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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD ______________
COMMISSION FILE NUMBER 1-10346
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MICROTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0226211
4290 E. BRICKELL STREET, ONTARIO, (909) 456-4321
CALIFORNIA 91761 (Registrant's telephone number,
(Address of principal executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, $.0033 par value REGISTERED
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
TITLE OF CLASS
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such a shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock at April 13, 1998 held by
nonaffiliates was approximately $13,792,000.
As of April 13, 1998 there were 11,927,793 shares of Common Stock, Par Value
$.0033, outstanding.
WHEN USED ANYWHERE IN THIS FORM 10-K, 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 SECTOR"; "CIRCUITS SECTOR";
"COMPONENTS AND SUBSYSTEM ASSEMBLIES SECTOR"; 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.
DOCUMENTS INCORPORATED BY REFERENCE. The definitive proxy statement in
respect of the 1998 Annual Meeting of Shareholders of the Company is
incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
MicroTel International, Inc. (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 primarily
to the telecommunications industry. Approximately 60% of the Company's hardware
sales are to customers in the telecommunications industries, including AT&T and
the Regional Bell Operating Companies ("RBOCs") domestically, and France Telecom
in Europe. The remainder of the sales are various information technology
products for 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 North America, Europe and
Asia.
In 1984, MicroTel International, Inc. 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., 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 a merger pursuant to which XIT
Corporation became a wholly-owned subsidiary of the Company, with XIT as the
surviving subsidiary (the "Merger"). 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 Ontario and
Monrovia, California from Pasadena, California and focused its circuits
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 information technology 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 85% of HyComp, Inc. through a share exchange with the
majority shareholders. HyComp, formed in 1969, designs and manufactures 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 communications
electronics, military, aerospace, medical, computer and industrial controls.
Subsequently, XIT acquired an additional approximate 7% of HyComp Common Stock
through an exchange of XIT common stock for HyComp common shares. As a result of
the exercise of certain Hycomp stock options in 1997, the Company's ownership of
the common shares outstanding of Hycomp was reduced to 88.5%.
In May 1995, XIT acquired certain work in process from a bankrupt printed
circuit board and contract manufacturing company and established XCEL Contract
Manufacturing Division (XCMD) temporarily located in Philadelphia, Pennsylvania.
The Company continues to service certain of the XCMD customers from its Ontario
and Monrovia facilities, but has since closed its Philadelphia operation.
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In May 1995, XIT sold its Computron Display Systems Division ("Computron")
based in Illinois, a manufacturer of higher cost custom color and monochrome
display monitors, for approximately $1.8 million. Computron was sold based on
XIT management's determination that the demand for its monochrome product lines
was declining and its custom color product was too high in cost. 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.
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 La Habra, California manufacturer of complex multi-layer,
surface mount circuit boards used in sophisticated electronic equipment for the
communications, computer, instrumentation and industrial controls industries.
XCEL Arnold's circuit boards are currently used principally in cellular
telephone transmission products. Due to a decline in its major customer's
business, management has decided to exit this business. On April 9, 1998, the
Company sold certain of the assets of XCEL Arnold to a private corporation (see
Note 17 to the Consolidated Financial Statements included elsewhere in this
report).
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 was
originally established as a division of XCEL Arnold, operates as XCEL Etch Tek
and is located in Concord, California. The assets of Etch Tek were not included
in the sale of XCEL Arnold and, following such sale, Etch-Tek will operate as a
division of XIT Corporation.
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
Systems, Ltd ("XPS"). XPS 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.
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 cost savings by the internal sourcing of components formerly
purchased from third party vendors.
In October 1997, the Company acquired all the capital stock of Critical
Communications Incorporated ("Critical"), a manufacturer of telecommunication
test instruments located in St. Charles, Illinois. The Company has transferred
manufacturing of Critical's product to its CXR Telcom subsidiary in Fremont,
California and has maintained the remaining operation as a product engineering
and development, customer service and mid-west sales office where it previously
lacked a presence.
Within the electronics industry, the Company now manufactures and
distributes three product lines and is organized into three related business
sectors which are discussed below.
1. INSTRUMENTATION AND TEST EQUIPMENT SECTOR
The Company's Instrumentation and Test Equipment products are manufactured
by CXR and CXR, S. A. In addition, CXR, S.A. performs network integration
services. Their customers include AT&T, France Telecom, 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 companies have been forced to develop their own
internal capacity to identify and
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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 700 Series of Transmission test sets are modular, rugged, lightweight
and a hand-held line of products which are principally used by telephone
companies to qualify and certify the service offerings to the end users. These
sets are configured in a variety of models designed to perform analog and
digital measurements on voice grade and wide band circuit applications. Testing
of the physical copper pair and qualifying it for the new wide band digital
services applications is becoming the primary concern on the part of the
telephone company. These services include the Digital Data Service (DDS), High
Capacity Digital Subscriber loops (HDSL) and Asymmetrical Digital Subscriber
loops (ADSL). Additionally, the modular nature of the equipment's design
provides an upgrade path for optional testing of the signaling parameters over
the telephony network, simulation of the Central Office (CO) and simulation of
the Private Branch Exchange (PBX). The 700 series can also be equipped with the
modules necessary to perform the Digital tests required to qualify the data
transmission rates for the service offered to the ultimate users. These rates
range from the basic modem rates to the higher speeds of the Pulse Coded
Modulation (PCM) network, namely 1.5 million bits per second (Mb/s).
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, signaling 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 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, 1997.
In October 1997, the Company acquired all the capital stock of Critical
Communications Incorporated ("Critical") of St. Charles, Illinois in a
stock-for-stock exchange. Founded in 1991, Critical is a provider of
sophisticated, state-of-the-art, portable telephone test instruments used by
both long-distance carriers and local telephone service providers as well as by
corporate and government telecommunications end users. The Company incorporated
the manufacturing operations of Critical into those of CXR Telcom and
distributes its products through both existing CXR and Critical sales channels.
This acquisition expands the present CXR product offering to include additional
software-driven, user-friendly and cost-competitive products which are expected
to broaden CXR's penetration of the Installation and Maintenance ("I&M") segment
of the telecommunications marketplace - i.e. that segment in which corporate
service installations and maintenance are provided by the various telephone
companies. While CXR's existing I&M products are used extensively in the Central
Office testing environment (which necessitates the use of a multi-function,
all-in-one test instrument), Critical's products are primarily designed to
service the test instrument needs at outside plant service installations, where
lightweight, portable products requiring fewer functional testing features are
required. It is particularly in this market segment, where CXR presently
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competes with only one, outdated product, that the Critical product line is
expected to have significant impact.
DATACOM TEST INSTRUMENTS. Datacom test instruments are used to test and
monitor the performance of computers and communications equipment to ensure
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 CXR Telcom Series 840 and 804 products address this market.
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 56,000 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 AJ 1456/2853 Series of products are a true V.90 compatible product line
designed to accommodate the newly standardized high speed of 56Kb/s and its
sub-rates standard of V.34, V.32 ter and V.32. These products operate on a full
duplex basis, using standard dial-up lines or on 2-wire and 4-wire leased lines.
The series features trellis coded modulation and local and remote echo
cancellation, with capabilities to cope with satellite delay of multiple hops in
long distance transmission. Also, the series is equipped with multiple number
storage capacity via a V.25 bis synchronous dialer for computer controlled
application. In leased line operation, the series features unattended automatic
dial backup using the dial-up network in the event of lease line failures. The
series is also available in either stand alone desktop applications or as a card
for chassis rackmount configuration.
The AJ Smart Rack is a modem management enclosure that accommodates 16
modular card modems that 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 provides 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 T-1
and fractional T-1 CSU-DSU applications. These newly introduced products provide
for the direct interface between the customer's equipment and the T-1
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
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Network Management Protocol (SNMP) and therefore can easily be used by any
network management system using SNMP.
In January 1998, CXR introduced a brand new product offering, a Remote
Access Server (RAS) to address the Internet Service Provider (ISP) market and
corporate communication users. The RAS-248, RAS-496 and RAS 3096+ product
provide high density communication to accommodate the incoming traffic from high
speed Modems (56Kb/s), ISDN Terminal Adapters (TA), Primary rate ISDN and at the
PCM rates for both the US and the International standards. The product
implements a secure 128 bit encryption, which operates using Windows NT
operating system platform. Also, the product features an adaptability to Web
Caching with application server options, built-in protocol analysis and is
compatible with the Local Area Network (LAN) infrastructures and its various
topologies. Like all of the AJ data transmission products, the RAS family uses
the SNMP management Protocol and therefore can be very easily configured and
managed from any location capable of using SNMP system.
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: (i)
multiplexing equipment used to transport data, voice and local area network
traffic over point-to-point leased lines and frame relay networks; (ii)
statistical multiplexers, terminal servers and routers for local area network
interconnections; (iii) data compression equipment used to compress and encrypt
data streams prior to network access to maximize transmission speed and secure
the transmission and to decompress and decipher upon transmission receipt; and
(iv) ISDN routers used to link remote offices to corporate office local area
networks.
2. CIRCUITS SECTOR
The Company's printed circuit boards are produced by XCEL Arnold Circuits,
Inc. ("XCEL Arnold"), a wholly-owned subsidiary of XIT based in La Habra,
California; XCEL Etch Tek and XCEL Circuits, located in Concord and Monrovia,
California respectively, both of which are currently divisions of XIT; and
HyComp, Inc. ("HyComp"), an approximately 89% owned subsidiary of XIT based in
Marlborough, Massachusetts. On April 9, 1998, the Company completed the sale of
substantially all of the assets of XCEL Arnold to Arnold Circuits, Inc., a newly
formed entity formed to consummate such purchase.
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. The
circuit boards
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produced at XCEL Arnold are high density, multi-layer printed circuit boards of
up to 12 layers. The majority of the XCEL Arnold's multi-layer rigid circuit
boards are manufactured on a standard base laminate material. The Company also
produces high performance circuit boards constructed from speciality materials
at its XCEL Circuits Division and XCEL Etch-Tek manufacturers of sophisticated
high multi-layer, quick turn, and prototype printed circuit boards up to 24
layers.
HyComp manufactures hybrid microelectronic 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. In 1997, HyComp established an industry-leading position in
producing and assembling flip chip devices starting from single semiconductor
chips, rather than requiring complete semiconductor wafers. HyComp is the only
company world-wide presently commercially producing flip chip assemblies from
single chips. 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.
3. COMPONENTS AND SUBSYSTEM ASSEMBLIES SECTOR
Components and Subsystem Assemblies products are produced and/or sold by
XIT's Digitran Division, based in Ontario, California, XCEL UK and XPS,
wholly-owned subsidiaries of XIT based in England, and another wholly-owned
subsidiary, 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, custom headers,
video to all standard formats or customized, front access controls for
brightness, contrast, and power, ruggedized exteriors, EMI/RFI shielding, low
energy power and universal power supplies. The predominant market segments for
these displays are medical, test instruments and rugged continuous use ATMs.
Color and monochrome monitors (including XCEL-Lite) are sold in Europe through
XCEL UK.
XPS located in Ashford, Kent, England, produces a range of electronic power
supplies for an international customer base, including telecommunications,
aerospace and military customers.
SUBSYSTEMS
Based on industry data, the Company believes that OEMs are increasingly
relying upon independent manufacturers of complex electronic 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 products, independent manufacturers can
provide greater specialization, expertise, responsiveness and flexibility and
can offer shorter delivery cycles than can be achieved by internal production.
The Company offers complete manufacturing solutions to OEMs, including
concurrent engineering, assembly of printed circuit boards and front panel
assemblies 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.
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By integrating the Company's printed circuit boards and components, the
Company is able to engineer and manufacture communications, medical, industrial,
and military weapons input and display 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 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 customers for the Circuits Sector include Motorola, GenRad, Raytheon,
Lockheed Martin, Tektronics, Teradyne, Holland Signal, Racal, EFW and Loral,
among others.
The principal customers for Components and Subsystems are OEMs in the
electronics industry and include manufacturers of communications equipment,
industrial and business computers, automatic teller machines, medical devices,
industrial instruments and test equipment, and aerospace and military products.
Such customers include Boeing, Lockheed Martin, Raytheon, Litton, Rockwell,
Teledyne, Honeywell, NCR, Eastman Kodak, British Aerospace, Aerospatiale,
Pilkington, Sagem, Toshiba and Hyundai, among many others.
The Company's largest customer, Motorola, accounted for approximately 14%,
34%, 41% and 13% of the net sales for the year ended December 31, 1997, the
three months ended December 31, 1996 and the years ended September 30, 1996 and
1995, respectively. No other customer accounted for more than 10% of the
Company's net sales for these periods.
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 (See Note 15 to the Consolidated Financial
Statements included elsewhere in this report).
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 and capital equipment purchases are lower than average during the
first quarter of each year, impacting the Instrumentation and Test
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Equipment sector. The Company's backlog of firm, unshipped orders was as follows
by business sector at December 31, 1997 and 1996 and September 30, 1996 and
1995, respectively.
<TABLE>
<CAPTION>
DEC. 31, DEC. 30, SEPT. 30, SEPT. 30,
1997 1996 1996 1995
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Circuits.................................................... $ 5,397 $ 5,880 $ 11,019 $ 14,087
Components and Subsystem Assemblies......................... 6,452 8,888 9,187 2,937
Instrumentation and Test Equipment.......................... 985 -- -- --
--------- --------- --------- ---------
$ 12,834 $ 14,768 $ 20,206 $ 17,024
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The decline in backlog for the Circuits Sector is principally the result of
XCEL Arnold's major customer, Motorola, changing its ordering pattern,
compounded in 1997 by a deferral of orders by this customer pending correction
of late delivery problems. Motorola as 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 at
September 30, 1996 is due to the backlog of XPS, acquired in September 1996, of
$5,992,000 at September 30, 1996. Order backlog for XPS is volatile and the
decline from September 30, 1996 to December 31, 1997 is not indicative of an
adverse trend. The remainder of the decline in backlog for the Sector from
September 30, 1996 to December 31, 1997 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 December 31, 1997 is that of CXR, acquired on March 26, 1997, and is not
material. Backlog for CXR is not deemed a significant measure of its business,
as its customers generally order on a just-in-time basis. The Company's order
backlog at December 31, 1997 was mostly shipped during the first quarter of
1998, with the exception of approximately $3,500,000 of orders at XCEL Arnold
(Circuits) and $229,000 of orders at XIT (Components) 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 year ended December 31, 1997,
the three months ended December 31, 1996 and the years ended September 30, 1996
and 1995, engineering and product development costs of the Company were
$2,046,000, $69,000, $309,000 and $328,000, respectively.
The product development costs of CXR were $1,797,000 and $2,612,000 during
the years ended December 31, 1997 and 1996, 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.
9
<PAGE>
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 (Engineering
Design Automation) workstation tools to design, simulate and test its advanced
product features or product enhancements for custom circuits and miniaturization
purposes. With the above mentioned tools, product developments are turned around
very quickly, keeping the highest quality and reliability integrated as part of
the overall development process. This kind of capability also allows CXR to
offer custom featured designs for the potentially expanding Original Equipment
Manufacturer (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 the adhesive flip-chip has significant
potential size, performance and cost advantages for hybrid circuit manufacture.
The two year ARPA program has made HyComp the only company worldwide with
current production capability 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 December 31, 1997, the production process has been implemented and
commercial orders have been produced for 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 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
10
<PAGE>
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 in-house 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. The Company believes it
complies with environmental regulations since it assembles, rather than
manufactures, electronic components and therefore discharges into the
environment are believed to be negligible.
The Company's product lines are subject to certain federal and state
statutes governing safety and environmental protection. The Company believes
that it is in substantial compliance with all such regulations and 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 December 31, 1997, the Company employed 425 persons. Of these
employees, 324 employees are employed in the United States and 101 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.
11
<PAGE>
ITEM 2. PROPERTIES
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 Ontario, California Corporate headquarters/
(Components and subsystem assemblies) Manufacturing
XCEL Circuit Division Monrovia, California Administrative/
(Circuits) Manufacturing
XCEL Etch Tek Concord, California Administrative/
(Circuits) Manufacturing
XCEL Corp. Ltd. Melbourne, United Administrative
(Components and subsystem assemblies) Kingdom
XCEL Power Supplies Ashford, United Administrative/
(Components and subsystem assemblies) Kingdom Manufacturing
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Administrative/ Assembly
(Components and subsystem assemblies)
XCEL Arnold Circuits, Inc. La Habra, California Administrative/
(Circuits) Manufacturing
HyComp, Inc. Marlborough, Administration/
(Circuits) Massachusetts Manufacturing
CXR, S.A Paris, France Administrative
(Instrumentation and test equipment)
CXR, S.A. Abondant, France Manufacturing
(Instrumentation and test equipment)
CXR Fremont, California Administrative/
(Instrumentation and test equipment) Manufacturing
</TABLE>
The lease for the Fremont facility will expire in or about September 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 in October 1998. The La Habra
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 2000. The Ashford facility is subject to a fifteen-year lease which
expires in September 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.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
JACOBSON V. CXR
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 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 was filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson 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 were acceptable to the Company.
The Company's motion for leave to cross-claim and Mr. Jacobson's motion for
leave to amend his complaint were granted and on August 25, 1997, Mr. Jacobson
filed an amended complaint. On September 24, 1997, the Company filed a demurrer
to Mr. Jacobson's second amended complaint which was denied on November 18,
1997.
A court supervised settlement conference with Mr. Jacobson was held on
February 5, 1998 and a settlement was reached. The value of the settlement was
not materially different than the amount previously recorded by the Company for
the deferred compensation arrangement, which approximates $1,000,000 at December
31, 1997 and which also approximates the value of the tentative settlement
reached on March 26, 1997.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme Court of
the State of New York, County of New York, to recover monetary damages in the
amount of $300,000 allegedly sustained by the failure of the Company, its stock
transfer agent and its counsel to timely deliver and register 30,000 shares
13
<PAGE>
of Common Stock for which payment had been made. The Company was informed by Mr.
Scheinfeld that in order to settle his claims, the Company would have to issue
him unrestricted shares of common stock. Since the Company cannot issue
unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's
motion and sought to compel him to serve a complaint upon the defendants. On
June 30, 1997, the complaint was served, and the Company has subsequently
answered, denying the material allegations of the complaint. In August 1997, the
Company served discovery requests on Mr. Scheinfeld, who was initially obligated
to respond by September 12, 1997. On March 2, 1998, Mr. Scheinfeld responded to
such discovery requests which response is currently under review by counsel to
the Company.
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the "Agreement")
with the former Chairman of the Company, which involved certain mutual
obligations. In December 1997, the former Chairman defaulted on the repayment of
the first installment of a debt obligation under the Agreement. Also in December
1997, the former Chairman of the Company filed suit in the District Court for
Galveston County, Texas alleging the Company has breached an alleged oral
modification of the Agreement. In January 1998, the Company answered the
complaint denying the allegation and the matter is currently being litigated in
Texas. The Company believes that the former Chairman's claim is without merit
and intends to vigorously defend itself and intends to assert its own claims
against the former chairman by way of counterclaim or separate action.
OTHER LITIGATION
In December 1997 a stockholder of the Company brought an action in Texas
against the Company's current Chairman and an unrelated party, alleging certain
misrepresentations during the merger discussions between XIT and the Company.
The Company has moved to dismiss this suit on jurisdictional grounds and will
vigorously defend the current Chairman on the merits should the matter not be
dismissed.
Although the ultimate outcome of the matters noted above cannot be predicted
with certainty, pending actual resolution, management believes the disposition
of these matters will not have a material adverse affect on the consolidated
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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.
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>
CALENDAR YEAR HIGH LOW
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
1997
Fourth Quarter.......................................................... $ 2.4375 $ 1.1563
Third Quarter........................................................... 2.625 2.375
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>
As of March 31, 1998, the Company had approximately 3,850 stockholders of
record, approximately 500 round lot stockholders and approximately 4,500
beneficial stockholders.
Other than the dividends paid on the redeemable preferred stock associated
with the acquisition of XCEL Arnold, 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.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected consolidated financial data for the
Company for the year ended December 31, 1997 the three months ended December 31,
1996 and each of the four years in the period ended September 30, 1996. The data
has been derived from and should be read in conjunction with the Company's
Consolidated Financial Statements, the related Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
financial data as of and for the three months ended December 31, 1996 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>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30
DECEMBER 31, DECEMBER 31, ----------------------------------
1997 1996 1996 1995 1994 1993
------------ ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................... $43,098 $ 7,886 $31,249 $19,602 $14,237 $13,766
Net income (loss)....................... $(9,693) $ (905) $ 1,083 $ 337 $ (672) $ 1,430
Income (loss) available to common
stockholders.......................... $(9,753) $ (924) $ 1,003 $ 327 $ (672) $ 1,430
Basic and diluted earnings (loss) per
share................................. $ (.96) $ (.15) $ .17 $ .07 $ (.14) $ .33
Total assets............................ $25,440 $20,564 $19,613 $15,955 $11,137 $10,716
Long-term obligations................... $ 3,319 $ 3,549 $ 2,678 $ 1,524 $ 740 $ 762
Redeemable preferred stock.............. $ 714 $ 794 $ 775 $ 835 $ -- $ --
Stockholders' equity.................... $ 6,015 $ 5,047 $ 5,845 $ 4,464 $ 3,263 $ 3,769
Shares outstanding at period end........ 11,926 6,064 6,064 5,814 4,886 4,659
</TABLE>
No cash dividends on the Company's common stock were declared during any of
the periods presented. Shares outstanding and earnings (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 historical financial data above prior to the
Merger 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 fiscal year ended September 30, 1996 and
the beginning of its new fiscal year, January 1, 1997.
16
<PAGE>
ITEM 7. 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:
LIQUIDITY AND CAPITAL RESOURCES, OUTLOOK, AND NEW ACCOUNTING PRONOUNCEMENTS.
PROSPECTIVE INVESTORS, READERS OR OTHER USERS OF THIS REPORT 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.
As discussed previously herein and in the notes to the accompanying
consolidated financial statements, the consolidated financial statements
presented are those of XIT Corporation and its wholly and majority-owned
subsidiaries and beginning March 26, 1997, include the Company and its
subsidiaries CXR Telcom Corporation and CXR, S.A. (the "Former Company"). This
is the result of the reverse acquisition by XIT of MicroTel International, Inc.
(the Registrant) and its subsidiaries in a merger on March 26, 1997. The Former
Company and "accounting acquiree" is described as "CXR" in the discussion below.
XIT Corporation is referred to as "XIT."
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 and Subsystems Assemblies Sector operates in its U.S.,
European and Asian markets, and the Instrumentation and Test Equipment Sector
operates principally in its U.S. and European markets. The Components and
Subsystems Assembly Sector is referred to as "the Components Sector" in the
discussion below for brevity.
In conjunction with the merger of XIT and CXR, XIT changed its fiscal year
end from September 30 to December 31 to conform to the fiscal year of CXR.
Consequently, the consolidated financial statements discussed herein are for the
year ended December 31, 1997, the three months ended December 31, 1996 (the
transition period), and the years ended September 30, 1996 and 1995.
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 three months ended December 31, 1996 or the
years ended September 30, 1996 and 1995.
17
<PAGE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED
SEPTEMBER 30, 1996
The following discussion relates to the comparison of the results of
operations for the twelve months ended December 31, 1997 ("Fiscal 1997") versus
the twelve months ended September 30, 1996 ("Fiscal 1996"), excluding the
results of CXR which are discussed separately below.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
----------------------------------- -----------
CONSOLIDATED CXR COMPARATIVE
----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales......................................... $ 43,098 $ 15,054 $ 28,044 $ 31,249
Cost of sales..................................... 32,670 8,735 23,935 23,057
----------- --------- ----------- -----------
Gross profit...................................... 10,428 6,319 4,109 8,192
Selling expense................................... 5,201 2,562 2,639 2,409
General & administrative.......................... 6,160 1,196 4,964 3,970
Engineering & product development................. 2,046 1,797 249 309
Write-down of goodwill............................ 5,693 4,000 1,693 --
Interest expense.................................. 895 110 785 507
Other expense (income)............................ 29 106 (77) (108)
Income taxes...................................... 97 6 91 22
----------- --------- ----------- -----------
Net income (loss)................................. $ (9,693) $ (3,458) $ (6,235) $ 1,083
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
NET SALES
Net sales for Fiscal 1997 declined by $3,205,000 or 10.3% from Fiscal 1996.
This decline was comprised of lower sales for the Company's Circuits Sector of
$3,019,000 and a decrease in the sales for the Components Sectors of $186,000.
The decrease for Fiscal 1997 in the Circuits Sector was comprised of an increase
in Sector sales of $2,212,000 due to the inclusion of Etch Tek's operations for
the entire twelve months in Fiscal 1997 versus five months in Fiscal 1996
subsequent to its acquisition on May 1, 1996, and a decline in sales for the
remainder of the Sector of $5,231,000 which primarily occurred in the XCEL
Arnold subsidiary. 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 orders received as a result of
material sourcing problems caused by cash flow constraints during the same
quarter. Although it is believed that customer requirements increased in the
second quarter of 1997, the Sector continued to experience lower demand due to
order cutbacks by Motorola resulting from the previous shipment performance
problems.
The decrease in net sales in the Components Sector was the net result of an
increase in Sector sales of $4,248,000 due to the inclusion of the operating
results of XCEL Power Systems, Ltd ("XPS") for the entire twelve months in 1997
versus one month in Fiscal 1996 subsequent to its acquisition on September 1,
1996 which was more than offset by: (i) the loss in July 1996 of a major account
for display monitors, (ii) a significant digital switch program in place in the
first half of 1996 which did not repeat in 1997 and (iii) a general decline in
sector product sales due to the aging of related customer programs.
18
<PAGE>
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales (in parentheses) for Fiscal 1997 and Fiscal
1996 are as follows.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
-------------------- --------------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Circuits Sector........................................ $ 1,246 (7.9)% $ 3,570 (18.9)%
Components Sector...................................... 2,863 (23.4)% 4,622 (37.3)%
--------- ---------
Total Gross Profit..................................... $ 4,109 (14.7)% $ 8,192 (26.2)%
--------- ---------
--------- ---------
</TABLE>
Consolidated gross profit, as a percentage of sales, declined from 26.2% in
Fiscal 1996 to 14.7% in Fiscal 1997 as the result of decreases in gross profit
of 11.0 and 13.9 percentage point decreases in gross profit percentage for the
Circuits and Components Sectors, respectively. The decrease for the Components
Sector was the combined result of (i) the lower sales volume, net of the
inclusion of XPS, for the reasons noted above and the consequential decline in
absorption of the Company's fixed manufacturing costs, and (ii) higher than
average margins on a Fiscal 1996 digital switch program that did not repeat in
Fiscal 1997. The decline in gross profit for the Circuits Sector was caused by
higher costs for XCEL Arnold's product sales due to the lower absorption of
fixed manufacturing costs related to declining sales levels and manufacturing
inefficiencies from a product mix change to higher technical content circuit
boards, and despite improved margins at Etch-Tek in Fiscal 1997 over those
achieved in Fiscal 1996.
OPERATING EXPENSES
Operating expenses (selling, general and administrative; engineering and
product development; and write-down of goodwill) increased by approximately
$2,857,000 from $6,688,000 in Fiscal 1996 to $9,545,000 Fiscal 1997. The primary
component of this change was a write-down of goodwill of $1,693,000 (see Note 11
to the Consolidated Financial Statements included elsewhere in this report).
This write-down resulted from the Company's reassessment of the anticipated
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. Selling expenses as a percentage of sales increased from 7.7% in
Fiscal 1996 to 9.4% in Fiscal 1997, despite the fact that they include
significant commissions 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 year. General and administrative expenses
increased by $994,000 or 25.0% in Fiscal 1997 over Fiscal 1996 as the positive
effects of the streamlining of the administrative structure in the Circuits
Sector in the second half of 1996, which approximated $601,000 for Fiscal 1997,
were more than outweighed by the inclusion of XPS for the entire twelve months
in 1997 versus only one month in 1996 and increased 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 CXR, and secondarily to higher
personnel costs and the implementation of a new computer system in 1997.
Engineering and product development expenses declined by $60,000 from Fiscal
1996 to Fiscal 1997 due principally to an increase in the amount of such costs
billable to specific contracts.
Interest expense increased by $278,000 in Fiscal 1997 versus Fiscal 1996
principally reflecting higher average borrowings during the respective periods.
Other expense (income) is principally comprised of foreign currency exchange
gains and losses incurred during the respective periods.
Income taxes, while nominal in both respective periods, increased $69,000
resulting from an income tax payable by the Company's U.K. subsidiary related to
debt forgiveness in connection with the XPS subsidiary acquisition. The
Company's domestic income tax obligation primarily consists of minimum state tax
payments as the Company is in a loss carryforward position for Federal income
tax purposes.
19
<PAGE>
RESULTS OF CXR
The table following summarizes the incremental results of CXR for Fiscal
1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Net sales.............................................. $15,054
-------
-------
Gross profit........................................... $ 6,319
-------
-------
Operating expenses..................................... 5,555
Write-down of goodwill................................. 4,000
Other expenses......................................... 222
-------
Net loss............................................... $ 3,458
-------
-------
</TABLE>
CXR's results of operations above consist of the nine months and five days
ended December 31, 1997 subsequent to the merger on March 26, 1997. CXR's
results of operations for Fiscal 1997, shown 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
$1,904,000 on net sales of $3,496,000. Included in these quarterly results prior
to March 26, 1997, CXR incurred certain significant charges as follows: (i)
$462,000 of compensation expense related to certain officers and directors whose
corporate capacities would terminate or change at the date of the merger with
XIT and (ii) $287,000 of asset write-downs and severance costs related to the
reassessment of the impact on asset realizable values and certain cutbacks in
personnel, respectively, necessitated by the continuing sluggishness of its
business volume. These charges directly impacted the net loss of CXR for the
quarter as there are no tax effects because CXR is in a net operating loss
carryforward position. 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 discussed below.
Through the majority of 1997, domestic sales for CXR were generally
negatively impacted by delays in purchasing 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. One notable exception was
the receipt in April 1997 of an order totaling $2,340,000 from AT&T for
customized test instruments. European sales of CXR, S.A. were negatively
impacted by a decline in sales to France Telecom during its pre-privatization
reorganization and a generally weak French economy in which unemployment
currently remains at peak levels. 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.
Compared to the first quarter of 1997, CXR's results improved significantly
in the second, third and fourth quarters as the result of substantially
increased net sales, a favorable impact on margins resulting from the shipment
of a high-margin product on an order received from AT&T in April 1997, and the
positive effects of personnel cutbacks made in the first quarter. Of the total
AT&T order of $2,340,000, CXR Telcom shipped approximately $241,000, $650,000
and $1,449,000 in the second, third and fourth quarters, respectively. As a
result of declining demand for certain of its test instruments, the aging of its
transmission product line and other economic and market factors, the Company
wrote down the carrying value of the goodwill originating from the reverse
acquisition with XIT to its net realizable value (see Note 11 to the
Consolidated Financial Statements included elsewhere in this report). Exclusive
of the write-down of goodwill, for the full twelve month period ended December
31, 1997, CXR incurred a net loss of $1,862,000 on net sales of $18,050,000
versus a net loss of $4,597,000 on net sales of $16,303,000 in the same period
of 1996.
20
<PAGE>
Although not necessarily indicative of the results that would have occurred
or of results which may occur in the future, a summary of the unaudited pro
forma results as if the merger had taken place at the beginning of 1997 is
presented in Note 2 to the Consolidated Financial Statements included elsewhere
in this report.
YEAR ENDED SEPTEMBER 30, 1996 VERSUS YEAR ENDED SEPTEMBER 30, 1995
NET SALES
Consolidated net sales grew by $11,647,000 or 59.4% in 1996 over 1995. 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 two-year period ended
September 30, 1996.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CIRCUITS SECTOR
XCEL Arnold (acquired 8/1/95)........................................... $ 13,586 $ 2,827
Etch-Tek (acquired 5/1/96).............................................. 1,648 --
Other................................................................... 3,632 3,165
--------- ---------
18,866 5,992
COMPONENTS SECTOR
Computron (disposed of 5/31/95)......................................... -- 2,905
XCMD (established 5/95)................................................. 365 343
XPS (acquired 9/1/96)................................................... 328 --
Other................................................................... 11,690 10,362
--------- ---------
12,383 13,610
--------- ---------
Total Sales............................................................. $ 31,249 $ 19,602
--------- ---------
--------- ---------
</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 XCEL Arnold's 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 primarily by HyComp. The sales volume for XCEL
Arnold for 1996 of $13,586,000 was 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 XCEL Arnold 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 XPS 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 (i) an increase in sales of XCEL-Lite display monitors of
approximately $1,177,000, principally to the Sector's one major account for this
product line, and (ii) 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.
21
<PAGE>
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 two
years ended September 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Circuits Sector........................................ $ 3,570 (18.9%) $ 1,445 (24.1%)
Components Sector...................................... 4,622 (37.3%) 3,825 (28.1%)
--------- ---------
Total Gross Profit..................................... $ 8,192 (26.2%) $ 5,270 (26.9%)
--------- ---------
--------- ---------
</TABLE>
Consolidated gross profit as a percentage of sales declined by 0.7% from
26.9% in 1995 to 26.2% in 1996, as the effects of a 9.2 percentage point
improvement in gross profit percentage for the Components Sector was more than
offset by the effects of a 5.2 percentage point 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: (i) the
favorable product mix shift to higher priced (and higher margin) switches noted
above under Net Sales; (ii) improved absorption of fixed manufacturing costs and
material pricing resulting from the increase in sales and production of
XCEL-Lite monitors; (iii) relatively higher margins for products sold by Abbott
(acquired in 1996), than those historically achieved for Sector products; and
(iv) 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 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 relatively
lower margins on 1996 Etch-Tek product sales, after its acquisition, than
historically achieved by the Sector.
OPERATING EXPENSES
Operating expenses for the years ended September 30, 1996 and 1995 were
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Commissions................................................................ $ 1,438 $ 517
Other selling.............................................................. 971 974
--------- ---------
Total selling expense...................................................... 2,409 1,491
General & administrative expense........................................... 3,970 3,379
--------- ---------
Total selling, general & administrative.................................... $ 6,379 $ 4,870
--------- ---------
--------- ---------
Engineering & product development.......................................... $ 309 $ 328
--------- ---------
--------- ---------
</TABLE>
Total selling expense as a percentage of net sales was 7.7% and 7.6% for the
years ended September 30, 1996 and 1995, respectively. Commissions as a
percentage of sales increased from 2.6% in 1995 to 4.6% in 1996 as a result of
and in direct relation to the increase in Circuits Sector sales. 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.
General and administrative expense increased by $591,000 in 1996 versus
1995. 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.
This decline was the combined result of reversals of accruals of $399,000
related to the favorable
22
<PAGE>
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.
Engineering and product development costs originated solely from the
research and product development activities of HyComp in 1996 and 1995 and were
relatively comparable between the periods.
OTHER INCOME AND EXPENSE
The increase in interest expense of $102,000 in 1996 compared to 1995
resulted principally from increased average borrowings during the respective
periods. Fluctuations in other income, net resulted principally from differences
in foreign currency exchange gains and losses incurred during the respective
periods. Other income in 1995 also included the gain on the sale of the
Computron Division of $480,000.
INCOME TAXES
Income taxes are nominal in the respective periods as the Company is in a
net operating 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, 1995. They include the full quarterly results of both Etch-Tek, a
manufacturer of printed circuit boards acquired on May 1, 1996, and XPS, 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995
----------------------------------------- ------
CONSOLIDATED ACQUISITIONS COMPARATIVE
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................................... $7,886 $2,200 $5,686 $6,796
Cost of sales............................................... 6,680 1,668 5,012 5,073
------ ------ ----------- ------
Gross profit................................................ 1,206 532 674 1,723
Selling expense............................................. 556 105 451 554
General & administrative.................................... 1,260 425 835 817
Engineering & product development........................... 69 -- 69 76
Interest expense............................................ 183 72 111 98
Other expense (income)...................................... 13 (1) 14 27
Income taxes................................................ 30 -- 30 --
------ ------ ----------- ------
Net income (loss)........................................... $ (905) $ (69) $ (836) $ 151
------ ------ ----------- ------
------ ------ ----------- ------
</TABLE>
As can be seen from the table, the consolidated results of operations for
the three months ended December 31, 1996 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%, 44.1%, and 28.1%,
respectively, of the consolidated totals.
23
<PAGE>
The table following summarizes by company the incremental results related to
the acquired companies for the three months ended December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
ETCH-TEK XPS TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Net sales....................................................... $ 1,013 $ 1,187 $ 2,200
----------- --------- ---------
----------- --------- ---------
Gross profit.................................................... $ 124 $ 408 $ 532
----------- --------- ---------
----------- --------- ---------
Operating expenses.............................................. 182 348 530
Interest expense................................................ 16 56 72
Other expense (income).......................................... (1) -- (1)
----------- --------- ---------
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
$1,110,000 or 16.3% from those in the same period of the prior year. The decline
was principally in the Components Sector, whose sales declined $1,183,000 or
37%. Approximately $640,000 of the decline in the Components Sector's sales was
due to the loss of a major account for display monitors, and the remaining
decline 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 11.9% for the three months ended December 31,
1996. This decline was the combined result of (i) the lower sales volume for the
Components Sector noted above and the consequential decline in absorption of
fixed manufacturing costs and (ii) 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) decreased by $92,000 in total from $1,447,000 in the three
months ended December 31, 1995 to $1,355,000 in the three months ended December
31, 1996. Selling expense, as a percentage of sales, was 7.9% in 1996 versus
8.2% in 1995. Selling expense consists principally of commissions for Circuits
Sector sales and fixed departmental costs for Components Sector sales. The
decrease 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 expense
(income), net is principally comprised of foreign currency exchange gains and
losses incurred during the respective periods, and in 1996, includes the
Company's portion of a loss in a real estate partnership of $5,000.
Income taxes are nominal in the respective periods as the Company is in a
loss carryforward position for Federal income tax purposes.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operations was $(1,668,000), $(564,000), $789,000
and $310,000 for the year ended December 31, 1997, the three months ended
December 31, 1996 and the years ended September 30, 1996 and 1995, respectively.
The principal non-cash items contributing to these cash flows are: (i) the
write-down of goodwill in Fiscal 1997 of $5,693,000; (ii) the provision for
obsolete inventory of $3,134,000 in Fiscal 1997; and (iii) depreciation and
amortization which was $923,000, $209,000, $589,000 and $278,000 in the
respective periods, with the increasing trend due principally to acquired
operations. The substantial increase in cash used in operations in Fiscal 1997
versus the cash provided by operations in Fiscal 1996 is the result of a decline
in results from operations, principally at XCEL Arnold, and the elongation of
accounts payable due to cash flow constraints. The increase in cash provided by
operations of $479,000 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.
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 a private
equity 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 borrowed $375,000 from a related party to assist in financing the
production of accelerating orders from Motorola.
Cash used in operations of $564,000 in the three months ended December 31,
1996 resulted form the decline in results of operations, coupled with changes in
working capital management during the period. During the three months ended
December 31, 1996, the Company had reduced inventory levels and elongated its
payables cycle due to cash flow constraints.
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 paying
down the accounts payable to fund the increase in accounts receivable and
inventories accompanying the growth during the period.
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 XPS 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 6 to the Consolidated Financial Statements included elsewhere in
this report) 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 $424,000, $155,000, $786,000, and $94,000 in the
year ended December 31, 1997, the three months ended December 31, 1996 and the
years ended September 30, 1996 and 1995, 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.
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 7 to the Consolidated Financial Statements
included elsewhere in this report, the bank lines of credit for XIT were renewed
on July 22, 1997 (the "XIT Debt") with more favorable advance rates against
related collateralized assets and with
25
<PAGE>
less restrictive financial covenants. Due principally to continued losses at
XCEL Arnold during the remainder of 1997 (following renewal of the lines of
credit noted above), XIT was not in compliance with certain financial covenants
at December 31, 1997. Although the bank did not waive compliance with such debt
covenants, it entered into a forbearance agreement with the Company in which it
agreed to forbear through April 30, 1998 from exercising its rights under the
terms of the XIT Debt agreement provided certain events occur, principally the
consummation of the sale of XCEL Arnold (see Note 17 to the Consolidated
Financial Statements included elsewhere in this report) and the Company
obtaining a replacement credit facility.
In April 1997, the Company sold 2,000,000 investment units at $2.50 per unit
(the "Placement"). The units consist of one share of common stock and one
quarter of a warrant to purchase one share of common stock. The warrants have an
exercise price of $3.45. The proceeds to the Company were $4,258,000 (net of
$600,000 of commissions and $142,000 for other expenses.) In connection with
this transaction, 200,000 warrants were issued to the placement agents at an
exercise price of $2.66. The proceeds of the Placement alleviated the then most
immediate cash flow problems of the Company, however, as a result of continued
losses from operations during the remainder of Fiscal 1997, primarily at XCEL
Arnold, the Company's cash flow is constrained.
The accompanying consolidated financial statements contained elsewhere in
this report have been prepared assuming the Company will continue as a going
concern. During the year ended December 31, 1997 and the three months ended
December 31, 1996, the Company experienced significant operating losses and had
negative cash flow from operations. As noted above, the Company is in default of
the XIT Debt agreement (see Note 7 to the Consolidated Financial Statements
included elsewhere in this report) as XIT is not in compliance with certain debt
covenants contained therein. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Although management has been successful in obtaining working
capital to fund operations to date, there can be no assurance that the Company
will be able to generate additional capital in the future.
While the Company was profitable for the fiscal year ended September 30,
1996 and had cash flow from operations of $789,000, during the year ended
December 31, 1997 and the three months ended December 31, 1996, the Company
experienced significant operating losses and had negative cash flows from
operations of $1,668,000 and $564,000, respectively. During the year ended
December 31, 1997 and the three months ended December 31, 1996, XCEL Arnold had
negative cash flows from operations of approximately $2,131,000 and $419,000,
respectively, requiring the Company to invest capital to support the operating
losses and working capital needs of XCEL Arnold. Consequently, the Company sold
XCEL Arnold in 1998 (see Note 17 to the Consolidated Financial Statements
included elsewhere in this report).
Also during 1997, the Company developed a corporate finance strategy
designed to obtain an expanded and consolidated domestic credit facility to
provide substantial additional working capital and replace the Company's
existing fragmented and limited domestic debt structure. The strategy also
involves the potential private placement of the Company's common stock and
warrants to purchase the Company's common stock and the potential sale of one of
the Company's profitable subsidiaries. While the Company is actively seeking to
implement this strategy, there are no firm commitments currently in place and
there can be no assurance that any or all of these elements will be successfully
accomplished. Additionally, management is exploring the potential to leverage
its existing European operations to provide additional working capital for
operations and acquisitions. Finally, management has developed and is
implementing plans to increase product pricing where feasible, reduce certain
existing cost structures, improve operating efficiencies and strengthen the
Company's operating infrastructure.
There are two significant legal proceedings pending against the Company (see
Note 14 to the Consolidated Financial Statements included elsewhere in this
report). Management believes that the
26
<PAGE>
outcome of these pending litigations will not have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
The Company continues to assess the impact, if any, of the Year 2000 issue
on its computer applications and operating systems, products and interactions
with third parties. At its domestic facilities, the Company is currently
installing accounting and operations management computer applications which are
year 2000 compliant and which operate on computer operating systems which are
also year 2000 compliant. The Company estimates that the completion of its
conversion to such computer systems will occur during 1999. The Company did not
initiate such changes in application and operating software systems in order to
accommodate the year 2000 issue but rather to upgrade and enhance its management
information systems capability. As a part of its selection criteria, the Company
considered the impact of the year 2000 issue. While the Company currently
believes that the impact of the change to the year 2000 will not have a material
effect on the Company's operations or financial condition, its assessment of
this issue is not yet complete and therefore some uncertainty exists as to
whether material year 2000 issues exist.
OUTLOOK
Despite the expectation of improved operating performance, the Company
believes that its high-volume printed circuit operation, XCEL Arnold, would not
ultimately achieve operating margins comparable to its other circuit operations
nor its other business sector operations and that from a long-term, strategic
perspective, the Company's assets will achieve a higher return if invested in
other activities. Accordingly, the Company sold XCEL Arnold to a private
corporation on April 9, 1998. The operating loss for XACI represents
approximately 68% of the operating loss for the Company, excluding the
write-down of goodwill of $5.7 million, for the year ended December 31, 1997.
In the Components Sector, the Company is in the process of qualifying itself
and its products with several 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, the Company 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 Components 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 Instrumentation and Test Equipment Sector, the negative impact of the
reorganizations of the Sector's domestic customers has eased with the merger of
Southwest Bell and PAC Bell, and Nynex and Mid-Atlantic Bell as well as the
final privatization approvals being settled for France Telecom. While 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, the industry continues to reposition itself and
enter into business combinations which may result in delays in the purchase of
capital equipment from other RBOCs. As a consequence of this phenomenon and the
technological obsolescence of the CXR transmission and test instrument product
lines, the Company wrote-down the carrying cost of goodwill originating in the
reverse acquisition by XIT of the Company in March 1997. While the industry
repositioning is expected to ultimately result in market expansion as the
changed entities emerge and the long distance and local carriers vie for
business opportunities in each others markets, it is unclear that will become
the situation in the near term.
27
<PAGE>
Additionally, in October 1997, the Company acquired Critical Communications,
Incorporated ("Critical") of St. Charles, Illinois. Founded in 1991, Critical is
a provider of sophisticated, state-of-the-art, portable telephone test
instruments used by both long-distance carriers and local telephone service
providers as well as by corporate and government telecommunications end users.
The Company has merged the manufacturing operations of Critical into those of
CXR Telcom and is distributing its products through both existing CXR and
Critical sales channels. This acquisition expands the present CXR product
offering to include additional software-driven, user-friendly and
cost-competitive products which are expected to broaden CXR's penetration of the
Installation and Maintenance ("I&M") segment of the telecommunications
marketplace - i.e. that segment in which corporate services installations and
maintenance are provided by the various telephone companies. While CXR's
existing I&M products are used extensively in the Central Office testing
environment (which necessitates the use of a multi-function, all-in-one test
instrument), Critical's products are primarily designed to service the test
instrument needs at outside plant service installations, where lightweight,
portable products requiring fewer functional testing features are required. It
is particularly in this market segment, where CXR presently competes with only
one, outdated product, that the Critical product line is expected to have
significant impact.
In 1997, HyComp established an industry-leading position in producing and
assembling flip chip devises starting from single semiconductor chips, rather
than requiring complete semiconductor wafers. HyComp is the only company
commercially producing flip chip assemblies from single chips. Flip chip is
forecasted by Prismark Partners, a recognized market research firm in the
microelectronics industry, to be the fastest growing interconnection technology
of the next five years. HyComp's 6-year development of flip chip interconnection
has been primarily funded by $810,000 in contracts from the Defense Advanced
Research Projects Agency to set up a prototype production facility based on
flipping single chips. HyComp was the only company so funded. This has brought
HyComp into joint development programs with Hewlett Packard, Litton, Amecon,
General Dynamics, Orbital Sciences, Raytheon, General Electric, Poly-Flex
Circuits, Lawrence Berkeley Laboratories, and Rutherford Laboratories (UK),
among others. While these development programs have totaled less than $50,000 in
sales to date, the first significant production program, approaching $500,000 in
sales per year is scheduled for the third quarter of 1998, with others of
similar or larger size expected to follow.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business enterprises
report certain information about operating segments in complete sets of
financial statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS 131 to have a material effect on its financial
position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997 and will require restatement of disclosures for earlier
periods provided for comparative purposes. SFAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on
28
<PAGE>
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer considered useful. The Company has not determined the effect, if any, of
adoption of SFAS 132 on its financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information appears in a separate section of this Report following Part
IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
29
<PAGE>
PART III
ITEMS 10-13.
The information required by Items 10 - 13 will either be set forth in the
definitive proxy statement in respect of the 1998 Annual Meeting of Stockholders
of the Company to be filed within 120 days of December 31, 1997, pursuant to
Regulation 14A under the Securities Exchange Act of 1934, which is incorporated
herein by reference, or the required information will be included as an
amendment to this Form 10-K Annual Report on or before April 30, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) (1) and Reference is made to the "Index to Consolidated Financial Statements and
(2) Financial Statement Schedule" appearing in a separate section of this
Report following this Part IV.
<S> <C>
(a) (3) Exhibits. See attached Exhibit Index.
(b) A report on Form 8-K under Item 5. Other Events was filed on October 14,
1997.
(c) The exhibits required by this portion of Item 14 are submitted as a separate
section of this Report.
(d) None.
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
MICROTEL INTERNATIONAL, INC.
By: /s/ CARMINE T. OLIVA
-----------------------------------------
Carmine T. Oliva
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: April 14, 1998
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ---------------------------------- -------------------------- --------------
President and Chief
/s/ CARMINE T. OLIVA Executive Officer and
- --------------------------------- Director (Principal April 14, 1998
Carmine T. Oliva Executive Officer)
/s/ DAVID A. BARRETT
- --------------------------------- Director April 14, 1998
David A. Barrett
/s/ LAURENCE P. FINNEGAN, JR.
- --------------------------------- Director April 14, 1998
Laurence P. Finnegan, Jr.
/s/ ROBERT B. RUNYON
- --------------------------------- Director April 14, 1998
Robert B. Runyon
/s/ JACK R. TALAN
- --------------------------------- Director April 14, 1998
Jack R. Talan
/s/ JAMES P. BUTLER Chief Financial Officer
- --------------------------------- (Principal Accounting April 14, 1998
James P. Butler and Financial Officer)
31
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------------------------------------
<C> <S>
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)
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)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------------------------------------
<C> <S>
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)
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)
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. (9)
10.43 Continuing Guarantee of MicroTel International, Inc. in favor of Imperial Bank Dated July 22, 1997. (9)
10.44 Continuing Guarantee of HyComp, Inc. in favor of Imperial Bank Dated July 22, 1997. (9)
10.45 Continuing Guarantee of XIT Corporation in favor of Imperial Bank Dated July 22, 1997. (9)
10.46 Security and Loan Agreement between XCEL Arnold Circuits, Inc., XIT Corporation and Imperial Bank Dated July 22,
1997. (9)
10.47 Lease Agreement between SCI Limited Partnership-I and CXR Telcom Corporation, Dated July 28, 1997. (9)
10.48 Share Exchange Agreement among CXR Telcom Corporation, MicroTel International, Inc. and Eric P. Bergstrom, Steve T.
Robbins and Mike B. Peterson, Dated October 17, 1997. #
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------------------------------------
<C> <S>
10.49 Indemnity Escrow Agreement among CXR Telcom Corporation, MicroTel International, Inc., Eric P. Bergstrom, Steve T.
Robbins and Mike B. Peterson and Gallagher, Briody & Butler, Dated October 17, 1997. #
10.50 Form of Contingent Stock Agreement among CXR Telcom Corporation, MicroTel International, Inc., Critical
Communications Incorporated, Mike B. Peterson, Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997. #
10.51 Form of Severance Agreement among CXR Telcom Corporation, Critical Communications Incorporated, Mike B. Peterson,
Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997. #
10.52 Asset Purchase Agreement, among Arnold Circuits, Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits,
Inc., XIT Corporation and Mantalica & Treadwell (without exhibits), Dated January 9, 1998. #
10.53 Addendum No. 1 to Asset Purchase Agreement, among Arnold Circuits, Inc, BNZ Incorporated, Robert Bertrand, XCEL
Arnold Circuits, Inc., XIT Corporation and Mantalica & Treadwell, Dated March 31, 1998. #
10.54 Bill of Sale and Assignment and Assumption Agreement between XCEL Arnold Circuits, Inc.and Arnold Circuits, Inc.,
Dated March, 31 1998. #
10.55 Warrant to Purchase Common Stock of MicroTel International, Inc. issued to BNZ Incorporated. #
10.56 Guaranty of Robert Bertrand in favor of XCEL Arnold Circuits, Inc., Dated March 31, 1998. #
10.57 Guaranty of BNZ Incorporated in favor of XCEL Arnold Circuits, Inc., Dated March 31, 1998. #
10.58 Pledge and Escrow Agreement between BNZ Incorporated and XCEL Arnold Circuits, Inc., Dated March 31, 1998. #
10.59 Promissory Note between Arnold Circuits, Inc. and XCEL Arnold Circuits, Inc. Dated March 31, 1998. #
10.60 Promissory Note between XIT Corporation and Arnold Circuits, Inc. Dated March 31, 1998. #
10.61 Security Agreement between Arnold Circuits, Inc and XCEL Arnold Circuits, Inc. Dated March 31, 1998. #
10.62 Joint Marketing and Supply Agreement between Arnold Circuits, Inc and XCEL Etch Tek, Dated March 31, 1998. #
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 Hardcastle Burton. #
27.1 Financial Data Schedule. #
27.2 Financial Data Schedule. #
27.3 Financial Data Schedule. #
99.1 Undertakings to be Incorporated by Reference to Forms S-8 33-27454 and 33-77926. (4)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------------------------------------------------------
<C> <S>
99.2 Undertakings to be Incorporated by Reference to Form S-8 333-12567.
</TABLE>
- ------------------------
# 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).
(9) Incorporated by reference to MicroTel International, Inc. Registration
Statement on Form S-1/A (File No. 333-29925) filed on September 23, 1997.
35
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants (BDO Seidman, LLP)...................................... F-2
Independent Auditors' Report (KPMG Peat Marwick LLP)....................................................... F-3
Independent Auditors' Report (Hardcastle Burton)........................................................... F-4
Consolidated Balance Sheets................................................................................ F-5
Consolidated Statements of Operations...................................................................... F-6
Consolidated Statements of Stockholders' Equity............................................................ F-7
Consolidated Statements of Cash Flows...................................................................... F-8
Notes to Consolidated Financial Statements................................................................. F-10
Consolidated Financial Statement Schedule II--Valuation and Qualifying Accounts............................ F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
MicroTel International, Inc.
We have audited the accompanying consolidated balance sheets of MicroTel
International, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1997 and the three months ended December 31, 1996.
We have also audited the information for the year ended December 31, 1997 and
the three months ended December 31, 1996 in the financial statement schedule
listed in the accompanying index. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement 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 financial
statement 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 financial statement 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 financial statement 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, 1997 and 1996, and the results of its
operations and its cash flows for the year ended December 31, 1997 and the three
months ended December 31, 1996 in conformity with generally accepted accounting
principles.
Also, in our opinion, the financial statement schedule referred to above
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
16 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is in default of certain of its credit facility
agreements, the effects of which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 16. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Costa Mesa, California
March 20, 1998, except as
to Note 17, which is as of
April 9, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MicroTel International, Inc.
We have audited the accompanying consolidated balance sheet of MicroTel
International, Inc. and subsidiaries (formerly known as XCEL Corporation and
subsidiaries) as of September 30, 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-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% in 1996,
and total revenues constituting 7% and 8% in 1996 and 1995, 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 the results of their operations and their cash flows for
each of the years in the two-year period then ended in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
December 13, 1996
F-3
<PAGE>
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-4
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS (NOTES 7 AND 8)
Current assets:
Cash and cash equivalents........................................... $ 1,921 $ 886 $ 785
Accounts receivable, net of allowance for doubtful accounts of $241,
$63 and $47....................................................... 6,749 4,734 4,568
Inventories (Note 4)................................................ 7,087 6,297 6,505
Prepaid and other current assets.................................... 869 714 556
------------ ------------ -------------
Total current assets.............................................. 16,626 12,631 12,414
Property, plant and equipment, net (Note 5)........................... 4,968 5,006 5,060
Goodwill, net of accumlated amortization of $44, $2,397 and $2,330
(Notes 2, 3 and 11)................................................. 1,906 1,836 1,903
Other assets (Note 6)................................................. 1,940 1,091 236
------------ ------------ -------------
$ 25,440 $20,564 $19,613
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7).............................................. $ 3,630 $ 3,492 $ 2,864
Current portion of long-term debt (Note 8).......................... 1,216 1,073 912
Accounts payable.................................................... 6,621 4,746 5,143
Accrued expenses.................................................... 3,837 1,795 1,332
------------ ------------ -------------
Total current liabilities......................................... 15,304 11,106 10,251
Long-term debt, less current portion (Note 8)......................... 2,530 3,549 2,678
Other liabilities..................................................... 789 -- --
Minority interest (Note 3)............................................ 88 68 64
------------ ------------ -------------
Total liabilities................................................. 18,711 14,723 12,993
Series A redeemable preferred stock, no par value.
Authorized, issued and outstanding one thousand shares (aggregate
liquidation preference of $120 in 1997) (Notes 3 and 9)........... 306 340 332
Series B redeemable preferred stock, no par value.
Authorized, issued and outstanding one thousand shares (aggregate
liquidation preference of $160 in 1997) (Notes 3 and 9)........... 408 454 443
Commitments and contingencies (Notes 14 and 16)
Subsequent event (Note 17)............................................
Stockholders' equity (Notes 2, 3 and 10):
Common stock, $.0033 par value. Authorized 25,000
shares; issued and outstanding 11,926, 6,064 and 6,064............ 39 20 20
Additional paid-in capital.......................................... 19,960 8,998 8,998
Accumulated deficit................................................. (13,877) (4,124) (3,200)
Foreign currency translation adjustment............................. (107) 153 27
------------ ------------ -------------
Total stockholders' equity........................................ 6,015 5,047 5,845
------------ ------------ -------------
$ 25,440 $20,564 $19,613
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS YEAR ENDED YEAR ENDED
DECEMBER 31, ENDED DECEMBER SEPTEMBER 30, SEPTEMBER 30,
1997 31, 1996 1996 1995
------------ --------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales............................................ $ 43,098 $ 7,886 $ 31,249 $ 19,602
Cost of sales........................................ 32,670 6,680 23,057 14,332
------------ ------ ------------- -------------
Gross profit..................................... 10,428 1,206 8,192 5,270
Operating expenses:
Selling, general and administrative................ 11,361 1,816 6,379 4,870
Engineering and product development................ 2,046 69 309 328
Write-down of goodwill (Note 11)................... 5,693 -- -- --
------------ ------ ------------- -------------
Income (loss) from operations........................ (8,672) (679) 1,504 72
Other income (expense):
Interest expense................................... (895) (183) (507) (405)
Gain from sale of asset (Note 3)................... -- -- -- 480
Minority interest in net income of consolidated
subsidiary (Note 3).............................. (20) (4) (4) (3)
Other, net......................................... (9) (9) 112 202
------------ ------ ------------- -------------
Income (loss) before income taxes.................... (9,596) (875) 1,105 346
Income taxes (Note 12)............................... 97 30 22 9
------------ ------ ------------- -------------
Net income (loss).................................... $ (9,693) $ (905) $ 1,083 $ 337
------------ ------ ------------- -------------
------------ ------ ------------- -------------
Basic and diluted earnings (loss) per share (Note
13)................................................ $ (.96) $ (.15) $ .17 $ .07
------------ ------ ------------- -------------
------------ ------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN ACCUMULATED CURRENCY
SHARES AMOUNT CAPITAL DEFICIT TRANSLATION TOTAL
--------- ----------- ----------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994................... 4,886 $ 16 $ 7,671 $ (4,530) $ 106 $ 3,263
Stock issued in connection with Arnold Circuits,
Inc. acquisition (Note 3)..................... 639 2 654 -- -- 656
Stock issued for debt conversion (Note 10)...... 289 1 207 -- -- 208
Accretion of preferred stock.................... -- -- -- (10) -- (10)
Foreign currency translation adjustment......... -- -- -- -- 10 10
Net income...................................... -- -- -- 337 -- 337
--------- --- ----------- ------------ ----- ---------
Balance at September 30, 1995................... 5,814 19 8,532 (4,203) 116 4,464
Stock issued in connection with acquisition of
minority interest (Note 3).................... 71 -- 344 -- -- 344
Stock issued for debt conversion (Note 10)...... 179 1 122 -- -- 123
Accretion of preferred stock.................... (80) -- (80)
Foreign currency translation adjustment......... -- -- -- -- (89) (89)
Net income...................................... -- -- -- 1,083 -- 1,083
--------- --- ----------- ------------ ----- ---------
Balance at September 30, 1996................... 6,064 20 8,998 (3,200) 27 5,845
Accretion of preferred stock.................... -- -- -- (19) -- (19)
Foreign currency translation adjustment......... -- -- -- -- 126 126
Net loss........................................ -- -- -- (905) -- (905)
--------- --- ----------- ------------ ----- ---------
Balance at December 31, 1996.................... 6,064 20 8,998 (4,124) 153 5,047
Stock issued in connection with reverse
acquisition (Note 2).......................... 3,186 10 5,235 -- -- 5,245
Stock issued in connection with private
placement (Note 10)........................... 2,000 7 4,251 -- -- 4,258
Stock issued in connection with acquisition
(Note 3)...................................... 500 2 1,123 -- -- 1,125
Stock issued for debt conversion (Note 10)...... 55 -- 44 -- -- 44
Stock issued upon exercise of stock options..... 30 -- 97 -- -- 97
Stock issued in connection with settlement of
dispute (Note 10)............................. 80 -- 190 -- -- 190
Stock issued as compensation and under stock
purchase plan................................. 11 -- 22 -- -- 22
Accretion of preferred stock.................... -- -- -- (60) -- (60)
Foreign currency translation adjustment......... -- -- -- -- (260) (260)
Net loss........................................ -- -- -- (9,693) -- (9,693)
--------- --- ----------- ------------ ----- ---------
Balance at December 31, 1997.................... 11,926 $ 39 $ 19,960 $ (13,877) $ (107) $ 6,015
--------- --- ----------- ------------ ----- ---------
--------- --- ----------- ------------ ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ (9,693) $ (905) $ 1,083 $ 337
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations:
Depreciation and amortization..................... 923 209 589 278
Amortization of intangible assets................. 358 67 210 210
Allowance for doubtful accounts................... 251 16 17 41
Provision for inventory obsolescence.............. 3,134 416 211 265
Write-down of goodwill............................ 5,693 -- -- --
Gain on sale of Computron......................... -- -- -- (480)
Minority interest................................. 20 4 (4) 28
Stock issued as compensation...................... 22 -- -- --
Equity in earnings of unconsolidated
partnership..................................... 21 5 -- --
Changes in operating assets and liabilities:
Accounts receivable............................. (554) (158) (5) (181)
Inventories..................................... (1,011) (169) (421) (48)
Prepaids and other assets....................... 413 (145) 145 (85)
Accounts payable................................ (755) (367) (296) 118
Accrued expenses................................ (490) 463 (740) (173)
------------ ------------ ------------- -------------
Cash provided by (used in) operations................. (1,668) (564) 789 310
------------ ------------ ------------- -------------
Cash flows from investing activities:
Net purchases of property, plant and equipment...... (424) (155) (786) (94)
Cash paid for purchase of Arnold Circuits, Inc...... -- -- -- (1,027)
Cash paid for purchase of Etch-Tek.................. -- -- (428) --
Cash paid for purchase of Abbott Electronics........ -- -- (735) --
Proceeds from sale of Computron..................... -- -- -- 1,157
Cash acquired in acquisition/merger................. 273 -- -- --
Investment in and loan to real estate partnership... -- (868) -- --
Proceeds from repayment of loan to partnership...... 125 -- -- --
------------ ------------ ------------- -------------
Cash provided by (used in) investment activities.... (26) (1,023) (1,949) 36
------------ ------------ ------------- -------------
</TABLE>
F-8
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in notes payable............ (3) 628 249 (216)
Proceeds from long-term debt........................ 163 1,326 2,000 1,334
Repayments of long-term debt........................ (1,606) (294) (1,055) (711)
Preferred stock dividends paid...................... (140) -- (140) --
Proceeds from sale of common stock.................. 4,258 -- -- --
------------ ------------ ------------- -------------
Cash provided by financing activities................. 2,672 1,660 1,054 407
------------ ------------ ------------- -------------
Effect of exchange rate changes on cash............... 57 28 (87) 9
------------ ------------ ------------- -------------
Net increase (decrease) in cash and cash
equivalents......................................... 1,035 101 (193) 762
Cash and cash equivalents at beginning of period...... 886 785 978 216
------------ ------------ ------------- -------------
Cash and cash equivalents at end of period............ $ 1,921 $ 886 $ 785 $ 978
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.......................................... $ 827 $ 183 $ 490 $ 411
Income taxes...................................... $ 58 $ -- $ 12 $ 5
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclusures of non-cash investing and
financing activities:
Issuance of common stock, preferred stock and
notes in connection with acquisitions........... $ 6,370 $ -- $ 539 $ 1,681
Issuance of common stock in conversion of debt to
equity.......................................... $ 44 $ -- $ 123 $ 208
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock in conection with
settlement of dispute........................... $ 190 $ -- $ -- $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock upon exercise of stock
options......................................... $ 97 $ -- $ -- $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Accretion of preferred stock...................... $ 60 $ 19 $ 80 $ 10
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(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.
BASIS OF PRESENTATION
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 stockholders 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 is not assumed to the
be acquirer and the financial statements of the combined entity are those of the
accounting acquirer (XIT), including any comparative prior year financial
statements presented by the combined entity after the business combination.
Consequently, the consolidated financial statements include the accounts of XIT
and its wholly and majority-owned subsidiaries, and beginning March 26, 1997,
include the Company and its other subsidiaries, CXR Telcom Corporation and CXR
S.A. (the "Former Company").
In connection with the reverse acquisition, the Company assumed the number
of authorized common shares of 25,000,000 and $.0033 par value per share of the
Former Company. Furthermore, the former stockholders of XIT were issued
approximately 6,199,000 shares of common stock, which resulted in a common share
exchange ratio of 1.451478. Accordingly, all references to the number of shares
and to the per share information in the accompanying consolidated financial
statements have been adjusted to reflect these changes on a retroactive basis.
XIT's 50% investment in a real estate partnership (see Note 6) is accounted
for using the equity method.
All significant intercompany balances and transactions have been eliminated
in consolidation.
FISCAL YEARS
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.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
F-10
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less when purchased.
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 useful lives of the assets
(or lease term, if shorter) as follows:
<TABLE>
<S> <C>
Buildings......................................................... 50 years
Machinery, equipment and fixtures................................. 3-7 years
Leasehold improvements............................................ 5 years
</TABLE>
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 and is
amortized on a straight-line basis over its estimated useful life. During 1997,
the Company wrote-down the value of goodwill by approximately $5.7 million and
reduced the estimated useful lives from 15 - 20 years to 10 years (see Note 11).
LONG-LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets 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 undiscounted 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.
SOFTWARE DEVELOPMENT COSTS
Software development costs, including purchased technology, are capitalized
beginning when technological feasibility has been established or when purchased
from third parties and continues 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. The carrying value of capitalized software development costs
aggregates $592,000 (net of accumulated amortization of $248,000) at December
31, 1997 and is included in other assets in the accompanying consolidated
balance sheet. During the
F-11
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ended December 31, 1997, $248,000 of amortization relating to the remaining
capitalized software was charged to cost of 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.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for its employee stock option plans, unless the exercise price of options
granted is less than fair market value on the date of grant. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
EARNINGS (LOSS) PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The statement
replaces the calculation of primary and fully diluted earnings (loss) per share
with basic and diluted earnings (loss) per share. Basic earnings (loss) per
share includes no dilution and is computed by dividing income (loss) available
to common shareholders by the weighted average number of shares outstanding
during the period. Diluted earnings (loss) per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings (loss) per share. All earnings (loss) per share amounts
have been restated to conform to the requirements of SFAS 128. Such adoption had
no net effect on the previously reported earnings (loss) per share.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" 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. This statement 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 December 31, 1997, the fair value of all financial
instruments approximated carrying value.
F-12
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value because of the short maturity of these items. The Company believes the
carrying amounts of its notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
USE OF ESTIMATES
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
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentration
of credit risk, consist primarily of cash and accounts receivable. The Company
places its cash with high quality financial institutions. At times, cash
balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.
The Company's accounts receivable results from sales to a broad customer
base. The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. Credit losses are provided for in the financial statements
and consistently have been within management's expectations.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries have been translated using the local
currency as the functional currency. Accordingly, foreign currency denominated
assets and liabilities have been translated to U.S. dollars at the current rate
of exchange on the balance sheet date. The effects of translation are recorded
as a separate component of stockholders' equity. Exchange gains and losses
arising from transactions denominated in foreign currencies are translated at
average exchange rates and included in operations. Such amounts are not material
to the accompanying consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business enterprises
F-13
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
report certain information about operating segments in complete sets of
financial statements of the enterprise and in condensed financial statements of
interim periods issued to shareholders. It also requires that public business
enterprises report certain information about their products and services, the
geographic areas in which they operate and their major customers. The Company
does not expect adoption of SFAS 131 to have a material effect on its financial
position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997 and will require restatement of disclosures for earlier
periods provided for comparative purposes. SFAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer considered
useful. The Company has not determined the effect, if any, of adoption of SFAS
132 on its financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the 1997 presentation.
(2) MERGER WITH XIT CORPORATION
On March 26, 1997, privately-held XIT merged with a wholly-owned, newly
formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant
to the transaction, the former stockholders 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 at the date of the merger collectively had the right to acquire an
additional 2,153,000 shares of common stock. Collectively, then the former XIT
stockholders owned, or had 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 described in Note 1, the merger has been accounted for as a purchase of
the Company by XIT. Accordingly, the purchase price, consisting of the value of
the common stock outstanding of the Company at the date of the merger of
$5,011,000 plus the direct costs of the acquisition of $730,000, and the
acquired assets and liabilities of MicroTel were recorded at their estimated
fair values at the date of the merger. The excess of $4,998,000 of the purchase
price over the fair value of the net assets acquired was recorded as goodwill
and thereafter was amortized on a straight-line basis over 15 years. In
September 1997, the Company wrote-down the goodwill associated with the merger
to $998,000. Thereafter, the remaining goodwill is being amortized on a
straight-line basis over ten years (see Note 11).
The following represents the unaudited pro forma results of operations as if
the merger had occurred at the beginning of the respective periods presented
below. The presentation for the year ended September 30, 1996 combines the
Company's results of operations for that year with the former MicroTel results
F-14
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(2) MERGER WITH XIT CORPORATION (CONTINUED)
of operations for the year ended December 31, 1996, with adjustments to reflect
amortization of the excess purchase price over the fair value of the net assets
acquired.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Net sales.............................................. $ 46,094,000 $ 47,552,000
----------------- ------------------
----------------- ------------------
Net loss............................................... $ (12,097,000) $ (3,514,000)
----------------- ------------------
----------------- ------------------
Basic and diluted loss per share....................... $ (1.12) $ (.40)
----------------- ------------------
----------------- ------------------
</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 respective period presented or of results which may occur in the future.
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
ACQUISITIONS
On October 17, 1997, the Company's CXR Telcom subsidiary acquired all the
capital stock of Critical Communications Incorporated ("Critical") of St.
Charles, Illinois in exchange for 500,000 shares of the Company's common stock.
Founded in 1991, Critical is a provider of sophisticated, state-of-the-art,
portable telephone test instruments used by both long-distance carriers and
local telephone service providers as well as by corporate and government
telecommunications end users. The acquisition of Critical has been accounted for
as a purchase, and accordingly, the results of operations of Critical since the
date of the acquisition are included in the Company's consolidated statement of
operations for the year ended December 31, 1997. The 500,000 shares of common
stock were valued at $1,125,000 based on the fair value of the common stock on
the acquisition date. The Company acquired $9,000 in cash in the acquisition and
the cost in excess of net assets acquired was $1,123,000 which is being
amortized on a straight-line basis over ten years. The pro forma effect of this
acquisition was not material to the results of operations for 1997 or 1996.
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
$195,000 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 operations for
F-15
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
the year ended September 30, 1996. Supplementary information related to the
acquisition of Etch-Tek for the year ended September 30, 1996 is as follows:
<TABLE>
<S> <C>
Assets acquired................................................. $1,401,000
Liabilities assumed............................................. (746,000)
Promissory note................................................. (195,000)
---------
Cash paid to sellers............................................ 460,000
Cash acquired................................................... (32,000)
---------
Net cash paid................................................... $ 428,000
---------
---------
</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 $735,000, 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, 639,000 shares of 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 Company's consolidated statement of operations for the year
ended September 30, 1995. The 639,000 shares of common stock were valued at
$656,000 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 year ended September 30, 1995 is as follows:
<TABLE>
<S> <C>
Assets acquired................................................. $5,665,000
Liabilities assumed............................................. (2,784,000)
Promissory note................................................. (200,000)
Series A preferred stock........................................ (354,000)
Series B preferred stock........................................ (471,000)
Common stock.................................................... (656,000)
----------
Cash paid to sellers............................................ 1,200,000
Cash acquired................................................... (173,000)
----------
Net cash paid................................................... $1,027,000
----------
----------
</TABLE>
F-16
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
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 year
ended September 30, 1995.
<TABLE>
<CAPTION>
1995
-------------
<S> <C>
Net sales...................................................................... $ 31,369,000
-------------
-------------
Net income..................................................................... $ 585,000
-------------
-------------
Basic and diluted earnings per share........................................... $ .12
-------------
-------------
</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 $306,000 (including acquisition costs of $150,000). The
Company financed the acquisition through cash of $150,000 and the issuance of
227,000 shares of the Company's common stock valued at $156,000 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. As the
result of the exercise of certain HyComp stock options in 1997, the Company's
ownership of the common shares outstanding of HyComp was reduced to 88.5%.
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 accompanying consolidated
financial statements as minority interest, and includes amounts applicable to
HyComp's preferred stock of $6,000, $6,000, $6,000 and $157,000 at December 31,
1997 and 1996 and September 30, 1996 and 1995, respectively. Dividends on the
preferred stock are cumulative at 8% per year, and minority interest at December
31, 1997 and 1996 and September 30, 1996 and 1995 includes cumulative dividends
in arrears of $8,000, $8,000, $8,000 and $185,000, respectively.
DISPOSITIONS
On May 31, 1995, XIT 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 $480,000.
F-17
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Raw materials.............................................. $3,044,000 $2,413,000 $ 3,072,000
Work-in-process............................................ 2,333,000 2,642,000 2,950,000
Finished goods............................................. 1,710,000 1,242,000 483,000
------------ ------------ -------------
$7,087,000 $6,297,000 $ 6,505,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Land and buildings........................................ $ 642,000 $ 262,000 $ 224,000
Machinery, equipment and fixtures......................... 7,634,000 7,203,000 7,172,000
Leasehold improvements.................................... 736,000 662,000 576,000
------------- ------------- -------------
9,012,000 8,127,000 7,972,000
Accumulated depreciation and amortization................. (4,044,000) (3,121,000) (2,912,000)
------------- ------------- -------------
$ 4,968,000 $ 5,006,000 $ 5,060,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(6) INVESTMENT IN PARTNERSHIP
On December 19, 1996, the Company's XIT subsidiary invested $100,000 and
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 in,
Ontario, California. The Company presently occupies 63,000 square feet of this
facility as a corporate headquarters and as an administrative and factory
facility for XIT's Digitran Division under a long-term lease from the
partnership. Immediately following the formation of the partnership, XIT
obtained a loan from a bank for $750,000 (Note 8), and in turn, loaned such
funds to the partnership under a note receivable with the same terms and
conditions. Such funds were utilized to reduce the existing debt secured by the
real estate. XIT's original investment in the partnership is adjusted for the
income (loss) attributable to XIT's portion of the partnership's results of
operations. The investment in the partnership of $126,000 and $105,000 and note
receivable of $625,000 and $750,000 are included in other assets in the
accompanying consolidated balance sheets at December 31, 1997 and 1996,
respectively.
F-18
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(7) NOTES PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Line of credit with a bank................................ $ 2,377,000 $ 2,027,000 $ 1,999,000
Factoring line of credit with a bank...................... 185,000 -- --
Foreign subsidiary lines of credit with banks............. 292,000 -- --
Foreign subsidiary line of credit with a bank............. 289,000 1,074,000 784,000
Foreign subsidiary line of credit with a bank............. -- 39,000 54,000
Notes payable to related parties.......................... 387,000 352,000 27,000
Other notes payable....................................... 100,000 -- --
------------- ------------- -------------
$ 3,630,000 $ 3,492,000 $ 2,864,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Company's XIT subsidiary has a line of credit with a bank (the "XIT
Debt") which provides for maximum borrowings of $3,500,000 of which $2,377,000
was outstanding at December 31, 1997. The line of credit was renewed on July 22,
1997 and expires on June 25, 1998. The credit line is collateralized by
substantially all assets of XIT and its domestic subsidiaries, bears interest at
the bank's prime rate (8.5% at December 31, 1997) plus 1% and is payable on
demand.
The XIT Debt agreement requires maintenance of certain financial ratios and
contains other restrictive covenants. XIT was not in compliance with certain
debt covenants at December 31, 1997. Although the bank did not waive compliance
with such debt covenants, it entered into a forbearance agreement with the
Company in which it agreed to forbear through April 30, 1998 from exercising its
rights under the terms of the XIT Debt agreement provided certain events occur,
principally the consummation of the sale of the Company's Xcel Arnold Circuits,
Inc. subsidiary and the Company obtaining a replacement credit facility (see
Notes 16 and 17).
The Company's CXR Telcom subsidiary has a factoring line of credit with a
bank, borrowings under which are based on an advance rate of 85% of eligible
accounts receivable with no maximum. The line bears interest at the bank's prime
(8.5% at December 31, 1997) plus 2% and an administrative fee of 1% charged on
the average factored balance for invoice processing. At December 31, 1997, this
subsidiary has $185,000 outstanding and has additional borrowings of $292,000
available under this line.
The Company's French subsidiary has bank lines of credit aggregating
$292,000 at December 31, 1997. Borrowings under the related agreements bear
interest at 5.7% to 5.8% at December 31, 1997 and are based on eligible accounts
receivable. Approximately $293,000 of additional borrowings were available under
the lines at December 31, 1997.
The Company's UK subsidiary has a bank line of credit with $289,000
outstanding at December 31, 1997. Borrowings under the related agreement bear
interest at the bank's base rate (6% at December 31, 1997) plus 2.5% and are
based on eligible accounts receivable. Approximately $277,000 of additional
borrowings were available under the line at December 31, 1997.
The Company has short-term borrowings from a stockholder and an officer of a
subsidiary aggregating $387,000 at December 31, 1997. Such loans bear no
interest and are payable on demand. Additionally, the Company borrowed $100,000
from a third party which it invested in a real estate partnership. The loan
F-19
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(7) NOTES PAYABLE (CONTINUED)
bears interest at 9.5%, is payable in full on May 15, 1998 and is secured by 25%
of XIT's interest in the partnership (Note 6).
(8) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
Term notes payable to bank (a)............................. $2,087,000 $2,462,000 $ 1,825,000
Term note payable to bank (b).............................. 568,000 767,000 817,000
Term notes payable to foreign banks (c).................... 124,000 208,000 194,000
Capitalized lease obligations (d).......................... 714,000 977,000 515,000
Other promissory notes..................................... 253,000 208,000 239,000
------------ ------------ -------------
3,746,000 4,622,000 3,590,000
Current portion............................................ (1,216,000) (1,073,000) (912,000)
------------ ------------ -------------
$2,530,000 $3,549,000 $ 2,678,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
- ------------------------
(a) Three term notes payable to bank bearing interest at the bank's prime rate
(8.5% at December 31, 1997) plus 1.25%. The notes are collateralized by
machinery and equipment and are payable in total monthly principal
installments of approximately $44,000 through December 1998, $48,000 through
December 2000 and $57,000 plus interest through final maturity dates in
fiscal 2001.
(b) The term note payable to bank is collateralized by all the assets of XCEL
Arnold Circuits, Inc (see Note 17). This note bears interest at the bank's
prime rate (8.5% at December 31, 1997) plus 1.25%. The note is payable in
monthly principal installments of $17,000 plus interest through maturity
date in October 2000.
(c) The Company has agreements with several foreign banks which include term
borrowings which mature serially through 2001. Interest rates on the
borrowings bear interest at rates ranging from 2.7% to 11.25% and are
payable in monthly installments. Included in the other term notes is a
$55,000 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 respective subsidiary.
(d) Capital lease agreements are calculated using interest rates appropriate at
the inception of the lease and range from 10.5% to 12.3%. Lease liabilities
are amortized over the lease term using the effective interest method. The
leases all contain bargain purchase options and expire through 2001.
F-20
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(8) LONG-TERM DEBT (CONTINUED)
Principal maturities related to long-term debt as of December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 1,216,000
1999............................................................................ 1,067,000
2000............................................................................ 863,000
2001............................................................................ 535,000
2002............................................................................ 27,000
Thereafter...................................................................... 38,000
------------
$ 3,746,000
------------
------------
</TABLE>
(9) REDEEMABLE PREFERRED STOCK
In connection with the Arnold Circuits, Inc. acquisition (see Note 3), 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 commencing in
June 1996, 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 December
31, 1997, the accumulated dividends in arrears were $210,000. 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-21
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(9) REDEEMABLE PREFERRED STOCK (CONTINUED)
The following table reflects the redeemable preferred stock activity:
<TABLE>
<CAPTION>
SERIES A REDEEMABLE SERIES B REDEEMABLE
PREFERRED STOCK PREFERRED STOCK
-------------------- --------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Balance at September 30, 1994............................... -- $ -- -- $ --
Preferred stock issued...................................... 1,000 354,000 1,000 471,000
Accretion of preferred stock................................ -- 4,000 -- 6,000
--------- -------- --------- --------
Balance at September 30, 1995............................... 1,000 358,000 1,000 477,000
Accretion of preferred stock................................ -- 34,000 -- 46,000
Preferred stock dividends paid.............................. -- (60,000) -- (80,000)
--------- -------- --------- --------
Balance at September 30, 1996............................... 1,000 332,000 1,000 443,000
Accretion of preferred stock................................ -- 8,000 -- 11,000
--------- -------- --------- --------
Balance at December 31, 1996................................ 1,000 340,000 1,000 454,000
Accretion of preferred stock................................ -- 26,000 -- 34,000
Preferred stock dividends paid.............................. -- (60,000) -- (80,000)
--------- -------- --------- --------
Balance at December 31, 1997................................ 1,000 $306,000 1,000 $408,000
--------- -------- --------- --------
--------- -------- --------- --------
</TABLE>
(10) STOCKHOLDERS' EQUITY
In April 1997, the Company sold 2,000,000 investment units at $2.50 per
unit. The units consist of one share of common stock and one quarter of a
warrant to purchase one share of common stock. The warrants have an exercise
price of $3.45. The proceeds to the Company were $4,258,000 (net of $600,000 of
commissions and $142,000 for other expenses). In connection with this
transaction, 200,000 warrants were issued to the placement agents at an exercise
price of $2.66.
STOCK OPTIONS AND WARRANTS
The Company has the ability to issue options to purchase its common stock
issued under the following arrangements:
- 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.
- 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.
- The MicroTel International Inc. 1997 Stock Incentive Plan (the "1997
Plan") provides that options granted may be either qualified or
nonqualified stock options and are required to be granted at fair market
value at the date of grant. Subject to termination of employment, options
may expire up to ten years from the date of grant and are nontransferable
other than in the event of death, disability
F-22
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(10) STOCKHOLDERS' EQUITY (CONTINUED)
or certain other transfers that the committee of the Board of Directors
administering the 1997 Plan may permit. Up to 1,600,000 stock options may
be granted under the 1997 Plan. All outstanding options of former
optionholders under the XIT 1987 Employee Stock Option Plan were converted
to options under the 1997 Plan as of the date of the merger between the
Company and XIT at the exchange rate of 1.451478 (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 date 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.
The following table shows activity in the outstanding options.
<TABLE>
<CAPTION>
THREE
MONTHS YEAR YEAR
WEIGHTED ENDED ENDED ENDED
YEAR ENDED AVERAGE DEC. 31, SEP. 30, SEP. 30,
DEC. 31, EXERCISE 1996 1996 1995
1997 PRICE SHARES SHARES SHARES
---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of period............. 842,000 $ 1.89 874,000 874,000 --
Granted........................................ 96,000 1.69 41,000 -- 874,000
XIT/MicroTel merger............................ 1,146,000 2.65 -- -- --
Exercised...................................... (30,000) 3.23 -- -- --
Canceled....................................... (55,000) 2.31 (73,000) -- --
---------- ----- --------- --------- ---------
Outstanding at end of period................... 1,999,000 $ 2.32 842,000 874,000 874,000
---------- ----- --------- --------- ---------
---------- ----- --------- --------- ---------
</TABLE>
Options exercisable as of December 31, 1997 and 1996 and September 30, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1996
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Exercisable................................. 1,843,000 821,000 874,000 874,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted Average Exercise Price............. $ 2.32 $ 1.91 $ 1.89 $ 1.89
</TABLE>
Weighted average exercise prices for 1997 are calculated at prices effective
as of December 31, 1997. The fair value of options granted during 1997 was
$132,000, at a weighted average value of $1.37 per share. Exercise prices for
options outstanding as of December 31, 1997 generally ranged from $1.69 to $3.45
per share and the weighted average remaining contractual life for these options
was 4.7 years. The fair value of options granted during the three months ended
December 31, 1996 and the year ended September 30, 1995 were $29,000 and
$735,000, at weighted average prices of $.72 and $.84 per share, respectively.
F-23
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(10) STOCKHOLDERS' EQUITY
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 1997 has been estimated based on a modified
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of approximately 73%, based on historical results; risk-free
interest rate of 5.1%; and average expected lives of approximately ten years.
The fair value at date of grant for options granted in 1996 and 1995 has been
estimated using the minimum value method with the following assumptions: no
dividend yield; risk-free interest rates of 6.0% and 6.5%, respectively and the
actual remaining life of the option.
The following table sets forth the net income (loss), income (loss)
available for common stockholders and earnings (loss) per share amounts for the
periods presented as if the Company had elected the fair value method of
accounting for stock options.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DEC. 31 DEC. 31 SEP. 30 SEP. 30
1997 1996 1996 1995
----------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NET INCOME (LOSS)
As reported...................................... $ (9,693) $ (905) $ 1,083 $ 337
Pro forma........................................ $ (9,825) $ (934) $ 1,083 $ (398)
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS
As reported...................................... $ (9,753) $ (924) $ 1,003 $ 327
Pro forma........................................ $ (9,885) $ (953) $ 1,003 $ (408)
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
As reported...................................... $ (.96) $ (.15) $ .17 $ .07
Pro forma........................................ $ (.98) $ (.16) $ .17 $ (.08)
</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 the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income (loss) in future years.
F-24
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(10) STOCKHOLDERS' EQUITY (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, 1995..................... 908,000 $ 1.21 to 3.79 $ 2,435,000
Warrants issued............................................. 363,000 3.44 1,248,000
Warrants canceled........................................... (73,000) 3.44 to 3.79 (252,000)
---------- ------------
Balance outstanding, September 30, 1996 and December 31,
1996...................................................... 1,198,000 1.21 to 3.79 3,431,000
Warrant--MicroTel merger.................................... 122,000 2.50 305,000
Warrants issued............................................. 1,170,000 2.13 to 3.45 3,410,000
---------- ------------
Balance outstanding, December 31, 1997...................... 2,490,000 $ 1.21 to 3.79 $ 7,146,000
---------- ------------
---------- ------------
</TABLE>
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. During
1997, 6,000 shares had been issued pursuant to the plan with 39,000 shares
reserved for future issuance.
At December 31, 1997, the total number of shares reserved for issuance upon
exercise of stock options and warrants or direct grants was 4,919,000 shares.
DEBT TO EQUITY CONVERSION
In March 1997, the Company converted $44,000 in various promissory notes to
55,000 shares of common stock. In September 1996, the Company converted $123,000
in various promissory notes to 179,000 shares of common stock. In September
1995, the Company converted $208,000 in various promissory notes to a current
stockholder to 289,000 shares of common stock.
SETTLEMENT OF DISPUTE
During 1997, the Company entered into an amendment to an agreement with a
former officer in settlement of a claim made by such officer for certain amounts
purportedly owed to him by the Company. In connection with the amended
agreement, the Company issued the former officer 80,000 shares of its common
stock valued at $190,000, the fair market value of the common stock on the date
of issuance.
(11) NON-RECURRING CHARGES--IMPAIRMENT OF GOODWILL
The Company assesses the recoverability of its goodwill whenever adverse
events or change in circumstances or business climate indicates that expected
future cash flows (undiscounted and without interest charges) for individual
business units may not be sufficient to support recorded goodwill. During the
third quarter ended September 30, 1997 the Company, due to declines in profit
margins and continuing operating losses, wrote-off the carrying value of
goodwill originating with the acquisition in 1986 of the Digitran division of
Becton Dickenson and the acquisition of HyComp, Inc. in 1993. The Company also
wrote-down the carrying value of goodwill originating from the reverse
acquisition with XIT (see Note 2) to its net realizable value. These write-downs
totaled $5,693,000 and were charged to operations.
F-25
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(12) INCOME TAXES
The Company files a consolidated U.S. federal income tax return. This return
includes all domestic companies 80% or more owned by the Company and the
proportionate share of its interest in partnership investments. State tax
returns are filed on a consolidated, combined or separate basis depending on the
applicable laws relating to the Company and its domestic subsidiaries.
Income (loss) before income taxes was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Domestic................................... $ (9,721,000) $ (882,000) $ 870,000 $ 398,000
Foreign.................................... 125,000 7,000 235,000 (52,000)
------------- ------------- ------------- -------------
Total...................................... $ (9,596,000) $ (875,000) $ 1,105,000 $ 346,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
CURRENT:
Federal................................... $ -- $ -- $ 6,000 $ --
State..................................... 17,000 16,000 11,000 5,000
Foreign................................... 80,000 14,000 5,000 4,000
------------ ------------- ------------- ------
$ 97,000 $ 30,000 $ 22,000 $ 9,000
------------ ------------- ------------- ------
------------ ------------- ------------- ------
</TABLE>
Income tax expense (benefit) 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>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tax at U. S. federal statutory rate........ $ (3,263,000) $ (297,000) $ 296,000 $ 135,000
State taxes, net of federal income tax
benefit.................................. 17,000 16,000 7,000 5,000
Foreign income taxes....................... 80,000 14,000 5,000 4,000
Net operating losses utilized.............. -- -- (62,000) (191,000)
Write-down of goodwill..................... 1,936,000 -- -- --
Losses with no current benefit............. 1,096,000 283,000 (307,000) --
Permanent differences...................... 157,000 15,000 54,000 53,000
Other...................................... 74,000 (1,000) 29,000 3,000
------------- ------------- ------------- -------------
$ 97,000 $ 30,000 $ 22,000 $ 9,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
F-26
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(12) INCOME TAXES (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>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1996 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... $ 61,000 $ 22,000 $ 20,000
Inventory reserves and uniform capitalization......... 449,000 225,000 238,000
Accrued vacation...................................... 174,000 146,000 137,000
Warranty reserve...................................... 45,000 3,000 3,000
Other accrued liabilities............................. 103,000 76,000 8,000
Deferred compensation................................. 588,000 -- --
Research credit carryforwards......................... 256,000 -- --
Alternative Minimum Tax credit carryforwards.......... 134,000 -- --
Net operating loss carryforwards...................... 10,786,000 3,148,000 2,789,000
-------------- ------------- --------------
Total deferred tax assets............................. 12,596,000 3,620,000 3,195,000
Valuation allowance for deferred tax assets........... (12,263,000) (3,596,000) (2,986,000)
-------------- ------------- --------------
Net deferred tax assets............................... 333,000 24,000 209,000
Deferred tax liabilities--depreciation.................. (333,000) (24,000) (209,000)
-------------- ------------- --------------
Net deferred taxes.................................. $ -- $ -- $ --
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
As of December 31, 1997, the Company has a federal net operating loss
carryforward of approximately $30,700,000 which expires at various dates between
2001 and 2012 and a state net operating loss carryforward of approximately
$5,900,000 which expires at various dates between 1998 and 2002.
As a result of the merger with XIT (Note 2), the Company experienced a more
than 50% ownership change for federal income tax purposes. As a result, an
annual limitation will be placed upon the Company's ability to realize the
benefit of its net operating loss and credit carryforwards. The amount of this
annual limitation, as well as the impact of the application of other possible
limitations under the consolidated return regulations, has not been definitively
determined at this time. Management believes sufficient uncertainty exists
regarding the realizability of the deferred tax asset items and that a valuation
allowance, equal to the net deferred tax asset amount, is required.
F-27
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(13) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss).................................. $ (9,693,000) $ (905,000) $ 1,083,000 $ 337,000
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock.................................. 60,000 19,000 80,000 10,000
------------- ------------- ------------- -------------
Income available forcommon stockholders.............. $ (9,753,000) $ (924,000) $ 1,003,000 $ 327,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
DENOMINATOR:
Weighted average number of common shares outstanding
during the period.................................. 10,137,000 6,064,000 5,841,000 4,995,000
------------- ------------- ------------- -------------
Basic and diluted earnings (loss) per share.......... $ (.96) $ (.15) $ .17 $ .07
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The computation of diluted earnings (loss) per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company or such instruments had exercise prices greater than the
average market price of the common shares during periods presented. See summary
of outstanding stock options and warrants in Note 10.
(14) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities under
operating leases which expire at various dates through 2002. 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 year
ended December 31, 1997, the three months ended December 31, 1996 and the years
ended September 30, 1996 and 1995 was $2,477,000, $595,000, $1,135,000 and
$643,000, respectively.
The future minimum rental payments required under operating leases that have
initial or remaining noncancellable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 1,357,000
1999............................................................................ 865,000
2000............................................................................ 641,000
2001............................................................................ 328,000
2002............................................................................ 124,000
------------
$ 3,315,000
------------
------------
</TABLE>
F-28
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Included in the above amounts is annual rent of $454,000 payable under a
lease to a real estate partnership which is 50% owned by the Company (Note 6).
The lease expires in August 2000.
LITIGATION
The Company and its subsidiaries are, from time to time, involved in legal
proceedings, claims and litigation arising in the ordinary course of business.
While the amounts claimed may be substantial, the ultimate liability cannot
presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows.
JACOBSON V. CXR
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 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 was filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson 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.
F-29
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
The Company's motion for leave to cross-claim and Mr. Jacobson's motion for
leave to amend his complaint were granted and on August 25, 1997, Mr. Jacobson
filed an amended complaint. On September 24, 1997, the Company filed a demurrer
to Mr. Jacobson's second amended complaint which was denied on November 18,
1997.
A court supervised settlement conference with Mr. Jacobson was held on
February 5, 1998 and a settlement was reached. The value of the settlement was
not materially different than the amount previously recorded by the Company for
the deferred compensation arrangement, which approximates $1,000,000 at December
31, 1997 and which also approximates the value of the tentative settlement
reached on March 26, 1997.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme Court of
the State of New York, County of New York, to recover monetary damages in the
amount of $300,000 allegedly sustained by the failure of the Company, its stock
transfer agent and its counsel to timely deliver and register 30,000 shares of
Common Stock for which payment had been made. The Company was informed by Mr.
Scheinfeld that in order to settle his claims, the Company would have to issue
him unrestricted shares of common stock. Since the Company cannot issue
unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's
motion and sought to compel him to serve a complaint upon the defendants. On
June 30, 1997, the complaint was served, and the Company has subsequently
answered, denying the material allegations of the complaint. In August 1997, the
Company served discovery requests on Mr. Scheinfeld, who was initially obligated
to respond by September 12, 1997. On March 2, 1998, Mr. Scheinfeld responded to
such discovery requests which response is currently under review by counsel to
the Company.
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the "Agreement")
with the former Chairman of the Company, which involved certain mutual
obligations. In December 1997, the former Chairman defaulted on the repayment of
the first installment of a debt obligation which was an obligation set forth in
the Agreement. Also in December 1997, the former Chairman of the Company, filed
suit in the District Court for Galveston County, Texas alleging the Company has
breached an alleged oral modification of the Agreement. In January 1998, the
Company answered the complaint denying the allegation and the matter is
currently being litigated in Texas. The Company believes that the former
Chairman's claim is without merit and intends to vigorously defend itself. The
Company is also in the process of bringing an action in California against the
former Chairman for breach of the Agreement.
F-30
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER LITIGATION
In December 1997, a stockholder of the Company brought an action in Texas
against the Company's current Chairman and an unrelated party, alleging certain
misrepresentations during the merger discussions between XIT and the Company
(see Note 2). The Company has moved to dismiss this suit on jurisdictional
grounds and will vigorously defend the current Chairman on the merits should the
matter not be dismissed.
EMPLOYEE BENEFIT PLANS
The Company sponsors several defined contribution plans ("401(k) Plans")
covering the majority of its U.S. domestic employees. Participants may make
voluntary pretax contributions to such plans up to the limit as permitted by
law. Annual contributions to any plan by the Company is discretionary. No
contributions by the Company have been made to any of the 401(k) Plans to date.
(15) EXPORT SALES, GEOGRAPHIC SEGMENT, AND MAJOR CUSTOMERS INFORMATION
A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales:
North America..................................... $ 28,098,000 $ 6,012,000 $ 27,854,000 $ 16,118,000
Asia.............................................. 857,000 333,000 1,211,000 1,859,000
Europe............................................ 14,143,000 1,541,000 2,184,000 1,625,000
------------- ------------- ------------- -------------
$ 43,098,000 $ 7,886,000 $ 31,249,000 $ 19,602,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Operating income (loss) (1):
North America..................................... $ (9,196,000) $ (603,000) $ 1,047,000 $ (105,000)
Asia.............................................. (80,000) 16,000 (54,000) 48,000
Europe............................................ 604,000 (92,000) 511,000 129,000
------------- ------------- ------------- -------------
$ (8,672,000) $ (679,000) $ 1,504,000 $ 72,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Identifiable assets:
North America..................................... $ 22,002,000 $ 15,219,000 $ 14,848,000 $ 14,036,000
Asia.............................................. 678,000 1,110,000 937,000 1,062,000
Europe............................................ 2,760,000 4,235,000 3,828,000 857,000
------------- ------------- ------------- -------------
$ 25,440,000 $ 20,564,000 $ 19,613,000 $ 15,955,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) Operating loss for North America for the year ended December 31, 1997
includes a write-down of goodwill of $5,693,000 (see Note 11).
F-31
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(15) EXPORT SALES, GEOGRAPHIC SEGMENT, AND MAJOR CUSTOMERS INFORMATION
(CONTINUED)
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.
The Company had sales to one customer which accounted for approximately 14%,
34%, 41% and 13% of net sales for year ended December 31, 1997, the three months
ended December 31, 1996 and the years ended September 30, 1996 and 1995,
respectively. The accounts receivable balance from this customer was
approximately 4%, 20% and 24% of total accounts receivable at December 31, 1997
and 1996 and September 30, 1996, respectively.
(16) GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the year ended
December 31, 1997 and the three months ended December 31, 1996, the Company
experienced significant operating losses and had negative cash flow from
operations. Additionally, the Company is in default of the XIT Debt agreement
(Note 7) as XIT is not in compliance with certain debt covenants contained
therein. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Although management has been successful in obtaining working capital to fund
operations to date, there can be no assurance that the Company will be able to
generate additional capital in the future.
While the Company was profitable for the fiscal year ended September 30,
1996 and had cash flow from operations of $789,000, during the following fifteen
months ended December 31, 1997, the Company experienced significant operating
losses and had negative cash flows from operations aggregating $2,232,000.
During this same period, the Company's Xcel Arnold Circuits, Inc. subsidiary
("XACI") experienced significant operating losses and had negative cash flows
from operations of $2,550,000 requiring the Company to invest capital to support
the operating losses and working capital needs of XACI. Consequently, the
Company sold XACI in 1998 (see Note 17).
Also during 1997, the Company developed a corporate finance program designed
to obtain an expanded and consolidated domestic credit facility to provide
substantial additional working capital and replace the Company's existing
fragmented and limited domestic debt structure. The finance program also
involves the potential private placement of the Company's common stock and
warrants to purchase the Company's common stock and the potential sale of one of
the Company's profitable subsidiaries. Additionally, management is exploring the
potential to leverage its existing European operation to provide additional
working capital for operations and acquisitions. Finally, management has
developed and is implementing plans to reduce certain existing cost structures,
improve operating efficiencies and strengthen the Company's operating
infrastructure.
F-32
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1996 AND 1995
(17) SUBSEQUENT EVENT
On January 9, 1998, the Company entered into a definitive agreement to sell
certain of the assets of its Xcel Arnold Circuits, Inc. subsidiary ("XACI"), a
manufacturer of multi-layer bare printed circuit boards. On April 9, 1998, the
Company completed the sale and received $1,350,000 in cash and a note receivable
aggregating $650,000, which is payable over the three years from the date of
sale. The proceeds from this sale were used to partially repay amounts due under
certain notes payable. The sale resulted in a gain of approximately $100,000.
Summarized below are unaudited pro forma financial information of the Company as
though the assets had been sold at the beginning of the year ended December 31,
1997.
<TABLE>
<S> <C>
Net sales.......................................................... $ 34,068
---------
---------
Net loss........................................................... $ 7,327
---------
---------
Basic and diluted loss per share................................... $ .72
---------
---------
Total assets....................................................... $ 21,021
---------
---------
</TABLE>
F-33
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR END DECEMBER 31, 1997, THREE MONTHS ENDED DECEMBER 31, 1996 AND
YEARS ENDED SEPTEMBER 30, 1996, AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND WRITE OFFS END OF
DESCRIPTION OF PERIOD EXPENSES OF ACCOUNTS PERIOD
- ----------------------------------------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997............................. $ 63,000 251,000 (73,000) $ 241,000
Three months ended December 31, 1996..................... 47,000 16,000 -- 63,000
Year ended September 30, 1996............................ 57,000 17,000 (27,000) 47,000
Year ended September 30, 1995............................ 123,000 41,000 (107,000) 57,000
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
Allowance for inventory obsolescence:
Year ended December 31, 1997............................. $ 685,000 3,134,000 (1,963,000) $ 1,856,000
Three months ended December 31, 1996..................... 322,000 416,000 (53,000) 685,000
Year ended September 30, 1996............................ 419,000 211,000 (308,000) 322,000
Year ended September 30, 1995............................ 677,000 265,000 (523,000) 419,000
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>
F-34
<PAGE>
EXHIBIT 10.48
SHARE EXCHANGE AGREEMENT
AGREEMENT made as of the 17th day of October, 1997, by and among CXR TELCOM
CORPORATION, a Delaware corporation ("CXR"), MICROTEL INTERNATIONAL, INC., a
Delaware corporation ("MicroTel"), and ERIC P. BERGSTROM, STEVE T. ROBBINS AND
MIKE B. PETERSEN (individually, a "Selling Shareholder" and collectively, the
"Selling Shareholders"), all of the shareholders of CRITICAL COMMUNICATIONS
INCORPORATED, an Illinois corporation ("Critical").
RECITALS:
WHEREAS, MicroTel is the owner of One Hundred Percent (100%) of the
outstanding shares of common stock of CXR and CXR desires to acquire all of the
shares of Critical common stock owned by the Selling Shareholders (collectively,
the "Critical Shares"); and
WHEREAS, the Selling Shareholders desire to exchange the Critical Shares
with CXR in exchange for Five Hundred Thousand (500,000) shares of MicroTel
common stock, par value .0033 per share (the "MicroTel Shares"); and
WHEREAS, it is intended by the parties that the transaction qualify as a
tax-free reorganization pursuant to Section 368(a)(1)(B) of the Internal Revenue
Code and that the Contingent Stock Agreements satisfy the requirements of Rev.
Proc 84-42; and
WHEREAS, the Selling Shareholders have had an opportunity to investigate
CXR and MicroTel and become familiar with their affairs and financial condition
and to review the filings of MicroTel made with the Securities and Exchange
Commission ("SEC"), including Amendment No. 1 to the S-1 Registration Statement
filed with the SEC on September 24, 1997;
NOW, THEREFORE, in consideration of the mutual promises and conditions
contained in this contract, and for other good and valuable consideration, the
parties hereto hereby agree as follows:
SECTION 1. EXCHANGE OF THE SHARES.
(a) In reliance upon the representations and warranties of CXR and
MicroTel contained herein, subject to the terms and conditions set forth herein,
the Selling Shareholders hereby exchange with CXR all of the Critical Shares in
return for MicroTel Shares allocated among the Selling Shareholders as set forth
on Schedule 1 hereto and MicroTel shares pursuant to and subject to the
Contingent Stock Agreement.
(b) In reliance upon the representations and warranties of the Selling
Shareholders contained herein, and subject to the terms and conditions set forth
herein, CXR hereby exchanges
<PAGE>
with the Selling Shareholders all of the Critical Shares in exchange for the
issuance of the MicroTel Shares.
(c) The Selling Shareholders shall deliver to CXR:
(A) an investor representation letter in the form of Exhibit A;
(B) the Escrow Agreement in the form of Exhibit B; together with the
50,000 MicroTel Shares and Stock Powers to be deposited with the
Escrow Agent;
(C) The Contingent Stock Agreements and Severance Agreements in the
forms of Exhibit C and Exhibit D, respectively;
(D) stock certificates of Critical, representing all of the
outstanding shares of common stock of Critical, endorsed in blank
or accompanied by duly executed assignment documents; and
(E) an opinion dated the date hereof of counsel to the Selling
Shareholders, satisfactory to CXR.
(d) CXR and/or MicroTel shall deliver to the Selling Shareholders:
(A) The Escrow Agreement in the form of Exhibit B;
(B) The Contingent Stock Agreements and Severance Agreements in the
forms of Exhibit C and Exhibit D, respectively;
(C) Stock certificates of MicroTel, representing Five Hundred
Thousand (500,000) shares of MicroTel common stock, registered in
the names of the Selling Shareholders in the amounts set forth on
Schedule 1;
(D) an opinion letter dated the date hereof of CXR's counsel,
satisfactory to Critical.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Except as set forth in the Disclosure Schedule annexed hereto as Schedule
2, each Selling Shareholder represents and warrants as follows:
(a) That he has good and marketable title to the Critical Shares owned
by him, free and clear of all liens, security interests, options, rights of
first refusal and other encumbrances of any kind whatsoever and that the
Critical Shares have all been duly authorized, validly issued and are fully
paid and non-assessable.
(b) That this Agreement is, and as of the Closing will be, a legal, valid
and binding obligation of his enforceable against him in accordance with its
terms, except as such enforcement may be subject to (i) applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
now or hereafter affecting creditors' rights and remedies generally and (ii)
general principles of equity (regardless of whether such enforcement is sought
in a proceeding in equity or at law).
Except as set forth in the Disclosure Schedule annexed hereto as Schedule
2, each Selling Shareholder jointly and severally represents and warrants as
follows:
-2-
<PAGE>
(c) That all the Selling Shareholders, collectively, are the owners of One
Hundred Percent (100%) of the common stock of Critical.
(d) Critical is not a party to any option, warrant, purchase right, or
other contract or commitment that could require the Critical to sell, transfer
or otherwise dispose of any capital stock of Critical and that, as of the date
hereof there are no such options, warrants, purchase rights or other contracts
or commitments now existing.
(e) Critical is duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization; has all requisite power
and authority to own or lease, and operate its properties and assets and to
carry on its business as now conducted and as proposed to be conducted; and
is duly qualified or licensed to do business and is in good standing as a
foreign corporation in all jurisdictions in which it owns or leases property
or in which the conduct of its business requires it so to qualify or be
licensed.
(f) The Selling Shareholders have delivered to CXR and MicroTel true
and complete copies of the unaudited balance sheets and the related
statements of income and expense of Critical at August 31, 1997 for the eight
(8) months then ended (the "August 31 Financials"). The August 31 Financials
present fairly the financial condition of Critical as of such date and the
results of operations of Critical for such period in accordance with
generally accepted accounting principles, consistently applied. Since August
31, 1997, there has been no material adverse change in the financial
condition of Critical taken as a whole. MicroTel and CXR acknowledge that the
Selling Shareholders may have caused Critical to pay out any cash remaining
in Critical as of September 30, 1997 as a bonus or dividend to the Selling
Shareholders prior to the date hereof.
(g) Critical has no material liabilities or obligations with respect to
its business except:
(i) those liabilities or obligations set forth on the August 31
Financials and not heretofore paid or discharged; or
(ii) those liabilities or obligations incurred, consistently with past
business practice, in or as a result of the normal and ordinary course
of business since August 31, 1997; and
For purposes of this Agreement, the term "liabilities" shall include,
without limitation, any direct or indirect indebtedness, guaranty, endorsement,
claim, loss, damage, deficiency, cost, expense, obligation or responsibility,
fixed or unfixed, known or unknown, asserted or unasserted, choate or inchoate,
liquidated or unliquidated, secured or unsecured, including, but not limited to,
any claim, loss, damage, deficiency, cost, expense, obligation or responsibility
relating to any environmental matter.
-3-
<PAGE>
(h) With respect to its business, Critical has complied with each, and is
not in violation of any, law, ordinance, or governmental or regulatory rule or
regulation ("Regulations"), whether federal, state, local or foreign, the
violation of which would have a material adverse effect on Critical. Critical
owns, holds, possesses or lawfully uses in the operation of its business all
franchises, licenses, permits, easements, applications, filings, registrations
and other authorizations ("Authorizations") which are in any manner necessary
for it to conduct its business as now or previously conducted, the absence of
which would have a material adverse effect on Critical.
(i) No litigation, including any arbitration, investigation or other
proceeding of or before any court, arbitrator or governmental or regulatory
official, body or authority, is pending or, to the best knowledge of any Selling
Shareholder, threatened against Critical which would have a material adverse
effect on Critical, nor does any Selling Shareholder know of any reasonably
likely basis for any such litigation, arbitration, investigation or proceeding,
the result of which could materially and adversely affect Critical's business.
Critical is not a party to or subject to the provisions of any judgment, order,
writ, injunction, decree or award of any court, arbitrator or governmental or
regulatory official, body or authority, which would materially and adversely
affect Critical.
(j) The assets, properties and operations of Critical's business are
insured under various policies of general liability and other forms of
insurance. Such policies are in amounts which are commercially reasonable in
the judgment of Critical in relation to its business and all premiums to date
have been paid in full.
(k) All patents, trademarks, service marks, trade names, copyright,
software, trade secrets, know-how and applications therefor ("Intellectual
Property") that are material to the business are identified in the Disclosure
Schedule. Critical has not received any notice or claim of infringement or any
other claim or proceeding relating to any third party's Intellectual Property.
No present or former employee of Critical, and no other person, owns or has any
proprietary, financial or other interest, direct or indirect, in whole or in
part, in any Intellectual Property that is material to Critical's business. All
confidentiality or non-disclosure agreements relating to Critical's business, to
which Critical, the Selling Shareholders or any of Critical's employees engaged
in Critical's business are parties, have been delivered to CXR and MicroTel, or
made available to CXR and MicroTel for inspection.
(l)(i) Critical has obtained all material permits, licenses and other
authorizations ("Environmental Authorizations") which are required
in connection with the conduct of its business under any statute,
rule, regulation, ordinance or other law relating to pollution or
protection of the environment ("Environmental Laws"), including
Environmental Laws relating to emissions, discharges, releases or
threatened releases of hazardous substance pollutants,
contaminants, or chemicals, or industrial, toxic or hazardous
substances or wastes into the environment (including without
limitation ambient air, surface water, groundwater, or land), or
-4-
<PAGE>
otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport, or handling of
hazardous substance pollutants, contaminants, or chemicals, or
industrial, toxic or hazardous substances or wastes. A complete
list of the permits, licenses and other approvals are set forth on
the Disclosure Schedule.
(ii) Critical is in compliance in all material respects in the conduct
of its business with all terms and conditions of the required
Environmental Authorizations, and is also in compliance in all
material respects with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in the Environmental
Authorizations or contained in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder.
(iii) Critical is not aware of, nor has Critical received notice of,
any past, present or future events, conditions, circumstances,
activities, practices, incidents, actions or plans in the conduct
of its business which may interfere with or prevent compliance or
continued compliance with Environmental Laws or any regulations,
code, plan, order, decree, judgment, injunction, notice or demand
letter issued, entered, promulgated or approved thereunder, or
which may give rise to any common law or legal liability, or
otherwise form the basis of any claim, action, demand, suit,
proceeding, hearing, study or investigation, based on or related
to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling, or the emission,
discharge release or threatened release into the environment, of
any hazardous substance pollutants, contaminants, or chemicals,
or industrial, toxic or hazardous substances or wastes the result
of which would have a material adverse on Critical.
(iv) No third party claims or criminal or administrative actions,
suits, demands, claims, hearings, notices or demand letters, notices
of violation, investigations or proceedings asserting a violation of
Environmental Laws ("Third Party Claims"), are pending or, to the
best of the Selling Shareholders' knowledge, threatened against
Critical or its business, and no Third Party Claims are pending or to
the best of the Selling Shareholders' knowledge, threatened against
Critical or its business.
As used herein, the term "Environmental Law(s)" shall mean any and all
federal, state and local laws, statutes, codes, ordinances, regulations, rules,
judicial and administrative orders, or other requirements relating to the
environment, all as amended or modified from time to time, including laws and
regulations relating to emissions, discharges, releases or threatened releases
of pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment (including, without limitation,
ambient air, surface water, groundwater, or land), or otherwise relating to the
manufacture, processing, distribution, use,
-5-
<PAGE>
treatment, storage, disposal, transport, or handling of pollutants,
contaminants, chemicals, or industrial, toxic or hazardous substances or
wastes. Environmental Law includes, but is not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), as amended
by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the
Resource Conservation Recovery Act of 1976 ("RCRA"), the Clean Water Act, the
Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the
Toxic Substances Control Act ("TSCA"), parallel and supplemental state
statutes, and all rules and regulations relating thereto, all as amended and
modified from time to time.
As used herein, the term "Hazardous Substance(s)" shall mean: (i)
any substance, the presence of which requires investigation or remediation
under any Environmental Law or under common law; (ii) any dangerous, toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic, or
otherwise hazardous substance which is regulated by any Environmental Law; or
(iii) urea-formaldehyde, polychlorinated biphenyls, asbestos or
asbestos-containing materials, petroleum and petroleum products, and any
radio-active material.
(m) There is no fact, development or, to the best of the Selling
Shareholders' knowledge, threatened development with respect to Critical's
business which could have a material adverse effect on such business which has
not been disclosed to CXR and MicroTel. Since August 31, 1997, except as
contemplated hereby or as requested by CXR or MicroTel, Critical operated its
business solely in the ordinary course consistent with past practice, and
Critical has not made any material commitment for capital expenditures or
entered into any material contracts.
SECTION 3. MICROTEL SHARES.
(a) Each Selling Shareholder acknowledges that CXR and MicroTel have
advised the Selling Shareholder that the MicroTel Shares have not been
registered under the Securities Act of 1933 as amended (the "Securities Act")
or any other securities regulation laws of any state. Each Selling
Shareholder is acquiring the MicroTel Shares for the account of the Selling
Shareholder for investment only and not with a view to resell or otherwise
distribute such MicroTel Shares, and each Selling Shareholder is not
acquiring the MicroTel Shares on behalf of any other person or entity. Each
Selling Shareholder does not intend to resell, transfer or dispose of all or
any part of the MicroTel Shares without registration under the Securities Act
or without an opinion from counsel acceptable to MicroTel that registration
is not required. Each Selling Shareholder is able to bear the economic risk
of this investment for an indefinite period of time under these circumstances
and agrees to execute an investor representation letter in substantially the
form attached hereto as Exhibit "A". Each Selling Shareholder acknowledges
that the MicroTel Shares are "restricted securities" as that term is defined
in Rule 144 of the General Rules and Regulations under the Securities Act.
Each Selling Shareholder understands that stop transfer instructions will be
issued to the transfer agent (if any) for MicroTel's stock.
-6-
<PAGE>
(b) To implement the provisions of subsection (a) above, each Selling
Shareholder consents to the placing of a legend in substantially the following
form on the back of the certificates issued to the Selling Shareholders:
THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE HAVE BEEN ISSUED WITHOUT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER STATE
LAWS REGULATING THE ISSUANCE OF SECURITIES AND ARE PURCHASED PURSUANT TO AN
INVESTMENT REPRESENTATION BY THE PURCHASER THEREOF. THESE SHARES SHALL NOT BE
OFFERED, SOLD, PLEDGED, HYPOTHECATED, DONATED, OR OTHERWISE TRANSFERRED, WHETHER
OR NOT FOR CONSIDERATION, BY THE SHAREHOLDER IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR SUCH SHARES EXCEPT UPON THE ISSUANCE TO THE COMPANY
OF A FAVORABLE OPINION OF ITS COUNSEL TO THE EFFECT THAT SUCH TRANSFER SHALL NOT
BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS.
(c) For a period of one year from the date hereof, 50,000 of the MicroTel
Shares (divided PRO RATA among the Selling Shareholders) shall be held in escrow
with the firm of Gallagher, Briody & Butler as escrow agent in order to secure
MicroTel and CXR's rights to indemnification pursuant to the terms of Section 5
hereof pursuant to the Escrow Agreement annexed as Exhibit B.
SECTION 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF CXR AND MICROTEL.
CXR and MicroTel jointly and severally represent and warrant as follows:
(a) CXR and MicroTel are duly organized, validly existing and in good
standing under the laws of their jurisdictions of incorporation; have all
requisite power and authority to own or lease, and operate their respective
properties and assets and to carry on their respective businesses as now
conducted and as proposed to be conducted; and are duly qualified or licensed
to do business and are in good standing as foreign corporations in all
jurisdictions in which they own or lease property or in which the conduct of
their respective businesses require them so to qualify or be licensed.
(b) MicroTel and CXR have taken all corporate actions necessary to
authorize them to enter into and perform their obligations under this
Agreement and to consummate the transactions contemplated hereby (including,
without limitation, the issuance and sale of the MicroTel Shares). Upon
issuance, the MicroTel Shares will be duly authorized, fully paid and
non-assessable, not subject to pre-emptive rights and free and clear of all
liens, claims and encumbrances except as provided in this Agreement. This
Agreement, the Contingent Stock Agreement and the other agreements
contemplated herein and therein are the legal, valid and binding obligation
of CXR and MicroTel, enforceable against CXR and MicroTel in accordance with
its terms, except as such enforcement may be subject to (i) applicable
bankruptcy,
-7-
<PAGE>
insolvency, fraudulent conveyance, reorganization, moratorium and similar
laws now or hereafter affecting creditors' rights and remedies generally and
(ii) general principles of equity (regardless of whether such enforcement is
sought in a proceeding in equity or at law).
(c) MicroTel has furnished the Selling Shareholders with a true and
complete copy of (a) MicroTel's Form 10-K for the fiscal year ended December
31, 1996, (b) MicroTel's Form 10-Q for the quarters ended March 31, 1997 and
June 30, 1997, and (c) Amendment No. 1 to S-1 Registration Statement dated
September 24, 1997 (as such documents have since the time of their filing
been amended, "the SEC Documents"). Since January 1, 1997, MicroTel has
filed with the Securities and Exchange Commission (the "SEC") all documents
required to be filed pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations promulgated
thereunder. As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the Exchange Act, and the rules
and regulations of the SEC thereunder applicable to such SEC Documents, and
none of the SEC Documents (as of their respective dates) contained any untrue
statement of a material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading. The financial
statements of MicroTel included in the SEC Documents (the "Financial
Statements") comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto. The Financial Statements are in all material
respects accurate, complete and have been prepared in accordance with the
books and records of MicroTel and in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto or, in the case of
the unaudited statements included in the SEC Documents, as permitted by
Form 10-Q of the SEC) and fairly present (subject, in the case of the
unaudited statements, to normal, recurring audit adjustments that are not
material) the consolidated financial position of MicroTel as at the dates
thereof and the consolidated results of its operations and cash flows for
the periods then ended. Since June 30, 1997, there has not been any material
adverse change in the business, operations, or assets of MicroTel and its
subsidiaries taken as a whole.
(d) The authorized capital stock of MicroTel consists of 25,000,000
shares of Common Stock, par value $.0033 per share and 10,000,000 shares of
Preferred Stock, par value $.01 per share. As of the date of this Agreement
11,391,216 shares of Common Stock were outstanding (excluding the MicroTel
Shares). No shares of Preferred Stock are issued or outstanding. The
MicroTel Shares to be issued pursuant to this Agreement will be, when issued,
validly issued, fully paid and nonassessable and not subject to preemptive
rights and free and clear of all liens, claims and encumbrances other than
provided herein or in the Exhibits hereto. There are currently outstanding
options to purchase 2,217,839 shares of Common Stock and outstanding warrants
to purchase 2,189,879 shares of Common Stock.
(e) MicroTel covenants that, for a period of two years from the date
hereof, it will file with the SEC all documents acquired to be filed by
MicroTel pursuant to the Exchange Act.
-8-
<PAGE>
(f) MicroTel will report the transfer of the MicroTel Shares and the
MicroTel shares pursuant to the Contingent Stock Agreement as qualified
securities in a tax-free reorganization pursuant to Section 368(a)(1)(B) of
the Code.
SECTION 5. INDEMNIFICATION OBLIGATION OF CRITICAL AND THE SELLING
SHAREHOLDERS.
(a) For a period of three years after the date hereof, the Selling
Shareholders shall jointly and severally reimburse, indemnify and hold harmless
and defend CXR and MicroTel and their successors and assigns (an "Indemnified
Party") against and in respect of:
(i) any misrepresentation, breach of warranty or nonfulfillment or
any agreement or covenant on the part of any or all of the Selling
Shareholders under this Agreement or any Closing Document to which
any or all of the Selling Shareholders are a party; and
(ii) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other
expenses (including, without limitation, reasonable legal fees and
expenses) incident to Section 5(a)(i) or to the enforcement of
this Section 5(a).
(b) For a period of three years, CXR and MicroTel shall jointly and
severally reimburse, indemnify and hold harmless and defend the Selling
Shareholders (an "Indemnified Party") against and in respect of:
(i) any misrepresentation, breach of warranty or nonfulfillment or
any agreement or covenant on the part of CXR or MicroTel under this
Agreement or any Closing Document to which CXR and/or MicroTel are a
party; and
(ii) any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other
expenses (including, without limitation, reasonable legal fees and
expenses) incident to Section 5(b)(ii) or to the enforcement of this
Section 5(b).
(c) Notwithstanding the above, the aggregate amount of the Selling
Shareholders' liability to indemnify CXR and MicroTel in respect of all of CXR
and MicroTel's claims for indemnification shall not exceed $1 Million.
(d) All disputes under this Section 5 shall be settled by arbitration
in Ontario, California if arbitration is requested by the Selling
Shareholders (or in the office of the American Arbitration Association
located nearest thereto) and in Chicago, Illinois if arbitration is requested
-9-
<PAGE>
by MicroTel before a single arbitrator pursuant to the rules of the American
Arbitration Association. Arbitration may be commenced at any time by any
party hereto giving written notice to each other party to a dispute that such
dispute has been referred to arbitration under this Section 5. The
arbitrator shall be selected by the joint agreement of the Selling
Shareholders and MicroTel, but if they do not so agree within 20 days after
the date of the notice referred to above, the selection shall be made
pursuant to the rules from the panels of arbitrators maintained by such
Association. Any award rendered by the arbitrator shall be conclusive and
binding upon the parties hereto; provided, however, that any such award shall
be accompanied by a written opinion of the arbitrator giving the reasons for
the award. This provision for arbitration shall be specifically enforceable
by the parties and the decision of the arbitrator in accordance herewith
shall be final and binding and there shall be no right of appeal therefrom.
Any arbitration award shall be binding and enforceable in the Superior Court
of the State of California or Circuit Court of the State of Illinois, as the
case may be. The prevailing party in such arbitration as determined by the
arbitrator shall be entitled to reasonable attorneys fees and costs of such
arbitration shall be entitled to reasonable attorneys fees and costs of such
arbitration, costs of suit to enforce such arbitration award and all costs of
collection of such arbitration award.
(e) If it is finally determined that MicroTel is entitled to
indemnification under this Agreement, MicroTel shall, unless the Selling
Shareholders satisfy the indemnification obligation in cash within thirty (30)
days of such final and non-appealable determination, be entitled to set off an
amount equal to the indemnification obligation against the MicroTel Shares held
in escrow pursuant to the terms of the Escrow Agreement.
SECTION 6. CONTINGENT STOCK ISSUABLE TO SELLING SHAREHOLDERS. Simultaneous
herewith, MicroTel and CXR and each of the Selling Shareholders shall execute
and deliver a Contingent Stock Agreement, substantially in the form attached
hereto as Exhibit "C". For each Selling Shareholder, the percentage to be
inserted for each year shall be determined by multiplying such Selling
Shareholder's percentage ownership of Critical by the percentage below:
<TABLE>
<CAPTION>
PERIOD PERCENTAGE
------ ----------
<S> <C>
October 1, 1997 to
December 31, 1998 9%
1999 6%
2000 4%
2001 3%
2002 2%
(through September 30, 2002)
</TABLE>
-10-
<PAGE>
The maximum number of MicroTel shares to be issued pursuant to the
Contingent Stock Agreements shall be 500,000.
SECTION 7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by the parties in this Agreement shall survive the date hereof
for a period of three years.
SECTION 8. REPURCHASE RIGHT.
For a period of five (5) years commencing in fiscal 1998, if (i) gross
annual sales of the Critical Products and any New Products (as defined in
Schedule 2 to the Contingent Stock Agreement) (the Critical Products and any
New Products collectively, the "Critical Line of Business") less all refunds
("Gross Sales") are less than $750,000 (the "Sales Target") in any two
consecutive fiscal years or (ii) MicroTel or its affiliates desire to
transfer for consideration all or any part of the Technology to any third
party; MicroTel must offer to sell the Critical Products, any New Products
and the Technology to the Employees still employed by it or its affiliates
(the "Remaining Employees") pursuant to the terms of this Article.
FAILURE TO MEET SALES TARGET. Within 105 days of the end of MicroTel's fiscal
year, MicroTel shall give to the Remaining Employees by registered or
certified mail the Gross Sales together with appropriate backup for such
calculation. Upon receipt of such calculation, if the Gross Sales have failed
to meet the Sales Target for the second consecutive fiscal year, the
Remaining Employees shall have 45 days to give notice to MicroTel by
registered or certified mail of their intent to value the Critical Line of
Business (the "Appraisal Request"). Within 20 days of MicroTel's receipt of
the Appraisal Request, the Remaining Employees and MicroTel shall each select
an independent certified appraiser at their own cost and expense who, within
20 days of their selection, shall value the Critical Line of Business. The
average of the appraisals shall be the price for the Remaining Employees to
purchase the Critical Line of Business (the "Purchase Price"). The Remaining
Employees shall have thirty days following determination of the Purchase
Price to elect to purchase the Critical Line of Business at the Purchase
Price by giving notice of such intent to MicroTel. Thereafter, MicroTel and
the Remaining Employees shall utilize reasonable best efforts to consummate
the purchase of the Critical Line of Business as quickly as possible. The
Remaining Employees shall be able to issue a promissory note in favor of
MicroTel for 50% of the Purchase Price. Said note shall bear interest at the
prime rate, be secured by the Critical Line of Business and have a maturity
of not more than five years.
PROPOSED SALE TO THIRD PARTY. If, at any time during the period ending five
years from the date of this Agreement, MicroTel desires to dispose of the
Technology or Critical Products or enter into any transaction the result of
which would be that MicroTel no longer owned the Technology or the Critical
Products pursuant to a bona fide offer made by an unaffiliated third party,
MicroTel shall give notice of the proposed sale to the Remaining Employees by
registered
-11-
<PAGE>
or certified mail. The notice shall identify the entity to whom the transfer
is to be made together with a copy of the offer containing all of the terms
and conditions, including price, of the intended disposition. The Remaining
Employees, for forty-five (45) days after receipt of said notice, shall have
the option to purchase the Technology or the Critical Products. The purchase
price for the transfer of the Technology or the Critical Products pursuant to
this section shall be the price at which MicroTel or its affiliate proposes
to dispose of such asset as described in the notice referred to in this
section.
TECHNOLOGY. As used herein, "Technology" means the following released
products, together with any modifications or enhancements to such products or
any new products based on such products to the extent Critical has rights to
such technology: (i) DTS92, Integrated Digital Data test-set: comprehensive
DDS DS0/4-wire circuit testing; (ii) CC195, Analog TIMS test set with
Wideband, Class Services and DID circuit testing; (iii) T124, Comprehensive
single-port T1 test set; and (iv) 2b128, Basic Rate ISDN test set, complete
TA emulation from U-Interface; together with any modifications or
enhancements to any such technology.
SECTION 10. MISCELLANEOUS.
(a) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, next-day air
courier, certified first-class mail, return receipt requested, telex, or
facsimile:
If to MicroTel and/or CXR, addressed to:
Carmine T. Oliva, Chairman,
President and Chief Executive Officer
c/o MicroTel International, Inc.
4290 E. Brickell Street
Ontario, CA 91761
with a copy to:
Martin J. Conroy, Esq.
Gallagher, Briody & Butler
212 Carnegie Center
Suite 402
Princeton, New Jersey 08540
If to Critical and the Selling Shareholders, addressed to:
Critical Communications, Inc.
218 Riverside Avenue
-12-
<PAGE>
St. Charles, Illinois 60174
Attn: Mike B. Petersen
with a copy to:
Richard W. Burke, Jr., Esq.
Burke, Warren, Mackay & Serritella, P.C.
330 N. Wabash
Suite 2200
Chicago, Illinois 60611
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; one business day after
being timely delivered to a next-day air courier; five business days after being
deposited in the mail, postage prepaid, if mailed; when answered back if
telexed; and when receipt is acknowledged by the recipient's telecopier machine,
if telecopied.
(b) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties, heirs,
personal representatives, successors and assigns, and no other persons shall
acquire or have any right under or by virtue of this Agreement.
(c) AMENDMENT AND WAIVER. This Agreement may only be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may only be given, provided that the same are in writing and signed by all
parties to this Agreement.
(d) COUNTERPARTS. This Agreement (and any exhibits hereto) may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
(e) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, as applied to contracts
made and performed within the State of California, without regard to principles
of conflicts of law. Critical and each Selling Shareholder hereby irrevocably
submits to the jurisdiction of any California state court or any federal court
in the State of California in respect of any suit, action or proceeding arising
out of or relating to this Agreement, and irrevocably accept for themselves and
in respect of their property, generally and unconditionally, the jurisdiction of
the aforesaid courts.
(f) ENTIRE AGREEMENT. This Agreement together with the agreements annexed
as exhibits hereto are intended by the parties as a final expression of their
agreement and intended to be a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter
contained herein.
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<PAGE>
(g) SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, illegal,
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions set forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and the parties hereto shall use
their best efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(h) TRANSFER TAXES. The Selling Shareholders shall pay to the appropriate
tax authorities the transfer tax, if any, applicable to the exchange of shares,
contemplated by this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have evidenced their agreement to
the foregoing by executing this Agreement the date and year first set forth
above.
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
--------------------------------
Carmine T. Oliva, Chairman,
President and Chief Executive
Officer
CXR TELCOM CORPORATION
By: /s/ Henry A. Mourad
--------------------------------
Henry A. Mourad, President
/s/ Eric P. Bergstrom
--------------------------------
Eric P. Bergstrom
/s/ Steve T. Robbins
--------------------------------
Steve T. Robbins
/s/ Mike B. Petersen
--------------------------------
Mike B. Petersen
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<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
NAME SHARE ALLOCATION
---- ----------------
<S> <C>
Eric P. Bergstrom 49,986
Steve T. Robbins 124,990
Mike B. Petersen 325,024
-------
Total: 500,000
</TABLE>
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<PAGE>
EXHIBIT 10.49
INDEMNITY ESCROW AGREEMENT
INDEMNITY ESCROW AGREEMENT dated as of September __, 1997 by and between
MicroTel International Inc. ("MicroTel"), CXR Telcom Corporation ("CXR"), Mike
B. Peterson, Steve T. Robbins and Eric Bergstrom (collectively the "Selling
Shareholders") and Gallagher, Briody & Butler as escrow agent (the "Escrow
Agent").
W I T N E S S E T H:
WHEREAS, MicroTel, CXR, Critical Communications, Inc. ("Critical") and the
Selling Shareholders are parties to a Share Exchange Agreement dated as of
September __, 1997 (the "Share Exchange Agreement") pursuant to which CXR has
acquired from the Selling Shareholders all of the outstanding shares of Critical
for a purchase price (the "Purchase Price") consisting of shares of common stock
of MicroTel, 100,000 of which are subject to this Escrow Agreement (the
"Shares"), and
WHEREAS, the Selling Shareholders have agreed to deliver this Escrow
Agreement as security for the indemnification obligations of the Selling
Shareholders under the Share Exchange Agreement.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and intending to be legally bound hereby agree as follows:
1. All terms used herein and not defined herein shall have the meaning
set forth in the Share Exchange Agreement.
2. On the date hereof the Selling Shareholders shall deliver to the
Escrow Agent certificates for the 100,000 Shares, in negotiable form, with
separate stock transfer powers duly endorsed in blank (the "Escrowed Shares").
3. The Escrow Agent agrees to hold the Escrowed Shares and deliver the
Escrowed Shares to the Selling Shareholders or to MicroTel in accordance with
the provisions of this Escrow Agreement.
4. (a) In the event the Selling Shareholders and MicroTel agree in
writing that MicroTel shall be entitled to indemnification from the Selling
Shareholders under Section 6 of the Share Exchange Agreement then the Escrow
Agent shall deliver to MicroTel Escrowed Shares equal in value to the amount of
MicroTel's claim, with each Escrowed Share having a value of $2.00 for purposes
of this section.
(b) The Escrow Agent shall deliver the Escrowed Shares to MicroTel
as set forth above only in the event the Selling Shareholders and MicroTel
agree in writing that the amount of the indemnification shall be finally
deemed to be a liability of the Selling Shareholders pursuant to the terms of
Section 6 of the Share Exchange Agreement.
<PAGE>
5. The Escrowed Shares which shall not have been delivered to MicroTel
under Section 4 of this Agreement, or which Purchaser has not made a claim upon
in writing to the Escrow Agent, shall be delivered by the Escrow Agent to the
Selling Shareholders on September __, 1998.
6. All cash dividends payable on the Escrowed Shares shall be paid to
the Selling Shareholders. The Selling Shareholders shall be entitled to vote
the Escrowed Shares for all valid purposes for which such Shares are entitled
to vote. There shall be added to the Escrowed Shares stock dividends, stock
splits or distributions of stock of other companies with respect to the
Escrowed Shares.
7. The acceptance by the Escrow Agent of its duties as such under this
Escrow Agreement is subject to the following terms and conditions, which all
parties to this Escrow Agreement hereby agree shall govern and control with
respect to the rights, duties, liabilities and immunities of the Escrow Agent.
(a) The Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, receipt or other paper or document which
the Escrow Agent in good faith believes to be genuine.
(b) The Escrow Agent shall not be liable for any error of judgment,
or for any act done or step taken or omitted by it in good faith, or for
anything which it may do or refrain from doing in connection herewith,
except its own negligence or misconduct.
(c) The Escrow Agent may consult with, and obtain advice from, legal
counsel in the event of any dispute or question as to the construction of
any of the provisions hereof or its duties hereunder, and it shall incur no
liability and shall be fully protected in acting in good faith in
accordance with the opinion and instructions of such counsel.
8. The Escrow Agent shall be entitled to reasonable compensation for its
services hereunder, including reimbursement for reasonable counsel fees and
other out-of-pocket expenses incurred by the Escrow Agent in the performance of
its duties hereunder. The compensation so payable shall be paid by MicroTel
unless incurred as a result of a controversy between the Purchaser and the
Seller in which case such compensation shall be borne equally by MicroTel and
the Selling Shareholders.
9. This Agreement sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby. It shall not be
amended or modified except by written instrument duly executed by each of the
parties hereto.
10. This Agreement may not be assigned by any party hereto without the
prior written consent of the other parties. Subject to the foregoing, all of
the terms and provisions of this
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<PAGE>
Agreement shall be binding upon and inure to the benefit of and be
enforceable by the successors and assigns of the Parties hereto.
11. Any notice, request, demand, waiver, consent, approval or other
communication which is required or permitted hereunder shall be in writing
and shall be deemed given only if delivered personally or sent by registered
or certified mail, postage prepaid, to the address set forth in the Share
Exchange Agreement or to such other address as the addressee may have
specified in a notice duly given to the sender as provided herein. Such
notice, request, demand, waiver, consent, approval or other communication
will be deemed to have been given as of the date so delivered.
12. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES HEREBY AGREE
THAT ANY PROCEEDING WITH RESPECT TO ENFORCEMENT OF THIS AGREEMENT SHALL BE IN
CALIFORNIA.
13. The covenants and agreements contained in this Agreement are for the
sole benefit of the parties hereto.
14. This Agreement may be executed in any number of counterparts and any
party hereto may execute any such counterpart, each of which when executed and
delivered shall be deemed to be an original and all of which counterparts taken
together shall constitute but one and the same instrument. This Agreement shall
become binding when one or more counterparts taken together shall have been
executed and delivered by the parties. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
15. Should any litigation or arbitration proceeding be commenced between
the parties to this Agreement concerning this Agreement, any provisions of this
Agreement, or the rights and obligations of either in relation thereto, or the
performance hereof, the party prevailing in such proceeding shall be entitled,
in addition to such other relief as may be granted, to a reasonable sum as and
for that party's attorney's fees in said proceeding.
-3-
<PAGE>
IN WITNESS WHEREOF, this Indemnity Escrow Agreement has been executed as of
the day and year first above written.
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
--------------------------------
Carmine T. Oliva, Chairman,
President and Chief Executive
Officer
CXR TELCOM CORPORATION
By: /s/ Henry A. Mourad
--------------------------------
Henry A. Mourad, President
By: /s/ Mike B. Peterson
--------------------------------
Mike B. Peterson
By: /s/ Steve T. Robbins
--------------------------------
Steve T. Robbins
By: /s/ Eric Bergstrom
--------------------------------
Eric Bergstrom
-4-
<PAGE>
EXHIBIT 10.50
CONTINGENT STOCK AGREEMENT
THIS CONTINGENT STOCK AGREEMENT ("Agreement") is made as of this 17th day
of October, 1997, by and between MICROTEL INTERNATIONAL, INC. (MICROTEL") and
CXR TELCOM CORPORATION ("CXR"), with an address at 4290 East Brickell Street,
Ontario, California 91761, CRITICAL COMMUNICATIONS INCORPORATED ("Critical"),
with an address at 218 Riverside Avenue, St. Charles, Illinois 60174 and
___________________ (the "Shareholder"), with an address at __________________.
W I T N E S S E T H
WHEREAS, CXR, MicroTel, the Shareholder and certain other shareholders
of Critical (collectively the "Selling Shareholders") are parties to a
certain Share Exchange Agreement dated of even date herewith (the "Share
Exchange Agreement") whereby MicroTel, in exchange for all of the common
stock of Critical, has delivered to the Selling Shareholders Five Hundred
Thousand (500,000) shares of MicroTel common stock ("Common Stock") and has
executed and delivered this Contingent Stock Agreement; and
WHEREAS, the value of Critical is difficult to determine and this
Contingent Stock Agreement is intended to provide for such difficulty; and
<PAGE>
WHEREAS, pursuant to the terms of the Share Exchange Agreement, the parties
thereto have agreed to enter into and are now desirous of entering into this
Contingent Stock Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and agreements hereinafter contained the parties hereto
agree as follows:
I. TERM.
Subject to the provisions for termination as hereinafter provided, the term
of this Agreement shall begin on the date hereof and shall terminate on
September 30, 2002 (the "Term").
II. AT-WILL EMPLOYEE.
The Shareholder acknowledges that this Contingent Stock Agreement does not
constitute a contract of employment. The Shareholder is and will remain at all
times an "at will" Employee of Critical (or CXR, if Critical is merged into CXR
after the Closing). In the event of a termination of the Shareholder's
employment by Critical or CXR other than for cause, such termination shall be
governed by a separate severance agreement between CXR, Critical, and the
individual Shareholder (the "Severance Agreement") and shall not affect the
rights of the Shareholder hereunder.
III. CONTINGENT STOCK AWARD.
During the Term of this Agreement, the Shareholder shall be eligible for
distribution of Common Stock (the "Stock Award") calculated for each period of
the Term as set forth on Schedule 1
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<PAGE>
hereto. The Stock Award shall be issued within 30 days of the end of each
period of the Term based on an initial estimate of the Gross Sales during
such period, with an adjustment to be made upon receipt of final audited
figures. The payment with respect to the period ending September 30, 2002
shall be no later than the fifth anniversary of the date of this Agreement.
IV. TERMINATION.
4.1. TERMINATION DUE TO DEATH OR DISABILITY. If, during the Term, the
Shareholder shall die or become Disabled, then the Stock Award shall be due for
the remainder of the Term; provided, however, that the sales of any New Products
(as defined in Schedule 1) first marketed after the date of death or Disability
shall not be included in the revenue base for determining the Stock Award.
Disability shall be defined as the inability of the Shareholder to perform his
duties of employment as a result of a physical or mental disability (i) for a
period of 180 consecutive days, or (ii) for shorter periods aggregating 180 days
during any period of twelve consecutive months.
4.2. TERMINATION FOR CAUSE. Critical may at any time during the Term
immediately terminate this Agreement and discharge the Shareholder for cause,
whereupon Critical's obligation to pay the Stock Award shall terminate on the
date of such discharge, and the Shareholder shall have no further right to
receive a Stock Award for the current year or any subsequent years,
notwithstanding anything herein contained to the contrary. As used herein the
term "for cause" shall be deemed to mean and include chronic alcoholism;
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<PAGE>
drug addiction; misappropriation of a material amount of money or other
material assets or properties of MicroTel, Critical and/or CXR or any of
their subsidiaries; willful violation of specific and lawful written
directions from the Board of Directors of MicroTel, Critical and/or CXR not
including the attainment of financial goals or performance objectives; wilful
disclosure of trade secrets or other confidential information resulting in
substantial detriment to MicroTel, Critical and/or CXR; or conviction in a
court of competent jurisdiction of any crime constituting a felony or
involving the funds or assets of MicroTel, Critical and/or CXR including, but
not limited to, embezzlement and larceny.
4.3 VOLUNTARY TERMINATION BY THE SHAREHOLDER. If the Shareholder
voluntarily resigns or otherwise voluntarily terminates his employment with
Critical, then the Shareholder shall not be entitled to the Stock Award for the
current year or any subsequent year.
V. MISCELLANEOUS PROVISIONS.
5.1. NOTICES AND COMMUNICATIONS. All notices and communications hereunder
shall be in writing and shall be hand delivered or sent postage prepaid by
registered or certified mail, return receipt requested, to the address first
above written or to such other address of which notice shall have been given in
the manner herein provided.
5.2. ENTIRE AGREEMENT. Except for the terms of the Share Exchange
Agreement, which are incorporated herein by reference, all prior and
contemporaneous agreements and understandings between the
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<PAGE>
parties with respect to the subject matter of this Agreement are superseded
by this Agreement, and this Agreement constitutes the entire understanding
between the parties. This Agreement may not be modified, amended, changed or
discharged except by a writing signed by the parties hereto, and then only to
the extent therein set forth.
5.3. ASSIGNMENT. This Agreement may be assigned by Critical and shall be
binding upon and inure to the benefit of Critical's successors and assigns.
5.4. WAIVER. No waiver of any breach of this Agreement or of any objection
to any act or omission connected herewith shall be implied or claimed by any
party, or be deemed to constitute a consent to any continuation of such breach,
act or omission, unless in a writing signed by the party against whom
enforcement of such waiver or consent is sought, and then only to the extent
therein set forth.
5.5. SECTION HEADINGS. The section headings of this Agreement are solely
for the purpose of convenience and shall neither be deemed a part of this
agreement nor used in any interpretation thereof.
5.6. GOVERNING LAW. This agreement and the relationship of the parties
shall be governed by, and construed in accordance with, the laws of the State of
Illinois.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
as of the day and year first above written.
Dated: MICROTEL INTERNATIONAL, INC.
By:
-------------------------------------
Carmine T. Oliva, Chairman,
President and Chief Executive Officer
CXR TELCOM CORPORATION
By:
-------------------------------------
Henry A. Mourad, President
CRITICAL COMMUNICATIONS INCORPORATED
By:
-------------------------------------
Henry A. Mourad, President
SHAREHOLDER
By:
-------------------------------------
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<PAGE>
SCHEDULE 1
The Shareholder shall be entitled to a Stock Award paid in Shares of
MicroTel Common Stock (the "Common Stock") based on a percentage of the Gross
Sales ("Gross Sales") of products currently sold by Critical and modifications
and enhancements to those products (the "Current Products") and new
telecommunication test equipment products developed by one or more of the
Selling Shareholders (the "New Products") to the extent that Gross Sales in a
given period exceed $1.0 million in accordance with the following schedule:
<TABLE>
<CAPTION>
PERIOD PERCENT OF SALES OVER $1.0 MILLION
------ ----------------------------------
<S> <C>
October 1, 1997 -
December 31, 1998 [ %]
1999 [ %]
2000 [ %]
2001 [ %]
2002 [ %]
(through September 30, 2002)
</TABLE>
The number of shares of Common Stock to be issued for each Stock Award
shall be determined by the following formula:
(Gross Sales greater than $1,000,000 X percentage)
-------------------------------------------------------
Fair Market Value of Common Stock at end of such period
For example, if Gross Sales were $1,8000,000 for the period October 1, 1997
through December 31, 1998 and the Fair Market Value was $2.00 per share on
December 31, 1998, the following calculation would be made:
$800,000 X % = shares
----------------- ----------------
$2.00
Fair Market Value shall be determined as of the last business day of the
period in question and is defined as follows: (i) If the Stock is not listed
on such date on any national securities exchange but is traded in the
over-the-counter market, the mean between the highest "bid" and lowest
"asked" quotations of a share of Stock on such date (or if none, on the most
recent date on which there were bid and offered quotations of a share of
Stock), as reported on the National Association of Securities Dealers, Inc.
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<PAGE>
Automated Quotation System, or, if not so reported, as reported by the
National Quotation Bureau, Incorporated, or any other similar service
selected by the Committee; or (ii) if the Stock is listed on such date on one
or more national securities exchanges, the last reported sale price of a
share of Stock on such date as recorded on the composite tape system, or, if
such system does not cover the Stock, the last reported sale price of a
share of Stock on such date on the principal national securities exchange on
which the Stock is listed, or if no sale of Stock took place on such date,
the last reported sale price of a share of Stock on the most recent day on
which a sale of a share of Stock took place as recorded by such system or on
such exchange, as the case may be; or (iii) if the Stock is neither listed on
such date on a national securities exchange nor traded in the
over-the-counter market, as determined by the Board of Directors of MicroTel.
The shares of Common Stock issued to the Shareholder pursuant to this
Agreement shall have standard "piggy-back" registration rights, subject to
the usual underwriters' cutback.
Notwithstanding anything to the contrary contained herein, the number of
shares of Common Stock to be issued to the Shareholder pursuant to this
Agreement shall not exceed the number of Shares issued to the Shareholder
pursuant to Schedule 1 of the Share Exchange Agreement.
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<PAGE>
EXHIBIT 10.51
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made as of this 17th day of
October, 1997, by and between CXR TELCOM CORPORATION ("CXR"), with an address at
4290 East Brickell Street, Ontario, California 91761, CRITICAL COMMUNICATIONS
INCORPORATED ("Critical"), with an address at 218 Riverside Avenue, St. Charles,
Illinois 60174 and ______________________ ("Employee"), with an address at
_______________________.
W I T N E S S E T H
WHEREAS, CXR, MicroTel, Critical and Employee and certain other
shareholders of Critical (collectively the "Selling Shareholders") are parties
to a certain Share Exchange Agreement dated of every date herewith (the "Share
Exchange Agreement") whereby MicroTel, in exchange for all of the common stock
of Critical, has delivered to the Selling Shareholders Five Hundred Thousand
(500,000) shares of MicroTel common stock; and
WHEREAS, as a material inducement for CXR to purchase all of the
outstanding shares of Critical common stock from Employee and the other Selling
Shareholders pursuant to the Share Exchange Agreement, Employee hereby agrees to
certain terms and restrictions on his employment.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and agreements hereinafter contained the parties hereto
agree as follows:
<PAGE>
I. AT-WILL EMPLOYEE.
Employee acknowledges that this Severance Agreement does not constitute a
contract of employment for any specified term and that Employee shall be and
remain at all times an "at will" employee of Critical (or CXR, if Critical is
merged into CXR after the Closing).
II. SALARY.
As of the date of this Agreement, Employee's annual salary will be
$________ . Employee shall also be entitled to such benefits as are
currently offered to persons in similar positions with CXR.
III. TERMINATION WITHOUT CAUSE; SEVERANCE.
Critical may terminate Employee's employment without cause at any time
without prior notice to Employee. If termination without cause occurs before
the end of three years from the date hereof, then Employee shall be entitled as
severance to have his salary continued until the date which is three years from
the date hereof; provided, however, that if termination occurs during the third
year, Employee's salary shall be continued for one year thereafter. From and
after the date which is three (3) years from the date hereof, Employee shall be
entitled only to such severance as may be mandated by CXR policy as in effect
from time to time.
A "Constructive Discharge" shall be treated as a termination of employment
without cause. A Constructive Discharge shall be deemed to have occurred if
Employee resigns his employment after any material reduction is made by Critical
or CXR in the duties or
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<PAGE>
salary or benefits of Employee from that in effect on the date hereof, or if
Employee is required to move his place of employment more than 30 miles from
St. Charles, Illinois.
IV. COVENANT NOT TO COMPETE.
4.1. RESTRICTIONS. During his employment with Critical/CXR and for a
period of two (2) years thereafter (six (6) months thereafter in the event of
a termination without cause provided Employer continues salary payments to
Employee during such six month period), he will not act as a principal,
agent, shareholder, employer, consultant, control person, stockholder,
director or co-partner of any person, firm, business entity other than
Critical and/or CXR, their subsidiaries and affiliates, or in any individual
or representative capacity whatsoever, directly or indirectly, without the
express consent of CXR and Critical pursuant to which he:
(a) engages or participates or is employed in the
telecommunication test equipment business (the "Business") in North America;
provided, however, that the ownership by Employee of not more than five
percent (5%) of a publicly-traded corporation shall not be deemed to be a
violation of this covenant as long as Employee does not become a controlling
person or actively involved in the management of such corporation or business
venture;
(b) approaches, solicits business from, or otherwise does business or
deals with any customer of Critical and/or CXR, their subsidiaries and
affiliates, who are customers of Critical and/or CXR in connection with the
Business.
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<PAGE>
(c) approaches, counsels, solicits, assists to solicit or attempts to
induce any person who is then in the employ of Critical and/or CXR, their
subsidiaries and affiliates, its affiliates or subsidiaries to leave the employ
of Critical and/or CXR, their subsidiaries and affiliates, or employ or attempt
to employ on behalf of any person or entity any such person or persons who at
any time during the preceding six months was in the employ of Critical and/or
CXR, their subsidiaries and affiliates;
(d) aid or counsel any other person, firm, corporation or business
entity to do any of the above.
For purposes of this Section 4.1, the term "customer" shall mean (i) any
person or entity who was a customer of Critical and/or CXR, their subsidiaries
and affiliates, at any time during the last two months (2) prior to the date
Employee's employment with CXR and/or Critical terminates, and (ii) any
prospective customer to whom Critical and/or CXR, their subsidiaries and
affiliates, had made a presentation (or similar offering of product(s)) during
the one (1) year prior to the date Employee's employment with CXR and/or
Critical terminates.
Employee acknowledges (i) that his position with Critical places him in a
position of confidence and trust with the customers and the employees of
Critical and/or CXR, their subsidiaries and affiliates, through which, among
other things, he shall obtain knowledge of such organizations "technical
information" and "know-how" and become acquainted with their customers, in which
matters such organizations have substantial proprietary interests, (ii)
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<PAGE>
that the restrictive covenants set forth above are necessary in order to
protect and maintain such proprietary interests and the other legitimate
business interests of Critical and/or CXR, their subsidiaries and affiliates
and (iii) that Critical and/or CXR, their subsidiaries and affiliates would
not have entered into this Agreement unless such covenants were included
herein.
Employee also acknowledges that the business of Critical and/or CXR, their
subsidiaries and affiliates presently extends throughout North America, that he
has personally supervised or engaged in such business on behalf of Critical
and/or CXR, their subsidiaries and affiliates, or will do so pursuant to the
terms of this Agreement, and, accordingly, it is reasonable that the restrictive
covenants set forth above are not more limited as to geographic area than is set
forth therein. Employee also represents to Critical that the enforcement of
such covenants will not prevent Employee from earning a livelihood.
If any of the provisions of this Section, or any part thereof, is
hereinafter construed to be invalid or unenforceable, the same shall not affect
the remainder of such provision or provisions, which shall be given full effect,
without regard to the invalid portions. If any of the provisions of this
Section, or any part thereof, is held to be unenforceable because of the
duration of such provision, the area covered thereby or the type of conduct
restricted therein, the parties agree that the court making such determination
shall have the power to modify the duration, geographic area and/or other terms
of such provision and, as so
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<PAGE>
modified, said provision shall then be enforceable. In the event that the
courts of any one or more jurisdictions shall hold such provisions wholly or
partially unenforceable by reason of the scope thereof or otherwise, it is
the intention of the parties hereto that such determination not bar or in any
way affect Critical's right to the relief provided for herein in the Courts
of any other jurisdictions as to breaches or threatened breaches of such
provisions in such other jurisdictions, the above provisions as they relate
to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
4.2 SURVIVAL. The provisions of Section 4.1 shall survive the termination
of this Agreement.
V. CONFIDENTIAL INFORMATION.
5.1. DISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that the financial information, trade secrets, technical information and
confidential or proprietary information of Critical and/or CXR, their
subsidiaries and affiliates including such information as may exist from time
to time, and information as to the identity of customers or prospective
customers of Critical and/or CXR, their subsidiaries and affiliates and other
similar items, are valuable, special and unique assets of Critical's and
CXR's business, access to and knowledge of which are essential to the
performance of the duties of Employee hereunder. Employee will not, during
or after the term hereof, in whole or in part, disclose such secrets or
confidential, technical or proprietary information to any person, firm,
corporation, association or other entity for
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<PAGE>
any reason or purpose whatsoever, nor shall Employee make use of any
such property or information for his own purpose or for the benefit of any
person, firm, corporation or other entity (except Critical and/or CXR, their
subsidiaries and affiliates) under any circumstances, during or after the term
hereof, except as may be required pursuant to the terms of a Court Order or as
otherwise required by law, provided that these restrictions shall not apply to
such secrets or information which are then in the public domain (provided that
Employee was not responsible directly or indirectly, for such secrets or
information entering the public domain without the consent of Critical).
5.2. OWNERSHIP OF INVENTIONS. Except as may be required otherwise by
applicable law, all of Employee's right, title and interest in all developments
or improvements devised or conceived by Employee, alone or with others, during
his working hours, as well as in all developments or improvements devised or
conceived by Employee, alone or with others, which relate to any business in
which Employee is then engaged or contemplating engaging, regardless of when
devised or conceived, is the exclusive property of Critical and CXR. Employee
shall promptly disclose all such developments and improvements to CXR. Employee
shall not use or disclose any such developments or improvements, other than in
furtherance of Critical's or CXR's business, without CXR's prior written
consent.
5.3. RETURN MEMORANDA. Employee hereby agrees to deliver promptly to
Critical, on termination of this Agreement, or at any
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<PAGE>
other time Critical may so request, all memoranda, notes, records, reports,
manuals, drawings and other documents (and all copies thereof) relating to
Critical's or CXR's business and all property associated therewith, which he
may then possess or have under his control.
5.4. SURVIVAL. The provisions of Section 5.1, 5.2 and 5.3 shall survive
the termination of this Agreement.
VI. INJUNCTIVE RELIEF.
6.1. Employee acknowledges that the remedy at law for any breach or
threatened breach of Articles IV and V hereof by the Employee will be
inadequate, and that, accordingly, CXR and/or Critical shall, in addition to all
other available remedies (including without limitation seeking such damages as
it can show it has sustained by reason of such breach), be entitled to
injunctive relief without being required to post bond or other security and
without having to prove the inadequacy of the available remedies at law.
Employee agrees not to plead or defend on grounds of adequate remedy at law or
any similar defense in any action by Critical and/or CXR against him or
injunctive relief or for specific performance of any of his obligations pursuant
to Articles IV and V hereof. Nothing herein shall be construed as prohibiting
Critical and/or CXR from pursuing any other remedies for such breach or
threatened breach.
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<PAGE>
VII. MISCELLANEOUS PROVISIONS.
7.1. NOTICES AND COMMUNICATIONS. All notices and communications hereunder
shall be in writing and shall be hand delivered or sent postage prepaid by
registered or certified mail, return receipt requested, to the address first
above written or to such other address of which notice shall have been given in
the manner herein provided.
7.2. ENTIRE AGREEMENT. Except for the terms of the Share Exchange
Agreement and the Contingent Stock Agreement, which are incorporated herein by
reference, all prior and contemporaneous agreements and understandings between
the parties with respect to the subject matter of this Agreement are superseded
by this Agreement, and this Agreement constitutes the entire understanding
between the parties. This Agreement may not be modified, amended, changed or
discharged except by a writing signed by the parties hereto, and then only to
the extent therein set forth.
7.3. ASSIGNMENT. This Agreement may be assigned by Critical and shall be
binding upon and inure to the benefit of Critical's successors and assigns.
7.4. WAIVER. No waiver of any breach of this Agreement or of any objection
to any act or omission connected herewith shall be implied or claimed by any
party, or be deemed to constitute a consent to any continuation of such breach,
act or omission, unless in a writing signed by the party against whom
enforcement of such waiver or consent is sought, and then only to the extent
therein set forth.
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<PAGE>
7.5. SECTION HEADINGS. The section headings of this Agreement are solely
for the purpose of convenience and shall neither be deemed a part of this
agreement nor used in any interpretation thereof.
7.6. GOVERNING LAW. This agreement and the relationship of the parties
shall be governed by, and construed in accordance with, the laws of the State of
Illinois.
IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
as of the day and year first above written.
Dated: CXR TELCOM CORPORATION
By:
--------------------------------
Henry A. Mourad, President
CRITICAL COMMUNICATIONS INCORPORATED
By:
--------------------------------
Henry A. Mourad, President
EMPLOYEE
By:
--------------------------------
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<PAGE>
10.52
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of January, 9 1998, by and among
ARNOLD CIRCUITS, INC., a California corporation ("Purchaser"), BNZ Incorporated,
a California corporation ("BNZ"), an affiliated corporation of Purchaser; Robert
Bertrand, the sole shareholder of Purchaser ("Bertrand"), XCEL Arnold Circuits,
Inc., a New Jersey corporation ("Seller"), and XIT Corporation, the sole
shareholder of Seller ("XIT"), and Mantalica & Treadwell, a Professional Law
Corporation as escrow agent ("Escrow Agent"), with reference to the following
RECITALS:
A. Seller is engaged, in part, in the business of manufacturing
printed circuit boards. Such business operations have been carried on as a
distinct business under the name of Arnold Circuits, Inc. (the "Arnold Circuits
Business"). All of the Arnold Circuits Business operations of Seller desired to
be purchased by Purchaser hereunder are referred to herein as the "Arnold
Circuits Business."
B. Subject to the terms and conditions hereinafter set forth,
Seller desires to sell and Purchaser desires to purchase the Arnold Circuits
Business, its operations, and the Assets of Seller used therein.
NOW, THEREFORE, in consideration of the recitals and of the respective
covenants, representations, warranties and agreements herein contained, and
intending to be legally bound hereby, the parties hereto hereby agree as
follows:
1. PURCHASE AND SALE
1.1 AGREEMENT TO SELL. At the Closing hereunder (as defined in
Section 2.1 hereof) and except as otherwise specifically provided in Section
1.3, Seller shall grant, sell, convey, assign, transfer and deliver to
Purchaser, all right, title and interest of Seller in and to (a) the Arnold
Circuits Business as a going concern, (b) the name "Arnold Circuits, Inc." and
all goodwill associated therewith, (c) all purchase orders, including, but not
limited to, all purchase orders from Motorola Cellular Infrastructure Group and
other locations ("Motorola") and (d) all of the assets, properties and rights of
Seller constituting the Arnold Circuits Business or used therein, of every kind
and description, real, personal and mixed, tangible and intangible, wherever
situated (which Arnold Circuits Business, name, goodwill, assets, properties and
rights are herein sometimes called the "Assets"), free and clear of all
mortgages, liens, pledges, security interests, charges, claims, restrictions and
encumbrances of any nature whatsoever.
1.2 INCLUDED ASSETS. The Assets shall include without limitation
the following assets, properties and rights of Seller used directly or
indirectly in the conduct of, or generated by or constituting, the Arnold
Circuits Business, except as otherwise expressly set forth in Section 1.3
hereof:
<PAGE>
(a) all machinery, equipment, tools, vehicles, furniture,
furnishings, leasehold improvements, goods, and other tangible personal
property used in the Arnold Circuits Business;
(b) all cash in the following bank accounts: Imperial Bank -
Account #07-097-468 (general disbursement account), Bank of America -
Account #09294-11871 (payroll account), and "all cash in the imperial
Bank lockbox account #07-111-002 shared with other XIT divisions either
on or after the closing date which is received in payment of any invoice
resulting from any shipment from the La Habra facility";
(c) all prepaid items, unbilled costs and fees, and accounts, notes
and other receivables;
(d) all supplies, raw materials, work-in-process, finished goods and
other inventories;
(e) to the extent permitted by applicable law, all rights under any
written or oral contract, agreement, lease, plan, instrument,
registration, license, certificate of occupancy, operating permit or
other permit or approval of any nature, or other document, commitment,
arrangement, undertaking, practice or authorization;
(f) all right, title and interest of Seller in, to and under all
purchase orders, including, but not limited to, all purchase orders from
Motorola;
(g) all rights under any written or oral distribution, dealer, sales
agency or sales representative agreements, including, but not limited to
any agreements with Gerard and Associates ("Gerard") or Salvatore
Dimiceli ("Dimiceli");
(h) all of Seller's right, title and interest in and to the name
"Arnold Circuits, Inc.";
(i) all rights under any trademark, service mark, trade name or
copyright, whether registered or unregistered, and any applications
therefor;
(j) all technologies, methods, formulations, data bases, trade
secrets, know-how, inventions and other intellectual property used in
the Arnold Circuits Business or under development;
(k) all rights in action arising out of occurrences before or after
the Closing, including without limitation all rights under express or
implied warranties relating to the Assets; and
(l) all information, files, records, data, plans, contracts and
recorded knowledge, including customer and supplier lists, related to
the foregoing.
2
<PAGE>
1.3 EXCLUDED ASSETS. Notwithstanding the foregoing, the Assets
shall not include any of the following (the "Excluded Assets"):
(a) the corporate seal, certificate of incorporation, minute books,
stock books, tax returns, books of account or other records having to do
with corporate organization of Seller;
(b) the rights which accrue or will accrue to Seller under this
Agreement;
(c) the rights to any of Seller's claims for any federal, state,
local, or foreign tax refunds;
(d) any cash in any of the Seller's bank accounts except for the
specific accounts referenced in Section 1.2(b);
(e) any assets used in connection with the business of XIT Circuits
Division (XCD), a division of Seller located in Monrovia, California,
and any assets used in connection with the business of XCEL Etch-Tek,
Inc., a wholly owned subsidiary of Seller located in Concord,
California. However, Seller has not and will not transfer any asset
used in the Arnold Circuit Business to either entity prior to Closing as
all such assets are to be transferred to Purchaser by this Agreement;
and
(f) the Gyrex Hot Air Solder Leveling Machine (the "Gyrex").
However, Purchaser shall have the right to use the Gyrex until Purchaser
has secured a replacement machine provided that Purchaser pays the
monthly rental on the Gyrex for such period of time. Once a replacement
machined is obtained, the Gyrex will be transferred from the Arnold
Circuits facility to Etch-Tek at Purchaser's expense.
1.4 AGREEMENT TO PURCHASE. At the Closing hereunder, Purchaser
shall purchase the Assets from Seller in exchange for the purchase price payable
under Section 1.5 and the Liabilities and obligations of Seller only to the
extent and as provided in Section 1.6 of this Agreement. Except as specifically
provided in Section 1.6 hereof, Purchaser shall not assume or be responsible for
any liabilities or obligations of the Arnold Circuits Business or Seller.
1.5 ESCROW AND PURCHASE PRICE. As consideration for the Assets
Purchaser will:
(a) pay to Seller on the Closing Date $1,875,000 by delivery of a
certified or bank cashier's check or by wire transfer (the "Closing
Payment") to be delivered to Escrow Agent to be deposited in its trust
account and disbursed as provided below; and
(b) deposit with Escrow Agent the Promissory Note of Purchaser in
the face amount of $375,000.00 in the form attached hereto as EXHIBIT A
(the "Promissory Note") to be delivered to Seller at the Closing;
3
<PAGE>
(c) forgive the payment of any unpaid dividends on the Class A and
Class B Preferred Stock (the "Preferred Stock") of Seller, all of which
is issued to and owned by Purchaser; and
(d) deposit with Escrow Agent the Preferred Stock for delivery to
Seller in redemption at the Closing without payment therefor.
1.6 ASSUMPTION OF LIABILITIES. At the Closing hereunder Purchaser
shall assume and agree to pay, discharge or perform, as appropriate, the
following liabilities and obligations of Seller:
(a) all liabilities and obligations of Seller reflected on the
November 30 Balance Sheet (as defined in Section 3.4); or which occurred
in the ordinary course of business since November 30, 1997 in respect of
the Arnold Circuits Business which remain unpaid and undischarged on the
Closing Date;
(b) all liabilities and obligations of Seller in respect of all
contracts of Seller which relate to the Arnold Circuits Business
including, but not limited to obligations to provide normal customer
service and warranty obligations to existing accounts for products
shipped prior to the Closing Date; and
(c) all obligations of Seller to Robert Bertrand (if any), Omega
Lamina Partnership or any of their affiliates.
In no event, however, shall Purchaser assume or incur any liability or
obligation under this Section 1.6 or otherwise in respect of any of the
following:
(t) any product liability or similar claim for injury to person or
property, regardless of when made or asserted, which arises out of or is
based upon any express or implied representation, warranty, agreement or
guarantee made by Seller, or alleged to have been made by Seller, or
which is imposed or asserted to be imposed by operation of law, in
connection with any service performed or product sold or leased by or on
behalf of Seller on or prior to the Closing, including without
limitation any claim relating to any product delivered in connection
with the performance of such service and any claim seeking recovery for
consequential damage, lost revenue or income;
(u) any federal, state or local income or other tax (i) payable with
respect to the Arnold Circuits Business, assets, properties or
operations of Seller or Arnold Circuits or any affiliated entity for any
period prior to the Closing Date, or (ii) incident to or arising as a
consequence of the negotiation or consummation by Seller or any member
of any affiliated group of which Seller is a member of this Agreement
and the transactions contemplated hereby;
(v) any liability or obligation under or in connection with the
Excluded Assets;
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(w) any liabilities of Seller to any of its affiliated companies;
(x) except for accrued vacation and sick time or any liability
assumed pursuant to 1.6(a), any liability or obligation arising prior to
or as a result of the Closing to any employees, agents, independent
contractors or sales representatives of Seller, whether or not employed
by Purchaser after the Closing;
(y) except for Purchaser's responsibility to pay for one-half of the
cost of legal fees to prepare purchase and sale documents, any liability
or obligation of Seller arising or incurred in connection with the
negotiation, preparation and execution of this Agreement and the
transactions contemplated hereby and fees and expenses of counsel,
accountants and other experts; or
(z) any liability or obligation of Seller to pay a brokerage or
finder's fee or commission.
1.7 ALLOCATION OF PURCHASE PRICE. Purchaser and Seller shall
negotiate in good faith prior to the Closing Date and determine the allocation
of the consideration paid by Purchaser for the Assets. Each party hereto agrees
(i) that any such allocation shall be consistent with the requirements of
Section 1060 of the Internal Revenue Code of 1986, as amended and the
regulations thereunder, (ii) to complete jointly and to file separately Form
8594 with its federal income tax return consistent with such allocation for the
tax year in which the Closing Date occurs and (iii) that no party will take a
position on any income, transfer or gains tax return, before any governmental or
regulatory authority charged with the collection of any such tax or in any
judicial proceeding, that is in any manner inconsistent with the terms of any
such allocation without the consent of the other party.
2. CLOSING
2.1 TIME AND PLACE OF CLOSING. The closing (the "Closing") of the
sale and purchase of the Assets shall take place at a time mutually agreed to by
the parties hereto on January 15, 1998 at such place and in such manner as may
be mutually agreed upon by Purchaser and Seller, provided that the parties agree
the Closing shall be effective as of December 31, 1997. The date of the Closing
is referred to herein as the "Closing Date."
2.2 ITEMS TO BE DELIVERED AT CLOSING. At the Closing:
(a) Purchaser, BNZ and Bertrand shall deliver to Escrow Agent:
(i) the Closing Payment;
(ii) the Promissory Note;
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(iii) the Guarantee of Bertrand in the form annexed as EXHIBIT
B (the "Bertrand Guarantee");
(iv) the Guarantee of BNZ in the form annexed as EXHIBIT C
(the "BNZ Guarantee");
(v) a Pledge and Security Agreement (the "Security
Agreement") executed by BNZ in favor of Seller in the
form annexed as EXHIBIT D together with the original
warrant agreement referenced therein;
(vi) the certificates representing the Preferred Stock duly
endorsed for transfer to Seller;
(vii) a Secretary's Certificate of Purchaser and BNZ
evidencing approval of the transactions contemplated
herein;
(viii) the cancelled note in the face amount of $225,000
payable to Bertrand and the cancelled note in the face
amount of $150,000 payable to BNZ;
(ix) such other documents or instruments as Seller may
reasonably require.
(b) Seller shall deliver to Escrow Agent:
(i) a bill of sale and assignment and assumption agreement
in customary form;
(ii) a Secretary's Certificate of Seller evidencing approval
of the transactions contemplated herein;
(iii) assignment agreements for all leased real property and
equipment utilized in the Arnold Circuits Business;
(iv) such other documents or instruments as Purchaser may
reasonably require.
(c) Escrow Agent shall, if in receipt of all money and documents
necessary to close, do the following:
(i) deliver to Imperial Bank the amount required to release
its lien on the Assets;
(ii) deliver to Seller the Promissory Note, the Bertrand
Guarantee, the BNZ Guarantee, the Security Agreement,
the Preferred Stock, the Secretary's Certificate, and
the Bertrand and BNZ notes marked "paid in full," and
other documents due to Seller;
(iii) deliver to Purchaser the bill of sale, the Secretary's
certificate, the assignment agreements, and other
documents due to Purchaser;
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(iv) deliver to Bertrand $225,000;
(v) deliver to BNZ $150,000; and
(vi) deliver the balance of the funds to, or as directed by,
Seller.
(d) Escrow Agent shall, if not in receipt of all documents necessary
to close:
(i) return the money and documents to the party who
delivered the same to the Escrow Agent;
(ii) in the event of any dispute, the parties stipulate that
Escrow Agent may, instead, deposit the money and
documents in court and request a judicial determination
as to the disposition of the same, which determination
shall be binding on all parties and relieve Escrow Agent
of any responsibility therefor;
(iii) the parties acknowledge that Escrow Agent is holding the
Escrow Account hereunder solely as a stakeholder at the
parties' request and for their convenience, that Escrow
Agent shall not be deemed to be the agent of any party
and that Escrow Agent shall not be liable to any party
for any act or omission on its part unless taken or
suffered in bad faith or in disregard of this Agreement
or involving negligence; and
(iv) Escrow Agent shall be permitted to act in any dispute as
to the disbursement of the monies held in trust
hereunder or any other dispute between the parties
whether or not Escrow Agent is in possession of the
deposit monies and continues to act as Escrow Agent.
2.3 DELIVERY OF POSSESSION. At the Closing, Seller shall make
available to Purchaser all of the purchase orders, including, but not limited
to, all purchase orders from Motorola, all of the contracts, licenses, customer
lists and all other documents, books, records, papers, files and data belonging
to the Seller that are part of the Assets or relate to the Arnold Circuits
Business; and, simultaneously with such delivery, all such steps shall be taken
as may be required to put Purchaser in actual possession and operating control
of the Assets. Seller shall execute and deliver such further documents and
instruments as Purchaser may request in order to cause full possession and
control of all of the Assets and of all other things and matters pertaining to
the operation of the Arnold Circuits Business to be transferred and delivered to
Purchaser.
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2.4 THIRD PARTY CONSENTS. To the extent that Seller's rights under
any agreement, contract, commitment, lease, or other Asset to be assigned to
Purchaser hereunder may not be assigned without the consent of another person
which has not been obtained, this Agreement shall not constitute an agreement to
assign the same if an attempted assignment would constitute a breach thereof or
be unlawful, and Seller, at its expense, shall use its best efforts to obtain
any such required consents as promptly as possible. If any such consent shall
not be obtained or if any attempted assignment would be ineffective or would
impair Purchaser's rights under the Asset in question so that Purchaser would
not in effect acquire the benefit of all such rights, Seller, to the maximum
extent permitted by law and the Asset, shall act after the Closing as
Purchaser's agent in order to obtain for it the benefits thereunder and shall
cooperate, to the maximum extent permitted by law and the Asset, with Purchaser
in any other reasonable arrangement designed to provide such benefits to
Purchaser.
2.5 FURTHER ASSURANCES. Seller from time to time after the Closing,
at Purchaser's request, will execute, acknowledge and deliver to Purchaser such
other instruments of conveyance and transfer and will take such other actions
and execute and deliver such other documents, certifications and further
assurances as Purchaser may reasonably require in order to vest more effectively
in Purchaser, or to put Purchaser more fully in possession of, any of the
Assets, or to better enable Purchaser to complete, perform or discharge any of
the liabilities or obligations assumed by Purchaser at the Closing pursuant to
Section 1.6 hereof. Each of the parties hereto will cooperate with the other
and execute and deliver to the other parties hereto such other instruments and
documents and take such other actions as may be reasonably requested from time
to time by any other party hereto as necessary to carry out, evidence and
confirm the intended purposes of this Agreement.
2.7 TERMINATION. If the Closing shall not have taken place on or
before January 15, 1998, or such later date as shall be mutually agreed to in
writing by Purchaser and Seller, all of the rights and obligations of the
parties hereunder this Agreement shall terminate, without liability to any other
party. This provision does not apply if the failure to close results from a
breach of this Agreement by either party, rather than the failure of a condition
precedent to Closing to occur by such date.
3. REPRESENTATIONS AND WARRANTIES OF SELLER
XIT and Seller hereby jointly and severally represent and warrant to
Purchaser as follows:
3.1 CORPORATE EXISTENCE. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. Seller is duly qualified to do business and is in good standing
as a foreign corporation in each jurisdiction where the conduct of the Arnold
Circuits Business by it requires it to be so qualified.
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3.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS.
Seller has the corporate power, authority and legal right to execute, deliver
and perform this Agreement. The execution, delivery and performance of this
Agreement by Seller have been duly authorized by all necessary corporate
action. This Agreement has been, and the other agreements, documents and
instruments required to be delivered by Seller in accordance with the
provisions hereof (the "Seller's Documents") will be, duly executed and
delivered by Seller, and this Agreement constitutes, and the Seller's
Documents when executed and delivered will constitute, the legal, valid and
binding obligations of Seller, enforceable against Seller in accordance with
their respective terms.
3.3 VALIDITY OF CONTEMPLATED TRANSACTIONS, ETC. The execution,
delivery and performance of this Agreement by Seller does not and will not
violate, conflict with or result in the breach of any term, condition or
provision of, or require the consent of any other person under, (a) any existing
law, ordinance, or governmental rule or regulation to which Seller is subject,
(b) any judgment, order, writ, injunction, decree or award of any court,
arbitrator or governmental or regulatory official, body or authority which is
applicable to Seller, (c) the charter documents or By-Laws of, or any securities
issued by Seller, or (d) any mortgage, indenture, agreement, contract,
commitment, lease, plan, or other instrument, document or understanding, oral or
written, to which Seller is a party, by which Seller may have rights or by which
any of the Assets may be bound or affected, or give any party with rights
thereunder the right to terminate, modify, accelerate or otherwise change the
existing rights or obligations of Seller thereunder. Except as disclosed by
Seller and agreed to by Purchaser at or before Closing, no authorization,
approval or consent of, and no registration or filing with, any governmental or
regulatory official, body or authority is required in connection with the
execution, delivery or performance of this Agreement by Seller.
3.4 FINANCIAL STATEMENTS. Seller has delivered to Purchaser true
and complete copies of (a) the balance sheets of the Arnold Circuits Business
and the related statements of income, cash flow and changes in shareholders
equity for the fiscal years since Seller acquired the Arnold Circuits Business;
and (b) unaudited balance sheets of Seller and related statements of income and
cash flow for the same time, all of which have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, including an unaudited pro forma balance sheet as of November
30, 1997 which does not include the assets and liabilities of the XCEL Circuits
Division (the "November 30 Balance Sheet"). Such balance sheets, including the
related notes, fairly represent the financial position, assets and liabilities
(whether accrued, absolute, contingent or otherwise) of the Arnold Circuits
Business at the dates indicated and such statements of income, cash flow and
changes in shareholders equity fairly present the results of operations, cash
flow and changes in shareholders equity for the periods indicated. The most
recent unaudited financial statements contain all adjustments, which are solely
of a normal recurring nature, necessary to present fairly the financial position
for the period then ended. Seller represents that there have been no material
changes in the operations of the Arnold Circuits Business since November 30,
1997.
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3.5 ABSENCE OF UNDISCLOSED LIABILITIES. Seller has no liabilities
or obligations with respect to the Arnold Circuits Business except those
reflected on the November 30 Balance Sheet or incurred in the ordinary course of
business since that date. For purposes of this Agreement, the term
"liabilities" shall include, without limitation, any direct or indirect
indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost,
expense, obligation or responsibility, fixed or unfixed, known or unknown,
asserted or unasserted, choate or inchoate, liquidated or unliquidated, secured
or unsecured, including, but not limited to, any claim, loss, damage,
deficiency, cost, expense, obligation or responsibility relating to any
environmental matter.
3.6 LITIGATION. No litigation, including any arbitration,
investigation or other proceeding of or before any court, arbitrator or
governmental or regulatory official, body or authority, including, but not
limited to the South Coast AQMD, is pending or, to the best knowledge of Seller,
threatened against Seller which relates to the Arnold Circuits Business, the
Assets or the transactions contemplated by this Agreement, nor does Seller know
of any reasonably likely basis for any such litigation, arbitration,
investigation or proceeding, the result of which could adversely affect the
Arnold Circuits Business, the Assets or the transactions contemplated hereby.
Seller is not a party to or subject to the provisions of any judgment, order,
writ, injunction, decree or award of any court, arbitrator or governmental or
regulatory official, body or authority, including, but not limited to the South
Coast AQMD, which may adversely affect Seller, the Assets or the transactions
contemplated hereby.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser and BNZ represent and warrant to Seller as follows:
4.1 CORPORATE EXISTENCE. Purchaser and BNZ are corporations duly
organized, validly existing and in good standing under the laws of the
jurisdiction of their incorporation.
4.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each
of Purchaser and BNZ has the corporate power, authority and legal right to
execute, deliver and perform this Agreement. The execution, delivery and
performance of this Agreement by Purchaser and BNZ has been duly authorized by
all necessary corporate action. This Agreement has been, and the other
agreements, documents and instruments required to be delivered by Purchaser and
BNZ in accordance with the provisions hereof (the "Purchaser's Documents") will
be, duly executed and delivered by Purchaser, and this Agreement constitutes,
and the Purchaser's Documents when executed and delivered will constitute, the
legal, valid and binding obligations of Purchaser and BNZ (to the extent they
are parties thereto); enforceable against Purchaser and BNZ in accordance with
their respective terms.
4.3 KNOWLEDGE OF THE PURCHASER. BNZ acknowledges that until
September of 1995 it owned and operated the Arnold Circuits Business, and
Bertrand has served as a consultant to Seller and XIT from and after the date
of sale to XIT. Therefore, Purchaser, BNZ and Bertrand are familiar with the
business, operations, assets, liabilities, properties and prospects of Arnold
Circuits, and they are relying solely on their knowledge and the specific
representations and warranties by Seller set forth herein, except as to any
material information known to Seller and not to Purchaser, Bertrand or BNZ and
withheld from or not disclosed to Purchaser, Bertrand or BNZ by Seller.
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5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made by the parties in this Agreement or in any certificate,
schedule, statement, document or instrument furnished hereunder or in connection
with negotiation, execution and performance of this Agreement shall survive the
Closing for a period of one year. Notwithstanding any investigation or audit
conducted before or after the Closing Date or the decision of any party to
complete the Closing, each party shall be entitled to rely upon the
representations and warranties set forth herein and therein.
6. INDEMNIFICATION
6.1 INDEMNIFICATION OBLIGATION OF SELLER AND XIT. From and after
the Closing, Seller and XIT will reimburse, indemnify and hold harmless
Purchaser and its successors and assigns (an "Indemnified Purchaser Party")
against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs
and expenses incurred or suffered by any Indemnified Purchaser Party
that result from, relate to or arise out of:
(i) except for those liabilities and obligations of Seller
which Purchaser assumes pursuant to this Agreement, any
and all damages, losses, deficiencies, liabilities,
costs and expenses of, or claims against, Purchaser,
resulting from, relating to or arising out of the
operations or assets of the Arnold Circuits Business
prior to the Closing Date or the actions or omissions of
Seller's officers, directors, shareholders, employees or
agents relating to the Arnold Circuits Business prior to
the Closing Date that is asserted after the Closing
Date, including, without limitation, any liability
relating to, and any claim which arises out of or is
based upon, negligence, strict liability, or any express
or implied representation, warranty, agreement or
guarantee made by or on behalf of Seller, or alleged to
have been made by or on behalf of Seller, or which is
imposed or asserted to be imposed on Seller by operation
of law, in connection with any product of the Arnold
Circuits Business designed, used, rented, sold,
manufactured, shipped or installed by or on behalf of
Seller or for any service relating to the Arnold
Circuits Business performed by or on behalf of Seller,
in any case prior to the Closing Date and irrespective
of the date that any claim, suite or other cause of
action related to any of the foregoing is filed or
otherwise instituted against Seller;
(ii) any and all actions, suits, claims, or legal,
administrative, arbitration, governmental or other
proceedings or investigations against any Indemnified
Purchaser Party that relate to the Arnold Circuits
Business in which the event giving rise thereto occurred
prior to the Closing Date or which results from or
arises out of any action or inaction prior to the
Closing Date of Seller or any director, officer,
employee, agent, representative or subcontractor of
Seller, except for those which Purchaser assumes
pursuant to this Agreement; or
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(iii) any misrepresentations, breach of warranty or
nonfulfillment of any agreement or covenant on the part
of Seller under this Agreement, or from any
misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to
Purchaser pursuant hereto or in connection with the
execution or performance of this Agreement; and
(b) Any and all actions, suits, claims, proceedings, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section.
6.2 INDEMNIFICATION OBLIGATION OF PURCHASER. From and after the
Closing, Purchaser, BNZ and Bertrand will jointly and severally reimburse,
indemnify and hold harmless Seller and its successors or assigns (an
"Indemnified Seller Party") against and in respect of:
(a) Any and all damages, losses, deficiencies, liabilities, costs
and expenses incurred or suffered by any Indemnified Seller Party that
result from, relate to or arise out of:
(i) any and all liabilities and obligations of Seller which
have been assumed by Purchaser pursuant to this
Agreement; or
(ii) any misrepresentations, breach of warranty or
non-fulfillment of any agreement or covenant on the part
of Purchaser under this Agreement, or from any
misrepresentation in or omission from any certificate,
schedule, statement, document or instrument furnished to
Seller pursuant hereto or in connection with the
execution or performance of this Agreement.
(b) Any and all actions, suits, claims, proceeding, investigations,
demands, assessments, audits, fines, judgments, costs and other expenses
(including, without limitation, reasonable legal fees and expenses)
incident to any of the foregoing or to the enforcement of this Section.
6.3 METHOD OF ASSERTING CLAIMS, ETC. (a) In the event that any
claim or demand for which a party or parties (the "Indemnifying Party") would be
liable to another party or party (the "Indemnified Party") is asserted against
or sought to be collected from the Indemnified Party by a third party, the
Indemnified Party shall promptly notify the Indemnifying Party of such claim or
demand, specifying the nature of such claim or demand and the amount or the
estimated amount thereof to the extent then feasible (which estimate shall not
be conclusive of the final amount of such claim and demand) (the "Claim
Notice"). The Indemnifying Party shall have thirty days from the personal
delivery or mailing of the Claim Notice (the "Notice Period") to notify the
Indemnified Party, (i) whether or not they dispute their liability to the
Indemnified Party hereunder with respect to such claim or demand and (ii)
notwithstanding any such dispute, whether or not they desire, at their sole cost
and expense, to defend the Indemnified Party against such claim or demand.
In the event that the Indemnifying Party notifies the Indemnified Party
within the Notice Period that they desire to defend the Indemnified Party
against such claim or demand then, except as hereinafter provided, the
Indemnifying Party shall have the right to defend the Indemnified Party by
appropriate proceedings, which proceedings shall be promptly settled or
prosecuted by them to a final
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conclusion. If any Indemnified Party desires to participate in, but not
control, any such defense or settlement, it may do so at its sole cost and
expense.
If the Indemnifying Party elects not to Defend the Indemnified Party
against such claim or demand, whether by not giving the Indemnified Party timely
notice as provided above or otherwise, then the amount of any such claim or
demand, or if the same be contested by the Indemnifying Party, then that portion
thereof as to which such defense is unsuccessful, shall be conclusively deemed
to be a liability of the Indemnifying Party hereunder.
If, in the reasonable opinion of the Indemnified Party, any such claim
or demand or the litigation or resolution of any such claim or demand involves
an issue or matter which could have a materially adverse effect on the business,
operations, assets, properties or prospects of the Indemnified Party, then the
Indemnified Party shall have the right to participate in, but not control, the
defense or settlement of any such claim or demand and its reasonable costs and
expenses shall be included as part of the indemnification obligation of the
Indemnifying Party hereunder.
(b) In the event an Indemnified Party should have a claim against
the Indemnifying Party hereunder that does not involve a claim or demand being
asserted against or sought to be collected from it by a third party, the
Indemnified Party shall promptly send a Claim Notice with respect to such claim
to the Indemnifying Party.
6.4 PAYMENT. Upon the determination of the liability under Section
6.1 or 6.2 hereof, the appropriate party shall pay to the other, as the case may
be, within ten days after such determination, the amount of any claim for
indemnification made hereunder. In the event that the Indemnified Party is not
paid in full for any such claim pursuant to the foregoing provisions promptly
after the other party's obligation to indemnify has been determined in
accordance herewith, it shall have the right, notwithstanding any other rights
that it may have against any amounts owed by it under this Agreement to the
Indemnifying Party. Upon the payment in full of any claim, either by set off or
otherwise, the entity making payment shall be subrogated to the rights of the
Indemnified Party against any person, firm or corporation with respect to the
subject matter of such claim.
6.5 RIGHT TO SETOFF. Purchaser shall be entitled to withhold
payment due Seller as Postclosing Consideration in an aggregate amount
sufficient to cover the full amount of any claim (or portion thereof) as to
which it has finally been determined that Purchaser is entitled to
indemnification under this Section; provided, however, that in the case of a
good faith dispute as to whether Purchaser is entitled to such indemnification
(or as to the size of such indemnification obligation), Purchaser shall not be
required to make any payment to the extent that such payment would reduce the
Postclosing Consideration below the Purchaser's good faith estimate of the
amount of the claim (or a portion thereof) which has not been finally
determined. During any period when payment is withheld by Purchaser relating to
indemnification claims which have not been finally determined, interest shall
accrue on any withheld payment to which the Seller is finally determined to be
entitled at the rate set forth in the Promissory Note. If it is finally
determined that Purchaser is entitled to indemnification, Purchaser may set off
against the Postclosing Consideration, the amount of the indemnification
obligation and Seller shall not be entitled to receive interest on the amounts
setoff.
7. CONDITIONS PRECEDENT TO THE CLOSING
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7.1 CONDITIONS OF OBLIGATIONS OF SELLER. The obligation of Seller
to effect the Asset Purchase is subject to the satisfaction on or before the
Closing Date of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Purchaser set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date.
(b) PERFORMANCE BY THE PURCHASER. Purchaser shall have performed
and satisfied all agreements and conditions which it is required by this
Agreement to perform or satisfy prior to or on the Closing Date.
(c) FORM AND CONTENT OF DOCUMENTS. The form and content of all
documents, certificates and other instruments to be delivered by
Purchaser shall be reasonably satisfactory to Seller.
(d) LITIGATION AFFECTING CLOSING. No court order shall have been
issued or entered which would be violated by the completion of the Stock
Purchase. No person who or which is not a party to this Agreement shall
have commenced or threatened to commence any litigation seeking to
restrain or prohibit, or to obtain substantial damages in connection
with this Agreement or the transactions contemplated by this Agreement.
(e) PURCHASE PRICE. Seller shall have received the Cash Payment and
the Note constituting the Purchase Price.
(f) GUARANTEE OF ROBERT BERTRAND. Bertrand shall have executed the
Bertrand Guarantee.
(g) GUARANTEE OF BNZ. BNZ shall have executed the BNZ Guarantee.
(h) SECURITY AGREEMENT. BNZ shall have executed the Security
Agreement and delivered the Warrants in escrow pursuant thereto.
7.2 CONDITIONS OF OBLIGATIONS OF PURCHASER. The obligation of
Purchaser to effect the Asset Purchase is subject to the satisfaction on or
before the Closing Date of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Seller set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as
of the Closing Date as though made on and as of the Closing Date.
(b) COMPLIANCE WITH THIS AGREEMENT. Seller shall have performed and
complied with all agreements and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing.
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(c) NO THREATENED OR PENDING LITIGATION. On the Closing Date, no
suit, action or other proceeding, or injunction or final judgment
relating thereto, shall be threatened or be pending before any court or
governmental or regulatory official, body or authority in which it is
sought to restrain or prohibit or to obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby, and no investigation that might result in any such
suit, action or proceeding shall be pending or threatened.
(d) CONSENTS AND APPROVALS. Any required consent, approval,
authorization or order required in connection with the sale of the
Assets shall have been obtained or made and shall be in effect on the
Closing Date.
(e) FINANCING. Purchaser's financing arrangements with Heller
Financial shall be in place so that Purchaser has the funds necessary to
close; provided that Purchaser shall use its best efforts to have such
commitment funded on or before January 15, 1998.
(f) CLOSING DOCUMENTS. Seller and Purchaser shall have executed and
delivered the closing documents set forth in Section 2.2 hereof.
(g) PERFORMANCE BY SELLER. Seller shall have performed and
satisfied all agreements and conditions which it is required by this
Agreement to perform or satisfy prior to or on the Closing Date.
(h) FORM AND CONTENT DOCUMENTS. The form and content of all
documents, certificates and other instruments to be delivered by Seller
shall be reasonably satisfactory to Purchaser.
8. POST CLOSING MATTERS
8.1 HIRING OF SELLER'S EMPLOYEES. As of the Closing Date, Purchaser
shall offer employment to, and Seller shall use its best efforts to assist
Purchaser in employing as new employees of Purchaser, all persons presently
engaged in the Arnold Circuits Business who are identified by Purchaser prior to
the Closing Date, including, but not limited to, those family relations of
Shareholder who currently are employees of Seller (the "Employees"). Seller
shall terminate effective as of the Closing Date all employment agreements it
has with any of the Employees. Purchaser shall retain such Employees in the
same manner as any other employees of Purchaser. During the Noncompete Period
described below, Seller will not directly or indirectly hire or offer employment
to any Employee who becomes an employee of Purchaser unless Purchaser first
terminates the employment of such employee.
8.2 EMPLOYEE BENEFITS.
(a) All Employees who are employed by Purchaser on or after the
Closing Date shall be new employees of Purchaser and any prior
employment by Seller of such employees shall not affect entitlement to,
or the amount of, salary or other cash compensation which Purchaser may
make available to its employees. All employees who are employed by
Purchaser shall no longer be considered employees of Seller for any
purposes.
15
<PAGE>
(b) Purchaser will assume the liability for any earned and unused
vacation time for any Employees of Seller hired by Purchaser.
8.3 NONSOLICITATION. Seller and XIT agree that, for the Noncompete
Period, none of Seller, MicroTel International, Inc. nor XIT will (directly or
indirectly) call on or solicit, or divert or take away from Purchaser the
business of, or divulge to any competitor or potential competitor of Purchaser
or other entity who or which at the Closing Date was, or at any time preceding
the Closing Date had been a customer of the Arnold Circuits Business or whose
identity is known to either the Seller or XIT at the Closing Date as one whom
Purchaser intends to solicit within the succeeding year. Nothing contained in
this Section shall be deemed to limit or impair, or be limited or impaired by,
the provisions otherwise appearing herein.
8.4 PAYMENTS RECEIVED. Seller and Purchaser each agree that after
the Closing they will hold and will promptly transfer and deliver to the other,
from time to time as and when received by them, any cash, checks with
appropriate endorsements (using their best efforts not to convert such checks
into cash), or other property that they may receive on or after the Closing
which properly belongs to the other party, including without limitation any
insurance proceeds, and will account to the other for all such receipts. From
and after Closing, Purchaser shall have the right and authority to endorse
without recourse the name of Seller on any check or any other evidences of
indebtedness received by Purchaser on account of the Arnold Circuits Business
and the Assets transferred to Purchaser hereunder.
9. MISCELLANEOUS
9.1 USE OF NAME. From and after the Closing Date, Seller will sign
such consents and take such other action as Purchaser shall reasonably request
in order to permit Purchaser to use the name "Arnold Circuits, Inc." and
variants thereof. From and after the Closing Date, Seller will not itself use
the name "Arnold Circuits, Inc." or any names similar thereto or variants
thereof.
9.2 PROVISION OF SERVICES. If requested by Purchaser, Seller shall
provide after the Closing the services of Bryan Fuller (the "Executive") to
Purchaser for a period of up to five days per week for up to one year after
Closing, provided that Purchaser reimburses Seller for salary, benefits,
transportation and living expenses for the Executive on a bi-weekly basis.
Nothing shall prevent Purchaser from offering the Executive full-time employment
with Arnold Circuits.
9.3 NON SOLICITATION. For a period of two years after the Closing,
Seller and XIT agree that they shall not solicit the services of the employees
of Purchaser, and Purchaser and Bertrand agree that they shall not solicit the
services of the employees of Seller or XIT.
9.4 AMENDMENT. This Agreement may be amended by the parties hereto
by an instrument in writing signed on behalf of each of the parties hereto.
9.5 EXTENSION; WAIVER. At any time prior to the Closing, the
parties hereto may extend the time for the performance of any of the obligations
or other acts of the other parties hereto, waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and waive compliance with any of the agreements or conditions
contained herein.
16
<PAGE>
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party.
9.6 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or mailed by
registered or certified mail (return receipt requested) to the Purchaser and
Seller at their respective addresses set forth above.
9.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.8 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES. This Agreement
(including the documents and the instruments referred to herein) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
9.9 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
governed and construed in accordance with the laws of the State of California
without regard to principles of conflicts of law. Each party hereby irrevocably
submits to the jurisdiction of any California state court or any federal court
in the State of California in respect of any suit, action or proceeding arising
out of or relating to this Agreement, and irrevocably accept for themselves and
in respect of their property, generally and unconditionally, the jurisdiction of
the aforesaid courts.
9.10 NOTICES. Any notice, request, demand, waiver, consent, approval
or other communication which is required or permitted hereunder shall be in
writing and shall be deemed given only if delivered personally or sent by
registered or certified mail, postage prepaid, as follows:
If to Seller, to:
XCEL Arnold Circuits, Inc.
c/o XCEL Corporation
4290 East Brickell Street
Ontario, California 91761-1511
Attention: Carmine T. Oliva
With a required copy to:
Gallagher, Briody & Butler
212 Carnegie Center, Suite 402
Princeton, NJ 08540
Attention: Thomas P. Gallagher
If to Purchaser to:
17
<PAGE>
BNZ Incorporated
P.O. Box 1085
LaHabra, California 90631
Attention: Robert Bertrand
With a required copy to:
Mantalica and Treadwell
835 Wilshire Boulevard
Suite 300
Los Angeles, CA 90017
Attention: Mark Treadwell
18
<PAGE>
or to such other address as the addressee may have specified in a notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval or other communication will be deemed to have been given as of
the date so delivered.
9.11 CALIFORNIA LAW TO GOVERN. THIS AGREEMENT SHALL BE GOVERNED BY
AND INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA. THE PARTIES HEREBY AGREE THAT ANY PROCEEDING WITH RESPECT TO
ENFORCEMENT OF THIS AGREEMENT SHALL BE BROUGHT IN ANY COURT OF COMPETENT
JURISDICTION IN ORANGE COUNTY, CALIFORNIA.
9.12 BROKERS' AND FINDERS' FEES. Seller, on the one hand, and
Purchaser, on the other hand, each to the other represent and warrant that all
negotiations relative to this Agreement have been carried on by it directly
without the intervention of any person, who may be entitled to any brokerage or
finder's fee or other commission in respect of this Agreement or the
consummation of the transactions contemplated hereby.
9.13 EXPENSES. Purchaser agrees to pay one half (1/2) of Seller's
legal costs in preparing a Purchase and Sale document. Except for such payment,
each party hereto shall pay its own expenses incidental to the preparation of
this Agreement, the carrying out of the provisions of this Agreement and the
consummation of the transactions contemplated hereby.
9.14 ASSIGNMENT AND BINDING EFFECT. This Agreement may not be
assigned prior to the Closing by any party hereto without the prior written
consent of the other parties. Subject to the foregoing, all of the terms and
provision of this Agreement shall be binding upon and inure to the benefit of
and be enforceable by the successors and assigns of Seller and Purchaser.
9.15 NO BENEFIT TO OTHERS. The representations, warranties,
covenants and agreements contained in this Agreement are for the sole benefit of
the parties hereto and, in the case of the Indemnification provisions hereof,
the indemnified parties, and their heirs, executors, administrators, legal
representatives, successors and assigns, and they shall not be construed as
conferring any rights on any other persons.
9.16 SEVERABILITY. Any provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall be ineffective to the extent of such
invalidity or unenforceability without invalidating or rendering unenforceable
the remaining provisions hereof, and any such invalidity or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date set forth above.
XIT CORPORATION
By: /s/ Carmine T. Oliva
-----------------------------
Carmine T. Oliva
President and CEO
XCEL ARNOLD CIRCUITS, INC.
By: /s/ Carmine T. Oliva
-----------------------------
Carmine T. Oliva
Chairman and CEO
ARNOLD CIRCUITS, INC.
By: /s/ Robert Bertrand
-----------------------------
Robert Bertrand
President and CEO
BNZ INCORPORATED
By: /s/ Robert Bertrand
-----------------------------
Robert Bertrand
President and
Chief Executive Officer
/s/ Robert Bertrand
-----------------------------
Robert Bertrand,
Individually
MANTALICA & TREADWELL
By: /s/ Mantalica & Treadwell
-----------------------------
-20-
<PAGE>
10.53
ADDENDUM NO. 1 TO ASSET PURCHASE AGREEMENT
This Addendum, dated as of the 31st day of March, 1998, amends that certain
Asset Purchase Agreement (the "Asset Purchase Agreement") dated as of January 9,
1998, by and among ARNOLD CIRCUITS, INC., a California corporation
("Purchaser"), BNZ INCORPORATED, a California corporation ("BNZ"), an affiliated
corporation of Purchaser; ROBERT BERTRAND, the sole shareholder of Purchaser
("Bertrand"), XCEL ARNOLD CIRCUITS, INC., a New Jersey corporation ("Seller"),
and XIT CORPORATION, the sole shareholder of Seller ("XIT"), and MANTALICA &
TREADWELL, a Professional Law Corporation as escrow agent ("Escrow Agent").
Capitalized terms used herein, but not otherwise defined, shall have the
meaning given to them in the Asset Purchase Agreement. The Asset Purchase
Agreement is hereby amended as follows:
1. Section 1.5 is hereby amended to read in full as follows:
ESCROW AND PURCHASE PRICE. As consideration for the Assets Purchaser will
pay the sum of $2,000,000 to Seller as follows:
(a) by making a cash payment on the Closing Date in an amount equal
to the amount of funds advanced by Fremont Financial and available to
Purchaser at the Closing by delivery of a certified or bank cashier's check
or by wire transfer (the "Closing Payment") to be delivered to Escrow Agent
to be deposited in its trust account and disbursed as provided below; and
(b) by depositing with Escrow Agent the Promissory Note of Purchaser
in an amount equal to the difference between $2,000,000 and the amount of
the Closing Payment in the form attached hereto as Exhibit A (the
"Promissory Note") to be delivered to Seller at the Closing. In addition,
BNZ shall forgive the payment of any unpaid dividends on the Class A and
Class B Preferred Stock (the "Preferred Stock") of Seller, all of which is
issued to and owned by BNZ, and BNZ shall deposit with Escrow Agent the
Preferred Stock for delivery to Seller in redemption at the Closing without
payment therefor.
2. Section 1.6 is hereby amended to add the following language as
subsection(d) immediately following subsection (c):
(d) all liability and obligation for merchandise, materials or
supplies delivered but not invoiced to Seller prior to the Closing Date,
and all liability and obligation for open purchase orders not cancelled by
Purchaser subsequent to the Closing Date.
3. Section 2.1 is hereby amended to read as follows:
<PAGE>
TIME AND PLACE OF CLOSING. The closing (the "Closing") of the sale and
purchase of the Assets shall take place at a time mutually agreed to by the
parties hereto at such place and in such manner as may be mutually agreed upon
by Purchaser and Seller, provided that the parties agree that for accounting
purposes the Closing shall be effective as of March 31, 1998. The date of the
Closing is referred to herein as the "Closing Date."
4. The following paragraph is added to the Asset Purchase Agreement:
At the Closing, all inter-company accounts shall be reconciled as of such
Closing Date and XIT shall issue a non-interest bearing promissory Note to
Arnold Circuits, Inc. for the net balance due from Seller to Arnold Circuits,
Inc., BNZ and Bertrand. The Note shall be repayable within three business days
of the closing of the refinancing by XIT and its affiliates of their existing
term loans and lines of credit. If such financing is not concluded and the Note
is not repaid by May 31, 1998, it shall be payable upon demand.
5. The Promissory Note (Exhibit A to the Asset Purchase Agreement) is amended
as set forth in Exhibit A annexed hereto.
6. The following paragraph is added to the Asset Purchase Agreement: As
security for the payment of the Promissory Note, Purchaser shall grant to Seller
a security interest in substantially all of its assets pursuant to a Security
Agreement in form and substance reasonably acceptable to Seller and Purchaser.
7. Except as modified herein, all terms and conditions of the Asset Purchase
Agreement shall remain in full force and effect.
8. In the event of any inconsistency between the terms of this Addendum and
the terms of the Asset Purchase Agreement, the terms of this Addendum shall
control.
IN WITNESS WHEREOF, the parties hereto have duly executed this Addendum as
of the date set forth above.
XIT CORPORATION
By: /s/ Carmine T. Oliva
------------------------------
Carmine T. Oliva
President and CEO
XCEL ARNOLD CIRCUITS, INC.
2
<PAGE>
By: /s/ Carmine T. Oliva
------------------------------
Carmine T. Oliva
Chairman and CEO
ARNOLD CIRCUITS, INC.
By: /s/Robert Bertrand
------------------------------
Robert Bertrand
President and CEO
BNZ INCORPORATED
By: /s/Robert Bertrand
------------------------------
Robert Bertrand
President and
Chief Executive Officer
/s/Robert Bertrand
------------------------------
Robert Bertrand, Individually
MANTALICA & TREADWELL
By: /s/ Mantalica & Treadwell
------------------------------
3
<PAGE>
10.54
BILL OF SALE AND
ASSIGNMENT AND ASSUMPTION AGREEMENT
BILL OF SALE AND ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of March
31, 1998 between XCEL Arnold Circuits, Inc., a New Jersey Corporation ("Seller")
and Arnold Circuits, Inc., a California corporation ("Purchaser").
W I T N E S S T H
WHEREAS, pursuant to the terms of an Asset Purchase Agreement dated as
of December 1997 (the "Asset Purchase Agreement") by and among the Purchaser,
Robert Bertrand, the Seller, and XIT Corporation, Seller has agreed to sell and
Purchaser has agreed to purchase the assets, properties and rights described and
referred to in Section 1.2 of the Asset Purchase Agreement, subject to the
exclusion of the assets, properties and rights described in Section 1.3 of the
Asset Purchase Agreement (such assets, properties and rights, subject to such
exclusions, are collectively referred to as the "Assets"); and
WHEREAS, pursuant to due authorization, Seller is executing and
delivering this instrument for the purpose of selling and assigning to and
vesting in Purchaser all of Seller's right, title and interest in and to the
Assets;
WHEREAS, pursuant to the Asset Purchase Agreement, Purchaser has
agreed that, at the closing of the purchase of the Assets, Purchaser would
deliver to Seller its written assumption of obligations whereby it would assume
and agree to perform, to pay or to discharge certain liabilities and obligations
of Seller to the extent and as provided in Section 1.6 of the Asset Purchase
Agreement (the "Assumed Liabilities");
NOW, THEREFORE, in consideration of the terms and conditions of the
Asset Purchase Agreement and other good and valuable consideration, the receipt
of which is hereby acknowledged, and intending to be legally bound, the parties
hereto agree as follows:
1. Seller hereby grants, sells, conveys, assigns, transfers, sets
over to, and vests in Purchaser, its successors and assigns, all of Seller's
right, title and interest, legal and equitable, in and to all of the Assets by
which Seller is bound and which are assumed hereby, including without limitation
all of its rights and privileges under or otherwise in respect of any contracts,
commitments, leases and other commitments that are part of the Assets, to have
and to hold the same, including the appurtenances thereof, unto Purchaser, its
successors and assigns, forever, to its and their own proper use.
2. Purchaser hereby assumes and agrees to perform or to pay or
discharge the Assumed Liabilities to the extent and as provided in Section 1.6
of the Asset Purchase Agreement.
1
<PAGE>
Purchaser shall indemnify and hold Seller harmless from and against any and all
damage, loss, deficiency, cost or liability, including fees of attorneys,
arising from its failure to pay, perform and discharge all such Assumed
Liabilities.
3. Seller hereby constitutes and appoints Purchaser, its successors
and assigns, as Seller's true and lawful agent and attorney with full power of
substitution, in Seller's name and stead, but on behalf of and for the benefit
of Purchaser, to demand and receive any and all of the Assets which are not in
the possession or under the exclusive control of Seller, and to give receipts
and releases for and in respect of the same, and any part thereof, and from time
to time to institute and in Seller's name or in the name of Purchaser, its
successors and assigns, as the legal attorney of and for Seller thereunto duly
authorized, for the benefit of Purchaser, its successors and assigns, any and
all proceedings at law, in equity or otherwise, which Purchaser, its successors
and assigns, may deem proper for the collection and enforcement of any claim or
right of any kind hereby granted, sold, conveyed, assigned, transferred or set
over to, or intended so to be, and to do all acts and things in relation to the
Assets which Purchaser, its successors and assigns, shall deem desirable, Seller
hereby declaring that the foregoing powers are coupled with an interest and are
and shall be irrevocable by Seller or by Seller's dissolution or in any manner
or for any reason whatsoever.
4. Seller for itself, its successors and assigns, hereby covenants
that, at any time and from time to time after the delivery of this instrument,
at Purchaser's request and without further consideration, Seller will do,
execute, acknowledge and deliver, or will cause to be done, executed,
acknowledged and delivered, all and every such further acts, conveyances,
transfers, assignments, powers of attorney and assurances as Purchaser
reasonably may require more effectively to convey, transfer to or vest in, and
to put Purchaser in possession of, any of the Assets, or to better enable
Purchaser to realize upon or otherwise enjoy any of the Assets or to carry into
effect the intent and purposes of the Asset Purchase Agreement and of this
instrument.
5. Neither the making nor the acceptance of this instrument shall
enlarge, restrict or otherwise modify the terms of the Asset Purchase Agreement
or constitute a waiver or release by Seller or Purchaser of any liabilities,
duties or obligations imposed upon either of them by the terms of the Asset
Purchase Agreement, including, without limitation, the representations and
warranties and other provisions which the Asset Purchase Agreement provides
shall survive the date hereof.
6. This instrument is being executed by Seller and Purchaser and
shall be binding upon Seller and Purchaser, and their respective successors and
assigns, for the uses and purposes above set forth and referred to, and shall be
effective as of the date hereof.
7. THIS INSTRUMENT SHALL BE GOVERNED BY AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA.
2
<PAGE>
IN WITNESS WHEREOF, Seller and Purchaser have caused this Bill of Sale
and Assignment and Assumption Agreement to be duly executed on the date first
above written.
XCEL ARNOLD CIRCUITS, INC.
By: /s/ Carmine T. Oliva
--------------------------------------
Carmine T. Oliva
President and Chief Executive Officer
ARNOLD CIRCUITS, INC.
By: /s/Robert Bertrand
--------------------------------------
Robert Bertrand
President
3
<PAGE>
10.55
WARRANTS TO PURCHASE COMMON STOCK
MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby
grants to BNZ INCORPORATED, a California corporation (the "Holder") Two Hundred
Fifty Thousand (250,000) warrants (the "Warrants") for the purchase of common
stock of the Company (the "Common Stock"), with each whole Warrant entitling the
Holder to purchase one share of Common Stock (each a "Warrant Share" and
collectively the "Warrant Shares") on the terms and subject to the conditions
set forth herein.
1. TERM. The Warrants may be exercised, in whole or in part, at any time
and from time to time from the date hereof until 5:00 Pacific Time on October
13, 2000 (the "Exercise Period").
2. EXERCISE PRICE. The initial exercise price of each whole Warrant
shall be $2.125 (the "Exercise Price"). The Exercise Price shall be subject to
adjustment as provided in Section 9.
3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms
provided herein at any time during the Exercise Period by the surrender of this
certificate to the Company at its principal office together with the Notice of
Exercise annexed hereto duly completed and executed on behalf of the Holder,
accompanied by payment in full, in immediately available funds, of the amount of
the aggregate Exercise Price of the Warrant Shares being purchased upon such
exercise. The Holder shall be deemed the record owner of such Warrant Shares as
of and from the close of business on the date on which this certificate is
surrendered together with the completed Notice of Exercise and payment in full
as required above (the "Exercise Date"). The Company agrees that the Warrant
Shares so purchased shall be issued as soon as practicable thereafter. It shall
be a condition to the exercise of the Warrants that the Holder or any transferee
hereof provide an opinion of counsel reasonably satisfactory to the Company that
the Warrants and the Warrant Shares to be delivered upon exercise thereof have
been registered under the Securities Act or that an exemption from the
registration requirements of the Securities Act is available.
4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common
Stock upon exercise of the Warrants, the Company may pay the Holder a cash
amount determined by multiplying the fraction of a share otherwise issuable by
the Fair Market Value of one share of Common Stock. For this purpose, "Fair
Market Value" means the average closing sale price for the ten trading days
immediately preceding the Exercise Date or, if there is no last-sale reporting
for the Common Stock at such time, then the value as determined in good faith by
the Board of Directors of the Company.
5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have
any rights as a stockholder of the Company with
<PAGE>
regard to the Warrant Shares prior to the Exercise Date for any actual purchase
of Warrant Shares.
6. [INTENTIONALLY OMITTED]
7. [INTENTIONALLY OMITTED]
8. RESERVATION OF SHARES. The Company agrees that, at all times during
the Exercise Period, the Company will have authorized and reserved, for the
exclusive purpose of issuance and delivery upon exercise of the Warrants, a
sufficient number of shares of its Common Stock to provide for the issuance of
the Warrant Shares.
9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time
during the Exercise Period shall, by subdivision, combination or
reclassification of securities, change any of the securities into which the
Warrants are exercisable into the same or a different number of securities of
any class or classes, the Warrants shall thereafter entitle the Holder to
acquire such number and kind of securities as would have been issuable as a
result of such change with respect to the Warrant Shares if the Warrant Shares
had been outstanding immediately prior to such subdivision, combination, or
reclassification. If shares of the Company's Common Stock are subdivided into a
greater number of shares of Common Stock, the Exercise Price for the Warrant
Shares upon exercise of the Warrants shall be proportionately reduced and the
number of Warrant Shares shall be proportionately increased; and conversely, if
shares of the Company's Common Stock are combined into a smaller number of
shares of Common Stock, the Exercise Price shall be proportionately increased,
and the number of Warrant Shares shall be proportionately decreased.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt
by the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any certificate representing the Warrants or the
Warrant Shares (referred to herein as the "original certificate"), and in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to the Company, and upon reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the original
certificate if mutilated, the Company will make and deliver a new certificate of
like tenor in lieu of the original certificate.
11. GENERAL. This certificate shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. The headings herein are for purposes of convenience
and reference only and shall not be used to construe or interpret the terms of
this certificate. The terms of this certificate may be amended, waived,
discharged or terminated only by a written instrument signed by both the Company
and the Holder. All notices and other
<PAGE>
communications from the Company to the Holder shall be mailed by first-class
registered or certified mail, postage pre-paid, to the address furnished to the
Company in writing by the last Holder who shall have furnished an address to the
Company in writing.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
March 31, 1998.
MICROTEL INTERNATIONAL, INC.
Dated: March 31, 1998 By:
-------------------------------
(Authorized Signature)
-------------------------------
(Name and Title)
4
<PAGE>
NOTICE OF EXERCISE
To: MicroTel International, Inc. (the "Company")
1. The undersigned hereby elects to exercise a total of ___________
Warrants for the purchase of a like number of Warrant Shares, and tenders
herewith payment of the Exercise Price for such shares in full.
2. In exercising the Warrants, the undersigned hereby confirms and
acknowledges that: (a) the Warrant Shares are being acquired solely for the
account of the undersigned for investment and not with a view to or for sale in
connection with any distribution; (b) the undersigned has a pre-existing
personal or business relationship with the Company or its executive officers, or
by reason of the undersigned's business or financial experience the undersigned
has the capacity to protect the undersigned's own interests in connection with
the exercise of the Warrants; and (c) the undersigned will not offer, sell or
otherwise dispose of any of the Warrant Shares unless the Warrant Shares have
been registered under the Securities Act or an exemption from such registration
is available, as evidenced by an opinion of counsel reasonably satisfactory to
the Company.
3. The undersigned hereby certifies that the undersigned has delivered to
the Company an opinion of counsel to the effect that the Warrants and the
Warrant Shares have been registered under the Securities Act or an exemption
from such registration is available.
4. Please issue a certificate representing the Warrant Shares in the name
of the Holder and deliver the certificate to the address set forth below.
5. Please issue a new certificate representing the unexercised portion
(if any) of the Warrants in the name of the Holder and deliver the certificate
to the address set forth below.
Dated:
------------- ---------------------------------
(Name)
---------------------------------
(Authorized Signature)
Address for Delivery:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
5
<PAGE>
10.56
GUARANTY
THIS GUARANTY dated as of March 31, 1998 is made and delivered by Robert
Bertrand, an individual maintaining an address at 851 Arbolado, Fullerton,
California 92635 ("Guarantor") to and for the benefit of XCEL Arnold Circuits,
Inc., a New Jersey corporation having an address at 4290 E. Brickell Street,
Ontario, California 91761 ("Lender").
A. Pursuant to an Asset Purchase Agreement, as amended, dated as of
January 9, 1998 (the "Asset Purchase Agreement"), Lender has agreed to sell to
Arnold Circuits, Inc., a California corporation ("Borrower"), which is a
wholly-owned by Bertrand, certain of its assets (the "Assets").
B. A portion of the purchase price of the Assets is being paid by the
Borrower by virtue of the execution of a $650,000.00 Promissory Note in the form
annexed as Exhibit A to the Asset Purchase Agreement (the "Note").
C. The Asset Purchase Agreement requires, as a condition and obligation
of Lender to effect the Asset Purchase, that Bertrand execute a guarantee of the
payment of $650,000 by Borrower pursuant to the Note.
D. To induce Lender to accept Borrower's Note as partial payment for the
Assets, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lender has required and Guarantor
has agreed to guarantee the performance of certain obligations of Borrower as
set forth herein.
NOW THEREFORE, in consideration of the foregoing premises and intending to
be legally bound hereby, the undersigned agrees as follows:
1. OBLIGATIONS GUARANTEED. For consideration, the adequacy and
sufficiency of which is acknowledged, Guarantor unconditionally guarantees the
payment and performance of Borrower's obligations under the Promissory Note and
the payment of all liabilities of Borrower to Lender, whether absolute or
contingent, matured or unmatured, direct or indirect, similar or dissimilar, due
or to become due arising under the Note (all such payment and performance
obligations are hereinafter referred to as the "Obligations").
2. CONTINUING NATURE/REVOCATION/REINSTATEMENT. This Guaranty is in
addition to any other guaranties of the Obligations, is continuing and covers
all Obligations. Revocation by one or more signers of this Guaranty or any
other guarantors of the Obligations shall not (a) affect the obligations under
this Guaranty of a non-revoking Guarantor, (b) apply to Obligations outstanding
when Lender receives written notice of revocation, or to any extensions,
renewals, readvances, modifications, amendments or replacements of such
Obligations, or (c) apply to Obligations, arising after Lender receives such
notice of revocation, which are created pursuant to a commitment existing at the
time of the revocation, whether or not there exists an unsatisfied condition to
such commitment or Lender has another defense to its performance. All of
Lender's rights pursuant to this Guaranty
<PAGE>
continue with respect to amounts previously paid to Lender on account of any
Obligations which are thereafter restored or returned by Lender, whether in
bankruptcy, reorganization, insolvency, receivership or similar proceeding
("Insolvency Proceeding") of Borrower or for any other reason, all as though
such amounts had not been paid to Lender; and Guarantor's liability under this
Guaranty (and all its terms and provisions) shall be reinstated and revived,
notwithstanding any surrender or cancellation of this Guaranty. Lender, at its
sole discretion, may determine whether any amount paid to it must be restored or
returned; provided, however, that if Lender elects to contest any claim for
return or restoration, Guarantor agrees to indemnify and hold Lender harmless
from and against all cost and expenses, including reasonable attorneys' fees,
expended or incurred by Lender in connection with such contest. If any
Insolvency Proceeding is commenced by or against Borrower or Guarantor, at
Lender's election, Guarantor's obligations under this Guaranty shall immediately
and without notice or demand become due and payable, whether or not then
otherwise due and payable.
3. AUTHORIZATION. Guarantor authorizes Lender, without notice and
without affecting guarantor's liability under this Guaranty, from time to time,
whether before or after any revocation of this Guaranty, to (a) renew,
compromise, extend, accelerate, release, subordinate, waive, amend and restate,
or otherwise amend or change, the interest rate, time or place for payment or
any other terms of all or any part of the Obligations; (b) accept delinquent or
partial payments on the Obligations; (c) take or not take security or other
credit support for this Guaranty or for all or any part of the Obligations, and
exchange, enforce, waive, release, subordinate, fail to enforce or perfect,
sell, or otherwise dispose of any such security or credit support; (d) apply
proceeds of any such security or credit support and direct the order or manner
of its sale or enforcement as Lender, at its sole discretion, may determine; and
(e) release or substitute Borrower or any guarantor or other person or entity
liable on the Obligations.
4. WAIVERS. To the maximum extent permitted by law, Guarantor waives (a)
all rights to require Lender to proceed against Borrower, or any other
guarantor, or proceed against, enforce or exhaust any security for the
Obligations or to marshall assets or to pursue any other remedy in Lender's
power whatsoever; (b) all defenses arising by reasons of any disability or other
defense of Borrower, the cessation for any reason of the liability of Borrower,
any defense that any other indemnity, guaranty or security was to be obtained,
any claim that Lender has made Guarantor's obligations more burdensome or more
burdensome than Borrower's obligations, and the use of any proceeds of the
Obligations other than as intended or understood by Lender or Guarantor; (c) all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, notices of acceptance of this Guaranty
and of the existence or creation of new or additional Obligations, and all other
notices or demands to which Guarantor might otherwise be entitled; (d) all
conditions precedent to the effectiveness of this Guaranty; (e) all rights to
file a claim in connection with the Obligations in an Insolvency Proceeding
filed by or against Borrower; (f) all rights to require Lender to enforce any of
its remedies; and (g) until the Obligations are satisfied or fully paid with
such payment not subject to return: (i) all rights of subrogation,
contribution, indemnification or reimbursement, (ii) all rights of recourse to
any assets or property of Borrower, or to any collateral or credit support for
the Obligations, (iii) all rights to participate in or benefit from any security
or credit support Lender may have or acquire, (iv) all rights, remedies and
defenses Guarantor may have or acquire against Borrower and (v) any rights or
defenses Guarantor may have
-2-
<PAGE>
by reason of protection afforded to Borrower with respect to the Obligations
pursuant to the laws of California.
5. ASSIGNMENTS. Without notice to Guarantor, Lender may assign the
Obligations and this Guaranty, in whole or in part.
6. INTEGRATION/SEVERABILITY/AMENDMENTS. This Guaranty is intended by
Guarantor and Lender as the complete, final expression of their agreement
concerning its subject matter. It supersedes all prior understandings or
agreements with respect thereto and may be changed only by a writing signed by
Guarantor and Lender. No course of dealing, or parol or extrinsic evidence
shall be used to modify or supplement the express terms of this Guaranty. If
any provision of this Guaranty is found to be illegal, invalid or unenforceable,
such provision shall be enforced to the maximum extent permitted, but if fully
unenforceable, such provision shall be severable, and this Guaranty shall be
construed as if such provision had never been a part of this Guaranty, and the
remaining provisions shall continue in full force and effect.
7. JOINT AND SEVERAL. The obligations of the Guarantor under this
Guaranty is independent of the Obligations and of the obligations of any other
person or entity. A separate action or actions may be brought and prosecuted
against any one or more Guarantors, whether action is brought against Borrower
or other guarantors of the Obligations, and whether Borrower or others are
joined in any such action.
8. GOVERNING LAW. THIS GUARANTY SHALL BE CONSTRUED IN ALL RESPECTS IN
ACCORDANCE WITH, AND GOVERNED BY, THE LAWS AND DECISIONS OF THE STATE OF
CALIFORNIA. EACH GUARANTOR HEREBY CONSENTS TO JURISDICTION AND VENUE IN ANY
CONTROVERSY INVOLVING THIS AGREEMENT IN FEDERAL OR STATE COURT SITTING IN THE
STATE OF CALIFORNIA.
WITNESS:
/s/Robert Bertrand
- ---------------------------- -------------------------
ROBERT BERTRAND
-3-
<PAGE>
10.57
GUARANTY
THIS GUARANTY dated as of March 31, 1998 is made and delivered by BNZ
Incorporated, a California corporation ("Guarantor") to and for the benefit of
XCEL Arnold Circuits, Inc., a New Jersey corporation having an address at 4290
E. Brickell Street, Ontario, California 91761 ("Lender").
A. Pursuant to an Asset Purchase Agreement, as amended, dated as of
January 9, 1998 (the "Asset Purchase Agreement"), Lender has agreed to sell to
Arnold Circuits, Inc., a California corporation ("Borrower") certain of its
assets (the "Assets").
B. Both BNZ and Borrower are wholly-owned by Robert Bertrand and his
affiliates.
C. BNZ will realize substantial benefits from the purchase of the Assets
by Arnold Circuits, including absorption of certain corporate overhead by Arnold
Circuits and other benefits.
D. A portion of the purchase price of the Assets is being paid by the
Borrower by virtue of the execution of a $650,000.00 Promissory Note in the form
annexed as Exhibit A to the Asset Purchase Agreement (the "Note").
E. The Asset Purchase Agreement requires, as a condition and obligation
of Lender to effect the Asset Purchase, that Guarantor execute a guarantee of
the payment of $650,000 by Borrower pursuant to the Note.
F. To induce Lender to accept Borrower's Note as partial payment for the
Assets, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lender has required and Guarantor
has agreed to guarantee the performance of certain obligations of Borrower as
set forth herein.
NOW THEREFORE, in consideration of the foregoing premises and intending to
be legally bound hereby, the undersigned agrees as follows:
1. OBLIGATIONS GUARANTEED. For consideration, the adequacy and
sufficiency of which is acknowledged, Guarantor unconditionally guarantees the
payment and performance of Borrower's obligations under the Promissory Note and
the payment of all liabilities of Borrower to Lender, whether absolute or
contingent, matured or unmatured, direct or indirect, similar or dissimilar, due
or to become due arising under the Note (all such payment and performance
obligations are hereinafter referred to as the "Obligations").
2. COLLATERAL. As security for this Guarantor, BNZ has pledged to Lender
250,000 warrants to purchase common stock in MicroTel International, Inc.
<PAGE>
3. CONTINUING NATURE/REVOCATION/REINSTATEMENT. This Guaranty is in
addition to any other guaranties of the Obligations, is continuing and covers
all Obligations. Revocation by one or more signers of this Guaranty or any
other guarantors of the Obligations shall not (a) affect the obligations under
this Guaranty of a non-revoking Guarantor, (b) apply to Obligations outstanding
when Lender receives written notice of revocation, or to any extensions,
renewals, readvances, modifications, amendments or replacements of such
Obligations, or (c) apply to Obligations, arising after Lender receives such
notice of revocation, which are created pursuant to a commitment existing at the
time of the revocation, whether or not there exists an unsatisfied condition to
such commitment or Lender has another defense to its performance. All of
Lender's rights pursuant to this Guaranty continue with respect to amounts
previously paid to Lender on account of any Obligations which are thereafter
restored or returned by Lender, whether in bankruptcy, reorganization,
insolvency, receivership or similar proceeding ("Insolvency Proceeding") of
Borrower or for any other reason, all as though such amounts had not been paid
to Lender; and Guarantor's liability under this Guaranty (and all its terms and
provisions) shall be reinstated and revived, notwithstanding any surrender or
cancellation of this Guaranty. Lender, at its sole discretion, may determine
whether any amount paid to it must be restored or returned; provided, however,
that if Lender elects to contest any claim for return or restoration, Guarantor
agrees to indemnify and hold Lender harmless from and against all cost and
expenses, including reasonable attorneys' fees, expended or incurred by Lender
in connection with such contest. If any Insolvency Proceeding is commenced by
or against Borrower or Guarantor, at Lender's election, Guarantor's obligations
under this Guaranty shall immediately and without notice or demand become due
and payable, whether or not then otherwise due and payable.
4. AUTHORIZATION. Guarantor authorizes Lender, without notice and
without affecting guarantor's liability under this Guaranty, from time to time,
whether before or after any revocation of this Guaranty, to (a) renew,
compromise, extend, accelerate, release, subordinate, waive, amend and restate,
or otherwise amend or change, the interest rate, time or place for payment or
any other terms of all or any part of the Obligations; (b) accept delinquent or
partial payments on the Obligations; (c) take or not take security or other
credit support for this Guaranty or for all or any part of the Obligations, and
exchange, enforce, waive, release, subordinate, fail to enforce or perfect,
sell, or otherwise dispose of any such security or credit support; (d) apply
proceeds of any such security or credit support and direct the order or manner
of its sale or enforcement as Lender, at its sole discretion, may determine; and
(e) release or substitute Borrower or any guarantor or other person or entity
liable on the Obligations.
5. WAIVERS. To the maximum extent permitted by law, Guarantor waives (a)
all rights to require Lender to proceed against Borrower, or any other
guarantor, or proceed against, enforce or exhaust any security for the
Obligations or to marshall assets or to pursue any other remedy in Lender's
power whatsoever; (b) all defenses arising by reasons of any disability or other
defense of Borrower, the cessation for any reason of the liability of Borrower,
any defense that any other indemnity, guaranty or security was to be obtained,
any claim that Lender has made Guarantor's obligations more burdensome or more
burdensome than Borrower's obligations, and the use of any proceeds of the
Obligations other than as intended or understood by Lender or Guarantor; (c) all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, notices of acceptance of this Guaranty
and of the existence or creation of new or additional Obligations, and all other
notices or demands to which Guarantor might otherwise be
-2-
<PAGE>
entitled; (d) all conditions precedent to the effectiveness of this Guaranty;
(e) all rights to file a claim in connection with the Obligations in an
Insolvency Proceeding filed by or against Borrower; (f) all rights to require
Lender to enforce any of its remedies; and (g) until the Obligations are
satisfied or fully paid with such payment not subject to return: (i) all rights
of subrogation, contribution, indemnification or reimbursement, (ii) all rights
of recourse to any assets or property of Borrower, or to any collateral or
credit support for the Obligations, (iii) all rights to participate in or
benefit from any security or credit support Lender may have or acquire, (iv) all
rights, remedies and defenses Guarantor may have or acquire against Borrower and
(v) any rights or defenses Guarantor may have by reason of protection afforded
to Borrower with respect to the Obligations pursuant to the laws of California.
6. ASSIGNMENTS. Without notice to Guarantor, Lender may assign the
Obligations and this Guaranty, in whole or in part.
7. INTEGRATION/SEVERABILITY/AMENDMENTS. This Guaranty is intended by
Guarantor and Lender as the complete, final expression of their agreement
concerning its subject matter. It supersedes all prior understandings or
agreements with respect thereto and may be changed only by a writing signed by
Guarantor and Lender. No course of dealing, or parol or extrinsic evidence
shall be used to modify or supplement the express terms of this Guaranty. If
any provision of this Guaranty is found to be illegal, invalid or unenforceable,
such provision shall be enforced to the maximum extent permitted, but if fully
unenforceable, such provision shall be severable, and this Guaranty shall be
construed as if such provision had never been a part of this Guaranty, and the
remaining provisions shall continue in full force and effect.
8. JOINT AND SEVERAL. The obligations of the Guarantor under this
Guaranty is independent of the Obligations and of the obligations of any other
person or entity. A separate action or actions may be brought and prosecuted
against any one or more Guarantors, whether action is brought against Borrower
or other guarantors of the Obligations, and whether Borrower or others are
joined in any such action.
9. GOVERNING LAW. THIS GUARANTY SHALL BE CONSTRUED IN ALL RESPECTS IN
ACCORDANCE WITH, AND GOVERNED BY, THE LAWS AND DECISIONS OF THE STATE OF
CALIFORNIA. EACH GUARANTOR HEREBY CONSENTS TO JURISDICTION AND VENUE IN ANY
CONTROVERSY INVOLVING THIS AGREEMENT IN FEDERAL OR STATE COURT SITTING IN THE
STATE OF CALIFORNIA.
ATTEST: BNZ INCORPORATED
By: /s/ Robert Bertrand
- ----------------------- -----------------------
Robert Bertrand
-3-
<PAGE>
10.58
PLEDGE AND ESCROW AGREEMENT
THIS AGREEMENT, entered into this 31st day of March, 1998, by BNZ
INCORPORATED, a California corporation (hereinafter referred to as "Guarantor");
and XCEL ARNOLD CIRCUITS, INC., a New Jersey corporation (hereinafter referred
to as the "Lender").
WITNESSETH:
WHEREAS, pursuant to an Asset Purchase Agreement, as amended, dated as of
January 9, 1998 (the "Asset Purchase Agreement"), Lender has agreed to sell to
Arnold Circuits, Inc. (the "Borrower") certain of its assets; and
WHEREAS, a portion of the purchase price of the Assets is being paid by the
Borrower by virtue of the execution, in favor of Lender, of a $650,000.00
Promissory Note in the form annexed as EXHIBIT A to the Asset Purchase Agreement
(the "Note"); and
WHEREAS, the Lender has required, and Guarantor has agreed, to guarantee
the payment of the Note (the "Guarantee"); and
WHEREAS, the Guarantee requires, as a condition and obligation of Lender to
effect the stock purchase and to make the loan, that Guarantor pledge, as
collateral and security for the Guarantee, Two Hundred Fifty Thousand (250,000)
Warrants to purchase the common stock of MicroTel International, Inc. (the
"Collateral"); and
WHEREAS, to induce Lender to accept Borrower's Note as partial payment for
the Shares, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lender has required and Guarantor
has agreed to pledge the Collateral as set forth herein; and
WHEREAS, the parties hereto are desirous of setting forth all of the
agreements between them.
NOW, THEREFORE, for and in consideration of the foregoing premises and
other good and valuable consideration, it is mutually understood and agreed by
and between the parties hereto as follows:
1. Guarantor does hereby assign, transfer and set over to Gallagher,
Briody & Butler, of Princeton, New Jersey, as escrowee and agent for Lender (the
"Escrowee"), all of its right, title and interest in and to Two Hundred Fifty
Thousand (250,000) Warrants to purchase the common stock of MicroTel
International, Inc. (the "Warrants"), together with all of its right, title and
interest in and to all dividends, income and issue therefrom and all rights of
preemption or other rights thereto attached, to have and to hold such shares of
common stock, dividends, income, issues and rights to
<PAGE>
said Escrowee, its successors and assigns and to its own use and behalf however,
subject, nevertheless to and upon the following terms and conditions.
2. Guarantor warrants to Lender that the Warrants are fully paid for and
that Guarantor has the absolute right thereto; that the Warrants are not subject
to any lien, pledge or subject to any contract of sale; and that so long as the
terms, provisions and conditions of this Agreement and those contained in the
Note shall be in full force and effect, Guarantor shall not sell, assign,
transfer, pledge, encumber or in any other way dispose of any or all of the
Warrants.
3. (a) In case any one or more of the following events (herein called
"Events of Default") shall happen:
(1) Default in payment of the principal and interest payments
when due pursuant to the Note;
(2) Default in performance or observance of any of the covenants
or agreements contained in this Agreement;
(3) The Guarantor shall become insolvent or file a petition in
bankruptcy, or if a petition in bankruptcy shall be filed
against Guarantor or if a petition for reorganization,
whether voluntary or involuntary, shall be filed by or
against the Guarantor, or if the Guarantor as an insolvent
shall take advantage of any other relief, now or hereafter,
permitted by the federal bankruptcy law or any state
insolvency law, or if the Guarantor shall make a general
assignment for the benefit of creditors, or if an order of
judgment or decree shall be entered by any court appointing
a receiver of the Guarantor, or of any of their property, or
proceedings shall be commenced for the dissolution of the
Guarantor, or if a money judgment or a judgment for the
transfer or delivery of property shall be entered against
the Guarantor; or
(4) Any other Event of Default as defined in the Note by and
among the parties of even date herewith.
Then, at the occurrence of each and any such Event of Default,
the Lender may declare the end principal balance of the loan due and payable (if
not then due and payable) and upon such declaration, the same shall become
immediately due and payable, anything in the Note to the contrary
notwithstanding.
(b) Upon the occurrence of any Event of Default, the Lender may
immediately, without demand for payment, without advertising and without notice
to Guarantor, all of which is and are hereby expressly waived, sell any or all
of the Warrants held under the terms of this Agreement at public or private
sale, and apply the proceeds of said sale as far as needed toward the payment of
the whole of the indebtedness of the Guarantor to the Lender, together with
interest and expense of sale, and the Guarantor shall remain responsible for any
deficiency remaining unpaid after such application; and it is expressly
understood and agreed that the Lender may be a purchaser at
<PAGE>
such sale of the whole or any part of the Warrants, free of any right of equity
or redemption, which rights are hereby expressly waived and released; and the
said Escrowee is directed to turn over to the purchaser at such sale the
Warrants issued in the name of the Guarantor without any further authority of
any of the parties hereto.
4. The Guarantor does hereby covenant and agree that it will pay all of
its obligations to the Lender when due and follow and observe the restrictions
set forth herein.
5. Upon Guarantor's discharge of its obligations to Lender and the
repayment of all monies due thereunder, or to become due to said Lender,
Escrowee is authorized to turn over to Guarantor the Warrants in accordance with
the provisions of this Agreement without further authority from any of the
parties hereto.
6. (a) The parties acknowledge that Escrowee is holding the Escrow
Account hereunder solely as a stakeholder at the parties request and for their
convenience, that Escrowee shall not be deemed to be the agent of any party and
that Escrowee shall not be liable to any party for any act or omission on its
part unless taken or suffered in bad faith or in willful disregard of this
Agreement or involving gross negligence. Guarantor hereby indemnifies and holds
Escrowee harmless from and against all costs, claims and expenses (including
reasonable attorney's fees) incurred in connection with the performance of
Escrowee's duties hereunder, except with respect to actions or omissions taken
or suffered by Escrowee in bad faith or in willful disregard of this Agreement
or involving gross negligence on the part of Escrowee. In the event a dispute
arises over the application of the above capital stock, the Escrowee is hereby
authorized to deposit said stock with a court of competent jurisdiction and to
abide by the judgment thereof.
(b) Escrowee may act or refrain from action in respect of any matter
referred to herein in full reliance upon and with the advice of counsel which
may be selected by it and shall be fully protected in so acting or refraining
from action upon the advice of such counsel.
(c) Escrowee has acknowledged agreement to the provisions of this
Agreement by signing in the place indicated below.
(d) Escrowee shall be permitted to act in any dispute as to the
disbursement of the monies held in trust hereunder or any other dispute between
the parties whether or not Escrowee is in possession of the deposit monies and
continues to act as Escrow Agent.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have caused these presents to be duly
executed by duly authorized persons the day and year first above written.
ATTEST: BNZ INCORPORATED
By: /s/Robert Bertrand
- -------------------- ---------------------------------
Name: Robert Bertrand
-------------------------------
Title: President and Chief Executive Officer
---------------------------------------
ATTEST: XCEL ARNOLD CIRCUITS, INC.
By: /s/ Carmine T. Oliva
- -------------------- ---------------------------------
Name: Carmine T. Oliva
-------------------------------
Title: President and Chief Executive Officer
---------------------------------------
ACCEPTED AND AGREED TO:
GALLAGHER, BRIODY & BUTLER
By:
---------------------------
-4-
<PAGE>
10.59
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Arnold Circuits, Inc., a California
corporation ("Arnold Circuits") promises to pay to XCEL Arnold Circuits, Inc., a
New Jersey corporation (the "Lender") Six Hundred Fifty Thousand and 00/100
Dollars ($650,000.00), together with interest, as follows:
1. ASSET PURCHASE AGREEMENT. This Note evidences a loan in the amount of
$650,000.00 (the "Loan") made pursuant to the terms of an Asset Purchase
Agreement dated as of January 9, 1998 by and between, INTER ALIA, Arnold
Circuits and the Lender, as amended (the "Asset Purchase Agreement"), pursuant
to which Arnold Circuits has acquired certain assets of the Lender. Capitalized
terms used herein and not otherwise defined shall have the meaning ascribed
thereto in the Asset Purchase Agreement.
2. TERM; PAYMENT; INTEREST RATE. The term of this Note is three (3)
years from the date of execution hereof. The principal amount of this Note
shall be repaid as follows: 1) One Hundred Twenty Five Thousand and 00/100
Dollars ($125,000.00) shall be due and payable on the first anniversary of the
date of this Note; 2) One Hundred Twenty Five Thousand and 00/100 Dollars
($125,000.00) shall be due and payable on the second anniversary of the date of
this Note; and 3) the balance remaining shall be due and payable on the third
anniversary of the date of this Note. Interest on this Note shall accrue at the
rate of 8.5% per annum based on a 365-day year, which interest shall be due and
payable monthly on the 1st day of each month beginning with the 1st day of May,
1998.
3. PREPAYMENTS. This Note and any and all interest thereon may be
prepaid, in whole or in part, by Arnold Circuits at any time, and from time to
time, and without penalty, provided that no prepayment may be made by Arnold
Circuits until the Lender or any Holder of the Note shall have received a
written notice of the prepayment not less than ten (10) days prior to such
prepayment.
4. DEFAULT. Arnold Circuits shall be in default under this Note upon the
occurrence of: (i) any of the events specified in Section 4(a) hereof and the
failure to cure such default within ten (10) days after receipt of written
notice thereof from the Lender; or (ii) any of the events specified in Section
4(b) hereof (any of the foregoing being an "Event of Default"):
(a) Failure to make any principal or interest payment required under
this Note on the due date of such payment; or
(b) Insolvency of, business failure of, or an assignment for the
benefit of creditors by or the filing of a petition under bankruptcy,
insolvency or debtor's relief law, or for any readjustment of indebtedness,
composition or extension by Purchaser or any Guarantor, or commenced
against Purchaser or any Guarantor which is not discharged within sixty
(60) days.
<PAGE>
5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of
Default:
(a) specified in clause (b) of Section 4, then the entire amount of
the Loan shall be automatically accelerated and immediately due and
payable;
(b) specified in clause (a) of Section 4, then the Lender may declare
the entire amount of the Loan immediately accelerated, due and payable; and
(c) the Lender shall have all of the rights and remedies provided to
the Lender by the Documents, at law and in equity, by statute or otherwise,
and no remedy herein conferred upon the Lender is intended to be exclusive
of any other remedy and each remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing
at law, in equity, by statute or otherwise.
6. RIGHT OF FIRST REFUSAL. As additional consideration for the Lender's
acceptance of this Note, should Arnold Circuits desire to sell substantially all
of the assets of Arnold Circuits or Bertrand desire to sell a majority of the
capital stock of Arnold Circuits (an "Arnold Sale") prior to the time this Note
is repaid in full, Arnold Circuits or Bertrand, as the case may be, shall grant
to Lender a right of first refusal to purchase the assets of Arnold Circuits or
the capital stock of Arnold Circuits on terms and conditions substantially
similar to those offered by any proposed third-party purchaser to Arnold
Circuits or Bertrand. If (i) Arnold Circuits or Bertrand elect to offer Arnold
Circuits for sale prior to the time this Note is repaid in full; (ii) Lender
elects not to exercise its right of first refusal; and (iii) Arnold Circuits or
Bertrand then concludes an Arnold Sale with a third party, then, upon the
closing of such sale, Arnold Circuits or Bertrand shall pay to Lender (after
payment of any prior secured debt) any remaining principal then due and owing on
the Note, plus any accrued but unpaid interest thereon. In addition, if the
aggregate purchase price and other consideration paid to Bertrand and/or Arnold
Circuits in the Arnold Sale (excluding any assumption of liabilities by the
Purchaser) exceeds $2.75 million, Arnold Circuits or Bertrand shall pay to
Lender fifty percent (50%) of the consideration received by Arnold Circuits or
Bertrand as consideration for the Arnold Sale in excess of $2.75 million (the
"Lender Bonus"). The requirement to pay the Lender Bonus shall apply to any
Arnold Sale occurring prior to the time this Note is repaid in full and for a
period of ninety (90) days thereafter.
If the operations of Arnold Circuits are not profitable (after adding back
to profit any salary or other compensation paid to Bertrand) for the period
commencing April 1, 1998 and ending on March 31, 1999, then within fifteen days
of March 31, 1999, Arnold Circuits may elect to require Lender to convert
$125,000 of the principal amount of this Promissory Note into a 5% equity
interest in Arnold Circuits. If the operations of Arnold Circuits are not
profitable (after adding back to profit any salary or other compensation paid to
Bertrand) for the period commencing April 1, 1999 and ending on March 31, 2000,
then within fifteen days of March 31, 2000, Arnold Circuits may elect to require
Lender to convert an additional $125,000 of the principal amount of the
Promissory Note into an additional 5% equity interest in the Arnold Circuits.
<PAGE>
Notwithstanding the above, in the event of an Arnold Sale, and if the
aggregate purchase price and other consideration paid to Bertrand and\or Arnold
Circuits in the Arnold Sale (excluding assumption of liabilities) exceeds
$2,000,000, Arnold Circuits or Bertrand agree to pay to Lender the net proceeds
of the Arnold Sale (after payment of any prior secured debt) up to the amount of
principal converted, as if such amounts were debt owed to Lender, prior to
making any further distributions pursuant to the above provisions of this
paragraph 6.
7. EQUITY FUNDS. If, during the term of this Note, any equity funds are
raised by Arnold Circuits, the proceeds of such equity offering sufficient to
extinguish any remaining principal and accrued but unpaid interest due on this
Note shall be promptly paid to Lender.
8. CHANGES; PARTIES. This Note can only be changed by an agreement in
writing signed by Arnold Circuits and the Lender. This Note shall inure to the
benefit of and be binding upon Arnold Circuits and the Lender and their
respective successors and assigns.
9. WAIVER OF PRESENTMENT. Arnold Circuits and every endorser or
guarantor of this Note or the obligation represented hereby waive presentment,
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this Note, assent
to any extension or postponement of time of payment or any other indulgence, to
any substitution, exchange or release of Collateral and to the addition or
release of any other party primarily or secondarily liable.
10. NOTE TRANSFERABLE. This Note is fully transferrable by Lender,
without the consent of or notice to, Arnold Circuits.
11. MAXIMUM RATE OF INTEREST. It is expressly stipulated and agreed to be
the intent of Arnold Circuits and Lender at all times to comply with the
applicable law governing the maximum rate of interest payable on or in
connection with all indebtedness and transactions hereunder (or applicable
United States federal law to the extent that it permits Lender to contract for,
charge, take, reserve or receive a greater amount of interest). If the
applicable law is ever judicially interpreted so as to render usurious any
amount of money or other consideration called for hereunder, or contracted for,
charged, taken, reserved or received with respect to any loan or advance
hereunder, or if acceleration of the maturity of this Note or the indebtedness
hereunder or if any prepayment by Arnold Circuits results in Arnold Circuits'
having paid any interest in excess of that permitted by law, then it is Arnold
Circuits' and Lender's express intent that all excess cash amounts theretofore
collected by Lender be credited on the principal balance of this Note (or if
this Note has been or would thereby be paid in full, refunded to Arnold
Circuits), and the provisions of this Note immediately 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. The right to accelerate maturity of this Note does not include the
right to accelerate any interest which has not otherwise accrued on the date of
such acceleration, and Lender does not intend to collect any unearned interest
in the event of acceleration.
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<PAGE>
12. COLLATERAL. As security for this Note, Arnold Circuits has granted a
security interest in substantially all of its assets to Lender pursuant to a
Security Agreement dated of even date herewith.
13. SUBORDINATION AGREEMENT. This Note is subject to a Subordination and
Intercreditor Agreement dated as of April 10, 1998 between Lender and Fremont
Financial Corporation, the terms of which are incorporated herein by reference.
14. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED ACCORDING TO THE LAWS OF
THE STATE OF CALIFORNIA AND ARNOLD CIRCUITS AND THE LENDER BY ACCEPTANCE HEREOF
CONSENT TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS OF THE STATE OF
CALIFORNIA TO DETERMINE ANY QUESTIONS OF FACT OR LAW ARISING UNDER THIS NOTE.
ARNOLD CIRCUITS AND LENDER CONSENT TO AND CONFER PERSONAL JURISDICTION ON THE
FEDERAL AND STATE COURTS OF CALIFORNIA, AND EXPRESSLY WAIVE ANY OBJECTIONS AS TO
VENUE IN ANY OF SUCH COURTS, AND AGREE THAT SERVICE OF PROCESS MAY BE MADE BY
MAILING A COPY OF THE SUMMONS TO ITS RESPECTIVE ADDRESS.
IN WITNESS WHEREOF, Arnold Circuits, Inc. has executed this Note as of the
day and year set forth below.
Dated: March 31, 1998
ARNOLD CIRCUITS, INC.
By: /s/Robert Bertrand
------------------------
Name: Robert Bertrand
----------------------
Title: President and Chief Executive Officer
AS TO PARAGRAPH 6 HEREOF:
/s/Robert Bertrand
---------------------------
ROBERT BERTRAND
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<PAGE>
10.60
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, XIT Corporation, a New Jersey
corporation ("XIT") promises to pay to Arnold Circuits, Inc., a California
corporation (the "Lender") Three Hundred Fifty Thousand and 00/100 Dollars
($350,000.00), without interest, as follows:
1. ASSET PURCHASE AGREEMENT. This Note evidences a loan in the
amount of $350,000.00 (the "Loan") made pursuant to the terms of an Asset
Purchase Agreement dated as January 9, 1998, as amended by the March 31, 1998
Addendum No. 1 to Asset Purchase Agreement, by and between, INTER ALIA, XCEL
Arnold Circuits, Inc. ("Seller"), XIT and the Lender (the "Asset Purchase
Agreement"), pursuant to which Lender has acquired certain assets of Seller.
Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed thereto in the Asset Purchase Agreement.
2. TERM; PAYMENT. The entire principal amount of this Note shall
be paid upon the earlier of the following: 1) within three (3) business days
of the closing of the refinancing by XIT and its affiliates of their existing
term loans and lines of credit, or 2) May 31, 1998. If the refinancing is
not concluded and the Note is not repaid by May 31, 1998, it shall thereupon
become payable upon demand.
3. PREPAYMENTS. This Note may be prepaid, in whole or in part,
by XIT at any time, and from time to time, and without penalty, provided that
no prepayment may be made by XIT until the Lender or any Holder of the Note
shall have received a written notice of the prepayment not less than ten (10)
days prior to such prepayment.
4. DEFAULT. XIT shall be in default under this Note upon the
occurrence of: (i) any of the events specified in Section 4(a) hereof and the
failure to cure such default within ten (10) days after receipt of written
notice thereof from the Lender; or (ii) any of the events specified in
Section 4(b) hereof (any of the foregoing being an "Event of Default"):
(a) Failure to make the principal payment required under this
Note on the due date of such payment; or
(b) Insolvency of, business failure of, or an assignment for
the benefit of creditors by or the filing of a petition under
bankruptcy, insolvency or debtor's relief law, or for any
readjustment of indebtedness, composition or extension by XIT,
or commenced against XIT which is not discharged within
sixty (60) days.
5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an
Event of Default specified in clauses (a) or (b) of Section 4, the Lender may
declare the entire amount of the Loan immediately accelerated, due and
payable.
<PAGE>
6. CHANGES; PARTIES. This Note can only be changed by an
agreement in writing signed by XIT and the Lender. This Note shall inure to
the benefit of and be binding upon XIT and the Lender and their respective
successors and assigns.
7. WAIVER OF PRESENTMENT. Except as otherwise set forth in this
Note, XIT and every endorser of this Note or the obligation represented
hereby waive presentment, demand, notice, protest and all other demands and
notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note, assent to any extension or postponement of time of
payment or any other indulgence and to the addition or release of any other
party primarily or secondarily liable.
8. NOTE TRANSFERABLE. This Note is fully transferrable by
Lender, without the consent of or notice to, XIT.
9. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED ACCORDING TO THE
LAWS OF THE STATE OF CALIFORNIA AND XIT AND THE LENDER BY ACCEPTANCE HEREOF
CONSENT TO THE JURISDICTION OF THE FEDERAL AND STATE COURTS OF THE STATE OF
CALIFORNIA TO DETERMINE ANY QUESTIONS OF FACT OR LAW ARISING UNDER THIS NOTE.
XIT AND LENDER CONSENT TO AND CONFER PERSONAL JURISDICTION ON THE FEDERAL
AND STATE COURTS OF CALIFORNIA, AND EXPRESSLY WAIVE ANY OBJECTIONS AS TO
VENUE IN ANY OF SUCH COURTS, AND AGREE THAT SERVICE OF PROCESS MAY BE MADE BY
MAILING A COPY OF THE SUMMONS TO ITS RESPECTIVE ADDRESS.
IN WITNESS WHEREOF, XIT Corporation has executed this Note as of
the day and year set forth below.
Dated: March 31, 1998
XIT CORPORATION
By: /s/ Carmine T. Oliva
-----------------------
Name: Carmine T. Oliva
---------------------
Title: President and Chief Executive Officer:
--------------------------------------
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<PAGE>
10.61
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement"), dated April 9, 1998,
is between ARNOLD CIRCUITS, INC., a California corporation ("Debtor"), located
at P.O. Box 1085, La Habra, California, 90631, and XCEL ARNOLD CIRCUITS, INC., a
New Jersey corporation ("Secured Party"), located at 4290 East Brickell Street,
Ontario, California 91761-1511. This Agreement is made with reference to the
following facts:
WHEREAS, Secured Party, as Seller, and Debtor, as Purchaser,
entered into that certain Asset Purchase Agreement, dated as of January 9, 1998,
as amended by the March 31, 1998 Addendum No. 1 to Asset Purchase Agreement (the
"Asset Purchase Agreement"), pursuant to which Secured Party agreed to sell to
Debtor, and Debtor agreed to purchase, the Assets (as defined in the Asset
Purchase Agreement) upon the terms and conditions provided therein;
WHEREAS, pursuant to a certain Promissory Note between the
parties, being Exhibit A of said Asset Purchase Agreement (the "Note"), Secured
Party has agreed to lend to Debtor the sum of $650,000.00, and, to secure
payment and performance of its obligations under the Note, Debtor has agreed to
grant Secured Party a security interest in substantially all of its assets,
subject to a Subordination and Intercreditor Agreement dated as of April 9, 1998
between Secured Party and Fremont Financial Corporation.
NOW, THEREFORE, in consideration of the foregoing recitals, the
mutual promises herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. GRANT OF SECURITY INTEREST. Debtor hereby grants to
Secured Party a continuing lien on and security interest in the property
described or referred to in Paragraph 2 below (collectively, the "Collateral")
to secure prompt payment and full performance of the liabilities described in
Paragraph 3 below (collectively, the "Liabilities").
2. COLLATERAL. The Collateral consists of all of Debtor's
now owned and hereafter acquired accounts, inventory, equipment, fixtures,
contract rights, general intangibles, chattel paper, instruments, documents, and
other property; including without limitation, all of the Assets conveyed to
Debtor pursuant to the Asset Purchase Agreement, all of the property described
below, and all of the proceeds and products thereof:
(a) all goods of Debtor, including without
limitation, machinery, equipment, furniture, furnishings,
<PAGE>
fixtures, tools, parts, supplies and motor vehicles of every kind and
description and all improvements thereto which Debtor now owns or in which
Debtor may have or may hereafter acquire any interest, together with all
customer lists and records of Debtor's business;
(b) all of Debtor's inventory, including, but not
limited to, all goods intended for sale or lease by Debtor, or for display or
demonstration, all work in process, all raw materials and other materials and
supplies of every nature and description used or which might be used in
connection with the manufacture, printing, packing, shipping, advertising,
selling, leasing or furnishing of such goods or otherwise used or consumed in
Debtor's business, and all documents evidencing and general intangibles relating
to any of the foregoing, whether now owned or hereafter acquired by Debtor;
(c) all contract rights and general intangibles of
Debtor, including without limitation, goodwill, trademarks, trade styles, trade
names, patents, patent applications, copyrights, bank deposits, deposit
accounts, income tax refunds and property in the possession, deposited with or
under the control of Secured Party or any of its affiliates;
(d) all present and future accounts, accounts
receivable and other receivables and all books and records relating thereto;
(e) all documents, instruments, pledged assets and
chattel paper; and
(f) all the products and proceeds of the foregoing,
and any replacements, additions, accessions, or substitutions thereof or
thereto, all after-acquired property, all accounts and proceeds arising from the
sale or disposition of any inventory of Debtor including any returns thereof and
including, where applicable, the proceeds of insurance covering said Collateral
or tort claims in connection with the Collateral; whether such Collateral shall
be presently in existence or whether it shall be acquired or created by Debtor
at any time hereafter, wherever located, to remain in force so long as Debtor
is, in any manner, obligated to Secured Party.
3. LIABILITIES. The liabilities ("Liabilities") secured
under this Agreement are all liabilities of Debtor to Secured Party from time to
time, including, without limitation:
(a) the secured Promissory Note of even date
herewith from Debtor to Secured Party in the principal amount of $650,000.00;
and
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<PAGE>
(b) any and all expenditures made or incurred by
Secured Party to protect and maintain the Collateral and to enforce the rights
of Secured Party under this Agreement.
4. COVENANTS OF DEBTOR. Until the Liabilities are paid in
full, Debtor agrees that it shall:
(a) not sell or otherwise dispose of the Collateral
except for the sale of inventory in the ordinary course of business or
dispositions of obsolete or worn-out equipment in the ordinary course of
business;
(b) except for "Permitted Liens" (as defined below),
not create, incur, assume or, permit to exist any liens, encumbrances, security
interests, levies, assessments or charges on or in any of the Collateral,
without Secured Party's prior consent;
(c) appear in and defend, at Debtor's own expense,
any action or proceeding which may affect Debtor's title to or Secured Party's
interest in the Collateral;
(d) procure or execute and deliver, from time to
time, in form and substance satisfactory to Secured Party, any endorsements,
assignments, financing statements or other writings deemed necessary or
appropriate by Secured Party to perfect, maintain or protect Secured Party's
security interest in the Collateral and the priority thereof, and take such
other action and deliver such other documents, instruments and agreements
pertaining to the Collateral as Secured Party may request to effectuate the
intent of this Agreement;
(e) notify Secured Party in writing at least thirty
(30) days prior to any change in Debtor's name, identity or corporate structure,
or any addition or change to the address of Debtor specified in the introductory
paragraph hereof;
(f) keep accurate and complete records of the
Collateral and provide Secured Party during normal business hours and upon
reasonable notice with access thereto and to Debtor's financial records, in each
case with the right to make extracts therefrom;
(g) provide Secured Party during normal business
hours and upon reasonable notice with access to the Collateral, and with such
other information as Secured Party may reasonably request from time to time;
(h) maintain and preserve its corporate existence,
and all rights, privileges, franchises and other authority necessary for the
conduct of its business; and
-3-
<PAGE>
(i) continue operations in the same form and
structure of business as currently conducted, and not merge or consolidate with
or acquire or be acquired by any other corporation, partnership, entity or
person, without Secured Party's prior written consent.
"Permitted Liens" means (i) liens of carriers, warehousemen, mechanics and
materialmen incurred in the ordinary course of Debtor's business securing sums
not overdue; (ii) liens incurred in the ordinary course of Debtor's business in
connection with worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, relating to employees, securing sums not
overdue or being diligently contested in good faith provided that adequate
reserves with respect thereto are maintained on the books of Debtor in
conformity with GAAP; (iii) liens in favor of Secured Party; (iv) liens for
taxes not yet due or being diligently contested in good faith, provided that
adequate reserves with respect thereto are maintained on the books of Debtor in
conformity with GAAP; PROVIDED, THAT, the foregoing liens shall have no effect
on the priority of the liens in favor of Secured Party or the value of the
assets in which Secured Party has such a lien and a stay of enforcement of any
such lien shall be in effect; and (v) any liens securing obligations in favor of
Fremont Financial Corporation ("Fremont") pursuant to a certain Loan and
Security Agreement between Debtor and Fremont, dated April 10, 1998 and as set
forth in a certain Subordination and Intercreditor Agreement dated as of April
10, 1998 between Secured Party and Fremont, the terms of which are incorporated
herein by reference.
5. AUTHORIZED ACTION BY SECURED PARTY. After the
occurrence of any "Event of Default" (as defined below) and while it is
continuing, Debtor hereby irrevocably appoints Secured Party as its
attorney-in-fact to do (but Secured Party shall not be obligated to and shall
not incur any liability to Debtor or any third party for failure so to do) any
act which Debtor is obligated by this Security Agreement to do, and to exercise
such rights and powers as Debtor might exercise with respect to the Collateral,
including, without limitation, the right to:
(i) collect by legal proceedings or otherwise and
endorse, receive and receipt for all payments, proceeds and
other sums and property now or hereafter payable on or on
account of the Collateral;
(ii) enter into any extension, deposit or other
agreement pertaining to, or deposit, surrender, accept, hold or
apply other property in exchange for, the Collateral;
(iii) process and preserve the Collateral; and
-4-
<PAGE>
(iv) make any compromise, settlement or adjustment,
and take any action it deems advisable, with respect to the
Collateral.
(b) Debtor agrees to reimburse Secured Party upon
demand for any costs and expenses, including attorneys' fees, Secured Party may
incur while acting as Debtor's attorney-in-fact hereunder, all of which costs
and expenses are included in the Liabilities secured hereby and are payable upon
demand, with interest thereon at the rate applicable to the obligations under
the note referred to in Paragraph 3(a) above.
(c) It is further agreed and understood between the
parties hereto that such care as Secured Party gives to the safekeeping of its
own property of like kind shall constitute reasonable care of the Collateral
when in Secured Party's possession; provided, however, that Secured Party shall
not be required to make any presentment, demand or protest, or give any notice
and need not take any action to preserve any rights against any prior party or
any other person in connection with the Liabilities or with respect to the
Collateral.
(d) Whether or not Debtor is in default, Debtor
agrees that Secured Party may at any time send verification requests, and so
long as an Event of Default has not occurred, such requests will not identify
Secured Party to any account debtor on any Collateral.
(e) If Debtor's records are prepared or retained by
a computer service company or any accountant or accounting service, so long as
any Liabilities are outstanding, Debtor grants Secured Party the absolute and
irrevocable right, with reasonable notice to Debtor, to inspect such records
(including Debtor's internal work papers), receive duplicate copies of all
information furnished to Debtor and prepared by such company, accountant or
accounting service, and agrees to furnish such consents as may be necessary to
effectuate the same. Debtor further agrees to promptly notify Secured Party of
the name and address of such company, accountant or accounting service and of
any change in respect thereof.
(f) All the foregoing powers authorized herein,
being coupled with an interest, are irrevocable so long as any Liabilities are
outstanding.
6. DEFAULT. The occurrence of any of the following events
or conditions (herein "Events of Default") shall constitute an Event of Default
hereunder:
(a) Debtor fails to perform, keep or observe any
covenant (other than for payment of Liabilities) within 5
-5-
<PAGE>
calendar days of the date Debtor is required to perform, keep or observe such
covenant;
(b) non-payment of any of the Liabilities as and
when due and payable to Secured Party; or
(c) any bankruptcy or other insolvency proceeding is
commenced by Debtor, or any such proceeding is commenced against Debtor and
remains undischarged or unstayed for forty-five (45) days.
7. REMEDIES. Upon the occurrence and during the
continuation of any Event of Default, Secured Party may, at its option, without
notice to or demand on Debtor, declare all Liabilities immediately due and
payable, and Secured Party shall have all the default rights and remedies of a
secured party under Chapter 5 of Division 9 of the California Uniform Commercial
Code and other applicable law as well as the following rights and remedies, all
of which may be exercised with or without further notice to Debtor:
(a) to the extent permitted by law, to notify any
and all obligors and account debtors on the Collateral that the same has been
assigned to Secured Party and that all payments thereon are to be made directly
to Secured Party;
(b) to settle, compromise or release, on terms
acceptable to Secured Party, in whole or in part, any amounts owing on the
Collateral, and to extend the time of payment, make allowances and adjustments
and to issue credits in Secured Party's name or in the name of Debtor in respect
thereof;
(c) to enter any premises where any Collateral may
be located and to take possession of and remove the Collateral, with or without
judicial process;
(d) to sell or otherwise dispose of the Collateral
or any part thereof, for cash, on credit or otherwise, with or without
representations or warranties, and upon such terms as shall be acceptable to
Secured Party;
(e) to remove from any premises where the same may
be located, any and all documents, instruments, files and records relating to
the collateral, and Secured Party may, at Debtor's expense, use the supplies and
space of Debtor at its places of business as may be necessary to properly
administer and control the Collateral or the handling of collections and
realizations thereon;
(f) receive, open and dispose of all mail addressed
to Debtor and notify postal authorities to change the
-6-
<PAGE>
address for delivery thereof to such address as Secured Party may designate; and
(g) take or bring, in Secured Party's name or in the
name of Debtor, all steps, actions, suits or proceedings deemed by Secured Party
necessary or desirable to effect collection of or to realize upon the
Collateral;
all at Secured Party's sole option and as Secured Party in its sole discretion
may deem advisable.
8. APPLICATION OF PROCEEDS OF COLLATERAL. The net cash
proceeds resulting from the collection, liquidation, sale or other disposition
of the Collateral shall be applied first to the expenses (including all
attorneys' fees) of retaking, holding, processing and preparing for sale,
selling, collecting, liquidating and the like, and then to the satisfaction of
all Liabilities secured hereby, application as to any particular obligation or
indebtedness or against principal or interest to be in Secured Party's
discretion. The balance, if any, shall be paid in accordance with applicable
law or as a court of competent jurisdiction may direct. Debtor shall be liable
to Secured Party and shall pay to Secured Party on demand any deficiency which
may remain after such sale, disposition, collection or liquidation of
Collateral.
9. CUMULATIVE RIGHTS. The rights, powers and remedies of
Secured Party under this Agreement shall be in addition to all rights, powers
and remedies given to Secured Party under any statute or rule of law or any
other document, instrument or agreement, all of which rights, powers and
remedies shall be cumulative and may be exercised successively or concurrently.
10. WAIVER. Any forbearance, failure or delay by Secured
Party in exercising any right, power or remedy shall not preclude the further
exercise thereof, and every right, power or remedy of Secured Party shall
continue in full force and effect until such right, power or remedy is
specifically waived in a writing executed by Secured Party. Debtor waives any
right to require Secured Party to proceed against any person or to exhaust any
Collateral or to pursue any remedy in Secured Party's power prior to pursuing
Debtor in respect of the Liabilities.
11. SETOFF. Debtor agrees that Secured Party may exercise
its rights of setoff with respect to the Liabilities in the same manner as if
the Liabilities were unsecured.
12. BINDING UPON SUCCESSORS. All rights of Secured Party
under this Agreement shall inure to the benefit of Secured Party and its
successors and assigns, and all obligations of Debtor shall bind the Debtor and
its successors and assigns.
-7-
<PAGE>
13. ENTIRE AGREEMENT; SEVERABILITY. This Agreement contains
the entire security agreement between Secured Party and Debtor with respect to
the Collateral. If any of the provisions of this Agreement shall be held
invalid or unenforceable, this Agreement shall be construed as if not containing
those provisions and the rights and obligations of the parties hereto shall be
construed and enforced accordingly.
14. REFERENCES. The captions or titles of the paragraphs of
this Agreement are for convenience of reference only and shall not define or
limit the provisions hereof.
15. CHOICE OF LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of California, and, where
applicable and except as otherwise defined herein, terms used herein shall have
the meanings given them in the California Uniform Commercial Code. DEBTOR
IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE JURISDICTION OF THE FEDERAL AND
STATE COURTS OF THE STATE OF CALIFORNIA IN CONNECTION WITH ANY LEGAL ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND DEBTOR WAIVES ANY
OBJECTION RELATING TO THE BASIS FOR PERSONAL OR IN REM JURISDICTION OR TO VENUE
WHICH IT MAY NOW OR HEREAFTER HAVE IN ANY SUCH SUIT, ACTION OR PROCEEDING. BOTH
DEBTOR AND SECURED PARTY WAIVE ANY RIGHT TO TRIAL BY JURY TO THE EXTENT
PERMITTED BY LAW.
16. ATTORNEYS' FEES. If any legal action or proceeding
shall be commenced at any time by any party to this Agreement in connection with
the interpretation of this Agreement or the enforcement of any rights or
remedies hereunder, the prevailing party or parties in such action or proceeding
shall be entitled to reimbursement of its reasonable attorneys' fees and costs
in connection therewith, in addition to all other relief to which the prevailing
party or parties may be entitled.
17. NOTICE. Any written notice, consent or other
communication provided for in this Agreement shall be delivered personally
(effective upon delivery), via overnight courier (effective the next day after
dispatch) or via U.S. Mail (effective 3 days after mailing, postage prepaid,
first class) to each party at its address set forth above, or to such other
address as either party shall specify to the other; provided, that all notices
to Secured Party shall be copied to any assignee of Secured Party's rights
hereunder.
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<PAGE>
18. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument.
DEBTOR:
ARNOLD CIRCUITS, INC.
By: /s/ Robert Bertrand
-------------------------------
Robert Bertrand
President and Chief Executive
Officer
SECURED PARTY:
XCEL ARNOLD CIRCUITS, INC.
By: /s/ Carmine T. Oliva
-------------------------------
Carmine T. Oliva
Chairman and Chief Executive
Officer
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<PAGE>
10.62
SUPPLY, MARKETING AND CONSULTING SERVICES AGREEMENT
This Joint Marketing and Supply Agreement (the "Agreement") is made and entered
into as of January 9, 1998, by and between Arnold Circuits, Inc., a California
corporation with principal offices located at 310 E. Fourth Avenue, La Habra,
California 90631 ("Arnold"), and XCEL Etch-Tek with principal offices located at
2455 Bates Avenue, Concord, California 94520 ("Etch-Tek"), a division of XIT
Corporation, a New Jersey corporation.
RECITALS
WHEREAS, Arnold and Etch-Tek are both a manufacturers of printed circuit boards
and suppliers of related products and services and;
WHEREAS, Arnold and Etch-Tek desire to purchase from each other certain product
or services supplied by the other and;
WHEREAS, Arnold and Etch-Tek desire to exchange information in order to procure
certain potential sales opportunities and;
WHEREAS, Etch-Tek desires to avail itself of the technical and business
expertise of Robert J. Bertrand who desires to provide Etch-Tek with such
expertise;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto hereby agree as
follows.
1. PRODUCT AND SERVICE PURCHASES. The parties hereto recognize that, from time
to time, each may encounter a situation in which they would purchase
manufactured products or materials, completed products or related products or
services (collectively the "Products") from a third party which Products are
also available from the other party hereto. In such situations, the parties
hereto agree to offer the other the opportunity to sell such Products to the
purchasing party before attempting to purchase such Products from any third
party. If the selling party is able to provide the desired Product to the
purchasing party at a price equivalent to that available from a third party, the
purchasing party shall purchase the Product from the selling party. All
standard terms of sale of the selling party shall apply to such transactions.
By way of example only and without limitation, if Arnold required multiple
laminated materials which are manufactured by Etch-Tek and if the price of such
Product from Etch-Tek is equivalent to that of a third party from whom Arnold
would other purchase such Product, then Arnold shall purchase such Product from
Etch-Tek on Etch-Tek's standard terms and conditions.
2. EXCHANGE OF MARKETING INFORMATION. The parties hereto recognize that, from
time to time, each may encounter a potential sales opportunity from a customer
or potential customer for a product which it does not manufacture but which is
manufactured or distributed by the other party hereto. In such situations, each
party hereto agrees to provide the other with
<PAGE>
all reasonably relevant information regarding such potential order, including
without limitation the customer name, address, telephone number, contact name
and description of the product. The parties hereto agree that the intent of
this Section 2 is to provide the each other with potential sales leads which
cannot be developed by the party providing the information. Sales leads
provided are to be developed by the recipient at the recipient's sole cost and
the parties hereto agree that no commission or other compensation shall be
payable to the party providing such potential sales leads information unless a
specific arrangement or agreement for a specific referral is established in
writing by the parties. The parties hereto further agree that each may
reference this relationship as an "affiliation" to any customer or potential
customer in order to enhance the likelihood of generating sale to such customer
or potential customer.
3. TECHNICAL ADVISOR. Arnold shall make available the services of Robert
Bertrand as a technical and business advisor to the general manager of Etch-Tek
during the term this Agreement remains in effect. Mr. Bertrand shall receive no
direct compensation from Etch-Tek but shall be reimbursed by Etch-Tek for any
reasonable travel or related expenses incurred as a direct result of specific
requests for such advisory services.
4. TERM. This Agreement shall become effective on the date first written above
and shall remain in full force and effect for three (3) years. Thereafter, this
Agreement shall automatically renew for one (1) year until one of the parties
hereto delivers to the other written notice of termination of this Agreement at
least sixty (60) days in advance of the renewal date. The parties hereto agree
this Agreement may only be terminated by the delivery of such notice or based
upon the provisions of Section 4 hereof.
5. TERMINATION. It is agreed that in case of a material breach (violation) by
either party of any of the provisions contained in this Agreement, the other
party shall have the right to terminate this Agreement at its option.
Furthermore, if either party becomes insolvent, makes a general assignment for
the benefit of creditors, has a petition or any proceeding under the bankruptcy
laws filed by or against it or under any other law relating to debtor's relief,
or if a receiver is appointed to take control of the business of either party,
the other party may, at its option, immediately cancel this Agreement. Notice
of cancellation shall be in writing.
6. CONFIDENTIALITY. Both parties hereto acknowledge that during the term of
this Agreement, each may obtain confidential information regarding the other
party's business. Both parties agree to treat all such information and the
terms of this Agreement as confidential and to take all reasonable precautions
against disclosure of such information to unauthorized third parties during and
after the term of this Agreement. Upon request by an owner thereof, all
documents relating to confidential information in the possession of the other
party will be returned to such owner.
7. ASSIGNMENT. Neither party to this Agreement may assign any of its rights or
delegate any of its duties under this Agreement. Any attempted or purported
assignment or delegation in violation of this provision shall be voidable at the
option of the nonassigning and/or nondelegating party and shall entitle that
party to terminate this Agreement.
<PAGE>
8. ARBITRATION. Any controversies or disputes arising out of or relating to
this Agreement shall be resolved by binding arbitration in accordance with the
then current Commercial Arbitration Rules of the American Arbitration
Association, except that no discovery shall be permitted. The parties shall
endeavor to select one (1) mutually acceptable arbitrator knowledgeable about
issues relating to the subject matter of this Agreement. In the event the
parties are unable to agree to such a selection, each party will select an
arbitrator and the arbitrators in turn shall select a third arbitrator who shall
be arbitrator designated to resolve the dispute. The arbitration shall take
place at a location that is reasonably centrally located between the parties, or
otherwise mutually agreed upon by the parties.
The arbitrator shall not have the authority, power, or right to alter, change,
amend, modify, add, or subtract from any provision of this Agreement or to award
punitive damages. The arbitrator shall have the power to issue mandatory orders
and restraining orders in connection with the arbitration. The award rendered
by the arbitrator shall be final and binding on the parties, and judgment may be
entered thereon in any court having jurisdiction. The agreement to arbitration
shall be specifically enforceable under the prevailing arbitration law. During
the continuance of any arbitration proceeding, the party shall continue to
perform their respective obligations under this Agreement. The prevailing party
shall have its reasonable attorney's fees paid by the non-prevailing party which
payment shall be made immediately following the arbitrator's final award.
9. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties and there are no other promises or conditions in any other agreement
whether oral or written. This Agreement supersedes any prior written or oral
agreements between the parties.
10. AMENDMENT. This Agreement may be modified or amended if the amendment is
made in writing and is signed by both parties.
11. NOTICE. Any notice, request, demand, waiver, consent, approval or other
communication which is required or permitted hereunder shall be in writing and
shall be deemed given only if delivered personally or sent by registered or
certified mail, postage prepaid, as follows:
If to Arnold, to:
Arnold Circuits, Inc.
Attn: President
310 E. Fourth Avenue
La Habra, California 90631
If to Etch-Tek, to: With a required copy to:
Xcel Etch-Tek MicroTel International, Inc.
Attn: General Manager 4290 East Brickell Street
2455 Bates Avenue Ontario, California 91761-1551
Concord, California 94520 Attn: Carmine T. Oliva
<PAGE>
12. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable for any reason, the remaining provisions shall continue
to be valid and enforceable. If a court finds that any provision of this
Agreement is invalid or unenforceable, but that by limiting such provision it
would become valid and enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
13. WAIVER OF AGREEMENTUAL RIGHT. The failure of either party to enforce any
provision of this Agreement shall not be construed as a waiver or limitation of
that party's right to subsequently enforce and compel strict compliance with
every provision of this Agreement.
14. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be governed
and construed in accordance with the laws of the State of California without
regard to principles of conflicts of law. Each party hereby irrevocably submits
to the jurisdiction of an California state court or federal court in the State
of California in respect of any suit, action or proceeding arising out of or
relating to this Agreement and irrevocably accept for themselves and in respect
of their property, generally and unconditionally, the jurisdiction of the
aforesaid courts.
The parties hereto have executed this Agreement at Ontario, California, on the
day and year above written.
ARNOLD CIRCUITS, INC.
By: /s/Robert Bertrand
-------------------------
Its: President and CEO
-------------------------
XCEL ETCH-TEK
By: /s/ Carmine T. Oliva
-------------------------
Its: President and CEO
-------------------------
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
MicroTel International, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements (Nos. 33-22518, 33-72926 and 333-12567) on Form S-8 of our report
dated March 20, 1998, except as to Note 17, which is as of April 9, 1998,
relating to the consolidated financial statements and financial statement
schedule of MicroTel International, Inc. appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. Our report contains
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
BDO Seidman, LLP
Costa Mesa, California
April 14, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
MicroTel International, Inc.:
We consent to incorporation by reference in the registration statement (Nos.
33-22518, 333-12567 and 33-72926) on Form S-8 of MicroTel International, Inc.
(formerly XCEL Corporation and subsidiaries) of our report dated December 13,
1996, relating to the consolidated balance sheets of MicroTel International,
Inc. as of September 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended September 30, 1996, and the related schedule, which
report appears in the December 31, 1997 annual report on Form 10-K of
MicroTel International, Inc. (formerly XCEL Corporation and subsidiaries).
Orange County, California
April 14, 1998
<PAGE>
Exhibit 23.3
[LETTERHEAD]
By Fax
J P Burder Esq
Microtel International Inc
4290 E Brickell Street
Ontario
CA 91761-1511
08 April 1998
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
filing.
Yours faithfully
HARDCASTLE BURTON
/s/ Hardcastle Burton
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