of the operations of Borrower for the period covered
thereby, and have been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date, there have been
no materially adverse changes in the financial condition or business of Buyer.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted.
c. Trademarks, Patents. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with valid trademarks, trade names, copyrights patents and license rights of
others.
d. Tax Status. Borrower has no liability for any delinquent state, local
or federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
4. Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent:
a. Type of Business. Management. Make any substantial change in the
character of its business; or make any change in its executive management
provided that Bank will not unreasonably withhold its consent to any change in
executive management.
b. Outside Indebtedness. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from Bank except obligations
now existing as shown in financial statement dated June 30, 1997, excluding
those being refinanced by Bank and except for indebtedness to shareholders; or
sell or transfer, either with or without recourse, any accounts or notes
receivable or any moneys due to become due.
<PAGE> 5
EXHIBIT A
Page 3
c. Liens and Encumbrances. Create, incur, assume any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other title retention
agreement) upon any asset now owned or hereafter acquired by it, other than (i)
liens for taxes not delinquent and liens in Bank's favor and (ii) obligations
secured by equipment or automotive vehicles purchased in the ordinary course of
Borrower's business.
d. Loans, Investments, Secondary Liabilities, Make any loans or advances
to any person or other entity other than in the normal and ordinary course of
its business as now conducted or make any investment(s), in the securities of
any person or other entity other than the United States Government; or guarantee
or otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
e. Acquisition or Sale of Business; Merger or Consolidation. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by leasing back of same.
f. Dividends, Stock Payments. Declare or pay any dividend (other than
dividends payable in common stock of Borrower, or that amount necessary for
company related income tax payments) or make any other distribution of any of
its capital stock now outstanding or hereafter issued or purchase, redeem or
retire any such stock. Nothing in this agreement shall be deemed to prohibit
Borrower from establishing any employee stock benefit plans.
g. Capital Expenditures. Make or incur obligations for capital
expenditures in excess of $100,000 from the date hereof through December 31,
1997 and $300,000 in any one fiscal year period thereafter.
h. Lease Liability. Make or incur liability for payments of rent under
leases of real property in excess of $50,000 and personal property operating
leases in excess of $100,000 in any one fiscal year.
5. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under any note executed by either Borrower, all
obligations, loans and liabilities of Borrower to Bank, due or to become due,
whether now existing or hereafter arising, shall at the option of the Bank,
become immediately due and payable without notice or demand, and Bank shall
thereupon have the right to exercise all of its default rights and remedies,
provided, however, that with respect to an non-monetary defaults, Borrower
<PAGE> 6
EXHIBIT A
Page 4
shall have thirty (30) days from notice from Bank of any such default to cure
same and with respect to any monetary default, Borrower shall have ten (10)
days from the date of such default to cure same.
6. In addition to the provisions in the Security and Loan Agreement, Eligible
Accounts shall only include such accounts as Bank in its sole discretion shall
determine are eligible from time to time. "Eligible Accounts" shall also NOT
include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower.
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to Borrower are more than 90 days from
invoice date are not eligible.
c. For accounts representing more than 20% of total accounts receivable,
the balance in excess of the 20% is not eligible. Bank may deem, at its sole
discretion, the entire amount, or any portion thereof, eligible and with
respect to Diebold, Inc., balances up to and including 30% shall be eligible.
d. Accounts with respect to international transactions unless insured by
an insurance company acceptable to the Bank or covered by letters of credit
issued or confirmed by a bank acceptable to the Bank.
e. Credit balances greater than 90 days from invoice date.
f. All accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists.
g. Accounts over 90 days from invoice date.
h. Consignment or guaranteed sales.
i. Bill and hold accounts.
j. Equipment rental offsets.
k. Collection accounts (aged up to 90 days from invoice date).
7. Borrower may borrow against eligible inventories consisting of raw
materials, deemed acceptable by Bank, up to $500,000 sub-limit within the line
(not to exceed 25% of eligible inventory, whichever is less), contingent upon
borrowing base availability, and supported by monthly inventory certification
submitted by Borrower to the Bank. Inventory eligible for advances under the
Security Agreement shall NOT include the following:
<PAGE> 7
EXHIBIT A
Page 5
a. Goods on consignment.
b. Inventory reserve amounts applicable to eligible inventory.
c. Inventory not insured, naming Bank as loss payee.
d. Obsolete inventory.
e. Inventory located in areas making it difficult to verify its
existence, or which will cause undue expense in liquidation due to
transportation costs, or other logistical reasons.
8. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with previous years. Compliance with
financial covenants shall be calculated based on the consolidated financial
statements of XIT Corporation and its subsidiaries which shall include the
elimination of all inter company transactions.
9. Borrower affirmatively covenants that so long as any loans, obligations or
liabilities remain outstanding or unpaid to Bank, it will:
a. Maintain a minimum tangible net worth (meaning the excess of all
assets, excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items, over its liabilities)
of not less than $4,000,000, plus, on a cumulative basis, 100% of all
extraordinary gains, proceeds from capital stock sold, equity issued in
connection with mergers and acquisitions and 80% of positive net income for the
reporting period.
b. Maintain working capital (Borrower's current assets minus current
liabilities) of not less than $1,500,000.
c. Maintain a current ratio of at least 1.1 to 1.0. Current ratio is the
ratio of current assets to current liabilities.
d. Maintain a maximum ratio of total debt to tangible net worth of not
greater than 3.00 to 1.0.
e. Maintain a ratio of Cash Flow (meaning the Borrower's net profit
after taxes and dividends, exclusive of non-recurring income, to which
depreciation, amortization, and other non-cash expenses are added for the three
(3) month period immediately preceding the date of calculation) to Debt Service
(meaning that portion of Borrower's long term liabilities and capital leases
coming due within 12 months after the date of calculation) of not less than
1.20 to 1.00 beginning with the quarter ending December 31, 1997 and quarterly
thereafter until June 30, 1998 at which time Borrower shall maintain a ratio of
Cash Flow (meaning the Borrower's net profit after taxes and dividends
<PAGE> 8
EXHIBIT A
Page 6
exclusive of non-recurring income, to which depreciation, amortization, and
other non-cash expenses are added for the 12 month period immediately preceding
the date of calculation) to Debt Service (meaning that portion of Borrower's
long term liabilities and capital leases coming due within 12 months after the
date of calculation) of not less than 1.20 to 1.00.
f. Make no loans, advances or distributions to parent company Microtel
International, Inc. or affiliates.
g. Maintain all significant bank accounts and banking relationship with
Bank. Not show a net loss for any two consecutive quarters beginning with, and
including the quarter ended September 30, 1997 nor at any fiscal year end
beginning with Borrower's 1998 fiscal year end.
i. Within 10 working days from each month-end, deliver to Bank an
accounts receivable aging reconciled to the general ledger of Borrower, a
detailed accounts payable aging reconciled to the Borrower's general ledger and
setting forth the amount of any book overdraft or the amount of checks issued
but not sent, and an inventory certification outlining both inventory
composition and activity for the month. All the foregoing will be in form
satisfactory to the Bank. Also provide the Bank on a quarterly basis or more
frequently if demanded by Bank, a complete address list of all active customers.
j. Quarterly Financial Statement. Within forty-five (45) days after the
close of each quarter of each fiscal year of Borrower, commencing with the
quarter next ending, a Compliance Certificate along with a consolidated and
consolidating balance sheet, profit and loss statement and reconciliation of
Borrower's capital accounts as of the close of such period and covering
operations for the portion of Borrower's fiscal year ending on the last day of
such period all in reasonable detail, prepared in accordance with generally
accepted accounting principles on a basis consistently maintained by Borrower
and certified by an appropriate officer of Borrower;
k. Annual Financial Statement. As soon as available, and in any event
within one hundred twenty (120) days after the close of each fiscal year of
Borrower, a Compliance Certificate along with a consolidated and consolidating
report of audit of Borrower's parent company, MicroTel International, Inc. as of
the close of and for such fiscal year, all in reasonable detail, prepared on an
audited basis by an independent certified public accountant selected by Borrower
and reasonably acceptable to Bank, in accordance with generally accepted
accounting principles on a basis consistently maintained by Borrower and
certified by an appropriate officer of Borrower;
l. Within one hundred twenty (120) days after the end of the fiscal year
ended of Borrower, a certificate of the chief financial officer of Borrower,
stating that Borrower has performed and observed each and every covenant
contained in this Agreement to be performed by it and that no event has occurred
and no condition then exists which constitutes an event of default hereunder or
<PAGE> 9
EXHIBIT A
Page 7
would constitute such an event of default upon the lapse of time or upon the
giving of notice and the lapse of time specified herein; or, if any such event
has occurred or any such condition exists, specifying the nature thereof;
m. Promptly after the receipt thereof by Borrower, copies of any detailed
audit reports submitted to Borrower by independent accountants in connection
with each annual or interim audit of the accounts of Borrower made by such
accountants;
n. Rights and Facilities. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business or partnership, maintain and preserve its existence.
o. Insurance. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to the Bank. Bank to be named as loss
payee.
p. Taxes and Other Liabilities. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental changes upon or against it or any of its properties, and any of its
liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
(b) It shall have set aside on its books reserves segregated to the
extent required by generally accepted accounting practice) deemed
adequate with respect thereto.
q. Records and Reports. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times.
10. The rate of interest applicable to the Loan Account shall be 1.00% per year
in excess of the rate of interest which Bank has announced as its prime lending
rate ("Prime Rate") which shall vary concurrently with any change in such Prime
Rate. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance of the loan account is
outstanding divided by 360, which shall, for interest computation purposes, be
considered one year. Should Borrower be in default, as default is defined
herein, Bank at its option may demand payment of any or all of the amount due
under the Loan Account including accrued but unpaid interest, at any time. Such
<PAGE> 10
EXHIBIT A
Page 8
notice may be given verbally or in writing and should be effective upon receipt
by Borrower.
The default rate of interest shall be five percent per year in excess of the
rate otherwise applicable.
11. Commercial (sight or usance) Letters of Credit (collectively "Letters of
Credit") may be issued by Bank for Borrower so long as the aggregate of the Loan
Account and Letters of Credit do not exceed the Borrowing Base. No letters of
credit are to expire later than 60 days past the maturity of the line of
credit. Tenor of usance letters of credit are not to exceed 90 days. Pricing
for issuance of Commercial Letters of Credit will be Bank's standard rates and
charges as announced from time to time.
12. Cross Default. Any default under any other obligation of Borrower, XIT
Corporation or Xcel Arnold Circuits, Inc., to Bank shall be a default hereunder
and Bank shall have all the rights set forth in the Security and Loan Agreement
for defaults thereunder.
13. Reference Provisions. The attached Reference Provisions are hereby
incorporated herein.
14. Late Charges. If any installment payment, interest payment, principal
payment or principal balance due hereunder is delinquent twenty or more days,
Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so
due and unpaid, in addition to the payment; but nothing in this paragraph is to
be construed as any obligation on the part of the Bank to accept payment of any
payment past due or less than the total unpaid principal balance after
maturity. The late charges provided for herein shall not apply while the
default rate contained in paragraph 10 is in effect.
All payments shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
15. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or
delay on the part of your Bank or any holder or Notes Issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof or of any other
right, power or privilege. All rights and remedies existing under this
agreement or any not issued in connection with a loan that your Bank may make
hereunder, are cumulative to, not exclusive of, any rights or remedies
otherwise available.
<PAGE> 11
EXHIBIT A
Page 9
16. JOINT AND SEVERAL LIABILITIES OF BORROWERS.
a. Each of the Borrowers is accepting joint and several liability
hereunder in consideration of the financial accommodations to be provided by
the Bank, for, the mutual benefit, directly and indirectly, of each of the
Borrowers and in consideration of the undertakings of each of the Borrowers to
accept joint and several liability for the obligations of each of them.
b. Each of the Borrowers, jointly and severally, hereby irrevocable and
unconditionally accept, not merely as a surety but also as a co-debtor, joint
and several liability with each of the other Borrowers, with respect to the
payment and performance of all of the obligations of each Borrower to Bank
hereunder, it being the intention of the parties hereto that all the
obligations of the any Borrower to Bank be joint and several obligations of
both of the Borrowers without preferences or distinction among them.
c. If and to the extent that either of the Borrowers shall fail to make
any payment with respect of any of the obligations hereunder when due, or to
perform any of such obligations in accordance with the terms thereof, then in
each such event each of the other Borrower will make such payment with respect
to, or perform such obligation.
d. The obligations of each Borrower under the provisions of this
Section 16 constitute the absolute and unconditional obligations of such
Borrower enforceable against it to the full extent permitted under the terms
hereof, irrespective of the validity, regularity or enforceability of the
Security and Loan Agreement or any other circumstances whatsoever.
e. Each Borrower waives (i) notice of acceptance of its joint and
several liability, (ii) any right to require the Bank to proceed against any
other Borrower or any other person, firm or corporation or to proceed against
or exhaust any security held by it at any time or to pursue any other remedy in
its power, (iii) any defense that may arise by reason of the incapacity, lack
of authority, death or disability of, or revocation hereof by any other
Borrower or any other or others or the failure of the Bank to file or enforce a
claim against the estate (either in administration, bankruptcy or other
proceeding) of any other Borrower or any others, (iv) demand, protest and
notice of any kind including, without limiting the generality of the foregoing,
notice of the existence, creation or incurring of new or additional
indebtedness or of any action or non-action on the part of any Borrower, the
Bank, any endorser, creditor of any Borrower under this or any other
instrument, or any other person whomsoever, in connection with any obligation
or evidence of indebtedness of the Borrowers, (v) any defense based upon an
election of remedies by the Bank, including, without limitation, an election to
proceed by nonjudicial rather than judicial foreclosure, which election
destroys or otherwise impairs subrogation rights of any Borrower or the right
of any Borrower to proceed against any other Borrower for reimbursement, or
both, and (vi) any defense or right based upon the acceptance by the Bank or an
affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing
the indebtedness, even if such acceptance destroys, alters or
<PAGE> 12
EXHIBIT A
Page 10
otherwise impairs subrogation rights of any Borrower or the right of any
Borrower to proceed against any other Borrower for reimbursement, or both.
17. This Addendum is executed by and on behalf of the parties as of the date
first above written.
XIT CORPORATION
"Borrower"
By:
----------------------------------------
Carmine T. Oliva, Chairman of the Board,
President, and CEO
XCEL ARNOLD CIRCUITS, INC.
"Borrower"
By:
----------------------------------------
Carmine T. Oliva, Chairman and CEO
IMPERIAL BANK
"Bank"
By:
----------------------------------------
Mark W. Campbell
Senior Vice President
<PAGE> 13
XIT CORPORATION and XCEL ARNOLD CIRCUITS, INC.
Dated July 22, 1997
Attachment to the Addendum to Security and Loan Agreement
The following Reference Provision is by this reference incorporated in the
Security and Loan Agreement:
REFERENCE PROVISION
1. Other than (i) non-judicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to this Note
("Agreement"), which controversy, dispute or claim is not settled in writing
within (30) days after the "Claim Date" (defined as the date on which a party
subject to the Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure ("CCP"), or their successor section, which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or Los Angeles County if none
(the "Court"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers of a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP Section 170.6. The referee shall (a) be requested to set the
matter for hearing within sixty (60) days after the Claim Date and (b) try any
and all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP Section 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following the notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee.
The referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either
<PAGE> 14
party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
2. Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon
the parties. The referee shall issue a single judgment at the close of the
reference proceeding which shall dispose of all of the claims of the parties
that are the subject of the reference. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under this
provision.
4. In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act. Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
XCEL ARNOLD CIRCUITS, INC. XIT CORPORATION
By: By:
----------------------------------- --------------------------------
<PAGE> 1
Exhibit 10.47
[California Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 28th day of July, 1997, between SCI
Limited Partnership-I, a Delaware Limited Partnership, ("Landlord"), and the
Tenant named below.
<TABLE>
<S> <C>
TENANT: CXR Telcom Corporation, a
Delaware Corporation
TENANT'S REPRESENTATIVE, Henry Mourad
ADDRESS, AND PHONE NO.: 2040 Fortune Drive
Suite 102
San Jose, CA 95131
408-435-8520
PREMISES: That portion of the Building, containing
approximately 29,120 rentable square feet, as
determined by Landlord and commonly known as 47233
Fremont Boulevard, Fremont, CA as shown on Exhibit
A, and the floor plan as shown as Exhibit B.
PROJECT: Bayside Commons
BUILDING: Shoreline Business Center #8 (14508)
TENANT'S PROPORTIONATE SHARE
OF PROJECT: 39%
TENANT'S PROPORTIONATE SHARE
OF BUILDING: 71%
LEASE TERM: Beginning on the Commencement Date and ending on the last
day of the 60th full calendar month thereafter.
COMMENCEMENT DATE: Upon substantial completion of tenant improvements estimated
to be October 10, 1997.
INITIAL MONTHLY BASE RENT: Twenty Seven Thousand Six Hundred Sixty Four Dollars
$27,664
INITIAL ESTIMATED MONTHLY 1. Utilities: $127
OPERATING EXPENSE PAYMENTS:
(estimates only and subject to 2. Common Area Charges: $1,134
adjustment to actual costs and
expenses according to the 3. Taxes: $3,951
provisions of this Lease)
4. Insurance: $97
INITIAL ESTIMATED MONTHLY
OPERATING EXPENSE PAYMENTS: $5,309
INITIAL MONTHLY BASE RENT AND
OPERATING EXPENSE PAYMENTS: $32,973
SECURITY DEPOSIT: $57,075 - $27,664 of said Security Deposit will be refunded to
Tenant when MicroTel ("Guarantor") provides Landlord with audited
financial statements at year end 1997 or there after showing net
income in excess of $1,000,000
BROKER: Jim Abarta/Colliers Parrish International, Inc.
ADDENDA: Addendum I, II, III, IV, V and VI Exhibit A, B, B-1, C and
Guarantee
</TABLE>
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1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except as provided in Paragraph 10,
in no event shall Landlord have any obligation for any defects in the Premises
or any limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises were
in good condition at the time possession was taken except for items that are
Landlord's responsibility under Paragraph 10 and any punchlist items agreed to
in writing by Landlord and Tenant. ANY WORK PERFORMED BY LANDLORD AT ITS SOLE
COST PRIOR TO THE COMMENCEMENT DATE SHALL BE IN COMPLIANCE WITH ALL THE
APPLICABLE LAWS.
LANDLORD SHALL DELIVER ALL BUILDING SYSTEMS (HVAC, ELECTRICAL, PLUMBING
AND MECHANICAL) IN GOOD OPERATING CONDITION AND REPAIR. LANDLORD SHALL WARRANT
THESE SYSTEMS REMAIN IN GOOD OPERATING CONDITION AND REPAIR FOR A PERIOD ENDING
SIX (6) MONTHS AFTER THE COMMENCEMENT DATE. LANDLORD AGREES TO REPAIR ALL ROOF
LEAKS AT LANDLORD'S SOLE COST AND EXPENSE (NOT TO BE PASSED THROUGH TO TENANT AS
AN OPERATING EXPENSE) FROM THE COMMENCEMENT DATE THROUGH DECEMBER 31, 1997.
PROVIDED TENANT IS RESPONSIBLE FOR ALL NORMAL MAINTENANCE COSTS TO ALL OF THE
ABOVE ITEMS DURING THIS PERIOD.
3. USE. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale sales) products,
materials and merchandise made and/or distributed by Tenant and for such other
lawful purposes as may be incidental thereto; provided, however, Tenant may also
use the Premises for light manufacturing. Tenant shall not conduct or give
notice of any auction, liquidation, or going out of business sale on the
Premises. Tenant will use the Premises in a careful, safe and proper manner and
will not commit waste, overload the floor or structure of the Premises or
subject the Premises to use that would damage the Premises. Tenant shall not
permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or
vibrations to emanate from the Premises, or take any other action that would
constitute a nuisance or would disturb, unreasonably interfere with, or endanger
Landlord or any tenants of the Project. Outside storage, including without
limitation, storage of trucks and other vehicles, is prohibited without
Landlord's prior written consent. Tenant, at its sole expense, shall use and
occupy the Premises in compliance with all laws, including, without limitation,
the Americans With Disabilities Act, orders, judgments, ordinances, regulations,
codes, directives, permits, licenses, covenants and restrictions now or
hereafter applicable to the Premises (collectively, "Legal Requirements"). The
Premises shall not be used as a place of public accommodation under the
Americans With Disabilities Act or similar state statutes or local ordinances or
any regulations promulgated thereunder, all as may be amended from time to time.
Tenant shall, at its expense, make any alterations or modifications, within or
without the Premises, that are required by Legal Requirements related to
Tenant's use or occupation of the Premises. Tenant will not use or permit the
Premises to be used for any purpose or in any manner that would void Tenant's or
Landlord's insurance, increase the insurance risk, or cause the disallowance of
any sprinkler credits. If any increase in the cost of any insurance on the
Premises or the Project is caused by Tenant's use or occupation of the Premises,
or because Tenant vacates the Premises, then Tenant shall pay the amount of such
increase to Landlord. Any occupation of the Premises by Tenant prior to the
Commencement Date shall be subject to all obligations of Tenant under this
Lease.
4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent, the Security Deposit, and the first monthly
installment of estimated Operating Expenses (as hereafter defined) shall be due
and payable on the date hereof, and Tenant promises to pay to Landlord in
advance, without demand, deduction or set-off, monthly installments of Base Rent
on or before the first day of each calendar month succeeding the Commencement
Date. Payments of Base Rent for any fractional calendar month shall be prorated.
All payments required to be made by Tenant to Landlord hereunder shall be
payable at such address as Landlord may specify from time to time by written
notice delivered in accordance herewith. The obligation of Tenant to pay Base
Rent and other sums to Landlord and the obligations of Landlord under this Lease
are independent obligations. Tenant shall have no right at any time to abate,
reduce, or set-off any rent due hereunder except as may be expressly provided in
this Lease. Tenant waives and releases all statutory liens and offset rights as
to rent. If Tenant is delinquent in any monthly installment of Base Rent or of
estimated Operating Expenses for more than 5 days, Tenant shall pay to Landlord
on demand a late charge equal to 5 percent of such delinquent sum.
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<PAGE> 3
The provision for such late charge shall be in addition to all of Landlord's
other rights and remedies hereunder or at law and shall not be construed as a
penalty.
5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid to Tenant when
Tenant's obligations under this Lease have been completely fulfilled. Landlord
shall be released from any obligation with respect to the Security Deposit upon
transfer of this Lease and the Premises to a person or entity assuming
Landlord's obligations under this Paragraph 5. LANDLORD SHALL RETURN THE
SECURITY DEPOSIT WITHIN SIXTY (60) DAYS AFTER EXPIRATION OR EARLIER TERMINATION
OF THE LEASE TERM AFTER TENANT HAS VACATED, PENDING THE TIME IT TAKES TO REPAIR
ITEMS NECESSARY TO BRING THE SPACE BACK TO A CONDITION REFERENCED IN PARAGRAPH
21.
6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on the
same date that Base Rent is due, Tenant shall pay Landlord an amount equal to
1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's
Proportionate Share (hereinafter defined) of Operating Expenses for the Project.
Payments thereof for any fractional calendar month shall be prorated. The term
"Operating Expenses" means all costs and expenses incurred by Landlord with
respect to the ownership, maintenance, and operation of the Project including,
but not limited to costs of: Taxes (hereinafter defined) and fees payable to tax
consultants and attorneys for consultation and contesting taxes; insurance;
utilities; maintenance, repair and replacement of all portions of the Project,
including without limitation, paving and parking areas, roads, roofs alleys, and
driveways, mowing, landscaping, exterior painting, utility lines, heating,
ventilation and air conditioning systems, lighting, electrical systems and other
mechanical and building systems; amounts paid to contractors and subcontractors
for work or services performed in connection with any of the foregoing; charges
or assessments of any association to which the Project is subject; property
management fees payable to a property manager, including any affiliate of
Landlord, or if there is no property manager, an administration fee of 10
percent of Operating Expenses payable to Landlord; security services, if any;
trash collection, sweeping and removal; and additions or alterations made by
Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse facility in the market area, provided that the cost
of additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the lesser of the useful life thereof for federal income tax purposes.
Operating Expenses do not include costs, or expenses, depreciation or
amortization for capital repairs and capital replacements required to be made by
Landlord under Paragraph 10 of this Lease, debt service under mortgages or
ground rent under ground leases, costs of restoration to the extent of net
insurance proceeds received by Landlord with respect thereto, leasing
commissions, or the costs of renovating space for tenants.
If Tenant's total payments of Operating Expenses for any year are
less than Tenant's Proportionate Share of actual Operating Expenses for such
year, then Tenant shall pay the difference to Landlord within 30 days after
demand, and if more, then Landlord shall retain such excess and credit it
against Tenant's next payments. For purposes of calculating Tenant's
Proportionate Share of Operating Expenses, a year shall mean a calendar year
except the first year, which shall begin on the Commencement Date, and the last
year, which shall end on the expiration of this Lease. With respect to Operating
Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate
Share" shall be the percentage set forth on the first page of this Lease as
Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord
in the future for changes in the physical size of the Premises or the Project;
and, with respect to Operating Expenses which Landlord allocates only to the
Building, Tenant's "Proportionate Share" shall be the percentage set forth on
the first page of this Lease as Tenant's Proportionate Share of the Building as
reasonably adjusted by Landlord in the future for changes in the physical size
of the Premises or the Building. Landlord may equitably increase Tenant's
Proportionate Share for any item of expense or cost reimbursable by Tenant that
relates to a repair, replacement, or service that benefits only the Premises or
only a portion of the Project or Building that includes the Premises or that
varies with occupancy or use. The estimated Operating Expenses for the Premises
set forth on the first page of this Lease are only estimates, and Landlord makes
no guaranty or warranty that such estimates will be accurate.
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<PAGE> 4
AT ANY TIME WITHIN 3 MONTHS AFTER LANDLORD HAS ISSUED A STATEMENT OF
OPERATING EXPENSES PAYABLE BY TENANT, AND AFTER AT LEAST 2 DAYS PRIOR WRITTEN
NOTICE TO LANDLORD, TENANT WILL HAVE THE RIGHT TO REVIEW AND AUDIT THE BOOKS AND
RECORDS OF LANDLORD RELATING TO SUCH OPERATING EXPENSES DURING NORMAL BUSINESS
HOURS AND AT THE OFFICE OF LANDLORD AT WHICH SUCH BOOKS AND RECORDS ARE
ROUTINELY MAINTAINED. THE AUDIT WILL BE CONDUCTED AT TENANT'S EXPENSE BY A
CERTIFIED PUBLIC ACCOUNTANT LICENSED IN THE STATE IN WHICH THE PREMISES ARE
SITUATED OR BY TENANT'S CONTROLLER. IF TENANT'S AUDIT REVEALS THAT THE OPERATING
EXPENSES CHARGED TO TENANT EXCEED OR WERE LESS THAN TENANT'S PROPORTIONATE SHARE
OF THE ACTUAL OPERATING EXPENSES, AND SUCH VARIANCE IS CONFIRMED BY LANDLORD'S
CERTIFIED PUBLIC ACCOUNTANT, THEN LANDLORD WILL REIMBURSE TENANT FOR ANY
OVERCHARGE, OR TENANT WILL PAY TO LANDLORD ANY UNDERCHARGE, AS APPLICABLE,
PROMPTLY AFTER SUCH FINAL DETERMINATION. IN THE EVENT OF A CONFIRMED OVERCHARGE
OF OPERATING EXPENSES TO TENANT IN EXCESS OF 5% OF TENANT'S PROPORTIONATE SHARE
OF ACTUAL OPERATING EXPENSES IN SUCH YEAR, LANDLORD ALSO SHALL REIMBURSE TENANT
FOR THE REASONABLE COST OF TENANT'S AUDIT IF SUCH AUDIT WAS CONDUCTED BY AN
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT, BUT NOT IN EXCESS OF AN AMOUNT EQUAL TO
$1,500.
7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord may cause at Tenant's expense any utilities to be separately
metered or charged directly to Tenant by the provider. Tenant shall pay its
share of all charges for jointly metered utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of utilities shall
result in the termination of this Lease or the abatement of rent. Tenant agrees
to limit use of water and sewer for normal restroom use.
8. TAXES. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon demand, at the option of Landlord, as additional rent; provided, however,
in no event shall Tenant be liable for any net income taxes imposed on Landlord
unless such net income taxes are in substitution for any Taxes payable
hereunder. If any such tax or excise is levied or assessed directly against
Tenant, then Tenant shall be responsible for and shall pay the same at such
times and in such manner as the taxing authority shall require. Tenant shall be
liable for all taxes levied or assessed against any personal property or
fixtures placed in the Premises, whether levied or assessed against Landlord or
Tenant.
9. INSURANCE. Landlord shall maintain all risk property insurance covering
the full replacement cost of the Building. Landlord may, but is not obligated
to, maintain such other insurance and additional coverages as it may deem
necessary, including, but not limited to, commercial liability insurance and
rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term: all risk
property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days' prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing
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duplicate or similar coverage shall be deemed excess over Tenant's policies).
Such policies or certificates thereof shall be delivered to Landlord by Tenant
upon commencement of the Lease Term and upon each renewal of said insurance.
The all risk property insurance obtained by Landlord and Tenant shall
include a waiver of subrogation by the insurers and all rights based upon an
assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss or damage thereby insured against. Neither party nor its officers,
directors, employees, managers, agents, invitees or contractors shall be liable
to the other for loss or damage caused by any risk coverable by all risk
property insurance, and each party waives any claims against the other party,
and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims against
such parties for, business interruption and losses occasioned thereby sustained
by Tenant or any person claiming through Tenant resulting from any accident or
occurrence in or upon the Premises or the Project from any cause whatsoever,
including without limitation, damage caused in whole or in part, directly or
indirectly, by the negligence of Landlord or its agents, employees or
contractors.
10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the
structural soundness of the roof, AND STRUCTURAL SUPPORTS AND COLUMNS,
foundation, and exterior walls of the Building in good repair, reasonable wear
and tear and uninsured losses and damages caused by Tenant, its agents and
contractors excluded. The term "walls" as used in this Paragraph 10 shall not
include windows, glass or plate glass, doors or overhead doors, special store
fronts, dock bumpers, dock plates or revelers, or office entries. Tenant shall
promptly give Landlord written notice of any repair required by Landlord
pursuant to this Paragraph 10, after which Landlord shall have a reasonable
opportunity to repair.
11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its
expense, shall repair, replace and maintain in good condition all portions of
the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water, and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefits may extend beyond the
Term. Heating, ventilation and air conditioning systems and other mechanical and
building systems serving the Premises shall be maintained at Tenant's expense
pursuant to maintenance service contracts entered into by Tenant or, at
Landlord's election, by Landlord. The scope of services and contractors under
such maintenance contracts shall be reasonably approved by Landlord. At
Landlord's request, Tenant shall enter into a joint maintenance agreement with
any railroad that services the Premises. If Tenant fails to perform any repair
or replacement for which it is responsible, Landlord may perform such work and
be reimbursed by Tenant within 10 days after demand therefor. Subject to
Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or
replacement to any part of the Building or Project that results from damage
caused by Tenant, its agents, contractors, or invitees and any repair that
benefits only the Premises. ANY REPAIR OVER $15,000 (MAJOR REPAIR) OF WHICH
TENANT IS RESPONSIBLE SHALL BE PAID BY TENANT AND AMORTIZED OVER THE USEFUL LIFE
FOR FEDERAL INCOME TAX PURPOSES.
12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") shall be subject to Landlord's prior written
consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to
comply with insurance requirements and with Legal Requirements and shall
construct at its expense any alteration or modification required by Legal
Requirements as a result of any Tenant-Made Alterations. All Tenant-Made
Alterations shall be constructed in a good and workmanlike manner by contractors
reasonably acceptable to Landlord and only good grades of materials shall be
used. All plans and specifications for any Tenant-Made Alterations shall be
submitted to Landlord for its approval UPON TENANT REQUEST, LANDLORD SHALL
ADVISE TENANT IN WRITING WHETHER IT RESERVES THE RIGHT TO REQUIRE TENANT TO
REMOVE ANY ALTERATIONS FROM THE PREMISES UPON TERMINATION OF THE LEASE. Landlord
may monitor construction of the Tenant-Made Alterations. Tenant shall reimburse
Landlord for its costs in reviewing plans and specifications and in monitoring
construction. Landlord's right to review plans and specifications and to monitor
construction shall be solely for its own benefit, and Landlord shall have no
duty to see that such plans and specifications or construction comply with
applicable laws, codes, rules and regulations. Tenant shall provide Landlord
with the identities and mailing addresses of all persons performing work or
supplying materials, prior to beginning such construction, and Landlord may post
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on and about the Premises notices of non-responsibility pursuant to applicable
law. Tenant shall furnish security or make other arrangements satisfactory to
Landlord to assure payment for the completion of all work free and clear of
liens and shall provide certificates of insurance for worker's compensation and
other coverage in amounts and from an insurance company satisfactory to Landlord
protecting Landlord against liability for personal injury or property damage
during construction. Upon completion of any Tenant-Made Alterations, Tenant
shall deliver to Landlord sworn statements setting forth the names of all
contractors and subcontractors who did work on the Tenant-Made Alterations and
final lien waivers from all such contractors and subcontractors. Upon surrender
of the Premises, all Tenant-Made Alterations and any leasehold improvements
constructed by Landlord or Tenant shall remain on the Premises as Landlord's
property, except to the extent Landlord requires removal at Tenant's expense of
any such items or Landlord and Tenant have otherwise agreed in writing in
connection with Landlord's consent to any Tenant-Made Alterations. Tenant shall
repair any damage caused by such removal.
Tenant, at its own cost and expense and without Landlord's prior approval,
may erect such shelves, bins, machinery and trade fixtures (collectively "Trade
Fixtures") in the ordinary course of its business provided that such items do
not alter the basic character of the Premises, do not overload or damage the
Premises, and may be removed without injury to the Premises, and the
construction, erection, and installation thereof complies with all Legal
Requirements and with Landlord's requirements set forth above. Tenant shall
remove its Trade Fixtures and shall repair any damage caused by such removal.
13. SIGNS. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
surrender or vacation of the Premises, Tenant shall have removed all signs and
repair, paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and approvals
for sign and exterior treatments. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. PARKING. Tenant shall be entitled to park in common with other tenants
of the Project in those areas designated for nonreserved parking. Landlord may
allocate parking spaces among Tenant and other tenants in the Project if
Landlord determines that such parking facilities are becoming crowded. Landlord
shall not be responsible for enforcing Tenant's parking rights against any third
parties.
15. RESTORATION. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 6
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 6 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business in accordance with
this Lease. Notwithstanding the foregoing, either party may terminate this Lease
if the Premises are damaged during the last year of the Lease Term and Landlord
reasonably estimates that it will take more than one month to repair such
damage. Tenant shall pay to Landlord with respect to any damage to the Premises
the amount of the commercially reasonable deductible under Landlord's insurance
policy (currently $10,000) within 10 days after presentment of Landlord's
invoice. If the damage involves the Premises of other tenants, Tenant shall pay
the portion of the deductible that the cost of the restoration of the Premises
bears to the total cost of restoration, as determined by Landlord. Base Rent and
Operating Expenses shall be abated for the period of repair and restoration in
the proportion which the area of the Premises, if any, which is not usable by
Tenant bears to the total area of the Premises. Such abatement shall be the sole
remedy of Tenant, and except as provided herein, Tenant waives any right to
terminate the Lease by reason of damage or casualty loss.
16. CONDEMNATION. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord this Lease shall terminate and Base Rent
shall be apportioned as of said date. If part of the Premises shall be Taken,
and
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this Lease is not terminated as provided above, the Base Rent payable hereunder
during the unexpired Lease Term shall be reduced to such extent as may be fair
and reasonable under the circumstances. In the event of any such Taking,
Landlord shall be entitled to receive the entire price or award from any such
Taking without any payment to Tenant, and Tenant hereby assigns to Landlord
Tenant's interest, if any, in such award. Tenant shall have the right, to the
extent that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as may
be separately awarded or recoverable by Tenant for moving expenses and damage to
Tenant's Trade Fixtures, if a separate award for such items is made to Tenant.
17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent,
which Landlord shall not unreasonably withhold, Tenant shall not assign this
Lease or sublease the Premises or any part thereof or mortgage, pledge, or
hypothecate its leasehold interest or grant any concession or license within the
Premises and any attempt to do any of the foregoing shall be void and of no
effect. For purposes of this paragraph, a transfer of the ownership interests
controlling Tenant shall be deemed an assignment of this Lease unless such
ownership interests are publicly traded. Notwithstanding the above, Tenant may
assign or sublet the Premises, or any part thereof, to any entity controlling
Tenant, controlled by Tenant or under common control with Tenant (a "Tenant
Affiliate"), without the prior written consent of Landlord. Tenant shall
reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in
connection with any assignment or sublease IN AN AMOUNT NOT TO EXCEED $500.00.
Upon Landlord's receipt of Tenant's written notice of a desire to assign or
sublet the Premises, or any part thereof (other than to a Tenant Affiliate),
Landlord may, by giving written notice to Tenant within 10 days after receipt of
Tenant's notice, terminate this Lease with respect to the space described in
Tenant's notice, as of the date specified in Tenant's notice for the
commencement of the proposed assignment or sublease. If Landlord so terminates
the Lease, Landlord may enter into a lease directly with the proposed sublease
or assignee. Tenant may withdraw its notice to sublease or assign by notifying
Landlord within 10 days after Landlord has given Tenant notice of such
termination, in which case the Lease shall not terminate but shall continue.
It shall be reasonable for the Landlord to withhold its consent to
any assignment or sublease in any of the following instances: (i) an Event of
Default has occurred and is continuing that would not be cured upon the proposed
sublease or assignment; (ii) the assignee or sublessee does not have a net worth
calculated according to generally accepted accounting principles at least equal
the net worth of the Tenant at the time it executed the Lease; (iii) the
intended use of the Premises by the assignee or sublessee is not reasonably
satisfactory to Landlord; (iv) the intended use of the Premises by the assignee
or sublessee would materially increase the pedestrian or vehicular traffic to
the Premises or the Project; (v) occupancy of the Premises by the assignee or
sublessee would, in Landlord's opinion, violate an agreement binding upon
Landlord or the Project with regard to the identity of tenants, usage in the
Project, or similar matters; (vi) the identity or business reputation of the
assignee or sublessee will, in the good faith judgment of Landlord, tend to
damage the goodwill or reputation of the Project; (vii) the assignment or sublet
is to another tenant in the Project and is at rates which are below those
charged by Landlord for comparable space in the Project; (viii) in the case of a
sublease, the subtenant has not acknowledged that the Lease controls over any
inconsistent provision in the sublease; or (ix) the proposed assignee or
sublessee is a governmental agency. Tenant and Landlord acknowledge that each of
the foregoing criteria are reasonable as of the date of execution of the Lease.
The foregoing criteria shall not exclude any other reasonable basis for Landlord
to refuse its consent to such assignment or sublease. Any approved assignment or
sublease shall be expressly subject to the terms and conditions of this Lease.
Tenant shall provide to Landlord all information concerning the assignee or
sublessee as Landlord may request.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all times
remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease (regardless
of whether Landlord's approval has been obtained for any such assignments or
sublettings). In the event that the rent ACTUALLY PAID by a sublessee or
assignee (or a combination of the rental payable under such sublease or
assignment plus any bonus or other consideration therefor or incident thereto)
exceeds the rental payable under this Lease, then Tenant shall be bound and
obligated to pay Landlord as additional rent hereunder 50% OF such excess rental
and other excess consideration AFTER DEDUCTING TENANT'S REASONABLE, OUT OF
POCKET COSTS TO EFFECT THE ASSIGNMENT OR SUBLEASE, INCLUDING, WITHOUT
LIMITATION, BROKERAGE COMMISSION, LEGAL FEES, AND REDECORATING AND REFURBISHING
COSTS, (ALL SAID COSTS SHALL BE AMORTIZED OVER THE REMAINING LEASE TERM PRIOR TO
DEDUCTING FROM ADDITIONAL RENT) within 10 days following receipt thereof by
Tenant.
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If this Lease be assigned or if the Premises be subleased (whether
in whole or in part) or in the event of the mortgage, pledge, or hypothecation
of Tenant's leasehold interest or grant of any concession or license within the
Premises or if the Premises be occupied in whole or in part by anyone other than
Tenant, then upon a default by Tenant hereunder Landlord may collect rent from
the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold
interest was hypothecated, concessionee or licensee or other occupant and,
except to the extent set forth in the preceding paragraph, apply the amount
collected to the next rent payable hereunder; and all such rentals collected by
Tenant shall be held in trust for Landlord and immediately forwarded to
Landlord. No such transaction or collection of rent or application thereof by
Landlord, however, shall be deemed a waiver of these provisions or a release of
Tenant from the further performance by Tenant of its covenants, duties, or
obligations hereunder.
18. INDEMNIFICATION. Except for the negligence OR WILLFUL MISCONDUCT of
Landlord, its agents, employees or contractors, and to the extent permitted by
law, Tenant agrees to indemnify, defend and hold harmless Landlord, and
Landlord's agents, employees and contractors, from and against any and all
losses, liabilities, damages, costs and expenses (including attorneys' fees)
resulting from claims by third parties for injuries to any person and damage to
or theft or misappropriation or loss of property occurring in or about the
Project and arising from the use and occupancy of the Premises or from any
activity, work, or thing done, permitted or suffered by Tenant in or about the
Premises or due to any other act or omission of Tenant, its subtenants,
assignees, invitees, employees, contractors and agents. The furnishing of
insurance required hereunder shall not be deemed to limit Tenant's obligations
under this Paragraph 18.
19. INSPECTION AND ACCESS. Landlord and its agents, representatives, and
contractors may enter the Premises at any reasonable time to inspect the
Premises and to make such repairs as may be required or permitted pursuant to
this Lease and for any other business purpose. Landlord and Landlord's
representatives may enter the Premises during business hours for the purpose of
showing the Premises to prospective purchasers and, during the LAST SIX (6)
MONTHS of the Lease Term, to prospective tenants. Landlord may erect a suitable
sign on the Premises stating the Premises are available to let or that the
Project is available for sale. Landlord may grant easements, make public
dedications, designate common areas and create restrictions on or about the
Premises, provided that no such easement, dedication, designation or restriction
materially interferes with Tenant's use or occupancy of the Premises. At
Landlord's request, Tenant shall execute such instruments as may be necessary
for such easements, dedications or restrictions. LANDLORD OR ITS AGENTS SHALL
GIVE TENANT 24 HOURS NOTICE EXCEPT IN CASE OF EMERGENCY, TENANTS REPRESENTATION
SHALL BE PRESENT.
20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
21. SURRENDER. Upon termination of the Lease Term or earlier termination
of Tenant's right of possession, Tenant shall surrender the Premises to Landlord
in the same condition as received, broom clean, ordinary wear and tear and
casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any
Trade Fixtures, Tenant-Made Alterations and property not so removed by Tenant as
permitted or required herein shall be deemed abandoned and may be stored,
removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all
claims against Landlord for any damages resulting from Landlord's retention and
disposition of such property. All obligations of Tenant hereunder not fully
performed as of the termination of the Lease Term shall survive the termination
of the Lease Term, including without limitation, indemnify obligations, payment
obligations with respect to Operating Expenses and obligations concerning the
condition and repair of the Premises.
22. HOLDING OVER. If Tenant retains possession of the Premises after the
termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to 150% OF
the Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over, by Tenant, whether with or without consent of LANDLORD, WHICH SHALL NOT BE
UNREASONABLY WITHHELD shall operate to extend this Lease except as otherwise
expressly provided, and this Paragraph 22 shall not be construed as consent for
Tenant to retain possession of the Premises.
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23. EVENTS OF DEFAULT. Each of the following events shall be an event of
default ("Event of Default") by Tenant under this Lease:
(i) TENANT SHALL FAIL TO PAY ANY INSTALLMENT OF BASE RENT OR ANY
OTHER PAYMENT REQUIRED HEREIN WHEN DUE, AND SUCH FAILURE SHALL CONTINUE
FOR A PERIOD OF 5 DAYS AFTER WRITTEN NOTICE PROVIDED THAT LANDLORD SHALL
NOT BE REQUIRED TO PROVIDE NOTICE OF MONETARY DEFAULT MORE THAN TWICE IN
ANY 12 MONTH PERIOD OR MORE THAN FOUR (4) TIMES DURING THE TERM OF THIS
LEASE (AS IT MAY BE EXTENDED) FROM THE DATE SUCH PAYMENT WAS DUE.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or
its debts or seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or of any substantial part of its
property (collectively a "proceeding for relief"); (C) become the subject
of any proceeding for relief which is not dismissed within 60 days of its
filing or entry; or (D) die or suffer a legal disability (if Tenant,
guarantor, or surety is an individual) or be dissolved or otherwise fail
to maintain its legal existence (if Tenant, guarantor or surety is a
corporation, partnership or other entity).
(iii) Any insurance required to be maintained by Tenant pursuant to
this Lease shall be cancelled or terminated or shall expire or shall be
reduced or materially changed, except, in each case, as permitted in this
Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or shall
fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease.
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien or
encumbrance is filed against the Premises.
(vii) Tenant shall fail to Comply with any provision of this Lease
other than those specifically referred to in this Paragraph 23, and except
as otherwise expressly provided herein, such default shall continue for
more than 30 days after Landlord shall have given Tenant written notice of
such default, UNLESS THE NATURE OF THE DEFAULT IS SUCH THAT IT CANNOT BE
REASONABLY CURED WITHIN 30 DAYS, IN WHICH EVENT TENANT SHALL NOT BE IN
DEFAULT HEREUNDER SO LONG AS TENANT COMMENCES THE CURE WITHIN 30 DAYS AND
THEREAFTER DILIGENTLY PROSECUTES SUCH CURE TO COMPLETION, BUT, SUBJECT TO
PARAGRAPH 33, IN NO EVENT SHALL SUCH CURE PERIOD EXTEND BEYOND 90 DAYS.
24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default and
so long as such Event of Default shall be continuing, Landlord may at any time
thereafter at its election: terminate this Lease or Tenant's right of possession
(but Tenant shall remain liable as hereinafter provided), and/or pursue any
other remedies at law or in equity. Upon the termination of this Lease or
termination of Tenant's right of possession, it shall be lawful for Landlord,
without formal demand or notice of any kind, to re-enter the Premises by summary
dispossession proceedings or any other action or proceeding authorized by law
and to remove Tenant and all persons and property therefrom. If Landlord
re-enters the Premises, Landlord shall have the right to keep in place and use,
or remove and store, all of the furniture, fixtures and equipment at the
Premises.
Except as otherwise provided in the next paragraph, if Tenant
breaches this Lease and abandons the Premises prior to the end of the term
hereof, or if Tenant's right to possession is terminated by Landlord because of
an Event of Default by Tenant under this Lease, this Lease shall terminate. Upon
such termination Landlord may recover from Tenant the following, as provided in
Section 1951.2 of the Civil Code of California: (i) the worth at the time of
award of the unpaid Base Rent and other charges under this Lease that had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the reasonable value of the unpaid Base Rent and other charges
under this Lease which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; (iii) the worth at the time of award by which the
reasonable value of the unpaid Base Rent and other charges under this Lease for
the balance of the
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term of this Lease after the time of award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided; and (iv) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or that in the
ordinary course of things would be likely to result therefrom. As used herein,
the following terms are defined: (a) The "worth at the time of award" of the
amounts referred to in Sections (i) and (ii) is computed by allowing interest at
the lesser of 18 percent per annum or the maximum lawful rate. The "worth at the
time of award" of the amount referred to in Section (iii) is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent; (b) The "time of award" as used
in clauses (i), (ii), and (iii) above is the date on which judgment is entered
by a court of competent jurisdiction; (c) The "reasonable value" of the amount
referred to in clause (ii) above is computed by determining the mathematical
product of (1) the "reasonable annual rental value" (as defined herein) and (2)
the number of years, including fractional parts thereof, between the date of
termination and the time of award. The "reasonable value" of the amount referred
to in clause (iii) is computed by determining the mathematical product of (1)
the annual Base Rent and other charges under this Lease and (2) the number of
years including fractional parts thereof remaining in the balance of the term of
this Lease after the time of award.
Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession, and Landlord may enforce all its rights
and remedies under this Lease, including the right to recover rent as it becomes
due. This remedy is intended to be the remedy described in California Civil Code
Section 1951.4, and the following provision from such Civil Code Section is
hereby repeated: "The Lessor has the remedy described in California Civil Code
Section 1951.4 (lessor may continue lease in effect after lessee's breach and
abandonment and recover rent as it becomes due, if lessee has right to sublet or
assign, subject only to reasonable limitations)." Any such payments due
Landlord shall be made upon demand therefor from time to time and Tenant agrees
that Landlord may file suit to recover any sums falling due from time to time.
Notwithstanding any such reletting without termination, Landlord may at any time
thereafter elect in writing to terminate this Lease for such previous breach.
Exercise by Landlord of any one or more remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Premises and/or a termination of this Lease by Landlord, whether by
agreement or by operation of law, it being understood that such surrender and/or
termination can be effected only by the written agreement of Landlord and
Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord
shall have the right at all times to enforce the provisions of this Lease in
strict accordance with the terms hereof; and the failure of Landlord at any time
to enforce its rights under this Lease strictly in accordance with same shall
not be construed as having created a custom in any way or manner contrary to the
specific terms, provisions, and covenants of this Lease or as having modified
the same. Tenant and Landlord further agree that forbearance or waiver by
Landlord to enforce its rights pursuant to this Lease or at law or in equity,
shall not be a waiver of Landlord's right to enforce one or more of its rights
in connection with any subsequent default. A receipt by Landlord of rent or
other payment with knowledge of the breach of any covenant hereof shall not be
deemed a waiver of such breach, and no waiver by Landlord of any provision of
this Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord. To the greatest extent permitted by law, Tenant waives the
service of notice of Landlord's intention to re-enter as provided for in any
statute, or to institute legal proceedings to that end, and also waives all
right of redemption in case Tenant shall be dispossessed by a judgment or by
warrant of any court or judge. The terms "enter," "re-enter," "entry" or
"re-entry," as used in this Lease, are not restricted to their technical legal
meanings. Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different am the remaining Lease Term, rental concessions, alterations and
repair of the Premises, lease of less than the entire Premises to any tenant and
leasing any or all other portions of the Project before reletting the Premises).
Landlord shall not be liable, nor shall Tenant's obligations hereunder be
diminished, because of Landlord's failure to relet the Premises or collect rent
due in respect of such reletting, PROVIDED THAT NOT WITHSTANDING ANYTHING TO THE
CONTRARY CONTAINED HEREIN LANDLORD SHALL HAVE A DUTY TO MITIGATE DAMAGES UPON AN
EVENT OF DEFAULT.
25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term
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"Landlord" in this Lease shall mean only the owner, for the time being of the
Premises, and in the event of the transfer by such owner of its interest in the
Premises, such owner shall thereupon be released and discharged from all
obligations of Landlord thereafter accruing, but such obligations shall be
binding during the Lease Term upon each new owner for the duration of such
owner's ownership. Any liability of Landlord under this Lease shall be limited
solely to its interest in the Project, and in no event shall any personal
liability be asserted against Landlord in connection with this Lease nor shall
any recourse be had to any other property or assets of Landlord.
26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY
JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. SUBORDINATION. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Notwithstanding the foregoing, any such
holder may at any time subordinate its mortgage to this Lease, without Tenant's
consent, by notice in writing to Tenant, and thereupon this Lease shall be
deemed prior to such mortgage without regard to their respective dates of
execution, delivery or recording and in that event such holder shall have the
same rights with respect to this Lease as though this Lease had been executed
prior to the execution, delivery and recording of such mortgage and had been
assigned to such holder. The term "mortgage" whenever used in this Lease shall
be deemed to include deeds of trust, security assignments and any other
encumbrances, and any reference to the "holder" of a mortgage shall be deemed to
include the beneficiary under a deed of trust.
28. MECHANIC'S LIENS. Tenant has no express or implied authority to create
or place any lien or encumbrance of any kind upon, or in any manner to bind the
interest of Landlord or Tenant in, the Premises or to charge the rentals payable
hereunder for any claim in favor of any person dealing with Tenant, including
those who may furnish materials or perform labor for any construction or
repairs. Tenant covenants and agrees that it will pay or cause to be paid all
sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises and
that it will save and hold Landlord harmless from all loss, cost or expense
based on or arising out of asserted claims or liens against the leasehold estate
or against the interest of Landlord in the Premises or under this Lease. Tenant
shall give Landlord immediate written notice of the placing of any lien or
encumbrance against the Premises and cause such lien or encumbrance to be
discharged within 30 days of the filing or recording thereof, provided, however,
Tenant may contest such liens or encumbrances as long as such contest prevents
foreclosure of the lien or encumbrance and Tenant causes such lien or
encumbrance to be bonded or insured over in a manner satisfactory to Landlord
within such 30 day period.
29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease is in full force and effect, the date to which rent has been
paid, that Landlord is not in default hereunder (or specifying in detail the
nature of Landlord's default), the termination date of this Lease and such other
matters pertaining to this Lease as may be requested by Landlord. Tenant's
obligation to furnish each estoppel certificate in a timely fashion is a
material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this Lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as
its attorney in fact to execute on its behalf and in its name any such estoppel
certificate if Tenant fails to execute and deliver the estoppel certificate
within 10 days after Landlord's written request thereof.
30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained in
products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes AND PROVIDED IN ADDENDUM VI, Tenant shall not permit or cause
any party to bring any Hazardous Material upon the Premises or transport, store,
use, generate, manufacture or release any Hazardous Material in or about the
Premises without Landlord's prior written consent. Tenant, at its sole cost and
expense, shall operate its business in the Premises in strict compliance with
all Environmental Requirements and shall remediate
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in manner satisfactory to Landlord any Hazardous Materials released on or from
the Project by Tenant, its agents, employees, contractors, subtenants or
invitees. Tenant shall complete and certify to disclosure statements as
requested by Landlord from time to time relating to Tenant's transportation,
storage, use, generation, manufacture, or release of Hazardous Materials on the
Premises. The term "Environmental Requirements" means all applicable present and
future statutes, regulations, ordinances, rules, codes, judgments, orders or
other similar enactments of any governmental authority or agency regulating or
relating to health, safety, or environmental conditions on, under, or about the
Premises or the environment, including without limitation, the following: the
Comprehensive Environmental Response, Compensation and Liability Act; the
Resource Conservation and Recovery Act; and all state and local counterparts
thereto, and any regulations or policies promulgated or issued thereunder. The
term "Hazardous Materials" means and includes any substance, material, waste,
pollutant, or contaminant listed or defined as hazardous or toxic, under any
Environmental Requirements, asbestos and petroleum, including crude oil or any
fraction thereof, natural gas, or synthetic gas usable for fuel (or mixtures of
natural gas and such synthetic gas). As defined in Environmental Requirements,
Tenant is and shall be deemed to be the "operator" of Tenant's "facility"
and the "owner" of all Hazardous Materials brought on the Premises by Tenant,
its agents, employees, contractors or invitees, and the wastes, by-products, or
residues generated, resulting, or produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from and
against any and all losses (including, without limitation, diminution in value
of the Premises or the Project and loss of rental income from the Project),
claims, demands, actions, suits, damages (including, without limitation,
punitive damages), expenses (including, without limitation, remediation,
removal, repair, corrective action, or cleanup expenses), and costs (including,
without limitation, actual attorneys' fees, consultant fees or expert fees and
including, without limitation, removal or management of any asbestos brought
into the Premises or disturbed in breach of the requirements of this Paragraph
30, regardless of whether such removal or management is required by law) which
are brought or recoverable against, or suffered or incurred by Landlord as a
result of any release of Hazardous Materials for which Tenant is obligated to
remediate as provided above or any other breach of the requirements under this
Paragraph 30 by Tenant, its agents, employees, contractors, subtenants,
assignees or invitees, regardless of whether Tenant has knowledge of such
noncompliance. The obligations of Tenant under this Paragraph 30 shall survive
any termination of this Lease.
Landlord shall have access to, and a right to perform inspections
and tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted to Landlord upon Landlord's
prior notice to Tenant and at such times so as to minimize, so far as may be
reasonable under the circumstances, any disturbance to Tenant's operations. Such
inspections and tests shall be conducted at Landlord's expense, unless such
inspections or tests reveal that Tenant has not complied with any Environmental
Requirement, in which case Tenant shall reimburse Landlord for the reasonable
cost of such inspection and tests. Landlord's receipt of or satisfaction with
any environmental assessment in no way waives any rights that Landlord holds
against Tenant.
31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project.
32. SECURITY SERVICE. Tenant acknowledges and agrees that, while Landlord
may patrol the Project, Landlord is not providing any security services with
respect to the Premises and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33. FORCE MAJEURE. Landlord shall not be held responsible for delays in
the performance of its obligations hereunder when caused by strikes, lockouts,
labor disputes, acts of God, inability to obtain labor or materials or
reasonable substitutes therefor, governmental restrictions, governmental
regulations, governmental controls, delay in issuance of permits, enemy or
hostile governmental action, civil commotion, fire or other casualty, and other
causes beyond the reasonable control of Landlord ("Force Majeure").
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34. ENTIRE AGREEMENT. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.
35. SEVERABILITY. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the partlease is illegal, invalid or unenforceable under
present is hereto that the remainder of this Lease shall not be affected
thereby. It is also the intention of the parties to this Lease that in lieu of
each clause or provision of this Lease that is illegal, invalid or
unenforceable, there be added, as a part of this Lease, a clause or provision as
similar in terms to such illegal, invalid or unenforceable clause or provision
as may be possible and be legal, valid and enforceable.
36. BROKERS. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction and that no
broker, agent or other person brought about this transaction, other than the
broker, if any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord harmless from and against any clause by any other
broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to Landlord
hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease shall
be in writing and shall be sent by registered or certified mail, return receipt
requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
(d) Except as otherwise expressly provided in this Lease or as otherwise
required by law, Landlord retains the absolute right to withhold any consent or
approval.
(e) At Landlord's request BUT NO MORE THAN ONCE PER YEAR, Tenant shall
furnish Landlord with true and complete copies of its most recent annual and
quarterly financial statements prepared by Tenant or Tenant's accountants and
any other financial information or summaries that Tenant typically provides to
its lenders or shareholders.
(f) Neither this Lease nor a memorandum of lease shall be filed by or on
behalf of Tenant in any public record. Landlord may prepare and file, and upon
request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions inserted
in this Lease are for convenience only and in no way affect the interpretation
of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at
13
<PAGE> 14
all times to comply with applicable law governing the maximum rate or amount of
any interest payable on or in connection with this Lease. If applicable law is
ever judicially interpreted so as to render usurious any interest called for
under this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by the
laws of the state in which the Project is located, excluding any principles of
conflicts of laws.
(l) Time is of the essence as to the Performance of Tenant's and
Landlord's obligations under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated into
this Lease and made a part hereof. In the event of any conflict between such
exhibits or addenda and the terms of this Lease, such exhibits or addenda shall
control.
38. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF
SECURITY CAPITAL INDUSTRIAL TRUST. Any obligation or liability whatsoever of
Security Capital Industrial Trust, a Maryland real estate investment trust,
which may arise at any time under this Lease or any obligation or liability
which may be incurred by it pursuant to any other instrument, transaction, or
undertaking contemplated hereby shall not be personally binding upon, nor shall
resort for the enforcement thereof be had to the property of, its trustees,
directors, shareholders, officers, employees or agents, regardless of whether
such obligation or liability is in the nature of contract, tort, or otherwise.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.
TENANT: LANDLORD:
CXR Telcom Corporation, a SCI Limited Partnership-I, a
California Corporation Delaware Limited Partnership
By: /s/ Henry Mourad By: /s/ Ned K. Anderson
-------------------------------- -----------------------------------
Title: President Ned K. Anderson
Title: Senior Vice President
Address: Address:
2040 Fortune Drive 47775 Fremont Boulevard
Suite 102 Fremont, CA 94538
San Jose, CA 95131
14
<PAGE> 15
Rules and Regulations
1. The sidewalk, entries, and driveways of the Project shall not be
obstructed by Tenant, or its agents, or used by them for any purpose other
than ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor furniture,
etc., in the parking areas, landscaped areas or other areas outside of its
Premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making
of loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections in
the Premises, Landlord or its agent will direct the electrician as to
where and how the wires may be introduced; and, without such direction, no
boring or cutting of wires will be permitted. Any such installation or
connection shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler, or
other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil, gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited. Explosives
or other articles deemed extra hazardous shall not be brought into the
Project.
7. Parking any type of recreational vehicles is specifically prohibited on or
about the Project. Except for the overnight parking of operative vehicles,
no vehicle of any type shall be stored in the parking areas at any time.
In the event that a vehicle is disabled, it shall be removed within 48
hours. There shall be no "For Sale" or other advertising signs on or about
any parked vehicle. All vehicles shall be parked in the designated parking
areas in conformity with all signs and other markings. All parking will be
open parking, and no reserved parking, numbering or lettering of
individual spaces will be permitted except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and other
pests.
9. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to the
effects of Tenant by the janitors or any other employee or person.
11. Tenant shall give Landlord prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment affecting the Premises.
12. Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, or dumping of
waste or refuse or permit any harmful materials to be placed in any
drainage system or sanitary system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal firm for the
Premises must be kept in the trash enclosure areas, if any, provided for
that purpose.
14. No auction, public or private, will be permitted on the Premises or the
Project.
15. No awnings shall be placed over the windows in the Premises except with
the prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or cooking or for any
immoral or illegal purposes or for any purpose other than that specified
in the Lease. No gaming devices shall be operated in the Premises.
17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account the
capacity of the electrical wiring in the Project and the Premises and the
needs of other tenants, and shall not use more than such safe capacity.
Landlord's consent to the installation of electric equipment shall not
relieve Tenant from the obligation not to use more electricity than such
safe capacity.
18. Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage.
19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.
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<PAGE> 16
HVAC Maintenance/Service Contract Requirements
A service contract with a Landlord approved HVAC contractor must become
effective within thirty (30) days of occupancy and service visits should be
performed on a quarterly basis. The following are the approved HVAC contractors:
Phoenix Heating and Air Conditioning 408/487-0390
Cal-Air Conditioning 408/947-0155
ICOM 408/298-8101
We suggest that you send the following list to one of the above HVAC contractors
to be assured that these items are included in the maintenance contract:
1. Adjust belt tension;
2. Lubricate all moving parts, as necessary;
3. Inspect and adjust all temperature and safety controls;
4. Check refrigeration system for leaks and operation;
5. Check refrigeration system for moisture;
6. Inspect compressor oil level and crank case heaters;
7. Check head pressure, suction pressure and oil pressure;
8. Inspect air filters and replace when necessary;
9. Check space conditions;
10. Check condensate drains and drain pans and clean, if necessary;
11. Inspect and adjust all valves;
12. Check and adjust dampers;
13. Run machine through complete cycle,
Note: A certificate must be provided for our files not later than thirty (30)
days after mutual execution hereof. Failure to provide such certificate or
perform said services, when required, shall constitute material default of
this lease.
16
<PAGE> 17
CXR
MATERIAL
LISTING
CXR MATERIAL SAFETY DATA SHEET
<TABLE>
<CAPTION>
CXR # DESCRIPTION QUANTITY
- ----- ----------- --------
<S> <C> <C>
CXRXAMP1 WATER SOLUBLE MASK/PT-650 1 CASE (24 PER CASE)
CXRXAMP3 FLUX STRIPPER 9 CASES (12 PER CASE)
CXRXAMP4 KLEENOX OR-904 9 JARS - 16 OZ. EACH
CXRXAMP5 AQUA-SOL FLUX #183 55 GALLON DRUM (STORED OUTSIDE)
CXRXAMP6 BER SOLDER FOR PC BOARDS 13 BOXES (50 LBS. EACH)
CXRXAMP6 ISOPROPYL ALCOHOL 99% 55 GALLON DRUM (STORED OUTSIDE)
12 GALLON DRUM (INSIDE)
CXRXAMP11 2-TON CLEAR EPOXY HARDENER 1 TUBE
CXRXAMP12 KRAZY GLUE 203 10 BOTTLES
CXRXAMP13 KRAZY GLUE ACCELERATOR 10 BOTTLES
MISC SOLDER DROSS 30 GALLON DRUM
</TABLE>
17
<PAGE> 18
ADDENDUM I
BASE RENT ADJUSTMENTS
ATTACHED TO AN A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
Base Rent shall equal the following amounts for the respective periods set forth
below:
<TABLE>
<CAPTION>
Period Monthly Base Rent
------ -----------------
<S> <C>
10/l/97 to 9/30/99 $27,664
10/l/99 to 9/30/00 $28,538
10/l/00 to 9/30/02 $29,411
</TABLE>
18
<PAGE> 19
ADDENDUM II
CONSTRUCTION
(TURNKEY)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
(a) Landlord agrees to furnish or perform at Landlord's sole cost and
expense those items of construction and those improvements (the "Tenant
Improvements") specified below:
- New paint throughout except in the warehouse.
- Wall demolition per the plan.
- New walls and patching of carpet as required where walls demoed.
- New VCT at wave solder room and replace ceiling tiles.
- New carpet consisting of 30 oz. direct glue down cut pile or level loop
at the following rooms: engineering, demo room, conference room 2, PO 1,
reception area, sales and marketing & administration
- Patch carpet at po's 3&4, 6&7, & 9&10.
- VCT patching at production as required.
- New VCT in production material control room.
- Demolition as noted.
- Vision windows in two new doors.
- Reuse of existing doors and sidelights as needed.
- Seal and texture wallcovering where walls removed.
- Final Clean up.
- Minor HVAC and sprinkler rework for new work.
- Re-caulk existing sinks at all restrooms.
- Replace any damaged or soiled ceiling tiles.
- Shampoo carpets.
- VCT - striped; waxed
NOTE: Landlord shall also coordinate the retrofit of the existing lighting
systems for energy efficiency. CXR will contract and pay for the cost of
lighting retrofit in its entirety. CXR will receive the benefit of the rebate
given after the job has been completed.
(b) If Tenant shall desire any changes, Tenant shall so advise Landlord
in writing and Landlord shall determine whether such changes can be made in a
reasonable and feasible manner. Any and all costs of reviewing any requested
changes, and any and all costs of making any changes to the Tenant Improvements
which Tenant may request and which Landlord may agree to shall be at Tenant's
sole cost and expense and shall be paid to Landlord upon demand and before
execution of the change order.
(c) Landlord shall proceed with and complete the construction of the
Tenant Improvements. As soon as such improvements have been Substantially
Completed, Landlord shall notify Tenant in writing of the date that the Tenant
Improvements were Substantially Completed. Such date, unless an earlier date is
specified as the Commencement Date in this Lease or otherwise agreed to in
writing between Landlord and Tenant, shall be the "Commencement Date," unless
the completion of such improvements was delayed due to any act or omission of,
or delay caused by, Tenant including, without limitation, Tenant's failure to
approve plans, complete submittals or obtain permits within the time periods
agreed to by the parties or as reasonably required by Landlord, in which case
the Commencement Date shall be the date such improvements would have been
completed but for the delays caused by Tenant. The Tenant Improvements shall be
deemed substantially completed ("Substantially Completed") when, in the opinion
of the construction manager (whether an employee or agent of Landlord or a third
party construction manager), the Premises are substantially completed except for
punch list items which do not prevent in any material way the use of the
Premises for the purposes for which they were intended. After the Commencement
Date Tenant shall, upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the Premises.
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<PAGE> 20
If Landlord has not achieved Substantial Completion of Tenant Improvements
on or before November 30, 1997, then Tenant may, at its option, terminate this
Lease and upon such termination Landlord shall promptly return the Security
Deposit to Tenant.
(d)The failure of Tenant to take possession of or to occupy the
Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to applicable
ordinances and building codes governing Tenant's right to occupy or perform in
the Premises, Tenant shall be allowed to install its tenant improvements,
machinery, equipment, fixtures, or other property on the Premises during the
final stages of completion of construction provided that Tenant does not thereby
interfere with the completion of construction or cause any labor dispute as a
result of such installations, and provided further that Tenant does hereby agree
to indemnify, defend, and hold Landlord harmless from any loss or damage to such
property, and all liability, loss, or damage arising from any injury to the
Project or the property of Landlord, its contractors, subcontractors, or
materialmen, and any death or personal injury to any person or persons arising
out of such installations, whether or not any such loss, damage, liability,
death, or personal injury was caused by Landlord's negligence. Any such
occupancy or performance in the Premises shall be in accordance with the
provisions governing Tenant-Made Alterations and Trade Fixtures in the Lease,
and shall be subject to Tenant providing to Landlord satisfactory evidence of
insurance for personal injury and property damage related to such installations
and satisfactory payment arrangements with respect to installations permitted
hereunder. Delay in putting Tenant in possession of the Premises shall not serve
to extend the term of this Lease or to make Landlord liable for any damages
arising therefrom.
(e)Except for incomplete punch list items, Tenant upon the Commencement
Date shall have and hold the Premises as the same shall then be without any
liability or obligation on the part of Landlord for making any further
alterations or improvements of any kind in or about the Premises. Landlord
agrees to pass through any warranties received by Landlord for any Tenant
Improvements performed on Premises prior to commencement.
20
<PAGE> 21
ADDENDUM III
RENEWAL OPTION
(BASEBALL ARBITRATION)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
(a)Provided that as of the time of the giving of the Extension Notice
and the Commencement Date of the Extension Term (as such terms are defined
below), (x) Tenant is the Tenant originally named herein, (y) Tenant actually
occupies all of the Premises initially demised under this Lease and any space
added to the Premises, and (z) no Event of Default exists, or would exist but
for the passage of time or the giving of notice, or both; then Tenant shall have
the right to extend the Lease Term for an additional term of 5 years (such
additional term is hereinafter called the "Extension Term") commencing on the
day following the expiration of the Lease Term (hereinafter referred to as the
"Commencement Date of the Extension Term"). Tenant must give Landlord notice
(hereinafter called the "Extension Notice") of its election to extend the term
of the Lease Term at least 9 months, but not more than 6 months, prior to the
scheduled expiration date of the Lease Term.
(b)The Base Rent payable by Tenant to Landlord during the Extension
Term shall be the greater of:
(i) the Base Rent in effect on the expiration of the Lease Term (if
the Base Rent is stated as an annual or other periodic rate, adjusted for the
length of the Lease Term), and
(ii) the Fair Market Rent, as defined and determined pursuant to
Paragraphs (c), (d), and (e) below.
(c)The term "Fair Market Rent" shall mean the Base Rent, expressed as
an annual rent per square foot of floor area, which Landlord would have received
from leasing the Premises for the Extension Term to an unaffiliated person which
is not then a tenant in the Project, assuming that such space were to be
delivered in "as-is" condition, and taking into account the rental which such
other tenant would most likely have paid for such premises, including market
escalations, provided that Fair Market Rent shall not in any event be less than
the Base Rent for the Premises as of the expiration of the Lease Term. Fair
Market Rent shall not be reduced by reason of any costs or expenses saved by
Landlord by reason of Landlord's not having to find a new tenant for the
Premises (including without limitation brokerage commissions, cost of
improvements necessary to prepare the space for such tenant's occupancy, rent
concession, or lost rental income during any vacancy period). Fair Market Rent
means only the rent component defined as Base Rent in the Lease and does not
include reimbursements and payments by Tenant to Landlord with respect to
operating expenses and other items payable or reimbursable by Tenant under the
Lease. In addition to its obligation to pay Base Rent (as determined herein),
Tenant shall continue to pay and reimburse Landlord as set forth in the Lease
with respect to such operating expenses and other items with respect to the
Premises during the Extension Term. The arbitration process described below
shall be limited to the determination of the Base Rent and shall not affect or
otherwise reduce or modify the Tenant's obligation to pay or reimburse Landlord
for such operating expenses and other reimbursable items.
(d)Landlord shall notify Tenant of its determination of the Fair Market
Rent (which shall be made in Landlord's sole discretion and shall in any event
be not less than the Base Rent in effect as of the expiration of the Lease Term)
for the Extension Term, and Tenant shall advise Landlord of any objection within
10 days of receipt of Landlord's notice. Failure to respond within the 10-day
period shall constitute Tenant's acceptance of such Fair Market Rent. If Tenant
objects, Landlord and Tenant shall conunence negotiations to attempt to agree
upon the Fair Market Rent within 30 days of Landlord's receipt of Tenant's
notice. If the parties cannot agree, each acting in good faith but without any
obligation to agree, then the Lease Term shall not be extended and shall
terminate on its scheduled termination date and Tenant shall have no further
right hereunder or any remedy by reason of the parties'
21
<PAGE> 22
failure to agree unless Tenant or Landlord invokes the arbitration procedure
provided below to determine the Fair Market Rent.
(e)Arbitration to determine the Fair Market Rent shall be in accordance
with the Real Estate Valuation Arbitration Rules of the American Arbitration
Association. Unless otherwise required by state law, arbitration shall be
conducted in the metropolitan area where the Project is located by a single
arbitrator unaffiliated with either party. Either party may elect to arbitrate
by sending written notice to the other party and the Regional Office of the
American Arbitration Association within 5 days after the 30-day negotiating
period provided in Paragraph (d), invoking the binding arbitration provisions of
this paragraph. Landlord and Tenant shall each submit to the arbitrator their
respective proposal of Fair Market Rent. The arbitrator must choose between the
Landlord's proposal and the Tenant's proposal and may not compromise between the
two or select some other amount. Notwithstanding any other provision herein, the
Fair Market Rent determined by the arbitrator shall not be less than, and the
arbitrator shall have no authority to determine a Fair Market Rent less than,
the Base Rent in effect as of the scheduled expiration of the Lease Term. The
cost of arbitration shall be paid by Landlord if the Fair Market Rent is that
proposed by Landlord and by Tenant if the Fair Market Rent is that proposed by
Tenant; and shall be borne equally otherwise. If the arbitrator has not
determined the Fair Market Rent as of the end of the Lease Term, Tenant shall
pay 105 percent of the Base Rent in effect under the Lease as of the end of the
Lease Term until the Fair Market Rent is determined as provided herein. Upon
such determination, Landlord and Tenant shall make the appropriate adjustments
to the payments between them.
(f)The parties consent to the jurisdiction of any appropriate court to
enforce the arbitration provisions of this Addendum and to enter judgment upon
the decision of the arbitrator.
(g)Except for the Base Rent as determined above, Tenant's occupancy of
the Premises during the Extension Term shall be on the same terms and conditions
as are in effect immediately prior to the expiration of the initial Lease Term;
provided, however, Tenant shall have no further right to extend the Lease Term
pursuant to this addendum or to any allowances, credits or abatements or options
to expand, contract, renew or extend the Lease.
(h)If Tenant does not send the Extension Notice within the period set
forth in Paragraph (a), Tenant's right to extend the Lease Term shall
automatically terminate. Time is of the essence as to the giving of the
Extension Notice and the notice of Tenant's objection under Paragraph (d).
(i)Landlord shall have no obligation to refurbish or otherwise improve
the Premises for the Extension Term. The Premises shall be tendered on the
Commencement Date of the Extension Term in "as-is" condition.
(j)If the Lease is extended for the Extension Term, then Landlord shall
prepare and Tenant shall execute an amendment to the Lease confirming the
extension of the Lease Term and the other provisions applicable thereto.
(k)If Tenant exercises its right to extend the term of the Lease for
the Extension Term pursuant to this Addendum, the term "Lease Term" as used in
the Lease, shall be construed to include, when practicable, the Extension Term
except as provided in (g) above.
22
<PAGE> 23
ADDENDUM IV
NON-DISTURBANCE AGREEMENT
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
Tenant shall not be obligated to subordinate the Lease or its interest
therein to any future mortgage, deed of trust or ground lease on the Project
unless concurrently with such subordination the holder of such mortgage or deed
of trust or the ground lessor under such ground lease agrees not to disturb
Tenant's possession of the Premises under the terms of the Lease in the event
such holder or ground lessor acquires title to the Premises through foreclosure,
deed in lieu of foreclosure or otherwise. Tenant shall be solely responsible for
any fees or expenses charged by the holder of such mortgage or deed of trust in
connection with the granting of such non-disturbance agreement.
23
<PAGE> 24
ADDENDUM V
VACATION OF PREMISES
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
Tenant's vacating of the Premises shall not constitute an Event of
Default if, prior to vacating the Premises, Tenant has made arrangements
reasonably acceptable to Landlord to (a) insure that Tenant's insurance for the
Premises will not be voided or cancelled with respect to the Premises as a
result of such vacancy, (b) insure that the Premises are secured and not subject
to vandalism, and (c) insure that the Premises will be properly maintained after
such vacation. Tenant shall inspect the Premises at least once each month and
report monthly in writing to Landlord on the condition of the Premises.
24
<PAGE> 25
ADDENDUM VI
STORAGE AND USE OF PERMITTED HAZARDOUS MATERIALS
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED JULY 28, 1997, BETWEEN
SCI Limited Partnership-I
and
CXR Telcom Corporation
1. Permitted Hazardous Materials and Use.
(a) Tenant has requested Landlord's consent to use the Hazardous
Materials listed below in its business at the Premises (the "Permitted Hazardous
Materials"). Subject to the conditions set forth herein, Landlord hereby
consents to the Use (hereinafter defined) of the Permitted Hazardous Materials.
Any Permitted Hazardous Materials on the Premises will be generated, used,
received, maintained, treated, stored, or disposed in a manner consistent with
good engineering practice and in compliance with all Environmental Requirements.
Permitted Hazardous Materials (including maximum quantities):
The storage, uses or processes involving the Permitted Hazardous
Materials (the "Use") are described below.
Use [If Limited to receiving and storage, so specify]:
2. No Current Investigation.
Tenant represents and warrants that it is not currently subject to an
inquiry, regulatory investigation, enforcement order, or any other proceeding
regarding the generation, use, treatment, storage, or disposal of a Hazardous
Material.
3. Notice and Reporting.
Tenant immediately shall notify Landlord in writing of any spill,
release, discharge, or disposal of any Hazardous Material in, on or under the
Premises or the Project. All reporting obligations imposed by Environmental
Requirements are strictly the responsibility of Tenant.
Tenant shall supply to Landlord within 5 business days after Tenant
first receives or sends the same, copies of all claims, reports, complaints,
notices, warnings or asserted violations relating in any way to Tenant's use of
the Premises.
4. Indemnification.
Tenant's indemnity obligation under the Lease with respect to Hazardous
Materials shall include indemnification for the liabilities, expenses and other
losses described therein as a result of the Use of the Hazardous Materials or
the breach of Tenant's obligations or representations set forth above. It is the
intent of this provision that Tenant be strictly liable to Landlord as a result
of the Use of Hazardous Materials without regard to the fault or negligence of
Tenant, Landlord or any third party.
5. Disposal Upon Lease Termination.
At the expiration or earlier termination of the Lease, Tenant, at its
sole cost and expense, shall: (i) remove and dispose off-site any drums,
containers, receptacles, structures, or tanks storing or containing Hazardous
Materials (or which have stored or contained Hazardous Materials) and the
contents thereof; (ii) remove, empty, and purge all underground and above ground
storage tank systems, including connected piping, of all vapors, liquids,
sludges and residues; and (iii) restore the Premises to its original condition.
Such activities shall be performed in compliance with all Environmental
Requirements and to the satisfaction of Landlord. Landlord's satisfaction with
such activities or the condition of the Premises does not waive, or release
Tenant from, any obligations hereunder.
25
<PAGE> 26
EXHIBIT A - SITE PLAN
[DIAGRAM]
EXHIBIT B - FLOOR PLAN - INTERIOR
[DIAGRAM]
26
<PAGE> 27
EXHIBIT B-1
SECURITY CAPITAL INDUSTRIAL TRUST
CUSTOMER FINISH WORK LETTER AGREEMENT
OFFICE-AREA
1. CABINETS: Coffee bar and/or lunch room base cabinet(s) shall be 6'0" long
plastic laminate with chrome wire pulls.
2. COUNTERTOPS: The coffee bar top shall have a square front edge with a 4"
splash in plastic laminate.
3. LAVATORY COUNTERTOPS: In multiple accommodation toilet rooms with multiple
lavatories, the lavatories shall be installed in a plastic laminated
countertop with a bullnose front edge and a 4" backsplash. Smaller tenant
spaces shall receive wall mounted lavatories.
4. ROOF INSULATION: The insulation above conditioned office area ceilings
shall be minimum R-11 fiberglass batts.
5. THERMAL WALL INSULATION: Walls between conditioned and unconditioned
spaces shall receive minimum R-1 unfaced fiberglass batt insulation.
6. ACOUSTIC INSULATION: All toilet room walls and ceilings shall receive 3
1/2" unfaced fiberglass batt acoustic insulation.
7. DOORS AND FRAMES: 3'-0" x 7-0'x 1-3/4", solid core, birch, B-3 stain
prefinished with anodized aluminum frames or prefinished black (Timely)
steel frames.
8. INTERIOR DOOR HARDWARE: Schlage "AL" series Saturn in a brushed chrome 626
finish.
9. INTERIOR WINDOWS: None
10. MIRRORS: toilet rooms shall have mirrors the length of the lavatory top or
24 x 36 if the lavatory is wall hung.
11. DRYWALL PARTITIONS: office walls shall be undergrid 3-5/8" x 25 Ga. metal
studs at 24" o.c. with 5/8" gypsum board.
12. DRYWALL FINISH: All drywall and exposed concrete walls within the office
and toilet rooms shall receive a skip trowel textured or smooth finish.
13. WAINSCOT: Toilet room wet walls shall have 4'-6" high white Pionite
wainscot.
14. ACOUSTIC CEILING TILE: Office areas shall have an exposed grid acoustic
ceiling with 24" x 48" non-directional fissured tile, installed at 9'-0"
15. OFFICE CARPET: Designweave or Shaw direct glue-down, 26 oz. face weight
level loop or 30 oz cut-pile carpet without pad.
16. LUNCH ROOM: shall have vinyl composition tile (VCT) flooring 1/8" gauge,
standard grade, as manufactured by Tarkett or Armstrong.
17. RUBBER BASE: The office areas shall have a 4" high topset rubber base as
manufactured by Burke, Roppe, or Tarkett, installed in all areas receiving
floor covering except the toilet rooms.
18. TOILET ROOM: The flooring shall be sheet vinyl by Armstrong "Suffield",
"Best of Both Worlds" or "Seagate" with a 6" covered base.
19. PAINT: One (1) coat of paint in a standard light color interior flat
latex, except in the toilet rooms and at the coffee bar which shall
receive one (1) coat of latex semi-gloss enamel over one (1) coat of PVA
sealer. If the walls are smooth finished, they shall receive two (2) coats
of paint.
20. TOILET ACCESSORIES: Napkin Disposals: Bobrick B-270 sanitary napkin
disposals in each women's toilet stall. Paper Towel Dispenser: Bobrick
B-369 (for single accommodation toilet rooms) or a Bobrick B-3944 (for
multiple accommodation toilet rooms) recessed paper towel dispenser with a
waste receptacle. Seat Cover Dispenser: Bobrick B-221 seat cover dispenser
in each toilet stall. Toilet Paper Holder: Bobrick B-686 double toilet
paper holder. Grab Bars: Bobrick No. B6806-36 and B6806-42 stainless steel
handicap grab bars per code.
21. TOILET PARTITIONS: Metal, floor mounted, overhead braced toilet partitions
with a backed enamel finish by Global Steel, Knickerbocker or equal in
manufactures standard color.
22. BLINDS: All exterior windows, except storefront doors, shall receive
mini-blinds by Bali, "inside mount", in a light building standard color
with a valance.
23. PLUMBING FIXTURES AND TRIM:
Lavatory for vanity: American Standard or equal, "Oval Horizon", model
3303.013, white, self-rimming with a Delta Model 523 WF HDF single lever
type faucet assembly with a grid strainer and bright chrome finish.
Wall-hung lavatory: American Standard or equal, "Lucerne", model 0355.012,
27
<PAGE> 28
white, wall mounted lavatory with a Delta Model 523 WF HDP single lever
type faucet assembly with a grid strainer and bright chrome finish.
Water closet: American Standard or equal, "Cadet Aquameter", elongated,
1.5 GPF, model 3042.12, white, with an Olsonite #95 seat and a Sloan #111
flush valve.
Urinal: American Standard or equal, "Allbrook", model 6540.017, white,
with a Sloan 180-1.5 flush valve.
Coffee bar sink: Elkay or equal,"Peacemaker Starlite", model PSR-1918,
stainless steel, with a Delta #100 faucet.
Water heater: Sized to meet demand installed in a smitty pan draining into
a hub drain with a trap primer.
24. Fire sprinkler heads shall be chrome with white escutcheons, semirecessed,
not centered, on the ceiling tiles.
25. The HVAC system shall maintain 75 degrees indoors, on a 100 degree
outdoor day.
26. The HVAC system shall be connected to a 7-day skip-a-day time clock and
include a bypass timer at each thermostat.
27. All thermostats shall have an automatic change-over feature and a locking
cover.
28. Toilet rooms shall have an exhaust fan.
29. All conditioned areas shall have a supply register and a deducted return
register. Supply and return air registers shall be white baked enamel
2' x 2' with a perforated face, flush mounted. Supply air registers shall
have a 4-way blow.
30. Office lighting: shall be 2' x 4' three lamp lay-in fluorescent light
fixtures with standard acrylic lens and T-12 low watt type lamps, 75 foot
candles a 3' A.F.F. or as permitted by code but no less than two (2)
fixtures per office.
31. Furnish and install two (2) 110V duplex receptacles in each office.
32. Furnish and install a dedicated 110 volt fourplex outlet at the telephone
board and two dedicated 110V outlets at the coffee bar.
33. Furnish and install a 2" diameter P.V.C. or steel (where required by
code) conduit for phone system from the building telephone service
entrance to a telephone board within the tenant space.
WAREHOUSE
34. FULL HEIGHT DRYWALL PARTITIONS @ tenant demising walls: Metal studs with
one layer of 5/8" type "X" gypsum board on each side from the floor to the
roof deck.
35. OFFICE/WAREHOUSE WALL: Metal studs with two layers of 5/8" type "X" gypsum
board on each side to 6" A.F.F.
36. WAREHOUSE WALL FINISH: All drywall shall be fire taped only. Spot nails in
firetaped areas.
37. CONCRETE FLOOR SEALER: Exposed concrete floors shall receive one coat of
acrylic concrete sealer.
38. WAREHOUSE LIGHTING: Provide 16' high output fluorescent strip light
fixtures or metal halide fixtures to achieve 15 foot candles of light
measured at 30" above the floor in the warehouse space.
28
<PAGE> 29
EXHIBIT C
SIGN CRITERIA
BAYSIDE COMMONS
WINDOW SIGNS IDENTIFICATION:
Each Tenant will be allowed one window sign placed either to the left or to the
right of the entrance door, whichever provides the best visibility.
Company names, logos or symbols will be allowed in this area - color and size to
be determined by the Tenant, all other copy in this area except for logos or
symbols will be white pressure sensitive letters.
Copy should start at 5' from grade working down to no more than 3 1/2' from
grade. Sign layout including copy, sizes and color must be approved by the
building management.
One security decal only may be applied to the front door glass in the lower
comer if the Tenant so desires. All exterior alarm bells are to be mounted to
the rear of the building only.
DIRECTORY SIGN IDENTIFICATION:
A monument directory sign has been provided for each building. If only one
tenant occupies an entire building, that Tenant shall be allowed to utilize the
entire directory sign area for its sensitive vinyl letters in the Handel Gothic
style with a letter height suitable for the area allowed, and a logo may be
used. Layout is to be approved by building management.
If two Tenants occupy a building, signs shall consist of 4: Handel Gothic,
Spar-Cal dark mauve pressure sensitive vinyl letters condensed to 60.4%.
Directory signs shall list the street number and the company names only, no
slogans or symbols allowed.
If three Tenants occupy a building, signs shall consist of 4: Handel Gothic,
Spar-Cal dark mauve pressure sensitive vinyl letters condensed to 60.4%.
Directory signs shall list the street number and the company names only, no
slogans or symbols allowed.
REAR LOADING SIGNS:
Each Tenant will be allowed to identify its rear door for shipping and receiving
purposes. The company name shall be placed on a 36" x 24" aluminum panel
adjacent to the rear doors.
Copy shall consist of 3" vinyl capital letters only in the Spar-Cal dark mauve
Handel Gothic style. Company names and logos only are allowed.
MANAGEMENT RESERVES THE RIGHT TO DENY ANY COPY IT CONSIDERS UNSUITABLE. LAYOUT
IS TO BE APPROVED BY BUILDING MANAGEMENT. THE COST OF ALL LETTERING AND LOGOS
WILL BE THE RESPONSIBILITY OF THE TENANT. NO OTHER SIGNS ARE ALLOWED IN THE
WINDOWS OR DOORS.
29
<PAGE> 30
LEASE GUARANTY (CORPORATION)
The undersigned (collectively the "Guarantor") hereby absolutely and
unconditionally, jointly and severally, guarantees the prompt, complete, and
full punctual payments by the Tenant under that certain Lease Agreement (such
lease, as amended, being herein referred to as the "Lease"), dated July 28,
1997, between SCI Limited Partnership, a Delaware Limited Partnership, as
Landlord ("Landlord"), and CXR Telcom Corporation, a California Corporation, as
Tenant ("Tenant") covering the premises located at 47233 Fremont Boulevard,
Fremont, California. This Guaranty shall include any liability Tenant shall
acquire under the Lease for any period following the term of the Lease.
The obligation of the Guarantor is primary and independent of Tenant's
obligations under the Lease and may be enforced directly against the Guarantor
independently of and without proceeding against the Tenant or exhausting or
pursuing any remedy against Tenant or any other person or entity.
This instrument may not be changed, modified, discharged, or terminated
orally or in any manner other than by an agreement in writing signed by
Guarantor and the Landlord.
The obligations of Guarantor under this Guaranty shall not be released or
otherwise affected by reason of any sublease, assignment, or other transfer of
the Tenant's interest under the Lease, whether or not Landlord consents to such
sublease, assignment, or other transfer.
The obligations of Guarantor hereunder shall not be released by Landlord's
receipt, application, or release of security given for the performance and
observance of covenants and conditions in said Lease contained on Tenant's part
to be performed or observed nor by any modification of said Lease; but in case
of any such modification the liability of Guarantor shall be determined in
accordance with the terms of any such modification of the Lease.
Guarantor waives any defense or right arising by reason of any disability
or lack of authority or power of Tenant and shall remain liable hereunder if
Tenant or any other party shall not be liable under the Lease for such reason.
Until all the covenants and conditions in said Lease on Tenant's part to
be performed and observed are fully affirmed and observed, Guarantor (i) shall
have no right of authorities against Tenant by reason of any payments or
preformed and observed by the Guarantor, in compliance with the obligations of
the Guarantor hereunder; (ii) waives any right to enforce any remedy which
Guarantor now or hereunder shall have against Tenant by reason of any one or
more payments or acts of performance in compliance with the obligations of
Guarantor hereunder: and (iii) subordinates any liability or indebtedness of
Tenant now or hereafter held by Guarantor to the obligations of Tenant to the
Landlord under said Lease.
The liability of Guarantor hereunder shall not be released or otherwise
affected by (i) the release or discharge of Tenant in any insolvency,
bankruptcy, reorganization, receivership, or other debtor relief proceeding
involving Tenant (collectively "proceeding for relief"); (ii) the impairment,
limitation, or modification of the liability of Tenant or the estate of the
Tenant in any proceeding for relief, or of any law referring to bankruptcy,
insolvency, or of any remedy for the enforcement of Tenant's liability under the
Lease, resulting from the operation of any law pertaining to bankruptcy,
insolvency, or similar proceeding or other law or from the decision in any
court; (iii) the rejection or disaffirmation of the Lease in any proceeding for
relief; or (iv) the cessation from any cause whatsoever of the liability of
Tenant.
This Guaranty shall continue to be effective or be rescinded, as the case
may be, if at any time any payment by Tenant to Landlord under the Lease is
rescinded or must otherwise be returned by Landlord and its successors and
assigns, and is and shall be binding upon Guarantor and its successors and
assigns, but Guarantor may not assign its obligations hereunder.
GUARANTOR AND LANDLORD WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN
LANDLORD AND GUARANTOR ARISING OUT OF THIS GUARANTY OR ANY OTHER DOCUMENT OR
INSTRUMENT EXECUTED IN CONNECTION HEREWITH OR ANY TRANSACTION RELATED TO THE
GUARANTY.
30
<PAGE> 31
Guarantor agrees to pay all costs and expenses, including reasonable
attorneys fees, incurred by Landlord in enforcing the terms of this Guaranty.
This Guaranty shall be governed by and constructed in accordance with the
internal laws of the State which governs the Lease excluding any principals of
conflicts of laws. For the purpose solely of litigating any dispute under this
Guaranty, the undersigned submits to the jurisdiction of the courts of said
state.
If the Guarantor is more than one person or entity, the liability of each
such Guarantor shall be joint and several.
WITNESS THE EXECUTION hereof this 28th day of July, 1997.
GUARANTOR:
MicroTel International, Inc.
By: /s/ Carmine T. Oliva
---------------------------------
Name: Carmine T. Oliva
-------------------------------
Title: President and Chief Executive Officer
31
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
MicroTel International, Inc.
Ontario, California
We hereby consent to the use in the Prospectus constituting a part of
this Registration Statement of our report dated April 14, 1997, relating to the
financial statements of MicroTel International, Inc., which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in
the Prospectus.
BDO SEIDMAN, LLP
San Francisco, California
September 22, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Microtel International, Inc.:
The audits referred to in our report dated December 13, 1996, except
for note 13, which is as of June 18, 1997, included the related financial
statement schedule as of September 30, 1996, and for each of the years in the
three-year period ended September 30, 1996, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
Orange County, California
September 22, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Amendment No.1 to Registration Statement
No. 333-29925 of MicroTel International, Inc. on Form S-1 of our report dated
August 31, 1994 (November 18, 1994 as to paragraphs two through four in Note
2), (which report expresses an unqualified opinion and includes explanatory
paragraphs referring to certain factors which raise substantial doubt about the
Company's ability to continue as a going concern and to a certain related
party transaction), appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the heading "Experts"
in such Prospectus.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
San Jose, California
September 18, 1997
<PAGE> 1
EXHIBIT 23.4
[LOGO]
Our reference GP/GC/X00980
Your reference
HARDCASTLE BURTON
Chartered Accountants
Registered Auditors
Lake House, Market Hill
Royston, Herts SG8 9JN
Tel: 01763 247371
Fax: 01763 245521
e-mail: [email protected]
Offices at:
Hoddesdon Redbourn
Northwood Newmarket
FAO Martin J. Conroy
Gallagher, Briody & Butler
Counsellors at Law
212 Carnegie Center
Suite 402
Princetown
New Jersey 08540
15 September 1997
Dear Sir
XCEL CORPORATION LIMITED
As requested, we hereby enclose an original signed audit report on the above
company's financial statements for the year ended 30 September 1996.
Furthermore, we hereby consent to this audit report being included within the
S-1 filing.
Yours faithfully
HARDCASTLE BURTON
/s/HARDCASTLE BURTON
A member firm of
THE UK 200 GROUP
PRACTICING CHARTERED ACCOUNTANTS
Partners: Consultant
Alan V. Melvin Brian W. Harley Philip J. Tostevin C. Berry Hardcastle
John F.T. Neighbour Colin J. Hayfield Gary S. Pyle John F. Palmer
B. Peter Homent Keith A. Grover Mark T. Wilkins
Brian D. Claxton John S. Clarke
Authorised To Carry On Investment Business
By The Institute Of Chartered Accountants
In England And Wales
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 786,149
<SECURITIES> 0
<RECEIVABLES> 4,614,893
<ALLOWANCES> 46,586
<INVENTORY> 6,504,736
<CURRENT-ASSETS> 12,414,172
<PP&E> 7,972,331
<DEPRECIATION> 2,912,411
<TOTAL-ASSETS> 19,813,466
<CURRENT-LIABILITIES> 10,251,260
<BONDS> 2,677,617
776,099
0
<COMMON> 9,018,077
<OTHER-SE> (3,172,426)
<TOTAL-LIABILITY-AND-EQUITY> 19,613,466
<SALES> 31,248,596
<TOTAL-REVENUES> 31,248,596
<CGS> 23,056,559
<TOTAL-COSTS> 23,056,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,247
<INTEREST-EXPENSE> 506,591
<INCOME-PRETAX> 1,105,049
<INCOME-TAX> 22,137
<INCOME-CONTINUING> 1,082,912
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,082,912
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
