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As filed with the Securities and Exchange Commission on July 17, 2000
Registration No.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MICROTEL INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3825 77-0226211
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(909) 297-2699
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
CARMINE T. OLIVA, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROTEL INTERNATIONAL, INC.
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(909) 297-2699
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
THOMAS P. GALLAGHER, ESQ.
BARBARA J. STEEN, ESQ.
GALLAGHER, BRIODY & BUTLER
212 CARNEGIE CENTER, SUITE 402
PRINCETON, NEW JERSEY 08540
(609) 452-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: from time to
time, following the effective date of this registration statement.
IF THE ONLY SECURITIES BEING REGISTERED ON THIS FORM ARE BEING OFFERED PURSUANT
TO DIVIDEND OR INTEREST REINVESTMENT PLANS, PLEASE CHECK THE FOLLOWING BOX. [ ]
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, OTHER THAN SECURITIES OFFERED ONLY IN CONNECTION WITH DIVIDEND OR INTEREST
REINVESTMENT PLANS, CHECK THE FOLLOWING BOX. [X]
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT
TO RULE 462(b) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST
THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ]
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(c) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING. [ ]
IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE FEE
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COMMON STOCK, $.0033 PAR VALUE...... 3,279,826 SHARES $0.58 $1,902,299.08 $502.21
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(1) Based upon the average of the bid and asked prices reported on July ,
2000.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
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ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Outside Back
of Prospectus Cover Page
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors; Selected
Financial Data
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Prospectus Summary
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Securities to be Registered
10. Interests of Named Experts and Counsel Legal Matters and Experts
11. Information with Respect to Registrant Business; Legal Proceedings; Market Information;
Financial Statements; Selected Financial
Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Directors and Executive
Officers; Executive Compensation; Security
Ownership of Certain Beneficial Owners and
Management; Certain Relationships and
Related Transactions
12. Disclosure of Commission Position on Disclosure of Commission Position on
Indemnification for Securities Act Indemnification for Securities Act
Liabilities Liabilities
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The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities in any state where the offer or sale is not permitted.
Subject to completion, dated July 17, 2000
PROSPECTUS
3,650,866 SHARES OF COMMON STOCK OF
MICROTEL INTERNATIONAL, INC.
The selling stockholders are offering up to 3,279,826 shares of common
stock. Of these shares, 2,180,603 are to be issued by us upon the exercise of
certain outstanding warrants and stock options.
This offering is not being underwritten.
Selling stockholders can sell their common stock in the
over-the-counter market or in privately negotiated transactions, whenever they
decide and at the price they set. The common stock may be sold at market price,
but the selling stockholders have the right to sell common stock at a premium or
discount to market price.
We will not receive any of the proceeds from the sale of these shares.
If all of the warrants and stock options are exercised, we will receive
$2,815,045.36. We have agreed to bear certain expenses in connection with the
registration and sales of these shares. See "Plan of Distribution" beginning on
page 17 for a description of the manner in which the securities covered by this
prospectus may be sold.
Our common stock is quoted on the OTC Bulletin Board under the stock
symbol "MCTL." On July 13, 2000, the closing bid price for the Common shares was
$0.53125 per share and the closing asked price was $0.625 per share.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGES 8 TO 12.
-----------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July ___, 2000
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WE
NOR THE SELLING STOCKHOLDERS HAVE AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE SELLING
STOCKHOLDERS ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF COMMON
STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. IN THIS
PROSPECTUS, REFERENCES TO "WE," "US," AND "OUR" REFER TO MICROTEL INTERNATIONAL,
INC.
TABLE OF CONTENTS
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PAGE
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Where You Can Find More Information.....................................................................6
Note Concerning Forward Looking Statements..............................................................6
Summary.................................................................................................7
About MicroTel International............................................................................7
Risk Factors............................................................................................8
Use of Proceeds........................................................................................12
Selling Stockholders...................................................................................13
Plan of Distribution...................................................................................17
Securities to be Registered............................................................................18
Legal Matters and Experts..............................................................................19
Business...............................................................................................19
Legal Proceedings......................................................................................28
Market Information.....................................................................................29
Financial Statements...................................................................................30
Selected Financial Data................................................................................68
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Management's Discussion and Analysis of Financial Condition and Results of Operations..................69
Directors and Executive Officers.......................................................................82
Executive Compensation.................................................................................83
Security ownership of Certain Beneficial Owners and Management.........................................88
Certain Relationships and Related Transactions.........................................................90
Disclosure of Commission Position on Indemnification for Securities Act................................92
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, commonly
called the SEC, a registration statement on Form S-1 under the Securities Act
with respect to the resale of these shares of common stock. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits to the registration statement. We refer you to the registration
statement and its exhibits for further information.
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You can read and copy any document we file at
the SEC's public reference rooms at 450 Fifth Street, N.W., Washington DC or in
New York, NY and Chicago, IL. You can request copies of these documents by
writing to the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for further information on public reference rooms. Our SEC
filings are also available to the public, free of charge, from the SEC's website
at http://www.sec.gov.
NOTE CONCERNING FORWARD LOOKING STATEMENTS
We make statements in this prospectus that are considered
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934. Sometimes these statements contain
words such as "anticipates," "plans," "intends," "expects" and similar
expressions to identify forward-looking statements.
These statements are not guarantees of our future performance and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
what we say in this prospectus. These risks, uncertainties and other factors
include, among others:
- General economic conditions;
- Changes in laws and government regulations;
- Fluctuations in demand for our products;
- Our ability to consummate strategic acquisitions and
successfully finance and integrate any such acquisitions;
- Our ability to consummate planned disposal of existing
loss-producing operations;
- Our ability to finance our current ongoing operations; and
- Competing products and technologies.
Given these uncertainties, you should not place undue reliance on these
forward-looking statements, which are current only as of the date of this
prospectus or the date of the document that we incorporate by reference. We will
not revise the forward-looking statements in this prospectus, or in any document
that we incorporate by reference, to reflect events or circumstances after the
date of this prospectus or to reflect the occurrence of unanticipated events.
6
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PROSPECTUS SUMMARY
This is a summary of our business. You should read the entire
prospectus, including "Risk Factors" starting on page 8, and the additional
information incorporated by reference contained in our reports filed with the
Securities and Exchange Commission.
MICROTEL INTERNATIONAL, INC.
OUR BUSINESS
We design, manufacture and distribute a wide range of electronic
hardware products and provide related services, including electronic
telecommunications test equipment and data transmission and networking
equipment. We sell these products primarily to the major long distance telephone
service companies, the regional Bell operating companies, international
telephone companies and private communications networks. We also design,
manufacture and market information technology products, including displays and
input components and printed circuits for the international telecommunications,
medical, industrial, and military/aerospace markets. Our company is organized
into three product line segments - Instrumentation and Test Equipment,
Components and Subsystem Assemblies, and Circuits.
OUR ADDRESS
Our principal executive offices are located at 9485 Haven Avenue, Suite
100, Rancho Cucamonga, California, 91730 and our telephone number is (909)
297-2699.
RISK FACTORS
The Common Shares being offered involve a high degree of risk. See "Risk
Factors."
THE OFFERING
Common Shares Offered All of the 3,279,826 Common Shares offered
by this prospectus are being sold by selling
shareholders.
Common Shares to be Outstanding 22,969,814 shares
after the Offering
Estimated Proceeds We will not receive any of the proceeds from
the sale of shares by selling stockholders.
We will receive $2,815,045.36 from the
exercise of the Warrants and Stock Options
if all of the Warrants and Stock Options are
exercised. We will use the proceeds from the
exercise of the Warrants for working
capital, business development and general
corporate purposes.
7
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RISK FACTORS
Investing in our shares is risky. Before you decide to invest in
MicroTel International common shares offered by this prospectus, you should
carefully consider the following risk factors, together with other information
contained or incorporated by reference in this prospectus.
There may be additional risks and uncertainties that are not presently
known to us or that we currently believe are immaterial which could also have a
negative impact on our business operations. If any of the following risks
actually occur, our business, financial condition and results of operations
would be materially adversely affected. In that event, the trading price of our
common stock could decline and you may lose all or part of your investment.
LIQUIDITY AND CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING;
GOING CONCERN UNCERTAINTY. For the year ended December 31, 1999 our cash flow
from operations was mainly used to pay down debt. For the year ended December
31, 1998 we incurred substantial negative cash flow from operations which
created a severe lack of working capital. As a result, cash flows from
operations during 1998 had to be supplemented by the offering of equity
securities to support our working capital and planned business development
needs. Although we have been successful in obtaining working capital to fund
operations to date, we cannot assure you that we will be able to generate
additional capital in the future or generate sufficient cash flow to fund
current and future operations.
For the three months ended March 31, 2000, our cash flow from
operations was $36,000 and cash flow from all activities during this period was
$154,000. The cash flow from non-operating activities benefited from the sale of
our 37% common stock interest in Digital Transmission Systems, Inc. for
$520,000.
Our specific needs for, and the timing of, any future financing
arrangements will depend on our results of operations, acquisition
opportunities, and other unforeseen factors that we cannot presently predict. We
cannot assure you that future financing will be available, or, if available,
that it will be on terms and conditions acceptable to us. If any additional
equity financings are available, they may be dilutive to our stockholders and
any debt financing may contain restrictive covenants and additional debt service
requirements that could adversely affect our operating results.
The consolidated financial statements incorporated by reference in this
prospectus have been prepared assuming the Company will continue as a going
concern. During the years ended December 31, 1999, 1998 and 1997, the Company
experienced significant operating losses. Additionally, the Company is in
default of the Domestic Credit Facility agreement as the Company is not in
compliance with an adjusted net worth covenant contained therein. These factors
raise substantial doubt about the Company's ability to continue as a going
concern and led the Company's independent certified public accountant to modify
their unqualified opinion to include an explanatory paragraph related to the
Company's ability to continue as a going concern. The consolidated financial
statements contained in or incorporated by reference in this prospectus do not
include any adjustments that might result from the outcome of this uncertainty.
The Company's foreign subsidiaries in the United Kingdom, France and Japan have
separate borrowing agreements. 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.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE. Competition in the electronics
hardware industry is very intense and there are a large number of companies
developing technology and products similar to ours. The industry consists of
development stage companies and major domestic and international companies, many
of which have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly
8
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greater than ours. We can not assure you that we will be successful in competing
with such entities or that our competitors will not develop products or
competing technologies that would make our products and technologies obsolete or
which would enable them to gain market acceptance of their products more rapidly
than ours.
DEPENDENCE ON KEY PERSONNEL. We are highly dependent on the effort of
our management. We maintain key man life insurance on our President and Chief
Executive Officer, Carmine T. Oliva. We cannot assure you that we will be able
to maintain this policy in effect or that the coverage will be sufficient to
compensate us for the loss of Mr. Oliva's services.
CONTINUING LOSSES; WRITE-DOWNS. We reported a net loss of $89,000 for
the three months ended March 31, 2000, $4,596,000 for the year ended December
31, 1999 and $1,185,000 for the year ended December 31, 1998. We had an
accumulated deficit of $19,871,000 and $19,759,000 at March 31, 2000 and
December 31, 1999, respectively. We have written down the carrying value of
certain of our assets in recent years, including certain inventory, capitalized
software and goodwill associated with certain acquisitions. While we believe,
based on our current assessments, that such write-downs are adequate, we cannot
assure you that further write-downs of our operating assets will not be required
in the future.
Although we have taken recent actions to reduce costs, improve
efficiency and increase sales, we cannot assure you that we will become
profitable.
CYCLICAL NATURE OF ELECTRONICS INDUSTRY. The segments of the
electronics industry in which we operate have, in many instances, historically
been cyclical and subject to significant economic changes and downturns. These
changes, including the contraction of military, commercial and governmental
aerospace spending in recent years, have sometimes been characterized by reduced
product demand, accelerated decreases of average selling prices, and excess
production capacity. In addition, the electronics industry is subject to rapid
technological change and short product life leading to product obsolescence. As
a result these factors, we may experience substantial fluctuations in future
operating results due to general electronic industry conditions, overall
economic conditions or other related factors.
DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING OF THE INDUSTRY. Our
subsidiaries that make up our Instrumentation and Test Equipment business sector
depend largely on sales to their principal customers in the telephone industry.
In the United States, these customers include among others AT&T, GTE, and the
regional Bell operating companies. As a result of the consolidation and/or
restructuring of these companies following the passage of the 1996
Telecommunications Bill, certain of our anticipated sales to these companies
were canceled or delayed. A significant portion of these consolidations and
restructurings are completed. However, there can be no assurance that we will
experience any increased demand.
VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE AND EXTENT OF CUSTOMER
COMMITMENTS ON ORDERS. The level and timing of orders placed by our customers
can vary as these customers attempt to manage inventory, change their
manufacturing strategies and vary their demand for our products due to, among
other things
- technological change;
- introduction of new products;
- shortened product life cycles;
- competitive conditions; or,
- general economic conditions.
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We generally receive long-term contracts to sell our telecommunication
products. However, we do not receive long term purchase orders or commitments
under such contracts but merely such quantities as required from time to time by
the customer. A certain portion of our backlog may be subject to cancellation or
postponement without a significant penalty or with no penalty.
ENVIRONMENTAL COMPLIANCE. We are subject to a variety of environmental
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used in certain of our manufacturing processes. Our failure to comply
with present and future regulations could subject us to future liabilities or
the suspension of production. These regulations could also restrict our ability
to expand our facilities or could require us to acquire costly equipment or to
incur other significant expenses to comply with environmental regulations. We
may also from time to time be subject to lawsuits with respect to environmental
matters. The extent of our liability under any such suit is not determinable and
may, in certain circumstances, have a material adverse affect on us.
POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price
of our common stock is subject to significant fluctuations in response to
variations in quarterly operating results, general conditions in the electronics
industry and other factors. The market price of our common stock has been, and
may continue to be, highly volatile. Also, the stock market is subject to price
and volume fluctuations which affect the market price for many high technology
companies in particular, and which can be unrelated to operating performance.
INCREASED PUBLIC FLOAT. The Company has outstanding 59.5 shares of
preferred stock that are convertible into 3,006,535 shares of common stock. The
shares of common stock underlying such preferred stock have been registered for
resale pursuant to a separate Prospectus. If the conversion of the preferred
stock occurs, the number of freely tradable shares of our common stock held by
non-affiliates will substantially increase. If a significant number of these
freely tradable shares are sold in the open market in the near term, the price
of our common stock may decline.
ACQUISITIONS. We may acquire other companies, assets or product lines
that complement or expand our existing business. Acquisitions involve a number
of risks that could adversely affect our operating results, including:
- diversion of our management's attention;
- the assimilation of the operations and personnel of the acquired
companies;
- amortization of acquired intangible assets; and
- potential loss of key employees.
We cannot assure you that any acquisition we make will not materially
and adversely affect us or that any such acquisition will enhance our business.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; PATENTS AND PROPRIETARY RIGHTS.
Our future success will be highly dependent on proprietary technology,
particularly in the areas of instrumentation and test equipment. Although we
hold a limited number of patents, we rely on copyright, trademark and trade
secret laws to establish our proprietary rights in our products. We cannot
assure you that our reliance on these laws will be adequate to protect our
proprietary rights or that our competitors will not independently develop
technologies that are equivalent or superior to ours.
In the future, we may file additional patent applications covering our
products or subsystems. We cannot assure you that:
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- any patents will be issued from our applications;
- if patents are issued, that the scope of claims granted will be broad
enough to protect our technology;
- any patents that may be issued to us will not be challenged,
consolidated or circumvented; or,
- any rights granted under those patents will provide us with a
competitive advantage or meaningful proprietary protection.
Although we will continue to implement protective measures and intend
to defend our proprietary rights, policing unauthorized use of our technology,
systems and products will be difficult and these measures may not be successful.
In addition, the laws of certain foreign countries in which we are active may
not protect our proprietary rights.
ADVERSE EFFECTS OF ISSUANCE OF ADDITIONAL PREFERRED STOCK. Our
Certificate of Incorporation authorizes the issuance of 10,000,000 shares of
preferred stock, with designations, rights and preferences that may be
determined from time to time by the Board of Directors, without further
stockholder approval. Preferred stock may have dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of the common stock. Also, issuance of additional
preferred stock could limit the price that certain investors might be willing to
pay in the future for shares of our common stock and may have the effect of
delaying or preventing a change in control of the Company. The issuance of
additional preferred stock also could decrease the amount of earnings and assets
available for distribution to the holders of common stock.
CONVERSION OF OUTSTANDING CONVERTIBLE SECURITIES; EXERCISE OF
OUTSTANDING OPTIONS AND WARRANTS; ADDITIONAL DILUTION; SHARES AVAILABLE FOR
SALE. On March 31, 2000, we had 59.5 shares of preferred stock outstanding that
are convertible into 3,006,535 common shares at an assumed conversion rate of
50,530 common shares per preferred share. Also, on March 31, 2000, there were
outstanding exercisable stock options to purchase an aggregate of 1,365,000
shares of common stock at exercise prices ranging from $0.20 to $3.44 per share
and outstanding and exercisable warrants for the purchase of 5,232,260 shares of
common stock at exercise prices ranging from $0.25 to $3.79 per share. If any of
the outstanding preferred shares are converted or the stock options and warrants
are exercised the interests of our existing stockholders will be substantially
diluted.
LACK OF DIVIDENDS. We have never paid a cash dividend on any class of
our capital stock and do not anticipate paying any dividends in the foreseeable
future. We anticipate that future earnings, if any, will be retained to finance
the development and expansion of our business.
RISKS OF TECHNOLOGICAL CHANGE. The markets for our products and
services are subject to a variety of factors including:
- rapidly changing technology;
- evolving industry standards;
- emerging competition; and,
- frequent new product and service introductions.
We cannot assure you that we will be able to successfully identify new
product opportunities and develop and bring new products and services to market
in a timely manner. To pursue the necessary technological advance necessary to
continue in our business, we will be required to expend substantial time and
expense, and we cannot assure you that we will succeed in adapting our
businesses to changing technology standards and customer requirements.
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The introduction of new products and services by competitors could make
our existing products and services obsolete and unmarketable. Also, we cannot
assure you that announcements or introductions of new products or services
either by us or our competitors or any change in industry standards will not
cause a decline in existing sales levels of existing products or services, which
could have a material adverse effect on our business, financial condition and
results of operations.
DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET. Until May 12,
1999, our common stock was quoted on the Nasdaq Stock Market. We were unable to
maintain the minimum bid price of $1.00 per share and our stock was delisted.
Our stock presently trades under the symbol MCTL on the OTC Bulletin Board. As a
result of this delisting, an investor could likely find it more difficult to
either dispose of, or to obtain quotations as to, the price of our common stock.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS. We have
substantial net operating loss ("NOL") carryforwards for Federal and state tax
purposes. Because of ownership changes to the company resulting from a merger in
1997, the use of these NOL carryforwards to offset future taxable income will be
limited. This limitation of the use of our NOL carryforwards may have a material
adverse effect on our results of operations and cash flow, should we have
taxable income in future years.
USE OF PROCEEDS
Because the selling shareholders are selling the shares offered hereby,
we will not receive any of the proceeds from any sale of the shares by the
selling shareholders. All proceeds will be for the account of the selling
shareholders. We will receive $2,815,045.36 if all of the 2,180,601 warrants and
stock options are exercised. We will use these proceeds, if any, for working
capital, business development and general corporate purposes.
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SELLING STOCKHOLDERS
The following table sets forth as of June 1, 2000, information
regarding ownership of our common stock by the selling stockholders. Except as
set forth below, the shares to be offered by the selling stockholders will be
acquired through the exercise of their warrants to purchase common stock.
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TOTAL NUMBER
OF SHARES TO BE SHARES TO BE OWNED UPON
OFFERED FOR COMPLETION OF OFFERING
SHARES OWNED SELLING -----------------------
NAME OF SELLING PRIOR TO THE STOCKHOLDER'S PERCENTAGE
SHAREHOLDER OFFERING(1) ACCOUNT(2) NUMBER OF CLASS
--------------- ------------ ------------- ------ ----------
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1. Placido Albanese 15,000 15,000 0 *
2. Bank of N.Y. ATF Exxon 66,532(3) 8,798 57,734 *
Benefit Plan
3. Bankers Trust, Trustee Jack 44,355(4) 5,865 38,490 *
Eckerd Corp. Pension Trust
4. David Barrett(5) 191,065(6) 16,875 174,190 *
5. Chase Manhattan Bank 44,355(7) 5,865 38,490 *
N.A.-Trustee IBM Retirement
Plan Trust
6. Chemical Bank Retirement Plan 88,711(8) 11,730 76,981 *
7. C.P. & Co. Venture Partners, 22,180(9) 2,933 19,247 *
L.P.
8. Robert Crane 2,360(10) 312 2,048 *
9. Crossroads Capital Limited 9,902 9,902 0 *
Partnership
10. Equitable Life Assurance 71,767(11) 9,940 62,777 *
Corporation
11. George Farndell 37,500 37,500 0 *
12. George and Sandra Farndell 72,561(12) 7,367 65,194 *
13. Laurence P. Finnegan, Jr.(13) 132,349(14) 15,060 117,289 *
14. Fortune Fund Limited Seeker III 1,323,100(15) 62,500 1,260,600 5.488%
15. Russell E. Froelich 20,403 20,403 0 *
16. Thomas P. Gallagher(16) 9,797 9,797 0 *
17. Generio T. Gargiulo 254,922(17) 68,510 186,412 *
18. Growth International, Ltd. 20,000 20,000 0 *
19. Paul Hickey(18) 37,893(19) 34,110 3,783 *
20. Raymond Jacobson 42,000(20) 32,000 10,000 *
21. Steven Jacobus 50,000 50,000 0 *
22. Lee Javitch 67,780(21) 19,353 48,517 *
23. William C. Johnson 14,515 14,515 0 *
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<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER
OF SHARES TO BE SHARES TO BE OWNED UPON
OFFERED FOR COMPLETION OF OFFERING
SHARES OWNED SELLING -----------------------
NAME OF SELLING PRIOR TO THE STOCKHOLDER'S PERCENTAGE
SHAREHOLDER OFFERING(1) ACCOUNT(2) NUMBER OF CLASS
--------------- ------------ ------------- ------ ----------
<S> <C> <C> <C> <C>
24. Frank Lahaye 26,135(22) 3,457 22,678 *
25. Landmark Equity Partners II, 44,355(23) 5,865 38,490 *
L.P.
26. Landmark Equity Partners V, 133,066(24) 17,595 115,471 *
L.P.
27. Landmark Venture Partners L.P. 88,711 11,730 76,981 *
28. Herb Lanzet 50,000 50,000 0 *
29. H.L. Lanzet, Inc. 50,000 50,000 0 *
30. Thomas McCann 16,692(25) 16,692 0 *
31. Gene Miller 26,135(26) 3,457 22,678 *
32. Montgomery Securities 62,006(27) 8,199 53,807 *
33. NY State Common Retirement Fund 88,711(28) 11,730 76,981 *
34. Northern Trust Company, ATF 133,068(29) 17,596 115,472 *
United System Master Trust
35. Carmine T. Oliva(30) 1,070,831(31) 1,015,291 55,540 *
36. Carmine T. and Georgeann Oliva 486,036(32) 486,036 0 *
37. Georgeann Oliva(33) 81,889 81,889 0 *
38. Jason Oliva 133,515(34) 133,500 15 *
39. Ronald Oliva 37,500 37,500 0 *
40. Ronald Oliva and Betty J. Oliva 159,365(35) 7,365 158,372 *
41. Rose Oliva 2,177 2,177 0 *
42. Samuel G. Oliva 183,347(36) 72,28737 101,060 *
43. Samuel J. Oliva 830,118(38) 107,830 722,288 *
44. Henry Oksman 11,322 11,322 0 *
45. Orbit II Partners, LP(39) 2,714,610 43,125 2,671,485 11.63%
46. OTAF LLC 150,000(40) 150,000 0
47. Portland General Holdings, Inc. 88,711(41) 11,730 76,981 *
48. Rana General Holding, Ltd. 234,375 46,875 46,875
49. Resonance Ltd. 456,250(42) 91,250 365,00
50. Robert Runyon(43) 327,303(44) 44,576 282,727 *
51. William Setteducato 125,000 125,000 0 *
52. Donald Skipwith 1,982(45) 262 1,720 *
53. St. John & Wayne 5,806 5,806 0 *
54. Hillel Weinberger 96,472(46) 8,709 87,763 *
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER
OF SHARES TO BE SHARES TO BE OWNED UPON
OFFERED FOR COMPLETION OF OFFERING
SHARES OWNED SELLING -----------------------
NAME OF SELLING PRIOR TO THE STOCKHOLDER'S PERCENTAGE
SHAREHOLDER OFFERING(1) ACCOUNT(2) NUMBER OF CLASS
--------------- ------------ ------------- ------ ----------
<S> <C> <C> <C> <C>
55. Laurie Ann Weis 46,775 46,775 0 *
56. Xerox Corp. 5,865 5,865 0 *
57. Yorkton Securities 70,000 70,000 0 *
</TABLE>
* Less than 1%.
(1) Unless otherwise indicated, all shares owned are issuable upon exercise of
outstanding warrants.
(2) This chart assumes the sale of all shares to be offered.
(3) Includes 8,798 shares issuable upon exercise of outstanding warrants.
(4) Includes 5,865 shares issuable upon exercise of outstanding warrants.
(5) Mr. Barrett was a director of the Company from March 1997 until June 1999,
when he resigned.
(6) Includes 58,060 shares issuable upon the exercise of outstanding options
and 16,875 shares issuable upon the exercise of outstanding warrants.
(7) Includes 5,865 shares issuable upon exercise of outstanding warrants.
(8) Includes 1,730 shares issuable upon exercise of outstanding warrants.
(9) Includes 2,933 shares issuable upon exercise of outstanding warrants.
(10) Includes 312 shares issuable upon exercise of outstanding warrants.
(11) Includes 9,490 shares issuable upon exercise of outstanding warrants.
(12) Includes 3,629 shares issuable upon the exercise of outstanding options and
7,365 shares issuable upon the exercise of outstanding warrants.
(13) Mr. Finnegan is a member of the Company's Board of Directors.
(14) Includes 4,789 share held jointly by Mr. Finnegan and his wife, and 88,178
shares issuable to Mr. Finnegan upon the exercise of MicroTel options and
warrants.
(15) Includes 312,500 shares issuable upon the exercise of outstanding warrants,
and 1,010,600 shares issuable upon conversion of Series A Preferred Stock.
(16) Mr. Gallagher is a partner in Gallagher, Briody & Butler, a law firm which
provides legal services to the Company.
(17) Includes 68,510 shares issuable upon exercise of outstanding warrants.
(18) Mr. Hickey was a director of Hycomp, Inc. an indirect majority owned
subsidiary of the Company that was divested by the Company in March of 1999.
(19) Includes 34,110 shares issuable upon exercise of outstanding warrants.
(20) Includes 32,000 shares issuable upon exercise of outstanding warrants and
10,000 shares issuable upon the exercise of outstanding options.
(21) Includes 19,353 shares issuable upon exercise of outstanding warrants.
(22) Includes 3,457 shares issuable upon exercise of outstanding warrants.
(23) Includes 5,865 shares issuable upon exercise of outstanding warrants.
(24) Includes 17,595 shares issuable upon exercise of outstanding warrants.
(25) Includes 5,806 shares issuable upon the exercise of outstanding warrants
and 10,886 shares issuable upon exercise of outstanding options.
(26) Includes 3,457 shares issuable upon exercise of outstanding warrants.
(27) Includes 8,199 shares issuable upon exercise of outstanding warrants.
(28) Includes 11,730 shares issuable upon exercise of outstanding warrants.
(29) Includes 17,596 shares issuable upon exercise of outstanding warrants.
(30) Mr. Oliva is the President, Chief Executive Officer and Chairman of the
Board of the Company.
(31) Includes 477,076 shares, issuable to Mr. Oliva upon the exercise of options
and warrants and 50,530 common shares issuable from the conversion of one share
of Series A Convertible Preferred Stock.
(32) Includes 7,365 shares issuable upon exercise of outstanding warrants.
(33) Georgeann Oliva is the wife of Carmine T. Oliva.
(34) Includes 133,500 shares issuable upon exercise of outstanding warrants.
(35) Includes 7,365 shares issuable upon exercise of outstanding warrants.
(36) Includes 46,000 shares issuable upon the exercise of outstanding warrants,
36,287 shares issuable upon the exercise of outstanding stock options, and
101,060 issuable upon the conversion of preferred stock.
15
<PAGE>
(37) These shares are issuable upon exercise of outstanding stock options and
warrants.
(38) Includes 107,830 shares issuable upon the exercise of outstanding warrants,
and 101,060 shares issuable from the conversion of Series A Convertible
Preferred Stock.
(39) OTAF, LLC, a New York limited liability company owns 150,000 shares
issuable upon the exercise of warrants. Orbit II Partners L.P. and its
Managing Partners, Alan Mackenzie, Jr., David Marino and Joel S. Kraut have a
beneficial interest in 215,625 common shares issuable upon the exercise of
warrants and 1,743,000 common shares issuable upon the conversion of Series A
Preferred Stock in addition to ownership of 755,700 shares of common stock.
The Managing Partners are also Administrative Members of OTAF, LLC.
(40) See footnote 39.
(41) Includes 11,730 shares issuable upon exercise of outstanding warrants.
(42) Represents 456,750 shares issuable upon the exercise of outstanding
warrants.
(43) Mr. Runyon is a member of the Company's Board of Directors.
(44) Includes 147,217 shares issuable to Mr. Runyon upon the exercise of
outstanding options and warrants.
(45) Includes 262 shares issuable upon exercise of outstanding warrants.
(46) Includes 8,709 shares issuable upon exercise of outstanding warrants.
16
<PAGE>
PLAN OF DISTRIBUTION
The common shares to be acquired by the selling stockholders upon the
exercise of the warrants may be sold from time to time by the selling
stockholders, subject to a current and effective prospectus.
The common shares may be sold by the selling stockholders from time
to time in one or more transactions (which may involve block transactions) in
the over-the-counter market, in negotiated transactions, or in a combination of
such methods of sale, at fixed prices, at market prices prevailing at the time
of sale, at prices related to the prevailing market prices or at negotiated
prices.
The shares may be sold by one or more of the following methods: (1) a
block trade in which the broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
in order to consummate the transaction; (2) a purchase by a broker or dealer as
principal, and the resale by such broker or dealer for its account pursuant to
this prospectus, including resale to another broker or dealer; (3) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
(4) on any national securities exchange or quotation service on which the common
stock may be listed or quoted at the time of sale: (5) in the over-the-counter
market; (6) in privately negotiated transactions; (7) through options; (8) by
pledge to secure debts and other obligations; (9) to cover short sales; or (10)
by a combination of the above methods. In effecting sales, brokers or dealers
engaged by a selling stockholder may arrange for other brokers or dealers to
participate. Any such brokers or dealers will receive commissions or discounts
from a selling stockholder in amounts to be negotiated immediately prior to the
sale. Such brokers or dealers and any other participating brokers or dealers may
be deemed to be "underwriters" within the meaning of the Securities Act. Any
gain realized by such a broker or dealer on the sale of shares which it
purchases as a principal may be deemed to be compensation to the broker or
dealer in addition to any commission paid to the broker by a selling
stockholder. The selling stockholders may enter into hedging transactions with
broker-dealers, and in connection with those transactions, broker-dealers may
engage in short sales of the shares. The selling stockholders also may enter
into option or other transactions with broker-dealers that require the delivery
to the broker-dealer of the shares, which the broker-dealer may resell pursuant
to this prospectus. The selling stockholders also may pledge the shares to a
third party, and upon default, the third party may effect sales of the pledged
shares pursuant to the prospectus.
The selling shareholders may also transfer, devise or gift their
shares by other means not described in this prospectus. As a result, pledges,
donees, transferees or other successors in interest that receive such shares as
a gift, partnership distribution or other non-sale related transfer may offer
shares of common stock.
Some of the shares covered by this prospectus may be sold under Rule
144 instead of pursuant to the prospectus. We will not receive any portion of
the proceeds of the shares sold by the selling stockholders. The selling
shareholders are not required to actually sell any of the shares held by the
selling stockholders.
We have informed the selling stockholders that the anti-manipulation
provision of Regulation M promulgated under the Securities Exchange Act may
apply to the sales of shares. We have also advised the selling shareholders of
the requirement for delivery of this prospectus with any sale of shares offered
under this prospectus.
Selling shareholders may from time to time purchase shares of common
stock in the open market. We have informed the selling shareholders that they
should not sell shares under this prospectus unless they have stopped buying,
bidding for or attempting to induce any other person to bid for or buy common
stock in the open market as provided in applicable securities regulations,
including Regulation M.
17
<PAGE>
SECURITIES TO BE REGISTERED
(a) MARKET INFORMATION.
Until May 11, 1999, the Company's common stock was traded on the Nasdaq
SamllCap Market. On May 12, 1999, the listing of the Company's common stock on
the Nasdaq SmallCap Market was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board under the symbol "MCTL". As a
consequence, the Company could find it more difficult to obtain capital through
an equity offering of its stock in the future.
The table below shows the high and low sales prices per share of the
Company's common stock by quarter for the three months ended March 31, 2000 and
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
CALENDAR YEAR HIGH LOW
------------- ---- ---
<S> <C> <C>
2000
First Quarter $ 2.75 $ 0.4844
1999
Fourth Quarter $ 0.4375 $ 0.1562
Third Quarter 0.3906 0.1875
Second Quarter 0.5625 0.25
First Quarter 1.0938 0.375
1998
Fourth Quarter $ 0.875 $ 0.375
Third Quarter 1.063 0.438
Second Quarter 1.25 0.938
First Quarter 1.625 1.00
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
</TABLE>
(b) SHAREHOLDERS
As of June 1, 2000, the Company had 3,663 stockholders of record, of
which 450 were round lot stockholders, and approximately 3,800 beneficial
stockholders.
(c) DIVIDENDS
No dividends on the Common Shares have been paid by the Company to
date. The Company's Loan and Security Agreement with Congress Financial
Corporation prohibits the payment of cash dividends on the Common Shares. The
Company currently intends to retain future earnings to fund the development and
growth of its business and, therefore, does not anticipate paying cash dividends
on the Common Shares within the foreseeable future. Any future payment of
dividends on the Common Shares will be determined by the Company's Board of
Directors and will depend on the Company's financial condition, results of
operations and other factors deemed relevant by its Board of Directors.
18
<PAGE>
LEGAL MATTERS AND EXPERTS
The validity of the shares of common stock offered under this
prospectus and certain other legal matters will be passed upon by Gallagher,
Briody & Butler, Princeton, New Jersey.
The consolidated financial statements and schedule included in this
prospectus and in the registration statement have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their report (which contains an explanatory paragraph regarding the
company's ability to continue as a going concern), appearing elsewhere herein
and in the registration statement and are incorporated herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
BUSINESS
OVERVIEW
MicroTel International, Inc. (the "Company"), through its various
direct and indirect subsidiaries, designs, manufactures and distributes a wide
range of electronics hardware products and provides related services primarily
to the telecommunications industry. Approximately 55% of the Company's product
sales are to customers in the telecommunications industries, including, among
many others, 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 does not market the products manufactured
and distributed by its subsidiaries in connection with the "MicroTel" name but
rather such products are distributed under each subsidiary's market-recognized
brand-names.
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 ("XIT") 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.
During 1999, the Company achieved certain objectives. In January 1999,
the Company acquired approximately 41% of the common stock of Digital
Transmission Systems, Inc. ("DTS"), a public company (OTC BB - DTSX), to expand
the Company's range of products to include wireless voice and data transmission
products. As part of its strategy to divest itself of certain subsidiaries, the
Company sold substantially all of the assets of HyComp, Inc. ("HyComp") which
manufactured hybrid circuits.
In November, 1999, the Company relocated and downsized its corporate
headquarters and the Digitran component operations of its XIT Corporation
("XIT") subsidiary to Rancho Cucamonga from a 63,000 square
19
<PAGE>
foot facility in Ontario, California. The corporate headquarters were relocated
to a 5,400 square foot office suite and the XIT operations were moved to a
15,745 square foot manufacturing facility. Both new locations are located in the
City of Rancho Cucamonga and are approximately within one mile of each other.
The move reduced monthly rental expense by $23,500 as well as reducing utility
expenses. Concurrent with the relocation, the Company sold its interest in
Capital Source Partners, a partnership that owned the building from which the
Company moved.
In January 2000 the Company sold all of its interest in DTS to Wi-LAN,
Inc. of Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN,
Inc. common stock , which is traded on the Toronto, Ontario stock exchange. The
market value of the acquired common stock of Wi-LAN, Inc. was approximately
$720,000 on the date of the transaction. The Company's decision to sell the DTS
stock was due to (1) the investment in DTS not providing expected benefits and
(2) the Company's need to increase liquidity and working capital.
Within the electronics industry, the Company now manufactures and
distributes three product lines and is organized into three related business
segments (which are described as sectors throughout this document) that are
discussed below.
1. INSTRUMENTATION AND TEST EQUIPMENT SECTOR
The Instrument and Test Equipment Sector is the Company's largest
sector, reporting 55% of the Company's net sales in 1999. This section is
considered the Company's core business and is the focus of the Company's growth
strategy. The products of this sector are manufactured by CXR and CXR, S.A. In
addition, CXR, S.A. performs network integration services and distributes test
equipment and data, voice and video transmission products manufactured by third
parties. Their customers include AT&T, France Telecom,the RBOCs, interconnect
carriers, independent telephone operating companies, private communications
networks, banks, brokerage firms and government agencies.
TELECOMMUNICATIONS TEST EQUIPMENT. The CXR HALCYON line of telecommunications
test equipment is used for installation, service and maintenance of
telecommunications services. With the explosive expansion of analog and
high-speed digital internet services and other competitive service alternatives,
the market for this test equipment has expanded dramatically. Regional Bell
Operating Companies ("RBCs"), Competitive Local Exchange Carriers ("CLECs"),
Long Distance Providers and Internet Service Providers ("ISPs") have been forced
to develop the capacity to install, identify and isolate troubles in the
transmission facilities and terminating equipment. In addition, with the growth
of e-commerce and internet related Business-to-Business activities, the
Information Technology ("IT") managers of Fortune-1000 companies have had to
incorporate internal test and maintenance organizations to ensure that corporate
Wide Area Networks ("WANs") are fully operational with minimum downtime.
The CXR HALCYON line of telecommunications equipment provides an
exceptional solution to integrated services installation, maintenance and
testing. Incorporation of the "Critical Communications" product line, acquired
in October 1997, has been completed and the stage has been set to take advantage
of the unique combination of performance and value offered by these products.
The new 700 series of telecommunications test sets, acquired through
the Critical Communications, Inc. acquisition, are a modular, rugged,
lightweight and hand-held line of products which are used predominantly by
telephone and internet companies to qualify and certify service offerings to end
users. These sets are configured in a variety of models designed to perform
analog and digital measurements from voice grade to wide-band Internet circuit
applications. Testing of the physical copper pair and qualifying it for
wide-band Digital Subscriber Services ("DSL") is a primary concern of the
telephone service providers. These voice and internet
20
<PAGE>
services include Plane Old Telephone services (POTs, Caller-ID, CO/PBX), Digital
Data Services (ISDN, DDS, T-1 and FT1), High Capacity Digital Subscriber Lines
("HDSL") and Asymmetrical Digital Subscriber Lines ("ADSL"). The unique modular
nature of this test equipment provides an easy configuration and upgrade path
for testing of the specific services offered by the various regional service
providers. The 700 series of telecommunications test equipment supports national
and international (CCITT) service applications.
Recent key performance enhancements to the 700 series product family
address the enormous appetite for conversion of analog service installations to
high-speed digital access lines. Some of these key features are: 1) 23-tone
test, an automated single key-stroke test which performs the equivalent of over
12 individual test sequences, 2) Load-Coil analysis, which identifies the
presence of voice coils which prevent high-speed digital access, 3) DS3,
installation and test of very high-speed digital transmission service equivalent
to 28 T-1 circuits and 4) Voice analysis and testing individual T-1 Channels.
These enhancements allow further penetration of CXR HALCYON test equipment into
the enormous telecommunications services market.
TRANSMISSION AND NETWORK ACCESS PRODUCTS. CXR develops, manufactures, and sells
a broad line of Anderson Jacobson ("AJ") transmission and network access
products. These include a line of high quality professional grade modems, which
are used worldwide for networking and central office telecommunications
applications including voice mail and billing systems. These modems are sold as
stand-alone devices for remote sites or as rackmount versions for central site
applications with end-to-end management. All Anderson Jacobson modems are
"feature rich" and generally offer more capabilities and better performance than
competing products especially when operating over poor quality lines. This
characteristic alone has made the AJ modems the modem of choice for voice-mail
applications where they are deployed in large numbers throughout the United
States. These products are also available in more rugged versions for industrial
applications like telemetry and remote monitoring.
Together with modems, CXR also offers a line of ISDN terminal adapters,
the digital equivalent of the analog modems. These terminal adapters are used in
a broad range of applications including point of sale and videoconferencing.
These adapters are available in standalone as well as rackmount versions. CXR is
also manufacturing a line of ISDN intelligent multiplexer/switches called the
CB2000, which are used to convert ISDN primary accesses into multiple basic
accesses with port-to-port switching. This product, which was designed primarily
for the European market, allows for a better use of ISDN resources and
facilitates the migration from basic rate to primary rate access.
The MD2000 is a new addition to the growing family of AJ transmission
products. It allows data transmission over a single copper pair at E1 or FE1
speed over a distance of up to 8.0 miles. It comes with a choice of different
interfaces including an Ethernet port with full bridging capability.
The AJ Smart rack is a universal shelf rack that holds up to sixteen
cards including analog modems, ISDN adapters and MDSL modems and CSU/DSU's. When
the optional intelligent controller card is installed, the data center manager
can keep track and modify configurations, run diagnostic routines or record
alarms. The main advantage of the Smart rack is the simplicity of operation
through a menu driven user interface.
REMOTE ACCESS PRODUCTS. CXR also markets a line of Remote Access Servers (RAS)
to address the Internet Service Providers market as well as corporate user
market. In a corporate environment these products are used to connect remote
users to the corporate local area network ("LAN") via the telephone network or
via the ISDN network using analog modems or terminal adapters. Systems range
from 8 to 64 ports with built-in security. Like all other AJ products the RAS
products are fully remotely manageable.
NETWORKING SYSTEMS. In 1996 CXR, S.A. formed a new business unit to market
several lines of products used to build multimedia enterprise networks. These
products are all purchased from third-party vendors under OEM or
21
<PAGE>
distributorship agreements. These network products are sold to customers in a
turnkey solution and includes network design, installation and maintenance and
often incorporates CXR's own manufactured products.
The product lines marketed consist of three main categories: (i)
Data-voice multiplexers to transport voice data and video over point to point
lease lines or frame relay networks; (ii) ISDN routers used to connect remote
offices to corporate offices; (iii) terminal servers and remote access servers
to connect local and remote users to the corporate LAN.
2. COMPONENTS AND SUBSYSTEM ASSEMBLIES SECTOR
The Components and Subsystem Assemblies Sector is the Company's second
largest and most profitable business sector representing approximately 36% of
1999 net sales. This business will continue to be managed for profitability and
growth for so long as it contributes to profitability, diversification of
earnings and contributes to the growth of the core Instruments and Test
Equipment Sector. Components and Subsystem Assemblies products are produced
and/or sold by XIT's Digitran Division, based in Rancho Cucamonga, California,
XCEL Ltd. and XCEL Power Systems, Ltd., wholly-owned subsidiaries of XIT based
in England, and another wholly-owned subsidiary, XCEL Japan, Ltd. XIT's Digitran
Division relocated from its Ontario facility to a smaller, lower cost facility
in Rancho Cucamonga in November 1999 simultaneously with the relocation of the
corporate headquarters from Ontario to an office suite in Rancho Cucamonga.
Although the Company plans to intensify its focus on the telecommunications
sector, the Company intends to continue its efforts to increase the
profitability and growth of the component sector businesses.
COMPONENTS
XIT's Digitran Division manufactures and sells digital switch products
serving aerospace, military, 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. The Digitran Division
previously produced the XCEL-Lite display color monitor product which was sold
in December 1998. Color and monochrome monitors (including XCEL-Lite) are sold
in Europe through XCEL Ltd.
XCEL Power Systems Ltd., located in Ashford, Kent, England, produces a
range of high and low voltage, high specification, compact and microelectronic
power supplies for an international customer base, including telecommunications,
aerospace and military customers.
XCEL JAPAN Ltd. resells various Digitran Division Products and other
third party Asian source components primarily into Japan and also into other
highly industrialized Asian countries.
22
<PAGE>
SUBSYSTEMS
The Company's Digitran Division previously produced subsystem
assemblies but discontinued marketing this service to new customers early in
1999. However, Digitran does continue this service for selected previous
customers. The Company's XCEL Power Systems, Ltd. UK subsidiary offers complete
manufacturing solutions to OEMs, outside and internal divisions and
subsidiaries, 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's XCEL Ltd. subsidiary believes its ability to
manufacture various electronic components, combined with its engineering
integration capability, provides it with a number of competitive advantages in
providing custom contract assembled subsystem assemblies. XCEL UK is able to
engineer and manufacture communications, medical, industrial, and military input
and display subsystems and other subsystem assemblies.
3. CIRCUITS SECTOR
This is the Company's smallest sector, generating approximately 9% of
net sales in 1999. Two of the previous units making up this sector, XCEL Arnold
Circuits, Inc. and HyComp, Inc. have been sold and the Company intends to
evaluate its alternatives related to this sector, including the possible
divestiture of its remaining XCEL Etch-Tek Division.
BACKLOG
The Company's business is not generally seasonal, with the exception
that the capital equipment purchases by telecom customers are lower than average
during the first quarter of each year as new budgets for calendar year purchases
of capital equipment are typically not approved until late in the first quarter,
thereby impacting the Instrumentation and Test Equipment sector. The Company's
backlog of firm, unshipped orders was as follows by business sector at March 31,
2000 and March 31, 1999.
<TABLE>
<CAPTION>
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Instrumentation and Test Equipment $ 1,525 $ 803
Components and Subsystem
Assemblies 6,179 5,222
Circuits 265 216
------------ ------------
$ 7,969 $ 6,241
============ ============
</TABLE>
The Company's backlog increased by $1,628,000 or 26% to $7,869,000 at
March 31, 2000 from $6,241,000 at March 31, 1999. The backlog in the
Instrumentation and Test Equipment segment increased by $722,000 at March 31,
2000 as compared to March 31, 1999 due to increases in order levels primarily
affected by the new 700 series test equipment. The increase in backlog of
$957,000 at March 31, 2000 as compared to March 31, 1999 in the Components and
Subsystem Assemblies segment was due to general increases in orders received and
receipt of a large order from British Aerospace PLC for the completion of a U.S.
Army contract.
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. Management is implementing a plan of outside contract manufacturing
for its U.S. produced
23
<PAGE>
telecom test equipment. Also, the Company is consolidating all its transmission
and modem manufacturing for the North American and European markets at its
French manufacturing facility at CXR, S.A.
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 CXR, S.A.). For the years ended December 31,
1999, 1998 and 1997, engineering and product development costs of the Company
were $1,873,000, $2,454,000 and $2,046,000, respectively. The decline in these
expenses in 1999 as compared to 1998 was primarily due to the sale of HyComp in
March 1999 as the net 1999 amount represents a slight increase exclusive of
HyComp.
The product development costs of CXR and CXR, S.A. were $1,213,000,
$2,202,000 and $1,797,000 during the years ended December 31, 1999, 1998 and
1997, 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
profit margins, although no assurances may be given that such improvements will
be achieved.
CXR and CXR SA 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 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.
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 Company's Components and Subsystem Assemblies Sector competes in a
highly fragmented market composed of a diverse group of manufacturers. The
Company believes that the primary bases of competition in this market segment
are capability, price, manufacturing quality, advanced manufacturing technology
and
24
<PAGE>
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 successfully compete, particularly in Europe.
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.
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. The Company competes
primarily against other independent manufacturers. A number of the Company's
competitors are larger than the Company and have greater financial, marketing
and other resources. It is for these reasons the Company is evaluating plans to
effectively exit this market.
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, 1999, the Company employed 223 persons. Of these
employees, 127 employees are employed in the United States and 96 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.
25
<PAGE>
PROPERTIES
As of March 31, 2000, the Company leases or owns approximately 100,000
square feet of administrative, production, storage and shipping space. All of
these facilities are leased other than the Abondant, France facility.
<TABLE>
<CAPTION>
BUSINESS UNIT LOCATION FUNCTION
<S> <C> <C>
MicroTel International Inc. Rancho Cucamonga, Administrative
(Corporate Headquarters) California
XIT Corporation/Digitran Rancho Cucamonga, California Manufacturing
(Components and subsystem assemblies)
XCEL Etch Tek Concord, California Manufacturing
(Circuits) Monrovia, California
XCEL Power Systems, Ltd. and XCEL Ltd. Ashford, United Kingdom Administrative/
(Components and subsystem assemblies) Manufacturing
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales/Assembly
(Components and subsystem assemblies)
CXR, S.A Paris, France Administration/Sales
(Instrumentation and test equipment)
CXR, S.A Abondant, France Manufacturing/Engineering
(Instrumentation and test equipment)
CXR Fremont, California Administrative/
(Instrumentation and test equipment) Manufacturing
CXR St. Charles, Illinois Engineering/Customer Service
(Instrumentation and test equipment)
</TABLE>
The lease for the Fremont facility will expire in or about September
2002, with one five-year renewal option. The Company has subleased approximately
12,000 square feet of this facility. The lease for the Paris, France facility
expires in April 2007. The Monrovia facility was covered by a lease that expired
in October 1999 and is currently being rented on a month to month basis until a
new lease is executed. The Concord facility is subject to a lease that expires
in September 2001, with options to renew until April 2016. 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.
On October 16, 1999, the Company sold its interest in the partnership
that owned the property at 4290 E. Brickell Street, Ontario, California, which
the Company leased, for assumption of the Company's rent debt of $152,000,
$75,000 in cash and forgiveness of certain other debt of approximately $17,000.
The sale also included a provision to release the company of its future lease
obligations consisting of seven remaining years and approximately $3,000,000 of
future lease payments regarding such property. As part of the mutual release,
the Company relinquished its claim on a $51,000 deposit and $115,000 note
receivable from the lessor. In accordance with this agreement, the Company
vacated the Brickell Street property on October 31, 1999. The Company relocated
its XIT Corporation components manufacturing operations to a 15,745 square foot
26
<PAGE>
manufacturing facility at 9654 Hermosa Avenue, Rancho Cucamonga, California and
relocated its administration and executive headquarters to a 5,400 square foot
office facility at 9485 Haven Avenue, Rancho Cucamonga, California. The lease on
the Hermosa Avenue property expires on November 30, 2004 and the lease on the
Haven Avenue property expires on October 31, 2002. The relocation to Rancho
Cucamonga, California and the subleasing of part of the Fremont facility are
expected to reduce costs by approximately $500,000 per year.
The Company believes that these facilities are adequate for the current
business operations but with the planned transition to contract manufacturing by
CXR of test instruments and with the consolidation and transfer of transmission
products, manufacturing and engineering to France, the Company intends to
sublease an additional 13,000 square feet of its Fremont facility in the year
2000 leaving a residual of 2,000 square feet at the Fremont, California
facility.
27
<PAGE>
LEGAL PROCEEDINGS
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 40,000
shares of common stock purchased by Mr. Scheinfeld. 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, in the absence of
registrations, the Company could not issue unrestricted shares, 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
subsequently answered, denying the material allegations of the complaint.
During the third quarter of 1999, settlement was reached with respect
to the Scheinfeld case. The Company agreed to pay $75,000 payable in an initial
payment of $6,250 and eleven monthly payments of $6,250 thereafter without
interest.
DANIEL DROR & ELK INTERNATIONAL, INC. 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 had breached an alleged oral modification of the Agreement. In
January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.
In April 1998, the Company brought an action in California against the
former Chairman for breach of the Agreement and sought recovery of all stock,
warrants and debt due the Company. The Company obtained a judgement against the
former Chairman in this litigation.
In December 1997, Elk International Corporation Limited ("Elk"), 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. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.
In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement called for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000. In
addition, the Company issued 1,000,000 warrants to purchase the Company's common
stock at an exercise price of $1.37 per share for two years in exchange for the
returning 750,000 options and returning 90,000 warrants all to purchase the
Company's common stock at an exercise price of $2.50 per share for 2.8 years.
The fair value of the warrants granted over the options and warrants returned on
the date of the settlement was approximately $17,000. The Company accrued for
this settlement in the accompanying 1998 consolidated financial statements.
28
<PAGE>
MARKET INFORMATION
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 and local loop carriers.
The principal customers for Components and Subsystems are OEMs in the
electronics industry and include manufacturers of communications equipment,
industrial 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.
During the periods presented in this report, the customers for the
Circuits Sector included GenRad, Raytheon, Lockheed Martin, Tektronics,
Teradyne, Holland Signal, Racal, EFW and Loral among others.
The Company's largest customer was Motorola which accounted for
approximately 14%, of the net sales for the year ended December 31, 1997. These
sales were made by XCEL Arnold, the assets of which were sold by the Company on
March 31, 1998. No customer accounted for more than 10% of the Company's net
sales in 1999 or 1998.
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 prospectus).
29
<PAGE>
FINANCIAL STATEMENTS
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
<S> <C>
Audited Financial Statements for Fiscal Year 1999:
- Report of Independent Certified Public Accountants..................................31
- Consolidated Balance Sheets.........................................................32
- Consolidated Statements of Operations...............................................33
- Consolidated Statements of Stockholders' Equity.....................................34
- Consolidated Statements of Cash Flows...............................................35
- Notes to Consolidated Financial Statements..........................................
Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts..................59
Unaudited Financial Statements for Three Months Ended March 31, 2000:
- Consolidated Condensed Balance Sheets...............................................60
- Consolidated Condensed Statements of Operations.....................................61
- Consolidated Condensed Statements of Cash Flows.....................................62
- Notes to Consolidated Condenses Financial Statements
for the Three Months Ended March 31, 2000...........................................63
</TABLE>
30
<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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. We have also
audited the information for each of the years in the three-year period ended
December 31, 1999 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999 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 a certain covenant of its domestic
credit facility agreement, 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.
/S/ BDO Seidman, LLP
Orange County, California
March 3, 2000
31
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS (NOTES 7 AND 8) 1999 1998
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 481 $ 572
Accounts receivable, net of allowance for doubtful accounts of
$202 and $275 6,519 7,337
Current portion of notes receivable (Notes 3 and 6) -- 291
Inventories (Note 4) 4,181 6,426
Prepaid and other current assets 578 926
-------- -------
Total current assets 11,759 15,552
Property, plant and equipment, net (Note 5) 1,393 1,939
Goodwill, net of accumulated amortization of $433 and $239 (Notes 2 and 3) 1,507 1,701
Notes receivable, less current portion (Note 3) -- 533
Investment in affiliates (Notes 3 and 6) 1,240 150
Other assets 722 1,367
-------- -------
$16,621 $21,242
======== =======
LIABILITIES. REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7) $ 2,107 $ 3,379
Current portion of long-term debt (Note 8) 1,422 805
Accounts payable 4,771 4,269
Accrued expenses 2,985 3,312
-------- -------
Total current liabilities 11,285 11,765
Long-term debt, less current portion (Note 8) 165 1,430
Other liabilities 782 954
Minority interest (Note 3) -- 95
-------- -------
Total liabilities 12,232 14,244
Convertible redeemable preferred stock, $10,000 unit value
Authorized 200 shares; issued and outstanding 59.5 shares in 1999 and 161
shares in 1998 (aggregate liquidation preference of
$595 and $1,610, respectively) (Note 9) 588 1,516
Commitment and contingencies (Notes 10, 14 and 16)
Subsequent event (Note 3)
Stockholders' equity (Notes 2, 3, 9, 10 and 14):
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.0033 par value. Authorized 25,000,000 shares;
issued and outstanding 18,152,000 and 12,622,000 shares 60 42
Additional paid-in capital 23,726 20,463
Accumulated deficit 19,759) 15,122)
Accumulated other comprehensive income (loss) (226) 99
-------- -------
Total stockholders' equity 3,801 5,482
-------- -------
$16,621 $21,242
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 15) $ 28,301 $ 37,261 $ 43,098
Cost of sales 19,659 23,871 32,670
------------ ------------ ------------
Gross profit 8,642 13,390 10,428
Operating expenses:
Selling, general and administrative 10,795 11,826 11,361
Engineering and product development 1,873 2,454 2,046
Write-down of goodwill (Note 11) -- -- 5,693
------------ ------------ ------------
Loss from operations (4,026) (890) (8,672)
Other income (expense):
Interest expense (411) (675) (895)
Gain on sale of subsidiary/investment,
net (Notes 3 and 6) 359 580 --
Other, net (Note 3) (390) (99) (29)
------------ ------------ ------------
Loss before income taxes (4,468) (1,084) (9,596)
Income taxes (Note 12) 128 101 97
Net loss $ (4,596) $ (1,185) $ (9,693)
------------ ------------ ------------
Other comprehensive income (loss)
Foreign currency translation adjustment (325) 206 (260)
------------ ------------ ------------
Total comprehensive income (loss) $ (4,921) $ (979) $ (9,953)
============ ============ ============
Basic and diluted loss per share (Note 13) $ (.28) $ (.10) $ (.96)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) TOTAL
------ ------ -------- ----------- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Foreign currency translation adjustment -- -- -- -- (260) (260)
Accretion of preferred stock -- -- -- (60) -- (60)
Net loss -- -- -- (9,693) -- (9,693)
-------------------------------------------------------------------------
Balance at December 31, 1997 11,926 39 19,960 (13,877) (107) 6,015
Stock issued upon conversion of preferred
stock (Note 9) 770 3 364 -- -- 367
Repurchase of stock issued in connection
with settlement of dispute (Note 10) (80) -- (168) -- -- (168)
Stock issued under stock purchase plan 7 -- 7 -- -- 7
Warrants issued in connection with
issuance of preferred stock (Note 9) -- -- 163 -- -- 163
Warrants issued for services -- -- 85 -- -- 85
Repricing of warrants issued in connection
with issuance of preferred stock (Note 9) -- -- 52 -- -- 52
Foreign currency translation adjustment -- -- -- -- 206 206
Accretion of preferred stock -- -- -- (60) -- (60)
Net loss -- -- -- (1,185) -- (1,185)
-------------------------------------------------------------------------
Balance at December 31, 1998 12,622 42 20,463 (15,122) 99 5,482
Stock issued upon conversion of preferred
stock (Note 9) 2,659 9 960 -- -- 969
Stock issued in connection with
acquisition (Note 3) 1,000 3 997 -- -- 1,000
Stock issued as compensation 1,716 6 1,077 -- -- 1,083
Stock and warrants issued in connection
with settlement of dispute (Note 14) 150 -- 73 -- -- 73
Stock issued under stock purchase plan 5 -- 2 -- -- 2
Warrants issued for services -- -- 63 -- -- 63
Repricing of warrants issued in connection
with issuance of preferred stock (Note 9) -- -- 91 -- -- 91
Foreign currency translation adjustment -- -- -- -- (325) (325)
Accretion of preferred stock -- -- -- (41) -- (41)
Net loss -- -- -- (4,596) -- (4,596)
-------------------------------------------------------------------------
Balance at December 31, 1999 18,152 $ 60 $ 23,726 $ (19,759) $ (226) $ 3,801
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,596) $ (1,185) $ (9,693)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 393 409 923
Amortization of intangible assets 540 449 358
Provision for doubtful accounts and notes
receivable 488 97 251
Provision for inventory obsolescence 1,145 885 3,134
Write-down of goodwill -- -- 5,693
Provision for impairment of investment 419 -- --
Equity in earnings of unconsolidated
investments (653) (24) 21
Gain on the sale of subsidiary/investment (359) (580) --
Stock and warrants issued for services 1,146 85 22
Repricing of warrants 91 52 --
Minority interest (33) 7 20
Changes in operating assets and liabilities:
Accounts receivable 782 (1,101) (554)
Inventories 741 (1,017) (1,011)
Prepaids and other assets 672 (411) 413
Accounts payable 621 (339) (755)
Accrued expenses and other liabilities (231) (460) (490)
--------- --------- ---------
Cash provided by (used in) operating activities 1,166 (3,133) (1,668)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (124) (182) (424)
Cash received on sale of subsidiary/investment 868 1,350 --
Cash acquired in acquisition/merger -- -- 273
Cash collected on notes receivable 9 451 125
--------- --------- ---------
Cash provided by (used in) investing activities 753 1,619 (26)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable (1,272) (251) (3)
Proceeds from long-term debt -- 1,542 163
Repayments of long-term debt (415) (2,916) (1,606)
Preferred stock dividends paid -- -- (140)
Proceeds from sale of preferred stock -- 2,000 --
Payment of preferred stock and debt issuance costs -- (423) --
Proceeds from sale of common stock 2 7 4,258
--------- --------- ---------
Cash provided by (used in) financing activities (1,685) (41) 2,672
--------- --------- ---------
Effect of exchange rate changes on cash (325) 206 57
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (91) (1,349) 1,035
Cash and cash equivalents at beginning of year 572 1,921 886
--------- --------- ---------
Cash and cash equivalents at end of year $ 481 $ 572 $ 1,921
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 443 $ 652 $ 827
=========== ============ ===========
Income taxes $ 124 $ 138 $ 58
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note receivable received upon sale of subsidiary $ -- $ 650 $ --
=========== ============ ===========
Warrants issued in connection with issuance of
preferred stock $ -- $ 163 $ --
=========== ============ ===========
Common stock issued upon conversion of preferred
stock $ 969 $ 367 $ --
=========== ============ ===========
Accretion of preferred stock $ 41 $ 60 $ 60
=========== ============ ===========
Issuance of common stock and warrants in
connection with settlement of dispute $ 73 $ -- $ 190
=========== ============ ===========
Repurchase of common stock issued in connection
with settlement of dispute in exchange for
Payable $ -- $ 168 $ --
=========== ============ ===========
Issuance of common stock in connection with
acquisitions $ 1,000 $ -- $ 6,370
=========== ============ ===========
Issuance of common stock upon exercise of stock
options $ -- $ -- $ 97
=========== ============ ===========
Issuance of common stock upon conversion of debt
to equity $ -- $ -- $ 44
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and 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, power supplies and various printed circuits. The Company conducts
its operations out of various facilities in the U.S., France, England and Japan
and organizes itself in three product line sectors: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits.
BASIS OF PRESENTATION
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 be
the 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.
The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 3) and its 50% investment in a real estate
partnership (Note 6) are accounted for using the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
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).
37
<PAGE>
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).
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 $66,000 and $412,000 (net of accumulated amortization of $763,000 and
$417,000) at December 31, 1999 and 1998, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $346,000, $169,000 and $248,000 was charged to cost
of sales during 1999, 1998 and 1997, respectively.
DEBT ISSUANCE COSTS
The costs related to the issuance of debt and the redeemable preferred
stock are capitalized and amortized over the life of the instrument.
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.
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.
38
<PAGE>
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 year and the change during the
year 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
Earnings (loss) per share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings 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 year. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the earnings of an entity.
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, 1999 and 1998, the fair value of all
financial instruments approximated carrying value.
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.
39
<PAGE>
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 in accumulated
other comprehensive income (loss). 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.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements. All prior period data presented have been restated to conform to the
provisions of SFAS 130.
REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires public business enterprises
to report certain information about operating segments in complete sets of
financial statements and in condensed financial statements of interim periods
issued to shareholders. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. All prior period
data presented has been restated to conform to the provisions of SFAS 131. The
Company has determined that it operates in three reportable segments:
Instrumentation and Test Equipment, Components and Subsystem Assemblies, and
Circuits.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the 1999 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, the
40
<PAGE>
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 year ended December 31,
1997.
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net sales $ 46,094,000
================
Net loss $ (12,097,000)
================
Basic and diluted loss per share $ (1.12)
================
</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
CRITICAL COMMUNICATIONS
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 statements of
operations. 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.
HYCOMP
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. In May 1996, the Company acquired additional common shares 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
41
<PAGE>
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 at December 31, 1998 and 1997.
Dividends on the preferred stock are cumulative at 8% per year, and minority
interest at December 31, 1998 and 1997 includes cumulative dividends in arrears
of $8,000.
On March 31, 1999, the Company sold substantially all of the assets and
liabilities of its HyComp, Inc. subsidiary in exchange for $750,000 in cash and
a royalty on 1999 revenues generated from HyComp's existing customer base in
excess of a specified amount. The transaction resulted in a gain of $331,000.
Summarized below is the unaudited pro forma financial information of the Company
as though the assets had been sold at the beginning of the year ended December
31, 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net sales $ 27,845,000 $ 34,435,000
=================== ===================
Net loss $ (4,306,000) $ (1,469,000)
=================== ===================
Basic and diluted loss per share $ (.26) $ (.13)
=================== ===================
Total assets $ 16,621,000 $ 19,125,000
=================== ===================
</TABLE>
In October 1999, the Company sold its interest in the outstanding
common and preferred stock of HyComp in exchange for $118,000. A gain in the
same amount was recorded in 1999 as HyComp, subsequent to the asset sale noted
above, was essentially a shell company with no significant assets or
liabilities.
XCEL ARNOLD CIRCUITS
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 was payable over three years. The sale
resulted in a gain of $580,000. The balance due under the note receivable was
$650,000 at December 31, 1998 of which $144,000 is included in current portion
of notes receivable in the accompanying 1998 consolidated balance sheet.
Summarized below is the 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>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 35,752,000 $ 34,068,000
=================== ===================
Net loss $ (715,000) (7,327,000)
=================== ===================
Basic and diluted loss per share $ (.06) (.73)
=================== ===================
Total assets $ 21,242,000 $ 21,021,000
=================== ===================
</TABLE>
During 1999, the buyer of XACI defaulted under the terms of the note
receivable. The Company offset the balance outstanding pursuant to a note
payable due to the buyer (Note 7) against the note receivable and then wrote-off
the net unpaid balance of $452,000. Such amount has been included in the net
amount of other expense in the accompanying 1999 consolidated statement of
operations.
42
<PAGE>
DIGITAL TRANSMISSION SYSTEMS
On January 31, 1999, the Company exercised an option to purchase
1,738,159 shares or 41% of the outstanding common stock of Digital Transmission
Systems, Inc. ("DTS") from a private company in exchange for 1,000,000 shares of
common stock of the Company. The Company's shares exchanged were valued at
$1,000,000 based on the fair value of the common stock on the transaction date,
excluding $33,000 of transaction-related costs. This option was granted to the
Company on December 31, 1998 in exchange for warrants (with a fair value of
approximately $55,000) to purchase 152,381 shares of the Company's common stock
at $0.66 per share for five years. DTS was founded in 1990 and is a publicly
traded company with its headquarters near Atlanta, Georgia. It designs,
manufactures and markets electronic products used to build, access and monitor
high-speed telecommunications networks worldwide. DTS's primary customers
include domestic and international wireless service providers, telephone service
providers and private wireless network users. During 1999, the Company accounted
for its investment in DTS using the equity method of accounting and recognized
$626,000 of income from its 41% interest in DTS. This amount is included in the
net amount of other income in the accompanying 1999 statement of operations.
On January 7, 2000, the Company sold all of its interest in the common
stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a
market value of $720,000 on the date of the transaction. Accordingly, as of
December 31, 1999, the Company wrote-down the carrying value of its investment
in the common stock of DTS to the value of the consideration received in January
2000. The write-down of $419,000 is included in other income (expense) in the
accompanying statement of operations for the year ended December 31, 1999. The
Company is restricted from selling the Wi-LAN stock until July 7, 2000 due to
Toronto exchange rules that restrict sales of stock obtained in an acquisition
related transaction.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 1,728,000 $ 2,926,000
Work-in-process 1,199,000 2,375,000
Finished goods 1,254,000 1,125,000
------------------ ------------------
$ 4,181,000 $ 6,426,000
=================== ===================
</TABLE>
Included in the amounts above is an allowance for inventory
obsolescence of $1,388,000 and $1,766,000 at December 31, 1999 and 1998,
respectively.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and buildings $ 306,000 $ 348,000
Machinery, equipment and fixtures 3,805,000 3,971,000
Leasehold improvements 479,000 1,022,000
------------------ ------------------
4,590,000 5,341,000
</TABLE>
43
<PAGE>
<TABLE>
<S> <C> <C>
Accumulated depreciation and amortization (3,197,000) (3,402,000)
------------------- -------------------
$ 1,393,000 $ 1,939,000
=================== ===================
</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 occupied 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 $150,000 was included in investment in affiliates in the
accompanying 1998 consolidated balance sheet. The balance due under the note
receivable was $124,000 at December 31, 1998 and was included in current portion
of notes receivable in the accompanying 1998 consolidated balance sheet.
In August 1999, the Company sold its interest in the partnership and
the note receivable to an unrelated party in exchange for $75,000. In connection
with this agreement, all associated liabilities were assumed by the purchaser
and all of the Company's unpaid rent in the amount of approximately $152,000 was
forgiven. Additionally, the Company's obligation under the long-term lease was
terminated. In connection with the sale of its investment in partnership, the
Company recognized a loss of $90,000.
(7) NOTES PAYABLE
A summary of notes payable is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Line of credit with a commercial lender $ 2,014,000 $ 2,485,000
Foreign subsidiary line of credit with a bank -- 77,000
Foreign subsidiary line of credit with a bank 93,000 317,000
Other notes payable -- 500,000
------------- -------------
$ 2,107,000 $ 3,379,000
============= =============
</TABLE>
On July 8, 1998, the Company entered into a $10.5 million credit
facility (the "Domestic Facility") with a commercial lender for a term of two
years which provided (i) a term loan of approximately $1.5 million; (ii) a
revolving line of credit of up to $8 million based upon assets available from
either existing or future-acquired operations; and (iii) a capital equipment
expenditure credit line of up to $1 million. This credit facility replaced the
existing credit facilities of the Company's domestic operating companies that
were paid in full at the closing.
Borrowings under the revolving line of credit provision of the Domestic
Facility totaled $2,014,000 and $2,485,000 at December 31, 1999 and 1998,
respectively. The credit line is collateralized by substantially all assets of
the Company's domestic subsidiaries, bears interest at the lender's prime rate
(8.5% at December 31, 1999) plus 1% and is payable on demand. No additional
borrowings were available under the line at December 31, 1999. No borrowings
were outstanding under the $1 million of the capital equipment expenditure
credit line at December 31, 1999 or 1998. The lines of credit expire on June 23,
2000. The Domestic Facility agreement requires compliance with certain covenants
and conditions. The Company was in compliance with, or had obtained waivers for,
all such covenants as of December 31, 1999, except for the adjusted net worth
covenant.
44
<PAGE>
The Company's French subsidiary has a bank line of credit with $0 and
$77,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at 4.2% to 4.6% at December 31, 1999
and are based on eligible accounts receivable. Approximately $380,000 of
borrowings were available under the line at December 31, 1999.
The Company's UK subsidiary has a bank line of credit with $93,000 and
$317,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at the bank's base rate (5.5% at
December 31, 1999) plus 2.5% and are based on eligible accounts receivable.
Approximately $350,000 of additional borrowings were available under the line at
December 31, 1999.
The Company borrowed $250,000 from a third party on a short-term basis
on December 31, 1998. This loan bore interest at 10% and was repaid in 1999. In
addition, the Company had an outstanding note with a balance of $250,000 at
December 31, 1998 in connection with the sale of its XCEL Arnold Circuits, Inc.
subsidiary (Note 3). This loan bore no interest and was payable on demand.
During 1999, the balance of the outstanding note payable was offset against the
note receivable received in connection with the sale of XCEL Arnold Circuits
(Note 3).
(8) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Term notes payable to commercial lender (a) $ 954,000 $ 1,526,000
Term note payable to bank (b) -- 135,000
Term notes payable to foreign banks (c) 108,000 101,000
Capitalized lease obligations (d) 258,000 380,000
Other promissory notes 267,000 93,000
------------- -------------
1,587,000 2,235,000
Current portion (1,422,000) (805,000)
------------- -------------
$ 165,000 $ 1,430,000
============= =============
</TABLE>
(a) Three term notes payable to a commercial lender bearing
interest at the lender's prime rate (8.5% at December 31,
1999) plus 1.25%. The notes are collateralized by machinery
and equipment and are payable in total monthly principal
installments (aggregating $28,000 at December 31, 1999), plus
interest through final maturity dates in fiscal 2003. As a
result of the Company's non-compliance with the adjusted net
worth covenant of the Domestic Facility (Note 7), the Company
has classified the entire balance of these term notes as a
current liability at December 31, 1999.
(b) Term note payable to a bank which bore interest at the
lender's prime rate plus 1.25%. The note was repaid during
1999.
(c) The Company has agreements with several foreign banks which
include term borrowings which mature at various dates through
2001. Interest rates on the borrowings bear interest at rates
ranging from 2.0% to 2.8% and are payable in monthly
installments. Included in the other term notes is a $101,000
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.
45
<PAGE>
(d) Capital lease agreements are calculated using interest rates
appropriate at the inception of the lease and range from 12%
to 22%. Lease liabilities are amortized over the lease term
using the effective interest method. The leases all contain
bargain purchase options and expire through 2002.
Principal maturities related to long-term debt as of December 31, 1999
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ------
<S> <C>
2000 $ 1,422,000
2001 157,000
2002 8,000
----------------
$ 1,587,000
================
</TABLE>
(9) REDEEMABLE PREFERRED STOCK
SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK
In connection with the Arnold Circuits, Inc. acquisition in 1995, 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 was
entitled to a cumulative cash dividend of $120 and $160 per year, respectively,
commencing in June 1996. The Series A and B shares had a liquidation preference
of and were 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. 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 was being accreted by periodic charges to retained earnings
over the original life of the issue.
The Series A and Series B redeemable preferred stock was retired as
part of the sale of the XCEL Arnold Circuits subsidiary in March 1998 (see Note
3).
The following table reflects the Series A and Series B redeemable
preferred stock activity:
<TABLE>
<CAPTION>
SERIES A REDEEMABLE SERIES B REDEEMABLE
PREFERRED STOCK PREFERRED STOCK
-------------------- --------------------
NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT
--------- ------ --------- ------
<S> <C> <C> <C> <C>
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
Accretion of preferred stock -- 7,000 -- 7,000
Cancellation of stock upon sale of
subsidiary (1,000) (313,000) (1,000) (415,000)
------ ---------- ------ ----------
Balance at December 31, 1998 and 1999 -- $ -- -- $ --
====== ========== ====== ==========
</TABLE>
CONVERTIBLE REDEEMABLE PREFERRED STOCK
46
<PAGE>
In June 1998, the Company sold 50 shares of convertible preferred stock
(the "New Preferred Shares") at $10,000 per share to one institutional investor.
In July 1998, the Company sold an additional 150 New Preferred Shares at the
same per share price to two other institutional investors. Included with the
sale of such New Preferred Shares were a total of one million warrants to
purchase the Company's common stock exercisable at $1.25 per share and expiring
May 22, 2001. The Company has ascribed an estimated fair value to these warrants
aggregating $163,000 and accordingly has reduced the convertible redeemable
preferred stock balance as of the date of issuance.
The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. The New
Preferred Shares were originally convertible into the common stock of the
Company at the option of the holder thereof at any time after the ninetieth
(90th) day of issuance thereof at the conversion price per share of New
Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One
Hundred Percent (100%) of the arithmetic average of the three lowest closing bid
prices over the forty (40) trading days prior to the exercise date of any such
conversion. No more than 20% of the aggregate number of New Preferred Shares
originally purchased and owned by any single entity may be converted in any
thirty (30) day period after the ninetieth (90th) day from issuance. In the
event of any liquidation, dissolution or winding up of the Company, the holders
of shares of New Preferred Shares are entitled to receive, prior and in
preference to any distribution of any assets of the Company to the holders of
the Company's common stock, an amount per share equal to $10,000 for each
outstanding New Preferred Share. Any unconverted New Preferred Shares may be
redeemed at the option of the Company for cash at a per share price equal to
$11,500 per New Preferred Share and any New Preferred Shares which remain
outstanding as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price. The excess of the redeemable
value over the carrying value is being accreted by periodic charges to retained
earnings over the original life of the issue.
In November 1998, the holders of the New Preferred Shares agreed to
modify the conversion rate to $10,000 divided by $0.50 in exchange for a
reduction in the exercise price of the Warrants to $0.75 per share. In
connection with the repricing of the warrants, the Company recognized $52,000 of
non-cash expense in 1998. This expense represents the excess of the fair value
of the warrants after repricing over the fair value of the warrants immediately
before the repricing.
In August 1999, the agreement previously reached with the holders of
the New Preferred Shares which limited the conversion rate of such stock to
$0.50 per common share so long as the Company's common stock continued to be
listed on NASDAQ was terminated as a result of the delisting (Note 10). The
conversion rate for the New Preferred Shares reverted to the terms of the
original subscription agreement which provided that conversion would occur at
the lower of $1.25 per common share or the arithmetic average of the three
lowest closing bid prices during the forty (40) days immediately prior to
conversion.
In December 1999, two institutional investors sold all of their
outstanding New Preferred Shares and the prorated portion of warrants applicable
to the then outstanding New Preferred Shares. The purchasers of such New
Preferred Shares and prorated warrants included an executive officer of the
Company and certain related parties. Also in December 1999, the holders of the
59.5 outstanding shares of the New Preferred Shares agreed to modify the
conversion ratio to a fixed factor whereby each share of the New Preferred
Shares is convertible into 50,530 shares of common stock (the fair value of the
underlying shares of common stock) in exchange for a reduction in the exercise
price of the warrants to $.25 per share and an extension of the expiration date
of the warrants to December 2002. In connection with the repricing of the
warrants, the Company recognized $91,000 of non-cash expense in 1999. This
expense represents the excess of the fair value of the warrants after repricing
over the value of the warrants immediately before the repricing.
47
<PAGE>
The following table reflects the convertible redeemable preferred stock
activity:
<TABLE>
<CAPTION>
NUMBER
OF SHARES AMOUNT
--------- ------
<S> <C> <C>
Balance at December 31, 1997 -- --
Preferred stock issued 200 1,837,000
Conversion to common stock (39) (367,000)
Accretion of preferred stock -- 46,000
------ ------------
Balance at December 31, 1998 161 1,516,000
Conversion to common stock (101.5) (969,000)
Accretion of preferred stock -- 41,000
------ ------------
Balance at December 31, 1999 59.5 $ 588,000
====== ============
</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 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 on 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 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
48
<PAGE>
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 for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
1999 EXERCISE 1998 1997
SHARES PRICE SHARES SHARES
------ -------- ------ ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,047,000 $2.13 1,999,000 842,000
Granted 430,000 0.20 200,000 96,000
XIT/MicroTel merger -- -- -- 1,146,000
Exercised -- -- -- (30,000)
Canceled (897,000) 2.39 (152,000) (55,000)
--------- ----- --------- ---------
Outstanding at end of year 1,580,000 $1.46 2,047,000 1,999,000
========= ===== ========= =========
</TABLE>
The following table summarizes information with respect to stock
options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED EXERCISABLE WEIGHTED
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICE 1999 LIFE (YEARS) PRICE 1999 PRICE
----- ---- ----------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$.20 to $1.00 430,000 9.9 $0.20 215,000 $0.20
$1.01 to $2.00 964,000 6.1 $1.71 964,000 $1.71
$2.01 to $3.00 56,000 6.2 $2.71 56,000 $2.71
$3.01 to $4.00 130,000 4.4 $3.16 130,000 $3.16
--------- --- ----- --------- -----
$.20 to $4.00 1,580,000 7.0 $1.46 1,365,000 $1.65
========= === ===== ========= =====
</TABLE>
Options exercisable as of December 31, 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Exercisable 1,365,000 1,892,000 1,843,000
Weighted Average Exercise Price $ 1.65 $ 2.26 $ 2.32
</TABLE>
Weighted average exercise prices for 1999 are calculated at prices
effective as of December 31, 1999. The fair value of options granted during 1999
was $63,000, at a weighted average value of $0.15 per share. Exercise prices for
options outstanding as of December 31, 1999 generally ranged from $0.20 to $3.45
per share and the weighted average remaining contractual life for these options
was 7 years. The fair value of options granted during the years ended December
31, 1998 and 1997 were $112,000 and $132,000, at weighted average prices of
$0.56 and $1.37 per share, respectively.
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 1999, 1998 and 1997 has been estimated
based on a modified Black-Scholes pricing model with the
49
<PAGE>
following assumptions: no dividend yield; expected volatility of 85% in 1999,
25% to 57% in 1998 and 73% in 1997, based on historical results; risk-free
interest rate of 5.1% to 6.0%; and average expected lives of approximately seven
to ten years.
The following table sets forth the net loss, net loss available for
common stockholders and 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>
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET LOSS
As reported $ (4,596) $ (1,185) $ (9,693)
Pro forma $ (4,628) $ (1,297) $ (9,825)
NET LOSS AVAILABLE FOR COMMON
STOCKHOLDERS
As reported $ (4,637) $ (1,245) $ (9,753)
Pro forma $ (4,669) $ (1,357) $ (9,885)
BASIC AND DILUTED LOSS PER SHARE
As reported $ (.28) $ (.10) $ (.96)
Pro forma $ (.28) $ (.11) $ (.98)
</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 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 years 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.
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, 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
Warrants issued 2,802,000 0.66 to 1.25 2,838,000
Warrants cancelled (1,000,000) 1.25 (1,250,000)
----------- -------------- ---------------
Balance outstanding, December 31, 1998 4,292,000 0.66 to 3.79 8,734,000
Warrants issued 2,865,000 0.25 to 1.38 2,199,000
Warrants expired/cancelled (1,925,000) 0.60 to 2.50 (2,015,000)
----------- -------------- ---------------
Balance outstanding at December 31, 1999 5,232,000 $ 0.25 to 3.79 $ 8,918,000
=========== ============== ===============
</TABLE>
50
<PAGE>
The Company has an Employee Stock Purchase Plan at its CXR subsidiary
allowing eligible subsidiary employees to purchase shares of the Company's
common stock at 85% of market value. During 1999, 1998 and 1997, 5,000, 7,000
and 6,000 shares, respectively, had been issued pursuant to the plan with 27,000
shares reserved for future issuance.
As of December 31, 1999, the Company has 18,152,000 shares of common
stock outstanding and potentially 9,846,000 shares of common stock issuable
pursuant to the exercise of outstanding stock options and warrants and
conversion of convertible redeemable preferred stock. In accordance with its
articles of incorporation, the Company is authorized to issue 25,000,000 shares
of common stock. Accordingly, the Company may be unable to issue the common
shares pursuant to its outstanding stock options, warrants and convertible
redeemable preferred stock until such time as the Company's articles of
incorporation are amended or until the terms of the related stock options,
warrants and/or convertible redeemable preferred stock are modified.
DEBT TO EQUITY CONVERSION
In March 1997, the Company converted $44,000 in various promissory
notes to 55,000 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. In November 1998, the Company entered into a further amended
agreement pursuant to which the former officer returned the 80,000 shares
previously issued in exchange for the Company's agreement to pay $168,000 over
the next two years. The Company cancelled the returned shares.
NASDAQ DELISTING
In May 1999, the listing of the Company's common stock on the NASDAQ
SmallCap Market ("NASDAQ") was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board.
(11) NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL
The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate 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 certain acquisitions. 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.
(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. 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.
51
<PAGE>
Income (loss) before income taxes was taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic $(3,954,000) $(1,090,000) $(9,721,000)
Foreign (514,000) 6,000 125,000
----------- ----------- -----------
Total $(4,468,000) $(1,084,000) $(9,596,000)
=========== =========== ===========
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 30,000 8,000 17,000
Foreign 98,000 93,000 80,000
-------- -------- -------
$128,000 $101,000 $97,000
======== ======== =======
</TABLE>
Income tax expense (benefit) differs from the amount obtained by
applying the statutory federal income tax rate of 34% to loss before income
taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $(1,519,000) $(368,000) $(3,263,000)
State taxes, net of federal income
tax benefit 30,000 8,000 17,000
Foreign income taxes 98,000 93,000 80,000
Write-down of goodwill -- -- 1,936,000
Losses with no current benefit 1,449,000 270,000 1,096,000
Permanent differences 70,000 98,000 157,000
Other -- -- 74,000
----------- -------- -----------
$128,000 $101,000 $97,000
=========== ======== ===========
</TABLE>
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>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 37,000 $ 90,000
Inventory reserves and uniform capitalization 254,000 387,000
Other accrued liabilities 140,000 279,000
Deferred compensation 326,000 537,000
Research credit carryforwards 256,000 256,000
Alternative Minimum Tax credit carryforwards 134,000 134,000
Net operating loss carryforwards 17,436,000 15,423,000
----------- -----------
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C>
Total deferred tax assets 18,583,000 17,106,000
Valuation allowance for deferred tax assets (18,335,000) (16,591,000)
----------- -----------
Net deferred tax assets 248,000 515,000
----------- -----------
Deferred tax liabilities:
Depreciation (166,000) (515,000)
Gain on sale of investment (82,000) --
----------- -----------
Total deferred tax liabilities (248,000) (515,000)
----------- -----------
Net deferred taxes $ -- $ --
============ ============
</TABLE>
As of December 31, 1999, the Company has a federal net operating loss
carryforward of approximately $50,000,000 which expires at various dates between
2001 and 2019 and a state net operating loss carryforward of approximately
$5,000,000 which expires at various dates through 2004.
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.
(13) LOSS PER SHARE
The following table illustrates the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NUMERATOR:
Net loss $ (4,596,000) $ (1,185,000) $ (9,693,000)
Less: accretion of the excess of the
redemption value over the carrying value
of redeemable preferred stock 41,000 60,000 60,000
------------ ------------ ------------
Income available for common stockholders $ (4,637,000) $ (1,245,000) $ (9,753,000)
============ ============ ============
DENOMINATOR:
Weighted average number of common shares
outstanding during the year 16,638,000 11,952,000 10,137,000
------------ ------------ ------------
Basic and diluted loss per share $ (.28) $ (.10) $ (.96)
============ ============ ============
</TABLE>
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 10.
53
<PAGE>
(14) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through 2003. 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 1999,
1998 and 1997, was $1,711,000, $2,091,000 and $2,477,000, 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>
2000 $ 1,215,000
2001 897,000
2002 626,000
2003 122,000
2004 84,000
--------------
$ 2,944,000
==============
</TABLE>
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.
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 40,000
shares of Common Stock purchased by Mr. Scheinfeld. 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, in the absence of
registrations, the Company could not issue unrestricted shares, 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.
During the third quarter of 1999, the Company entered into a settlement
agreement with David Scheinfeld. The Company agreed to pay $75,000 payable in an
initial payment of $6,250 and eleven monthly payments of $6,250 thereafter
without interest. The unpaid amount due as of December 31, 1999, aggregating
$50,000, is presented in other promissory notes (Note 8).
54
<PAGE>
DANIEL DROR & ELK INTERNATIONAL, INC. 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 had breached an alleged oral modification of the Agreement. In
January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.
In April 1998, the Company brought an action in California against the
former Chairman for breach of the Agreement and sought recovery of all stock,
warrants and debt due the Company. The Company obtained a judgement against the
former Chairman in this litigation.
In December 1997, Elk International Corporation Limited ("Elk"), 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. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.
In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement calls for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000. In
addition, the Company issued 1,000,000 warrants to purchase the Company's common
stock at an exercise price of $1.37 per share for two years in exchange for the
returning 750,000 options and returning 90,000 warrants all to purchase the
Company's common stock at an exercise price of $2.50 per share for 2.8 years.
The fair value of the warrants granted over the options and warrants returned on
the date of the settlement was approximately $17,000. The Company accrued for
this settlement in the accompanying 1998 consolidated financial statements.
EMPLOYEE BENEFIT PLANS
Though September 30, 1998, the Company sponsored several defined
contribution plans ("401(k) Plans") covering the majority of its U.S. domestic
employees. Effective October 1, 1998, these plans were terminated and a new plan
was instituted covering the same 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. The Company made
contributions of $31,000, $22,000 and $43,000 to the 401(k) Plans for the
calendar years ended December 31, 1999, 1998 and 1997, respectively.
(15) SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the U.S. and
European markets and designs, manufactures and distributes telecommunications
test instruments and voice and data transmission and networking equipment. The
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Circuits Sector operates principally in the U.S. market and
designs, manufactures and markets various circuit products.
55
<PAGE>
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based upon profit or loss from operations before income
taxes exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.
The Company's reportable segments are comprised of operating
entities offering the same or similar products to similar customers. Each
segment is managed separately because each business has different customers,
design and manufacturing and marketing strategies. Selected financial data
for each of the Company's operating segments is shown below.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SALES FROM EXTERNAL CUSTOMERS:
Instruments $15,666,000 $17,532,000 $15,054,000
Components 10,080,000 12,412,000 12,197,000
Circuits 2,555,000 7,317,000 15,847,000
----------- ----------- -----------
$28,301,000 $37,261,000 $43,098,000
=========== =========== ===========
INTERSEGMENT SALES:
Instruments $ -- $ 17,000 $ 133,000
Components 279,000 635,000 957,000
Circuits 433,000 699,000 819,000
----------- ----------- -----------
$ 712,000 $ 1,351,000 $ 1,909,000
=========== =========== ===========
INTEREST EXPENSE:
Instruments $ 110,000 $ 79,000 $ 109,000
Components 75,000 323,000 396,000
Circuits 114,000 168,000 346,000
----------- ----------- -----------
$ 299,000 $ 570,000 $ 851,000
=========== =========== ===========
DEPRECIATION AND AMORTIZATION:
Instruments $ 490,000 $ 265,000
Components 101,000 91,000 284,000
Circuits 136,000 312,000 607,000
----------- ----------- -----------
$ 727,000 $ 668,000 $ 1,055,000
=========== =========== ===========
1999 1998 1997
---- ---- ----
SEGMENT PROFITS (LOSSES):
Instruments $(1,828,000) $367,000 $ 536,000
Components 1,341,000 2,473,000 794,000
Circuits (1,043,000) (786,000) (1,055,000)
----------- ----------- -----------
$(1,530,000) $ 2,054,000 $275,000
=========== =========== ===========
SEGMENT ASSETS:
Instruments $ 7,960,000 $10,234,000 $ 9,691,000
Components 5,213,000 7,193,000 6,946,000
Circuits 1,379,000 2,737,000 7,966,000
----------- ----------- -----------
$14,552,000 $20,164,000 $24,603,000
=========== =========== ===========
</TABLE>
56
<PAGE>
The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET SALES
Total sales for reportable segments $29,013,000 $38,612,000 $45,007,000
Elimination of intersegment sales (712,000) (1,351,000) (1,909,000)
----------- ----------- -----------
Total consolidated revenues $28,301,000 $37,261,000 $43,098,000
=========== =========== ============
PROFIT (LOSS) BEFORE INCOME TAXES
Total profit (loss) for reportable segments $(1,530,000) $2,054,000 $ 275,000
Write-down of goodwill -- -- (5,693,000)
Unallocated amounts:
General corporate expenses (2,938,000) (3,138,000) (4,178,000)
----------- ----------- -----------
Consolidated loss before income taxes $(4,468,000) $(1,084,000) $(9,596,000)
=========== =========== ============
ASSETS
Total assets for reportable segments $14,552,000 $20,164,000 $24,603,000
Other assets 2,069,000 1,078,000 837,000
----------- ----------- -----------
Total consolidated assets $16,621,000 $21,242,000 $25,440,000
=========== =========== ============
INTEREST EXPENSE
Interest expense for reportable segments $ 299,000 $ 570,000 $ 851,000
Other interest expense 112,000 105,000 44,000
----------- ----------- -----------
Total interest expense $ 411,000 $ 675,000 $895,000
=========== =========== ============
</TABLE>
<TABLE>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense
for reportable segments $ 727,000 $ 668,000 $ 1,055,000
Other depreciation and amortization expense 206,000 190,000 226,000
----------- ----------- -----------
Total depreciation and amortization $ 933,000 $ 858,000 $ 1,281,000
=========== =========== ============
</TABLE>
A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales:
United States $11,878,000 $19,965,000 $28,098,000
Japan 658,000 706,000 857,000
France 10,958,000 11,118,000 8,450,000
United Kingdom 4,807,000 5,472,000 5,693,000
----------- ----------- -----------
$28,301,000 $37,261,000 $43,098,000
=========== =========== ===========
Long-lived assets:
United States $ 2,533,000 $ 3,656,000 $ 6,631,000
Japan 16,000 13,000 12,000
France 257,000 458,000 807,000
United Kingdom 190,000 133,000 296,000
----------- ----------- -----------
$ 2,996,000 $ 4,260,000 $ 7,746,000
=========== =========== ===========
</TABLE>
57
<PAGE>
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. Net sales by geographic
area have been determined based upon the country from which the product was
shipped.
The Company had sales to one customer which accounted for
approximately 14% of net sales in 1997. No one customer accounted for more
than 10% of net sales in 1998 or 1999.
(16) GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. During the
years ended December 31, 1999, 1998 and 1997, the Company experienced
significant operating losses. Additionally, the Company is in default of the
Domestic Credit Facility agreement (Note 7) as the Company is not in
compliance with an adjusted net worth covenant 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. The
Company's foreign subsidiaries in the United Kingdom, France and Japan have
separate borrowing arrangements. 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.
During 1999, the Company took certain actions in an effort to become
profitable and improve cash flow from operations in the future. As a result
of the current and future anticipated operating losses at the Company's
HyComp subsidiary, the Company sold substantially all the assets of this
subsidiary in the first quarter of 1999. Additionally, during the second half
of 1999, the Company embarked on a cost reduction program, which included a
significant reduction in personnel at the Company's domestic subsidiaries and
the relocation and downsizing of the corporate headquarters and certain
subsidiaries' manufacturing and office facilities. Furthermore, the Company
terminated its lease obligation related to its corporate headquarters and one
manufacturing facility in connection with the sale of its investment in a
partnership (Note 6) and also subleased a portion of another subsidiary's
facility. In addition, subsequent to year end, the Company sold its
investment in the common stock of Digital Transmission Systems, Inc. for
which the Company received cash proceeds of $520,000 and common shares of a
foreign publicly-traded company, with a then current market value of
approximately $720,000 (Note 3).
The Company is implementing a corporate finance program designed to
improve its working capital structure by considering certain alternatives to
its existing domestic credit facilities. The Company is actively searching
for alternative financing to replace the current domestic credit facility.
Although no replacement lender has been selected, the Company has identified
several prospective lenders, one of whom has submitted a proposal to the
Company. The finance program also involves the potential private placement of
certain debt or equity securities. Additionally, management is exploring the
potential to further leverage its common stock held in Wi-LAN, Inc. (Note 3)
which has a fair market value of approximately $1,600,000 as of February 29,
2000. The Company's domestic credit facilities lender has provided an
additional $400,000 of borrowing capacity against this asset. In addition,
the Company is in negotiations with a foreign financial institution to
leverage the Company's existing United Kingdom subsidiary to provide
additional working capital for operations and acquisitions. Finally,
management has developed and continues to implement plans to reduce existing
cost structures, improve operating efficiencies, and strengthen the Company's
operating infrastructure.
58
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND WRITE-OFFS OF BALANCE AT
DESCRIPTION YEAR EXPENSES ACCOUNTS END OF YEAR
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 275,000 36,000 (109,000) 202,000
Year ended December 31, 1998 241,000 97,000 (63,000) 275,000
Year ended December 31, 1997 63,000 251,000 (73,000) 241,000
========== ========= =========== =========
Allowance for inventory
obsolescence:
Year ended December 31, 1999 $1,766,000 1,145,000 (1,523,000) 1,388,000
Year ended December 31, 1998 1,856,000 885,000 (975,000) 1,766,000
Year ended December 31, 1997 685,000 3,134,000 (1,963,000) 1,856,000
========== ========= =========== =========
</TABLE>
59
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 635 $ 481
Short-term investments 1,181 --
Accounts receivable - net 5,544 6,519
Inventories 4,129 4,181
Other current assets 632 578
--------- ---------
Total current assets 12,121 11,759
Property, plant and equipment-net 1,312 1,393
Goodwill-net 1,459 1,507
Investment in unconsolidated affiliate -- 1,240
Other assets 649 722
--------- ---------
$ 15,541 $ 16,621
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,046 $ 2,107
Current portion of long-term debt 1,245 1,422
Accounts payable 4,124 4,771
Accrued expenses 2,595 2,985
--------- ---------
Total current liabilities 10,010 11,285
Long-term debt, less current portion 121 165
Other liabilities 722 782
--------- ---------
Total liabilities 10,853 12,232
Convertible redeemable preferred stock 611 588
Stockholders' equity:
Common stock 61 60
Additional paid-in capital 23,817 23,726
Accumulated deficit (19,871) (19,759)
Accumulated comprehensive income (loss) 70 (226)
--------- ---------
Total stockholders' equity 4,077 3,801
--------- ---------
$ 15,541 $ 16,621
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
60
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------- ------------
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $6,486 $ 7,510
Cost of sales 4,113 4,904
------ -------
Gross profit 2,373 2,606
Operating expenses:
Selling, general and administrative 2,212 3,716
Engineering and product development 243 558
------ -------
Loss from operations (82) (1,668)
Other income (expense)
Interest expense (96) (119)
Gain on sale of subsidiary -- 331
Equity in earnings of unconsolidated affiliates -- 536
Other 95 (47)
------ -------
Loss before income taxes (83) (967)
Income taxes 6 8
------ -------
Net loss $ (89) $ (975)
------ -------
Other comprehensive income (loss):
Change in net unrealized gain on marketable
securities 461 --
Foreign currency translation adjustment (165) (263)
------ -------
Total comprehensive income (loss) $ 207 $(1,238)
====== =======
Basic and diluted loss per share $(0.01) $ (0.07)
====== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
61
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------- ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (89) $(975)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 32 136
Amortization of intangibles 66 91
Gain on sale of subsidiary -- (331)
Gain on sale of fixed assets (43) --
Equity in earnings of unconsolidated entities -- (536)
Stock and warrants issued as compensation -- 781
Other noncash items 84 360
Changes in operating assets and liabilities:
Accounts receivable 975 687
Inventories 52 (77)
Other assets 56 (95)
Accounts payable and accrued expenses (1,097) (192)
------- -----
Cash provided by (used in) operating activities 36 (151)
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (6) (8)
Cash received for sale of DTS stock 520 --
Proceeds from sale of fixed assets 43 --
Cash collected on note receivable -- 9
------- -----
Cash from investing activities 557 1
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long-term debt (282) 202
Proceeds from exercise of employee stock options 8 --
Proceeds from sale of common stock -- 1
------- -----
Cash provided by (used in) financing activities (274) 203
------- -----
EFFECT OF EXCHANGE RATE CHANGES ON CASH (165) (263)
------- -----
NET INCREASE (DECREASE) IN CASH 154 (210)
CASH AT BEGINNING OF PERIOD 481 572
------- -----
CASH AT END OF PERIOD $ 635 $ 362
======== =====
</TABLE>
See accompanying notes to consolidated condensed financial statements.
62
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLITICES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. is an international telecommunications
electronics company comprised of three wholly-owned subsidiaries -- CXR Telcom
Corporation in Fremont, California, CXR, S.A. in Paris, France and XIT
Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR,
S.A. design, manufacture and market electronic telecommunications test
instruments, wireless and wireline voice, data and video transmission and
network access equipment. XIT Corporation designs, manufactures and markets
information technology products, including input and display components,
subsystem assemblies and power supplies. The Company operates out of facilities
in the U.S., France, England and Japan.
The Company is organized into three segments -- Instrumentation and
Test Equipment, Components and Subsystem Assemblies, and Circuits. Through the
sale of various subsidiaries in 1998 and 1999, the Company has divested a
majority of its circuits operations.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The unaudited consolidated condensed financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of March 31, 2000 and December 31, 1999 and the results of
operations and cash flows for the related interim periods ended March 31, 2000
and 1999. However, these results are not necessarily indicative of results for
any other interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with the
Company's Consolidated Financial Statements included in its 1999 Annual Report
on Form 10-K.
(2) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
NUMERATOR
Net loss $ (89,000) $ (975,000)
Less: accretion of the excess of the redemption value
over the carrying value of redeemable preferred stock (23,000) (56,000)
---------- ------------
Loss attributable to common stockholders (112,000) (1,031,000)
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C>
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 18,174,000 14,766,000
----------- -----------
Basic and diluted loss per share $ (.006) $ (.070)
=========== ===========
</TABLE>
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company.
(3) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Raw materials $ 1,644,000 $ 1,728,000
Work-in-process 962,000 1,199,000
Finished goods 1,523,000 1,254,000
----------- ------------
$ 4,129,000 $ 4,181,000
=========== ============
</TABLE>
(4) LITIGATION
The Company and its subsidiaries from time to time become 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.
(5) DISPOSITION OF A BUSINESS
On January 7, 2000, the Company sold all of its interest in the common
stock in Digital Transmission Systems, Inc. ("DIS") to Wi-LAN, Inc. ("Wi-LAN"),
a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of
Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto
Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of
the transaction. The Company is restricted from selling the Wi-LAN stock until
July 7, 2000 due to Toronto exchange rules that restrict sales of stock obtained
in an acquisition related transaction. As of March 31, 2000 the value of the
Company's Wi-LAN shares had increased in value by $461,000 to $1,181,000. The
increase in value has been reflected in the carrying value of the investment and
the other comprehensive income or loss line of the equity section in the balance
sheet. The Wi-LAN investment is shown in the current asset section of the
balance sheet as short-term investments.
(6) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of one dollar or more and ranging as high as
$3.79 the opportunity to exchange their warrants with new warrants for one
64
<PAGE>
half the number of shares at one half the exercise price of the original
warrants. Neither the expiration dates, nor any other terms of the warrants,
were changed as a result of this offer. The offer was available to all warrant
holders with exercise prices of one dollar or more including Carmine T. Oliva,
the Company's President and Chairman of the Board, and the two other directors.
The primary reason for the offer was to reduce the quantity of shares allocated
to warrants so that the Company would have sufficient authorized stock for its
needs until an increase in the authorized stock could be voted on by the
stockholders as part of the year 2000 Annual Meeting of Stockholders.
The offers and acceptances were finalized by April 10, 2000. Shares
represented by warrants were reduced by 1,787,000 shares and this reduction
would serve to reduce the dilution of future earnings per share since fewer
shares could be outstanding. An $87,000 expense was recorded in the first
quarter of 2000 for the difference in fair value of the new warrants as compared
to previous warrants at the date of acceptance.
(7) REPORTABLE SEGMENTS
The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the U.S. and
European markets and designs, manufactures and distributes telecommunications
test instruments and voice and data transmission and networking equipment. The
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Company has disposed of the majority of its Circuits segment
business operations and has only one such operation that is material.
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in its 1999 Annual Report
on Form 10-K.
65
<PAGE>
Selected financial data for each of the Company's operating segments is shown
below
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31 ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
SALES TO EXTERNAL CUSTOMERS:
Instruments $ 3,553,000 $ 3,708,000
Components 2,264,000 2,918,000
Circuits 669,000 884,000
------------- -------------
$ 6,486,000 $ 7,510,00
============= =============
INTERSEGMENT SALES:
Instruments $ -- $ --
Components 73,000 60,000
Circuits -- 181,000
------------- -------------
$ 73,000 $ 241,000
============= =============
SEGMENT PRETAX PROFITS
Instruments $ (95,000) $ (781,000)
Components 467,000 512,000
Circuits (111,000) (387,000)
------------- -------------
$ 261,000 $ (656,000)
============= =============
SEGMENT ASSETS
Instruments $ 7,113,000 $ 9,439,000
Components 5,127,000 7,133,000
Circuits 1,457,000 2,421,000
------------- -------------
$ 13,697,000 $ 18,993,000
============= =============
</TABLE>
66
<PAGE>
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31 ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Total income (loss) for reportable segments $ 261,000 $ (665,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated
affiliates -- 540,000
Unallocated general corporate expenses (344,000) (1,182,000)
----------- -----------
Consolidated loss before income taxes $ (83,000) $ (967,000)
=========== ===========
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
ASSETS
------
Total assets for reportable segments $13,697,000 $18,993,000
Other assets 1,844,000 2,584,000
----------- -----------
Total consolidated assets $15,541,000 $21,577,000
=========== ===========
</TABLE>
(7) SUBSEQUENT EVENT
On April 7, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
Belix is located in England, U.K. and is in the business of manufacturing power
supplies for various applications. It will be integrated into the Company's
existing power supply producer, XCEL Power Systems, Ltd. A charge for severance
and other consolidation costs will likely be incurred in the second quarter.
Belix' tangible assets consist primarily of accounts receivable, inventories and
fixed assets.
67
<PAGE>
SELECTED FINANCIAL DATA
The following table summarizes selected consolidated financial data for
the Company for the three months ended March 31, 2000 and 1999, and for the
years ended December 31, 1999, 1998 and 1997, the three months ended December
31, 1996 and the years ended September 30, 1996 and 1995. 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.
<TABLE>
<CAPTION>
THREE THREE THREE
MONTHS MONTHS YEAR YEAR YEAR MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED YEAR ENDED
MARCH 31, MARCH 31, DEC 31, DEC 31, DEC 31, DEC 31, SEP 30, SEP 30,
2000 1999 1999 1998 1997 1996 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 6,486 $ 7,510 $28,301 $37,261 $43,098 $ 7,886 $31,249 $19,602
Net income (loss) $ (89) $ (975) $(4,596) $(1,185) $(9,693) $ (905) $ 1,083 $ 337
Income (loss) available to
common stockholders $ (112) $(1,031) $(4,637) $(1,245) $(9,753) $ (924) $ 1,003 $ 327
Basic and diluted earnings
(loss) per share $ (.01) $ (.07) $ (.28) $ (.10) $ (.96) $ (.15) $ .17 $ .07
Total assets $15,541 $16,621 $16,621 $21,242 $25,440 $20,564 $19,613 $15,955
Long-term obligations,
less current portion $ 121 $ 165 $ 947 $ 2,384 $ 3,319 $ 3,549 $ 2,678 $ 1,524
Redeemable preferred stock $ 611 $ 761 $ 588 $ 1,516 $ 714 $ 794 $ 775 $ 835
Stockholders' equity $ 4,077 $ 6,780 $ 3,801 $ 5,482 $ 6,015 $ 5,047 $ 5,845 $ 4,464
Shares outstanding at
period end $18,494 16,436 18,152 12,622 11,926 6,064 6,064 5,814
</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 acquirer) 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 Acquirer"). 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.
68
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
prospectus.
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
"Merger"). 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; Instrumentation and Test Equipment, Components and Subsystem Assemblies
and Circuits. The Instrumentation and Test Equipment Sector operates principally
in the U.S. and European markets. The Components and Subsystem Assemblies
Sector operates in U.S., European and Asian markets. The Circuits Sector
operates principally in the U.S. market. The Instrumentation and Test Equipment
Sector and the Components and Subsystems Assembly Sector are referred to as "the
Test Equipment Sector" and "the Components Sector" in the discussion below for
brevity.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
NET SALES
Consolidated net sales decreased by $8,960,000 or 24% in 1999 compared
with 1998. The table below sets forth the composition of consolidated net sales
by business sector, separately identifying the operations of the Company's
HyComp subsidiary and XCEL Arnold Circuits, Inc. ("XCEL Arnold") subsidiary
during the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
DOLLARS
IN THOUSANDS INCREASE/(DECREASE)
SECTOR 1999 1998 VARIANCE PERCENT
------ -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Test Equipment $15,666 $17,532 $(1,866) (10.6)%
Components 10,080 12,412 (2,332) (18.8)%
Circuits 2,099 2,981 (882) (29.6)%
HyComp Inc. (sold 3/31/99) 456 2,826 (2,370) (83.9)%
XCEL Arnold (sold 3/31/98) -- 1,510 (1,510) (100.0)%
------- ------- -------
Total Sales $28,301 $37,261 $(8,960) (24.0)%
======= ======= =======
</TABLE>
The Test Equipment Sector sales declined by $1,866,000 or 10.7% in 1999
as compared to 1998. The major reason for the decline was caused by reduced
sales of the older 5200 series test equipment. The newer 700 series replaced the
older model but the older model's sales declined at a faster rate than the
increase in sales of
69
<PAGE>
the new models. Since most of the decline in sales of the older models has been
realized, it is expected that increases in the sales of the newer 700 series
equipment should result in net increases in total sales in the year 2000 for
this sector. Offsetting some of the decrease was an increase of 77% of U. S.
transmission product sales in 1999 as compared to 1998. Transmission products
increased their share of total U.S. Test equipment Sector sales to 38% in 1999
from 16% in 1998. The sales of CXR, S.A., based in France, grew in 1999 compared
to 1998, but was offset by a decline in the value of the French Franc in
relation to the U.S. dollar.
Net sales for the Component Sector decreased by $2,332,000 or 18.8% in
1999 as compared to 1998. The sales decline resulted from the discontinuance of
the XCEL-Lite products, discontinuance of low margin subsystem assemblies, loss
of keypad business for NCR in Scotland and a decline in the switch business of
about $743,000 in sales for 1999 as compared to 1998.
The Circuits Sector, exclusive of the sold operations, realized a
reduction in sales of $882,000 or 29.6%. The reduction in sales was primarily
the result of the lack of working capital available to acquire the materials
necessary to support customer delivery requirements.
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales are as follows for the years ended December 31,
1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
SECTOR
------
<S> <C> <C> <C> <C>
Test Equipment $5,216 33.3% $ 8,052 45.9%
Components 3,606 35.8% 4,650 37.5%
Circuits 70 2.7% 688 9.4%
Circuits - HyComp Warranty (250) --
------ -------
Total Gross Profit $8,642 30.5% $13,390 35.9%
====== =======
</TABLE>
Consolidated gross profit as a percentage of net sales decreased 5.4
percentage points in 1999 as compared to 1998.
The gross profit for the Test Equipment Sector decreased to 33.3% in
1999 from 45.9% in 1998. The major reasons for the decline were a 48% reduction
in the relatively high margin older test instrument sales and a 77% increase in
lower margin transmission product sales. The gross margin was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, CXR has been forced to use higher cost suppliers than those
used previously due to the Company's failure to comply with some payment terms.
The decrease in gross profit of 1.7 percentage points in 1999 as
compared to 1998 for the Component Sector was mainly because of additional
costs, incurred and recorded in the fourth quarter, associated with the move
from the Ontario facility to the Rancho Cucamonga facility.
The gross margin of the Circuit Sector was reduced by 6.7 percentage
points in 1999 as compared to 1998. This reduction was primarily due to the sale
of HyComp in March 1999. Etch-Tek, the major remaining Circuit Sector business,
reduced its negative margin of 5.6% in 1998 to 4.4% in 1999, despite a reduction
in sales, due to cost cutting. Also a reserve of $250,000 was established for
potential warranty claims associated with products sold by HyComp prior to its
sale.
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<PAGE>
OPERATING EXPENSES
Operating expenses for the years ended December 31, 1999 and 1998 were
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---- -----
<S> <C> <C>
Commissions $ 786 $ 1,167
Other selling 3,467 4,230
------- -------
Total selling expense 4,253 5,397
General & administrative expense 6,542 6,429
------- -------
Total selling, general & administrative $10,795 $11,826
======= =======
Engineering & product development $ 1,873 $ 2,454
======= =======
</TABLE>
Total selling expense as a percentage of net sales was 15.0% and 14.5%
for the years ended December 31, 1999 and 1998, respectively. Commission expense
as a percentage of net sales was 2.8% in 1999 as compared to 3.1% in 1998. Total
selling expenses for 1999 were $1,144,000 less than in 1998. The reduction in
selling expenses is the result of the divestitures of HyComp and XCEL Arnold
Circuits to the extent of $475,000 of the reduction. The remaining difference of
$669,000 was due to reductions in sales volumes, cost reductions in the Test
Equipment Sector and the elimination of product lines in the Component Sector
that required substantial selling efforts.
General and administrative expense increased by $113,000 in 1999
from 1998. Such expenses represented 23.1% of net sales in 1999 as compared
to 17.2% of net sales in 1998. This increase largely resulted from $522,000
paid in the Company's common stock and warrants associated with the Company's
program to retain its listing on the Nasdaq SmallCap Market that was
unsuccessful. These expenses are non recurring. Offsetting such increases in
general and administrative expenses were reductions in expenses due to the
transfer of the administrative functions of CXR Telcom to the corporate
office and the reduction in such expenses as a result of the divestitures of
XCEL Arnold Circuits, Inc. and HyComp, Inc.
Engineering and product development costs originated principally
from the research and product development activities of the Test Equipment
Sector and decreased by $581,000 in 1999 from 1998. $219,000 of this
reduction was due to the divestiture of HyComp, Inc. on March 31, 1999. Also,
in May 1999, the Company eliminated the CXR engineering function in Fremont,
California thereby reducing the Test Equipment Sector's engineering expense
by $294,000. The Company's engineering staff for its U. S. based test
equipment products is now primarily operating out of the St. Charles,
Illinois facility. The Company believes that engineering and product
development are important to its future profitability. All engineering for
its instrumentation products has been consolidated in France at its CXR, S.A.
facility and a higher level of engineering expense at both St. Charles,
Illinois and France is expected in 2000.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $264,000 in 1999 compared to
1998 resulted principally from decreased average borrowings during the
respective periods. Other expenses of $390,000 in 1999 include a $452,000
write-off of a note receivable related to the divestiture of XCEL Arnold
Circuits, Inc. This expense was offset with the net effect of the equity in
earnings of the unconsolidated subsidiary and the write-down of the Company's
investment in this subsidiary.
71
<PAGE>
INCOME TAXES
Income taxes, while nominal in both respective periods, consist
primarily of foreign taxes as the Company is in a loss carryforward position
for federal income tax purposes. At December 31, 1999, the Company has total
net deferred income tax assets of approximately $18,335,000. Such potential
income tax benefits, a significant portion of which relates to net operating
loss carryforwards, have been subjected to a 100% valuation allowance since
realization of such assets is not more likely than not in light of the
Company's recurring losses from operations.
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
NET SALES
Consolidated net sales decreased by $5,837,000 or 13.5% in 1998
compared with 1997. This decrease in sales was due in large part to the sale
of XCEL Arnold as of March 31, 1998. The table below sets forth the
composition of consolidated net sales by business sector, separately
identifying the operations of XCEL Arnold during the years ended December 31,
1998 and 1997.
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
Sector 1998 1997 VARIANCE PERCENT
------ -----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Test Equipment $17,532 $15,054 $ 2,478 16.5%
Components 12,412 12,197 215 1.8%
Circuits 5,807 6,817 (1,010) (14.8)%
XCEL Arnold (sold 3/31/98) 1,510 9,030 (7,520) (83.3)%
------- ------- -------
Total Sales $37,261 $43,098 $(5,837) (13.5)%
======= ======= ========
</TABLE>
During 1998, the Test Equipment Sector experience a substantial
increase in net sales in that Sector's French business operation, CXR, S.A,
which increased sales to $2,668,000 or 31.5% over its sales levels in 1997.
The Sector's CXR Telcom business unit experience a slight decline in sales of
$190,000 or 2.8% compared with prior year as the growth in the sale of new
test instruments substantially replaced products which are reaching the end
of their life. The growth in the French business operation resulted from
increased sales of both internally produced and third party resale products.
Net sales in the Component Sector increased only slightly as sales
of digital switch products increased in 1998 to offset a decline in sales of
custom engineered subsystem component and display products, both of which
have now been discontinued as part of the Company's strategic decision to
focus its attention and resources on only higher margin products and core
instrumentation and test products. The backlog for this Sector rose
approximately 11% or $685,000 from December 31, 1997 to December 31, 1998
indicating a continued demand for both digital switch products, despite the
aging of the product line, and custom power supply products which are
manufactured and distributed in the Sector's United Kingdom operations.
Overall Circuits Sector sales, excluding XCEL Arnold, decreased as
sales for XIT's XCEL Etch-Tek division ("Etch-Tek") decreased approximately
$1 million from 1997 levels, particularly in the latter half of 1998, as
insufficient working capital was available to enable Etch-Tek to acquire the
necessary raw materials and process supplies to accept higher levels of
"quick-turn" (short manufacturing time) order commitments. The sales at
Etch-Tek are not expected to return to former levels in the foreseeable
future and the Company has instituted significant cost reduction measures to
bring the operation's overhead expenses into line with anticipated internal
requirements and outside customer sales levels.
72
<PAGE>
GROSS PROFIT
The composition of consolidated gross profit by business sector and
the percentages of related net sales are as follows for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Sector
------
<S> <C> <C> <C> <C>
Test Equipment $ 8,052 45.9% $ 6,319 42.0%
Components 4,650 37.5% 2,863 23.5%
Circuits 688 9.4% 1,246 7.9%
------- -------
Total Gross Profit $13,390 35.9% $10,428 24.2%
======= =======
</TABLE>
Consolidated gross profit as a percentage of net sales increased
11.7% percentage points in 1998 from 1997, as the impact of the higher margin
sales in the Test Equipment Sector represented a larger component of the
consolidated sales mix for 1998. Gross profit margin percentages in the Test
Equipment Sector increased in 1998 from 1997 and the Sector's net sales as a
percent of total net sales increased to 47.1% in 1998 from 34.9% in 1997.
Accordingly, the Company generated an increase of approximately $3.0 million
in gross profit on $5.8 million less in net sales. Additionally, gross profit
margins as a percent of net sales rose substantially in the Components Sector
where net sales remained stable.
The improvement in gross profit percentage for the Test Equipment
Sector resulted from the introduction in early 1998 of a new line of test
instruments at the Company's CXR Telcom subsidiary. These new,
software-intensive test instruments were designed to replace aging,
hardware-intensive products which had comparatively lower margins.
Additionally, sales mix at the Company's CXR, S.A subsidiary shifted to
higher margin, internally manufactured products in 1998 and as management
sought to improve profits through the addition of new third-party products.
The improvement in gross profit percentage for the Components Sector
was the combined result of (i) a favorable product mix shift to higher margin
digital switch products noted above under Net Sales and (ii) relatively
higher margins for products sold by XCEL Power Systems, Inc., located in the
U.K. ("XPS"), in 1998 which also experienced a shift in product mix as
management focused sales efforts on more desirable custom power supply
products with associated higher gross profit margins.
The increase in gross profit percentage for the Circuits Sector was
principally the result of the sale of XCEL Arnold and the associated
avoidance of continued negative margins at that operation in 1998 as compared
with 1997, the effect of which was partially offset by relatively higher
costs for the Sector's Etch Tek division's product sales in 1998 compared
with 1997 due to the underabsorption of fixed manufacturing costs related to
declining sales levels.
73
<PAGE>
OPERATING EXPENSES
Operating expenses for the years ended December 31, 1998 and 1997 were
comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commissions $ 1,167 $ 1,511
Other selling 4,230 3,690
------- -------
Total selling expense 5,397 5,201
General & administrative expense 6,429 6,160
------- -------
Total selling, general & administrative $11,826 $11,361
======= =======
Engineering & product development $ 2,454 $ 2,046
======= =======
</TABLE>
Total selling expense as a percentage of net sales was 14.5% and
12.1% for the years ended December 31, 1998 and 1997, respectively.
Commissions as a percentage of net sales decreased slightly from 3.5% in 1997
to 3.1% in 1998 as a result of and in direct relation to the decrease in
Circuits Sector sales. In contrast to Components Sector sales which are
primarily achieved through direct selling, the majority of Circuits Sector
sales are made through manufacturer representatives. The increase in other
selling expense, which consists of sales and marketing departmental costs,
from 1997 to 1998, occurred principally in the Test Equipment Sector as the
other Sectors remained relatively stable. This increase in the Test Equipment
Sector was the result of the inclusion of CXR's operations for the entire
twelve months in 1998 versus nine months in 1997 subsequent to the Merger on
March 26, 1997.
General and administrative expense increased by $269,000 in 1998
versus 1997. This increase occurred in the Test Equipment Sector and was the
result of the inclusion of CXR's operations for the entire twelve months in
1998 versus nine months in 1997. General and administrative expenses
represent not only those costs associated with general corporate overhead but
also reflects the dispersion of the Company's business operations onto three
continents as well as the broad diversity of products which are produced in
each of the local markets served by those business operations. Additionally,
included in this category are expenses associated with legal matters which,
although resolved in late 1998 and early 1999, pre-date the Merger (see Item
3 - Legal Proceedings and Note 14 to the Consolidated Financial Statements
included elsewhere in this report).
Engineering and product development costs originated principally
from the research and product development activities of the Test Equipment
Sector and increased by $408,000 in 1998 versus 1997 as additional
engineering staff associated with the introduction of new test instruments
was added.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $220,000 in 1998 from 1997
resulted principally from decreased average borrowings during the respective
periods. Fluctuations in other expense (income), net resulted principally
from differences in foreign currency exchange gains and losses incurred
during the respective periods. Other income in 1998 also included the gain on
the sale of XCEL Arnold of $580,000.
INCOME TAXES
Income taxes, while nominal in both respective periods, consists
primarily of foreign taxes as the Company is in a loss carryforward position
for Federal income tax purposes. At December 31, 1998, the Company has total
net deferred income tax assets of approximately $16,591,000. Such potential
income tax benefits, a significant portion of which relates to net operating
loss carryforwards, have been subjected to a
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<PAGE>
100% valuation allowance since realization of such assets is not more likely
than not in light of the Company's recurring losses from operations.
THREE MONTHS ENDED MARCH 31, 2000 VERSUS THREE MONTHS ENDED MARCH 31, 1999
NET SALES
Consolidated net sales for the first quarter of 2000 decreased by
approximately $1,024,000 or 13.6% compared with the same period in the prior
year. This decrease in sales was primarily comprised of:
- The sale of the Company's HyComp, Inc. ("HyComp") subsidiary.
- A reduction in the sales of the Company's U.K. based component
business.
The table below sets forth the composition of consolidated net sales by
business segment, separately identifying the operations of HyComp for the three
months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, VARIANCE
SEGMENT 2000 1999 INCREASE/(DECREASE) PERCENT
------- ------------------------------------------------------------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Instruments $3,553 $3,708 $ (155) (4.2)%
Components 2,264 2,918 (654) (22.4)%
Circuits 669 428 241 56.3%
HyComp
(sold 3/31/99) -- 456 (456) (100.0)%
------ ------ -------
Total Sales $6,486 $7,510 $(1,024) (13.6)%
====== ====== =======
</TABLE>
Instrument sales were down slightly by 4.2% in the first quarter of
2000 compared to the first quarter of 1999. Management believes this decrease
was partially due to reduced orders of test equipment by U.S. telecom customers
in late 1999 due to Y2K concerns which was a one time non-recurring event.
Orders for test equipment have since improved beyond expectation. The reduction
in test equipment sales was offset by improved sales of transmission products.
The increase in U.S. transmission sales was the result of major product
qualification efforts in the latter half of 1999 which had been underway for
almost a year with Pacific Bell and GTE. Sales of transmission and modem
equipment from the Company's facility in France in the current quarter were
slightly below the first quarter of 1999 due to lower than usual sales in
January. This was expected as the sales for this facility in December 1999 were
unusually high which had the affect of shifting sales that would otherwise have
normally been shipped in January into December.
Component sales declined 22.4% to $2,264,000 in the first quarter of
2000 from $2,918,000 in the first quarter of 1999. The U.S. component operation
incurred a 9% sales decrease in the current quarter compared to the first
quarter of 1999 due to a decrease in switch sales. The majority of the sales
decline in this segment is due to a short term delay in the release of
production for certain contracts at the Company's U.K. facility for power
supplies. This resulted in a 28.5% sales decrease in the first quarter of 2000
from the first quarter of 1999 for the U.K. facility.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
sales for the Circuit sector increased 56.3% to $669,000 in the current quarter
from $428,000 in the first quarter of 1999. The increase in sales was the result
of a successful effort to replace the Circuit segment's sales to other
facilities of the Company with sales to
75
<PAGE>
unrelated third parties at higher prices. Unit sales were up to 4% in the first
quarter of 2000 from the comparable prior year period.
GROSS PROFIT
The composition of consolidated gross profit by business segment and
the percentages of related net sales are as follows for the three months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
SEGMENT 2000 1999
------- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Instruments and Test Equip. $1,351 38.0% $1,452 39.2%
Components 947 41.8% 1,083 37.1%
Circuits 75 11.2% (68) (15.8)%
HyComp (sold 3/31/99) -- -- 139 30.5%
------ ------
Total Gross Profit $2,373 36.6% $2,606 34.7%
====== ======
</TABLE>
Gross profit for the Instrumentation and Test Equipment segment
declined slightly in the current quarter compared to the prior year period. The
U.S. facility reduced its manufacturing costs considerably and with a slightly
reduced sales level was able to increase its gross margin to 39% of sales in the
first quarter of 2000 as compared to 32.8% of sales in the first quarter of 1999
due to reducing headcount, subletting part of its facility and reorganizing.
This improvement in margin was more than offset with a reduction in margin at
the French facility to 37% of sales in the current period from 42.9% of sales in
the prior year period. The French facility's margin was reduced because of the
lower exchange rate of the Euro and French Franc to the U.S. dollar, causing
their importation of manufacturing components and resale items from the U.S. to
be more costly in their local currency and thereby reducing the margins.
Overall, the components segment was able to increase its gross profit
margin to 41.8% of sale sin the current quarter from 37.1% of sales in the first
quarter of last year even though sales declined for this segment by 22.4% for
the same comparison periods. Although the gross margin increased as a percentage
of sales, the gross margin declined to $947,000 in the first quarter of 2000
from $1,083,000 in the first quarter of 1999. The U.S. facility has produced a
substantial increase in its margin performance for the current period by
increasing its gross margin percentage of sales to 57.3% in the current quarter
from 43% in the comparable prior year quarter. This improvement was accomplished
by support personnel reductions and moving from the Ontario, California facility
to the smaller and more efficient Rancho Cucamonga, California facility. The
improvement of the gross margin in the U.S. facility was offset by the reduction
in volume causing less absorption of overhead due to the temporary delay in the
placement of production releases for previously awarded contracts.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
the gross margin for the circuits segment improved to $75,000, or 11.2% of sales
in the first quarter of 2000 from a negative $68,000, or a negative 15.8% of
sales in the first quarter of 1999. This improvement was accomplished by
reducing personnel and making higher unit priced sales as well as a slight
increase in unit volume.
76
<PAGE>
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2000 and 1999
were comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
------- -------
<S> <C> <C>
Commissions $ 205 $ 250
Other selling 745 937
------ ------
Total selling expense 950 1,187
General & administrative expense 1,262 2,539
------ ------
Total selling, general & administrative $2,212 $3,716
====== ======
Engineering & product development $ 243 $ 558
====== ======
</TABLE>
Total selling expense as a percentage of net sales decrease to 14.6%
from 15.8% for the three months ended March 31, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions as a percentage of net sales remained relatively stable at 3.2% in
the first quarter of 2000 and 3.3% in the first quarter of 1999.
General and Administrative Expenses ("G&A") declined to $1,262,000 or
19.5% of net sales in the current quarter from $2,529,000 or 33.7% of net sales
in the first quarter of 1999. After adjusting for $715,000 of non-recurring
charges in the first quarter of 1999, G&A expenses have been reduced by $552,000
or 30.4% in the current quarter from the prior year quarter. The Company reduced
G&A expenses dramatically by transferring the administrative functions of CXT
Telcom to the corporate office in May 1999 and did so with a reduced corporate
staff. Additional savings in G&A were achieved through closely monitoring and
reducing such expenses at the divisional level and the corporate level.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first quarters of 2000 and
1999. In the first quarter of 1999, $32,000 of such expenses were recorded in
the Circuits segment by HyComp, Inc. which was sold March 31, 1999. Engineering
and product development costs were $243,000 or 3.7% of net sales in the current
quarter which is a $315,000 reduction from the $558,000 or 7.4% of net sales
recorded for the first quarter of 1999. The reduction is primarily due to the
elimination of the CXR Telcom engineering effort in Fremont, California and the
consolidation of such engineering efforts in the St. Charles, Illinois facility.
This reorganization has reduced costs and improved the efficiency of the product
development process. The engineering and product development costs will focus on
the Instrumentation and Test Equipment segment and will focus on bringing new
products to the market in order to improve the Company's competitive position in
this segment.
OTHER INCOME AND EXPENSE
In January 2000, the Company sold all of its interest in Digital
Transmission Systems, Inc. ("DTA") to Wi-LAN, Inc. of Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN, Inc. common stock, which is
traded on the Toronto, Ontario stock exchange. The market value of the acquired
common stock of Wi-LAN, Inc. was approximately $720,000 on the date of the
transaction. The Company's decision to sell the DTS stock was due to (1) the
investment in DTS not providing expected benefits and (2) the Company's need to
increase liquidity and working capital.
In the first quarter of 1999, the Company recorded $536,000 of equity
in earnings for DTS and $331,000 gain on the sale of HyComp. No expenses or
income related to either DTS or HyComp were incurred in the first quarter of
2000 and none are expected to be incurred in the future. Interest expense was
reduced to $96,000 in the
77
<PAGE>
current period from $119,000 in the prior year due to lower average loan
balances. Income taxes are not material due to U.S. loss carryforwards.
SUBSEQUENT EVENT
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
Belix is located in England, U.K. and is in the business of manufacturing power
supplies for various applications. It will be integrated into the Company's
existing power supply producer, XCEL Power Systems, Ltd. Belix' tangible assets
consist primarily of accounts receivable, inventories and fixed assets. A charge
for severance and other consolidation costs will likely be recorded in the
second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $1,166,000 in cash flow from operations in 1999.
The major contributions to the cash flow were substantial decreases in accounts
receivable, inventories and prepaid expenses and other assets. Also contributing
to the cash flow was an increase in accounts payable. In addition to the cash
generated by operations, the Company received $868,000 in cash for the sale of
its HyComp, Inc. subsidiary. The cash generated from operations and investing
activities was used to pay down $1,685,000 of short and long-term debt. The
Company's cash flow in 1999 compares favorably to 1998 in which the Company used
$3,133,000 to fund its operations and 1997 in which the Company's operations
used cash of $1,668,000.
Cash of $36,000 was generated from operations during the first quarter
of 2000 as compared to a cash usage from operations of $151,000 in the first
quarter of 1999. The primary source of cash from operations was the collection
of receivables which reduced the balance of receivables to $5,544,000 as of
March 31, 2000 as compared to $6,519,000 as of December 31, 19099. The primary
usage of cash from operations was the reduction in accounts payable by $647,000
in the first quarter of 2000. The Company generated net cash of $154,000 for the
first quarter of 2000 compared to a net cash usage of $210,000 in the first
quarter of prior year. The Company received $520,000 cash from the sale of its
DTS stock which was primarily used to pay down debt. Cash used to reduce debt
was $282,000 in the first quarter of 2000.
The improvements in operating cash flow are the result of management's
efforts to cut costs, reorganize and improve the efficiency of the organization.
Capital expenditures were $124,000, $182,000 and $424,000 in the years
ended December 31, 1999, 1998, and 1997, respectively. There are currently no
formal commitments for future capital expenditures.
On January 7, 2000, the Company sold all of its interest in the common
stock of Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc., a public
company based in Alberta, Canada. As consideration, the Company received
$520,000 in cash and 28,340 shares of Wi-LAN common stock valued at
approximately $720,000 at the time of the transaction. The Company used the cash
to pay down debt. In conjunction with the transaction, the Company's lender,
Congress Financial Corporation ("Congress"), agreed to waive certain defaults of
the loan agreement relating to a $350,000 overdraft the Company was required to
pay down by September 22, 1999 and eliminated the requirement of a $350,000
target reserve. The target reserve was a funding requirement to pay down the
principal of the term loan by $350,000 in addition to the regular monthly
principal payments.
Due to rules of the Toronto Stock exchange, where Wi-LAN, Inc. stock
trades, the Company is prohibited from selling its interest in the Wi-LAN, Inc.
stock for six months after acquisition because the stock
78
<PAGE>
was acquired in a transaction related to the sale or purchase of a company.
However, the Company's lender did increase the Company's borrowing availability
by $400,000 on February 29, 2000 based on the market value of the Company's
28,340 shares of Wi-LAN stock on that date of $1,571,000.
The financing provided by Congress expires on June 23, 2000. Congress
has informed management that it will not renew the loans and such loans will be
due and payable on that day. The Company is actively pursuing replacement
financing and has already received one proposal from a prospective lender and
expects other additional proposals. If the Company is unable to secure
alternative financing by the date of the expiration of the Congress financing
facility, the Company may not be able to continue its domestic operations.
The Company continues to suffer from a shortage of cash. However, with
the recent efforts in cost cutting, reorganizing in the Instrument and Test
Equipment segment, the improvement in recent orders and improved operating
performance and cash flows, management believes the Company's cash situation,
though serious, has improved substantially since the fourth quarter of 1999.
Management believes the Company's cash position is inadequate for the
capital needs of the Company. The Company is unable to pay some of its vendors
on a timely basis and some suppliers have placed the Company on COD terms.
Management has taken actions to improve the cash position of the Company such as
selling the DTS stock, relocating the corporate headquarters and XIT, subleasing
part of the Fremont, California facility, restructuring CXR and streamlining the
Test Equipment Sector's management structure. In order to further enhance the
Company's performance, management is considering plans to divest itself from the
Circuit Sector, convert CXR to use contract manufacturers and pursue strategic
acquisitions that will add profit to the Company. The Company has recently
considered an offer to buy its XIT components business. In February 2000, the
Company decided not to sell XIT based on the offer presented.
The Company is implementing a corporate finance program designed to
improve its working capital structure by replacing its existing domestic credit
facilities. The Company is actively searching for alternative financing to
replace the current domestic credit facility. Although no replacement lender has
been selected as of the date of this report, the Company has identified several
prospective lenders, one of whom has submitted a proposal to the Company. The
finance program also involves the potential private placement of certain debt or
equity securities. Additionally, management is exploring the potential to
further leverage its Wi-LAN stock which had market value of approximately
$1,600,000, as of May 15, 2000. Congress is at present lending $400,000 against
this asset. In addition, as part of an acquisition financing, the Company plans
to leverage its existing U.K. operations to provide additional working capital
for operations and acquisitions. Finally, management has developed and continues
to implement plans to reduce existing cost structures, improve operating
efficiencies and strengthen the Company's operating infrastructure.
The accompanying consolidated financial statements contained elsewhere
in this report have been prepared assuming that the Company will continue as a
going concern. The Company has suffered recurring losses from operations and is
in default of a provision of its domestic credit facility, the effects of which
raise substantial doubt about its ability to continue as a going concern (see
Note 16 to the Consolidated Financial Statements included elsewhere in this
report). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
YEAR 2000
To date, the Company experienced no material effects related to
computer operations and the arrival of the year 2000 as of the date of this
report. Management does not expect any disruptions due to the year 2000 as
management believes all its current systems are year 2000 compliant.
79
<PAGE>
At certain of its domestic facilities, the Company has installed
accounting and operations management computer applications which are Year 2000
compliant and which operate on computer operating systems that are also Year
2000 compliant. 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. The Company has not experienced Year 2000 disruptions with its
suppliers or customers and management believes that such entities are Year 2000
compliant with respect to their systems that could affect the Company.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either the Company or its
various operating subsidiaries.
EURO CONVERSION
The Company has operating subsidiaries located in France and the U.K.
with combined net sales from these operations approximating 48% of total Company
net sales for the first quarter of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 34% of the Company's net sales for the
first quarter of 2000. The Company continues to review the impact of the Euro
conversion on its operations.
In 1998, the Company's European operations took steps to ensure their
capability of entering into Euro transactions as of January 1, 1999. No material
changes to information technology and other systems were necessary to
accommodate these transactions as such systems previously had the capability to
utilize multiple currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on the Company's European operations, at this time, the Company does
not foresee any material impediments in its ability to compete for orders from
customers requesting pricing using the new exchange rate. Since the Company has
no significant direct sales between its U.S. operations and Europe, exchange
rate risk is regarded as nominal.
OUTLOOK FOR THE COMPANY
The Company's overall strategy is to expand its Instrumentation and
Test Equipment segment through the acquisition and/or development of new
products, product lines and/or separate operating companies. Concurrently, the
Company continues to evaluate existing lower-margin or loss operations elsewhere
throughout the Company, with a view toward divestment so as to redirect capital
to the higher margin Instrumentation and Test Equipment segment. In addition,
the Company will continue to seek to maximize short to intermediate term
profitability on existing maturing product lines in all segments through price
increases and lower operating costs. The Company has completed its transfer of
production of its U.S. transmission and modem product lines from its CXR Telcom
Fremont facility to its French subsidiary, CXR, S.A. This transfer will improve
the manufacturing efficiency and sales effort of these product lines as they
will now be centralized in one location.
CXR Telcom has released a new universal ADSL/xDSL facility test set
incorporating IEEE 23 tone test technique that should result in a significant
increase in the sale of its 704A universal test set. Also, CXR, S. A. has
introduced in Europe its new high speed mSDSL multirate modem. This new Fastline
2000 modem varies its transmission rate to provide maximum performance over
single pair copper wires. In the Component Sector, XIT's Digitran Division has
achieved recertification by the U. S. government's Defense Supply center to
manufacture the Digitran patented family of Binary Coded Digital switches for
the government's Qualified Parts
80
<PAGE>
List. In April 2000, CXR Telcom received a contract from the Federal Aviation
Agency for the Halcyon 704A-400 combination test unit that is expected to
provide $8,000,000 in revenue over a three year period.
The Company's XCEL Power Systems, Ltd. ("XPS") subsidiary in the U. K.
acquired Belix, Ltd. ("Belix") on April 17, 2000. Belix manufactures power
supplies as does XPS. The combined entity is expected to double its sales
compared to its sales before the acquisition. Belix is expected to be profitable
in its first year as part of the Company's U. K. operations.
In the U.S. Instrumentation and Test Equipment segment, the recent
completion of mergers of various Regional Bell Operating Companies is beginning
to produce new opportunities. The consolidation of Southwest Bell and Pacific
Bell is now complete and release of equipment purchases has once again returned
to traditional levels. Although the NYNEX and Bell Atlantic merger had initially
created some uncertainty and delayed capital equipment purchases, this merger,
now complete, has afforded the Company the opportunity to provide the combined
entity with the Company's newer test equipment products. Domestic sales of
transmission products have expanded with the introduction of Remote Access
Server products for Internet applications as well as for other transmission
products for billing and voice mail applications which are currently being sold
to SBC Communications, GTE and others. Additionally, in-house efforts are being
directed toward developing software that will allow the recently acquired test
equipment products to be marketed in both Europe and Latin America.
The Company expects its profit and cash flow to continue to improve in
subsequent quarters of 2000.
DISAGREEMENTS WITH ACCOUNTANTS.
None.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
81
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of MicroTel are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLES
---- --- ------
<S> <C> <C>
Carmine T. Oliva 57 Chairman of the Board of Directors, President and
Chief Executive Officer
Laurence P. Finnegan, Jr. 61 Director
Robert B. Runyon 74 Secretary and Director
Randolph D. Foote 51 Senior Vice President and Chief Financial Officer
Graham Jefferies 42 Executive Vice President
</TABLE>
CARMINE T. OLIVA (Class III Director) has been the Chairman, President and Chief
Executive Officer of the Company since March 26, 1997 and of XIT Corporation, a
subsidiary of the Company, since its founding in 1983. From 1980 to 1983, Mr.
Oliva was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior
to that position, Mr. Oliva held a number of executive positions with ITT
Corporation and its subsidiaries over an eleven-year period. Mr. Oliva is the
founder of XIT. Mr. Oliva attained the rank of Captain in the United States Army
and is a veteran of the Vietnam War.
LAURENCE P. FINNEGAN, JR. (Class II Director) was appointed as a Director of
MicroTel on March 26, 1997. In addition to being a director of XIT since 1985,
Mr. Finnegan joined XIT as its Chief Financial Officer on a part-time basis in
1994. Mr. Finnegan has held positions with ITT (1970-74) as controller of
several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief
Financial Officer and Executive Vice President, and Fischer & Porter (1986-1994)
as Senior Vice President, Chief Financial Officer and Treasurer. Since 1994, he
has been a principal of Gwyn Allen Partners, Bethlehem, Pennsylvania, an
executive management consulting firm, and President of GA Pipe, Inc., a
manufacturing company based in Langhorne, Pennsylvania.
ROBERT B. RUNYON (Class III Director) was appointed as a Director and Secretary
of MicroTel on March 26, 1997. He is the owner and principal of Runyon and
Associates, a human resources and business advisory firm since 1990. Prior to
the Merger, Mr. Runyon served XIT both as a director and as consultant in the
areas of strategy development and business planning, organization, human
resources, and administrative systems. He also consults for companies in
environmental products, marine propulsion systems and architectural services
sectors in these same areas. From 1970 to 1978, Mr. Runyon held various
executive positions with ITT Corporation including Vice President,
Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to
1970, Mr. Runyon held executive positions at BP Oil including Vice President,
Corporate Planning and Administration of BP Oil Corporation, and director,
organization and personnel for its predecessor, Sinclair Oil Corporation. Mr.
Runyon was Executive Vice President, Human Resources at the Great Atlantic &
Pacific Tea Company from 1978 to 1980.
RANDOLPH D. FOOTE was appointed Senior Vice President and Chief Financial
Officer on October 4, 1999. Mr. Foote was the Corporate Controller of Unit
Instruments, Inc., a public semiconductor equipment manufacturer, from 1995 to
1999. From 1985 to 1995, Mr. Foote was the Director of Tax and Financial
Reporting at Optical Radiation Corporation, a public company, which was a
designer and manufacturer of products using advanced optical technology. Prior
to 1985, Mr. Foote held positions with Western Gear Corporation and Bucyrus Erie
Company which were both public companies.
82
<PAGE>
GRAHAM JEFFERIES was appointed Executive Vice President and Chief Operating
Officer of the Company's worldwide Telecommunications Group on October 21, 1999.
Mr. Jefferies is also Managing Director of the Company's United Kingdom
operations. Prior to joining the Company in 1992, he was Sales and Marketing
Director of Jasmin Electronics PLC, a major UK software and systems provider,
from 1987 to 1992. Mr. Jefferies held a variety of project management positions
at GEC Marconi from 1978 to 1987. Mr. Jefferies has an Honours degree in
Electronics and has experience in mergers and acquisitions.
EXECUTIVE COMPENSATION
The cash compensation paid by the Company during the years ended
December 31, 1999, 1998 and 1997 to its Chief Executive Officer and other
executive officers earning salary and bonus exceeding $100,000 annually is
presented in the Summary Compensation Table below.
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
-----------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name and Annual Restricted Underlying
Principal Compensation Stock Options/ LTIP All Other
Position(1) Year Salary($)(2) Bonus($) ($)(3) Awards(s)($) SARs (#) Payouts($) Compensation(4)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carmine T. Oliva, 1999 198,872 0 0 0 0 0 0
President, CEO 1998 198,872 0 0 0 0 0 0
1997 239,364 0 0 0 0 0 0
Randolph D. Foote, 1999 23,367 0 1,800 0 50,000 0 0
Senior Vice 1998 0 0 0 0 0 0 0
Pres., CFO 1997 0 0 0 0 0 0 0
Graham Jefferies, 1999 114,192 0 6,199 0 60,000 0 5,116
EVP 1998 98,918 0 6,097 0 30,000 0 5,567
1997 95,755 0 6,527 0 0 0 6,527
James P. Butler, 1999 122,769 0 5,400 0 0 0 0
Former CFO 1998 125,000 0 7,200 0 40,000 0 0
(Resigned 1997 44,377 0 2,700 0 75,000 0 0
10/4/99)
</TABLE>
(1) Carmine T. Oliva became Chairman and Chief Executive Officer on
3/26/97, upon Jack Talan's resignation concurrent with the merger of
the Registrant with XIT Corporation.
83
<PAGE>
(1) Randolph D. Foote was appointed Senior Vice President and Chief
Financial Officer on October 4, 1999, following receipt of notification
of the resignation of the Registrant's former Chief Financial Officer,
James P. Butler.
(1) Mr. Jefferies was appointed Executive Vice President and Chief
Operating Officer of the worldwide Telecommunications Group on October
21, 1999. Mr. Jefferies is based in the United Kingdom and receives his
remuneration in British pounds. The compensation amounts listed for Mr.
Jefferies are shown in U. S. dollars, converted from British pounds
using the average conversion rates in effect during the time periods of
compensation.
(2) Mr. Oliva's salary includes payments of $45,333 in 1997 of voluntarily
deferred salary from years prior to 1997.
(3) Consists solely of an automobile allowance.
(4) Consists of contributions to Mr. Jefferies retirement plan.
LONG TERM INCENTIVE PLAN
In 1997, the Company's Board of Directors approved a Long Term
Incentive Plan - the 1997 Stock Incentive Plan (the "1997 Plan") - which
provides incentive compensation opportunities for officers and other key
employees in the form of stock options, stock appreciation rights, restricted
stock and other forms consistent with the objectives of the 1997 Plan. Adoption
of the 1997 Plan was approved by the stockholders at the 1998 Annual Meeting of
Stockholders. The following two tables depict stock option grants to and
exercises by the named executives for the year ended December 31, 1999 and the
status of outstanding stock options issued to them at December 31, 1999.
OPTIONS/SAR GRANTS GRANTED DURING THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE ALTERNATIVE TO
APPRECIATION FOR OPTION (f) AND (g):
INDIVIDUAL GRANTS TERM (1) GRANT DATE VALUE
------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (f)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS/ EMPLOYEES IN BASE PRICE EXPIRATION 5% 10% VALUE PRESENT
NAME SARS GRANTED(#) FISCAL YEAR ($/SHARE) DATE ($) ($) ($)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Carmine T. Oliva, CEO 0 0 n/a n/a n/a n/a n/a
Randolph D. Foote,
CFO 50,000 11.6% 0.20 11/15/09 6,289 15,937 7,357
</TABLE>
84
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Graham Jefferies,
EVP 60,000 14.0% 0.20 11/15/06 7,547 19,125 8,828
James P. Butler,
Former CFO
(Resigned 10/4/99) 0 0 n/a n/a n/a n/a n/a
</TABLE>
(1) The dollar amounts under the 5% and 10% columns in the table shown above
are the result of calculations required by the SEC's rules and are not
intended to forecast any future appreciation in the Company's stock price.
No gain to the Named Executive Officer is possible without appreciation in
the price of the Company's common stock, which would benefit all
stockholders.
AGGREGATED OPTIONS/SAR EXERCISES IN 1999
AND OPTIONS/SAR VALUES AT DECEMBER 31, 1999
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED ON 12/31/99 (#) 12/31/99 ($)
EXERCISE EXERCISABLE/ EXERCISABLE/
NAME (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carmine T. Oliva, CEO 0 0 130,633/0 0/0
Randolph D. Foote, CFO 0 0 25,000/25,000 5,938/5,938
Graham Jefferies, EVP 0 0 96,287/30,000 7,125/7,125
James P. Butler, Former CFO 0 0 115,000/0 0/0
(Resigned 10/4/99)
</TABLE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Pursuant to the employment agreement dated January 1, 1996 between the
Company and XIT Corporation, Carmine T. Oliva was employed as Chairman,
President and Chief Executive Officer of XIT Corporation for a term of five
years at an annual salary of $250,000. In July 1996, Mr. Oliva voluntarily
agreed to abate a portion of his annual salary in connection with XIT's salary
abatement program then in effect. On May 6, 1997, the Board of Directors of the
Company voted to assume the obligations of XIT under this Agreement in light of
the appointment of Mr. Oliva to the positions of Chairman of the Board,
President and Chief Executive Officer of the Company. On October 15, 1997, the
Company and Mr. Oliva entered into a replacement agreement on substantially the
same terms and conditions as the prior agreement. The current agreement is
subject to automatic renewal for three successive two year terms commencing on
October 15, 2001, unless, during the required notice periods as provided
therein, either party gives written notice of its desire not to renew and
provides that Mr. Oliva's salary continues at the abated amount of $198,865 per
annum until such time as the Company has reported two (2) consecutive profitable
quarters during the term of the
85
<PAGE>
agreement or any renewals thereof. In the event of Mr. Oliva's termination for
cause, the Company's obligation to pay any compensation, severance allowance, or
other amounts payable under the Agreement terminates on the date of such
termination. In the event of a termination without cause, Mr. Oliva shall be
paid his annual salary for two and one-half years following the effective date
of such termination or until October 15, 2002, whichever is longer. If such
termination without cause occurs during a renewal period, Mr. Oliva shall be
paid his annual salary through the expiration of that particular renewal period
as well as any and all other amounts payable pursuant to the Agreement. The
Company may terminate the agreement upon thirty days written notice in the event
of a merger, sale or reorganization of the Company in which the shareholders of
the Company immediately prior to such reorganization receive less than fifty
percent of the outstanding voting shares of the successor corporation.
On May 1, 1998, the Company and Mr. Jefferies entered into an
employment agreement for a term of two years at an initial annual salary of
67,000 British pounds (approximately $106,500 at current exchange rates) that is
subject to automatic renewal for two successive one year terms commencing on May
1, 2000, unless, during the required notice periods as provided therein, either
party gives written notice of its desire not to renew. In the event Mr.
Jefferies's duties are substantially changed (the "Redesignation"), resulting in
a substantial net change in the scope of his responsibilities, Mr. Jefferies may
elect not to accept such Redesignation and resign. In such event, if the
Redesignation occurs during the initial term of the agreement, the Company shall
pay Mr. Jefferies his annual salary for one year or through May 1, 2000
whichever is longer. If the Redesignation occurs during a renewal period, the
Company shall pay Mr. Jefferies his annual salary for one year following the
effective date of his resignation. In the event of Mr. Jefferies' termination
for cause, the Company's obligation to pay any compensation, severance
allowance, or other amounts payable under the Agreement terminates on the date
of such termination. In the event of a termination without cause during the
initial term of the agreement, Mr. Jefferies shall be paid his annual salary for
one year following the effective date of such termination or until May 1, 2000,
whichever is longer. If such termination without cause occurs during a renewal
period, Mr. Jefferies shall be paid his annual salary through the expiration of
that particular renewal period as well as any and all other amounts payable
pursuant to the Agreement. The Company may terminate the agreement upon thirty
days written notice in the event of a merger, sale or reorganization of the
Company in which the shareholders of the Company immediately prior to such
reorganization receive less than fifty percent of the outstanding voting shares
of the successor corporation.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Executive Compensation and Management Development Committee of the
Board of Directors, composed of one outside director, is responsible for
establishing and administering the Company's policies involving the compensation
of all executive officers of the Company and establishing and recommending to
the Board of Directors the terms and conditions of all employee compensation and
benefit plans. No employee of the Company serves on this committee. During the
fiscal year ended December 31, 1999, the Executive Compensation and Management
Development Committee of the Board of Directors consisted of Robert Runyon and,
prior to June 26, 1999, David Barrett.
REPORT OF THE COMPENSATION COMMITTEE
This report is provided by the Executive Compensation and Management
Development Committee of the Board of Directors to assist shareholders in
understanding the Company's objectives, policies and procedures in establishing
its executive compensation structure and system. The Committee is responsible
for (a) reviewing and approving base salaries, bonuses and incentive awards for
all executive officers, (b) reviewing and establishing the base salary, bonuses
and incentive awards for the Chief Executive Officer, and (c) reviewing,
approving and recommending to the Board of Directors the content, terms and
conditions of all employee compensation and benefit plans, or changes thereto.
86
<PAGE>
The compensation philosophy and policy of the Company is based upon four central
objectives:
- To provide an executive compensation structure and system
which is both competitive in the outside industrial
marketplace and also internally equitable based upon the
weight and level of responsibilities in the respective
executive positions.
- To attract, retain and motivate qualified executives within
this structure, and reward them for outstanding
performance-to-objectives and business results through
financial and other appropriate management incentives.
- To align the Company's financial results and the compensation
paid to the Company's executive officers with the enhancement
of shareholder value.
- To structure the Company's compensation policy so that
executive officers' compensation is dependent, in one part, on
the achievement of its current year business plan objectives,
and in another part, on the long term increase in company net
worth and the resultant improvement in shareholder value, and
to maintain an appropriate balance between short and long
range performance objectives, over time.
The Company's compensation programs consist of base salary, an annual
incentive bonus, and the award of stock options and other equity-based
incentives. The base salary is targeted to recognize each executive's unique
value and historical contributions to the success of the Company in light of the
industry salary norms for the equivalent position in the relevant market. The
Compensation and Management Development Committee reviews the compensation of
the Chief Executive Officer, and with the Chief Executive Officer, the base
compensation of all executive officers and other key employees on an annual
basis to assure that a competitive position is maintained.
The annual incentive bonus is based upon actual performance compared to
pre-established quantitative and qualitative performance objectives, derived
from the Company's business plan and operating budgets, which can include
Company, operating subsidiary/division and individual components.
To further align the financial interests of the executive with those of
the Company and its shareholders, the long range executive incentive program is
primarily equity based, and provides the opportunity for the executive to earn
stock options and thereby benefit, along with all shareholders, from
performance-driven advancement of share value in the marketplace.
Within the controlling corporate policy direction of the Compensation
Committee and the Board of Directors, the equity incentive program (1997 Stock
Incentive Plan) includes (a) the criteria for option awards, (b) the number of
shares and timing of option grants, (c) internal equity in terms of grantee
levels of responsibility and potential to impact Company performance, (d)
measured consistency within the competitive marketplaces, (e) relation to
financial results, (f) the mutuality of interest between grantee and
shareholders, and (g) the essential objectives, processes and controls.
The Company also maintains certain other executive benefits that are
considered necessary in order to offer fully competitive opportunities to its
executives. These include, but are not limited to, 401(k) retirement savings
plans, profit sharing opportunities, car allowances, employment agreements, and
indemnification agreements.
87
<PAGE>
CHIEF EXECUTIVE OFFICER COMPENSATION
The base salary of Carmine T. Oliva, Chairman and Chief Executive
Officer, is targeted to fairly recognize his unique leadership skills and
management responsibilities compared to similarly positioned executives in the
industry and general marketplaces. The criteria for measurement includes data
available from objective, professionally conducted market studies, integrated
with additional competitive intelligence secured from a range of industry and
general market sources.
The Committee has determined that no increase in base salary for Mr.
Oliva would be considered until the Company's cash flow can be significantly
strengthened. Also, no bonus was paid to Mr. Oliva or to other executive
officers for 1999, as corporate financial performance fell short of objectives.
However, to assure strength and continuity in the office of the Chief
Executive, Mr. Oliva's employment contract was renegotiated, and the new
agreement became effective in October, 1997. The agreement is based on a
five-year commitment, with three successive two-year automatic renewals,
predicated upon a mutual agreement between the Company and Mr. Oliva at those
times.
Respectfully submitted,
Executive Compensation and Management
Development Committee
MicroTel International, Inc.
Robert B. Runyon, Chairman
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of July 1, 2000 by the
following: (i) each person who is beneficial owner of more than five percent
(5%) of the Company's outstanding common stock; (ii) each Director; (iii) each
of the named executive officers of the Company; and (iv) all Directors and
executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS+
------------------- ------------------ ----------------
<S> <C> <C>
Orbit II Partners, LP 2,714,610(1) 11.82%
2 Rector Street 16th Floor
New York, NY 10006
Carmine T. Oliva 1,638,756(2) 7.13%
c/o MicroTel International, Inc.
9485 Haven Avenue, Suite 100
Rancho Cucamonga, CA 91730
Samuel J. Oliva 830,118(3) 3.61%
80 Brandywyne Drive
Florham Park, NJ 07932
Laurence P. Finnegan, Jr. 132,349(4) *
3 Woods Lane
</TABLE>
88
<PAGE>
<TABLE>
<S> <C> <C>
Ambler, PA 19002
Robert B. Runyon 327,303(5) 1.42%
10 Eagle Claw Drive
Hilton Head, SC 29926
Randolph D. Foote 55,000(6) *
c/o MicroTel International, Inc
9485 Haven Avenue, Suite 100
Rancho Cucamonga, CA 91730
Graham Jefferies 129,563(7) *
c/o XCEL Powers Systems, Ltd.
Brunswick Road, Cobbs Wood
Ashford, Kent TN23 1 EB, U. K.
All executive 2,282,971 9.94%
officers and directors as a group
(5 persons)
+ On a fully diluted Post-Offering Basis
*(less than 1%)
</TABLE>
(1) Orbit II Partners L. P. and its Managing Partners, Alan Mackenzie, Jr.,
David Marino and Joel S. Kraut have a beneficial interest in 215,625
common shares issuable upon the exercise of warrants and 1,743,000
common shares upon the conversion of Series A Preferred Stock in
addition to ownership of 755,700 shares of common stock. The Managing
Partners are also Administrative Members of OTAF, LLC, a New York
limited liability company that owns 150,000 shares issuable upon the
exercise of warrants.
(2) Includes 486,036 shares held jointly by Mr. Oliva and his wife, as well
as 81,889 shares held individually by Mr. Oliva's wife. Also includes
477,076 shares, issuable to Mr. Oliva upon the exercise of MicroTel
options and warrants and 50,530 common shares issuable from the
conversion of one share of Series A Convertible Preferred Stock.
(3) Includes 107,830 shares issuable to Mr. Oliva upon the exercise of
MicroTel warrants and 101,060 shares issuable from the conversion of
Series A Convertible Preferred Stock.
(4) Includes 4,789 shares held jointly by Mr. Finnegan and his wife, and
88,178 shares issuable to Mr. Finnegan upon the exercise of MicroTel
options and warrants.
(5) Includes 147,217 shares issuable to Mr. Runyon upon the exercise of
MicroTel options and warrants.
(6) Includes 50,000 shares issuable to Mr. Foote upon exercise of MicroTel
options.
(7) Includes 126,287 shares issuable to Mr. Jefferies upon exercise of
MicroTel options.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 9, 1998, the Company's wholly-owned subsidiary XCEL Arnold
Circuits, Inc. sold substantially all of the assets used in its Arnold Circuits
business to Arnold Circuits, Inc., a company wholly owned by Robert Bertrand.
Mr. Bertrand, the Trustee of The Bertrand Family Trust, a beneficial owner of
more than five percent (5%) of the Company's outstanding common stock as of
December 31, 1998. Mr. Bertrand had owned and operated the Arnold Circuits
business until September of 1995, when the assets of that business were acquired
by XCEL Arnold Circuits, Inc.
The purchase price for the assets was $2 million plus the assumption of
liabilities of the Arnold Circuits business. The purchase price was paid by a
cash payment of $1,350,000 and delivery of a promissory note (the "Note") in the
amount of $650,000. The cash proceeds were used to retire bank debt and certain
other debt, including debt owed to Mr. Bertrand and a related entity. As
security for the Note, XCEL Arnold Circuits, Inc. was granted a second lien on
substantially all the assets of Arnold Circuits, Inc. Payment of the Note was
guaranteed by Mr. Bertrand and a related entity. Certain provisions of the
transactions would permit XCEL Arnold Circuits, Inc. to share in any gain of the
sale of the Arnold Circuits business while the Note is outstanding.
The purchase price for the Arnold Circuits business was arrived at via
negotiation between Messrs. Oliva and Bertrand and was approved by the Board of
Directors. Prior to reaching agreement with Mr. Bertrand, the Company
unsuccessfully attempted for several months to locate a buyer for the Arnold
Circuits business. Given the extent of the operating losses of the Arnold
Circuits business in 1997, the Company believes the terms of the transaction
with Mr. Bertrand were no less favorable to the Company than would have been
obtained in an arm's-length transaction with a third party, assuming an
interested third party had been found.
In connection with the transaction, in reconciliation of inter-company
accounts, the Company issued to Mr. Bertrand and an affiliated entity two
non-interest bearing promissory notes totaling $350,000 which are payable on the
consummation by the Company of a financing transaction and, if no financing
transaction occurs by May 31, 1998, on demand. In July 1998, the Company made a
payment of $100,000 against the notes and no demand has been made for the
balance.
During 1999, Arnold Circuits, Inc. defaulted under the terms of the
note receivable. The Company offset the balance of the note payable against the
note receivable and then wrote-off the unpaid balance of $452,000.
In November 1996, the Company entered into an agreement (the
"Agreement") with Daniel Dror, former Chairman of the Company, which involved
certain mutual obligations. In December 1997, Mr. Dror 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, Mr. Dror filed suit in the
District Court for Galveston County, Texas alleging the Company had breached an
alleged oral modification of the Agreement. In January 1998, the Company
answered the complaint denying the allegation and litigation commenced in Texas.
In April 1998, the Company brought an action in California against Mr.
Dror for breach of the Agreement and sought recovery of all stock, warrants and
debt due the Company. The Company obtained a judgement in the amount of $211,000
against the former Chairman in this litigation. In December 1997, Elk
International Corporation, Limited ("Elk"), 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
90
<PAGE>
discussions between XIT and the Company. In February 1999, Elk filed suit
against the Company, the current Chairman and counsel to the Company in
connection with a stop transfer placed by the Company on certain common shares
then held by Elk. Elk is described in the litigation as a Bahamian corporation
with an investment office in Galveston County, Texas. Mr. Dror stipulated in the
litigation that he manages the affairs of Elk in the United States.
On March 1, 1999, the parties entered into a settlement agreement which
terminated all of the foregoing actions. Pursuant to the terms of the settlement
agreement, the Company cancelled 750,000 options to purchase the Company's
common stock formerly held by Elk and issued to Elk warrants to purchase
1,000,000 shares of the Company's restricted common stock. Additionally, the
Company issued 100,000 shares of its restricted common stock to Elk and 25,000
shares each to two other parties to the settlement agreement. The Company also
agreed to pay certain legal expenses, totaling $60,000, over a period of six
months. The aggregated fair value of the settlement was approximately $130,000
and is reflected in the Company's consolidated financial statements for the
period ended December 31, 1998.
On December 23, 1999, Resonance Ltd. and Rana General Holding Ltd. sold
all their shares of Series A Convertible Preferred Stock and the prorated
portion of warrants applicable to the unconverted preferred shares. The
purchasers of such shares and prorated stock warrants were Orbit II Partners, L.
P., a limited partnership formed under the laws of Delaware, Samuel J. Oliva,
Samuel G. Oliva and Carmine T. Oliva. Carmine T. Oliva is the Company's
President and Chairman of the Board. Samuel J. Oliva and Samuel G. Oliva are
relatives of Carmine T. Oliva. The conversion ratio of the preferred shares sold
and outstanding was changed to a fixed factor whereby one share of preferred is
convertible into 50,530 shares of common stock. Also, all the warrants issued in
conjunction with the preferred stock (except those issued to the broker) were
amended to reduce the exercise price to $0.25 per share and to extend the
expiration date to December 22, 2002. These conversion and exercise terms were
also applied to the remaining preferred stock and warrants applicable to the
preferred stock that were not part of this exchange.
91
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
92
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
registration of the Shares is as follows:
<TABLE>
<S> <C>
SEC Registration $ 2,105.92
NASD Fees --
Accounting Fees and Expenses 7,500.00
Legal Fees and Expenses, including
Blue Sky Fees and Expenses 10,000.00
Printing Costs 1,000.00
Miscellaneous Expenses 5,000.00
------------
TOTAL $ 18,105.92
============
</TABLE>
II-1
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS
There are no indemnification provisions for directors, officers or
controlling persons of the Company against liability under the Securities Act.
However, as permitted by Section 145 of the Delaware General Corporation Law
(the "DGCL"), Article XI of the Company's By-laws provides for the
indemnification of officers, directors and certain other persons acting on
behalf of the Company (a) against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person by reason of the fact
that such person was or is an authorized representative of the Company, in
connection with a threatened, pending or completed third-party proceeding,
whether civil or criminal, administrative or investigative, if such individual
acted in good faith and in a manner such person reasonably believed to be in, or
not opposed to, the best interests of the Company, and, if the action was a
criminal proceeding, if such person had no reasonable cause to believe that such
person's conduct was unlawful; and (b) against expenses actually and reasonably
incurred by such person in connection with the defense or settlement of a
threatened, pending or completed corporate proceeding, by reason of the fact
such person was or is an authorized representative of the Company, if such
person acted under the standards set forth in section (a) above and if such
person was not found liable for negligence or misconduct in the performance of a
duty to the Company (or if so found liable, if a proper court found such person
to be fairly and reasonably entitled to indemnification). The Company's By-laws
further provide for mandatory indemnification of authorized representatives of
the Company who have been successful in defense of any third-party or corporate
proceeding or in defense of any claim, issue or matter therein, against expenses
actually and reasonably incurred in connection with such defense.
In addition, Article Fifth of the Company's Certificate of
Incorporation provides that, to the fullest extent permitted by the DGCL, a
director of the Company shall not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duties. Section 102(b)(7) of the
DGCL allows for the elimination or limiting of the personal liability of a
director for monetary damages for breaches of fiduciary duties as a director
except for situations involving: (i) breach of the duty of loyalty; (ii) bad
faith or misconduct; (iii) unlawful dividends; or (iv) transactions where
directors received an improper personal benefit. As a result of this provision,
the Company and its stockholders may be unable to obtain monetary damages from a
director for breach of his duty of care. Although stockholders may continue to
seek injunctive or other equitable relief for any alleged breach of fiduciary
duty by a director, stockholders may not have any effective remedy against the
challenged conduct if equitable remedies are unavailable.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted against the
Company by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-2
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
JULY 1998 SERIES A CONVERTIBLE PREFERRED STOCK PLACEMENT
In June 1998, the Company sold 50 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share to one
institutional investor. On July 8, 1998, the Company sold an additional 150
Preferred Shares at the same per share price to two other institutional
investors. Included with the sale of such Preferred Shares were a total of one
million warrants to purchase the Company's common stock exercisable at $1.25 per
share and expiring May 22, 2001. In addition, Pacific Continental Securities
Corporation, as agent in the transaction, received an additional 250,000
warrants to purchase the Company's common stock at $1.25 per share. The Company
received net proceeds of approximately $1,847,000 after deduction of commissions
and transaction-related expenses and utilized such proceeds for working capital.
As set forth herein, 59.5 of the Class A Preferred Shares have not been
converted as of the date of this prospectus. Each remaining Preferred Share is
convertible into 50,530 shares of common stock. The warrants have not been
exercised and have been modified to provide for an exercise price of $0.25 per
share (except for the agent's 250,000 warrants which have not been repriced).
II-3
<PAGE>
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(a) EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
-------
<S> <C>
2. Merger Agreement dated December 31, 1996 between XIT
Corporation, XIT Acquisition, Inc. and MicroTel
International, Inc.(1)
3.1 Certificate of Incorporation of MicroTel
International, Inc. as amended to date.(2)
3.2 Bylaws of MicroTel International, Inc.(3)
3.3 Amended Certificate of Amendment of Certificate of
Incorporation of MicroTel International, Inc.(7)
4.1 Certificate of Designations, Preferences and Rights
of Preferred Stock of MicroTel International Inc., a
Delaware Corporation. (12)
4.2 Warrant to Purchase Common Stock of MicroTel
International, Inc. Issued to DDC.(4)
4.3 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Yorkton Securities,
Inc.(7)
4.4 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Entrenet Group,
L.L.C.(7)
4.5 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to various subscribers.(7)
4.6 Second Amended and Restated Certificate of
Designations, Preferences and Rights of Preferred
Stock of MicroTel International, Inc.(11)
4.7 Second Amended and Restated Certificate of
Designations, Preferences and Rights of Preferred
Stock of MicroTel International, Inc.(15)
5.1 Opinion of Gallagher, Briody & Butler.(#)
10.1 1986 Incentive Stock Option Plan.(3)
10.2 Form of Officers Deferred Compensation Agreement by
and between Raymond E. Jacobson and CXR
Corporation.(5)
10.3 Qualified Employee Stock Purchase Plan.(3)
10.4 1993 Incentive Stock Option Plan.(6)
10.5 Stock Purchase Agreement with DDC.(4)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
------
<S> <C>
10.6 First Amendment to Stock Purchase Agreement with
DDC.(4)
10.7 First Amendment to Stock Purchase Agreement with
Daniel Dror and Company. (4)
10.8 Agreement between MicroTel International, Inc. and
Elk International Corporation, Ltd. dated November
15, 1996 (without Exhibits).(8)
10.9 Settlement Agreement between MicroTel International,
Inc. and Daniel Dror dated December 3, 1996 (without
Exhibits).(8)
10.10 Agency Agreement between MicroTel International, Inc.
and Yorkton Securities, Inc.(7)
10.11 Form of Subscription Agreement between MicroTel
International, Inc. and various subscribers.(7)
10.12 Employment Arrangement between Henry Mourad and
Registrant (without Exhibits).(7)
10.13 Employment Arrangement between Barry Reifler and
Registrant (without Exhibits).(7)
10.14 Employment Agreement dated January 1, 1996 between
XIT and Carmine T. Oliva.(8)
10.15 Lease Agreement between XIT Corporation and P&S
Development.(8)
10.16 Lease Agreement between XIT Corporation and Don
Mosco.(8)
10.17 General Partnership Agreement between XIT Corporation
and P&S Development.(8)
10.18 Lease Agreement between XCEL Arnold Circuits, Inc.
and RKR Associates.(8)
10.19 Option Agreement between MicroTel International, Inc.
and Elk International Corporation dated November 15,
1996.(8)
10.20 Amendment to Option Agreement between MicroTel
International, Inc. and Daniel Dror dated November
15, 1996.(8)
10.21 Option Agreement between MicroTel International, Inc.
and Elk International Corporation dated December 3,
1996.(8)
10.22 Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Elk International
Corporation.(8)
10.23 Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry
dated June 28, 1996.(8)
10.24 Amended Agreement of Settlement and Mutual Release
between MicroTel International, Inc. and Francis John
Gorry dated November 30, 1996.(8)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
-------
<S> <C>
10.25 Promissory Note between MicroTel International, Inc.
and Jack Talan dated February, 1997.(8)
10.26 Lease Agreement between SCI Limited Partnership-I and
CXR Telcom Corporation, Dated July 28, 1997. (9)
10.27 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. (10)
10.28 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)
10.29 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)
10.30 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)
10.31 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)
10.32 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)
10.33 Bill of Sale and Assignment and Assumption Agreement
between XCEL Arnold Circuits, Inc.and Arnold
Circuits, Inc., Dated March, 31 1998. (10)
10.34 Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to BNZ Incorporated. (10)
10.35 Guaranty of Robert Bertrand in favor of XCEL Arnold
Circuits, Inc., Dated March 31, 1998. (10)
10.36 Guaranty of BNZ Incorporated in favor of XCEL Arnold
Circuits, Inc., Dated March 31, 1998. (10)
10.37 Pledge and Escrow Agreement between BNZ Incorporated
and XCEL Arnold Circuits, Inc., Dated March 31, 1998.
(10)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
------
<S> <C>
10.38 Promissory Note between Arnold Circuits, Inc. and
XCEL Arnold Circuits, Inc. Dated March 31, 1998. (10)
10.39 Promissory Note between XIT Corporation and Arnold
Circuits, Inc. Dated March 31, 1998. (10)
10.40 Security Agreement between Arnold Circuits, Inc and
XCEL Arnold Circuits, Inc. Dated March 31, 1998. (10)
10.41 Joint Marketing and Supply Agreement between Arnold
Circuits, Inc and XCEL Etch Tek, Dated March 31,
1998. (10)
10.42 Loan and Security Agreement between Congress
Financial Corporation (Western) and MicroTel
International, Inc., XIT Corporation, CXR Telcom
Corporation and HyComp, Inc. dated June 23, 1998.
(11)
10.43 Security Agreement between Congress Financial
Corporation (Western) and XIT Corporation dated June
23, 1998. (11)
10.44 Subscription Agreement for the sale of Series A
Convertible Preferred Stock of MicroTel
International, Inc. to Fortune Fund Limited Seeker
III. (11)
10.45 Subscription Agreement for the sale of Series A
Convertible Preferred Stock of MicroTel
International, Inc. to Rana General Holding, Ltd.
(11)
10.46 Subscription Agreement for the sale of Series A
Convertible Preferred Stock of MicroTel
International, Inc. to Resonace Ltd. (11)
10.47 Form of Warrant to purchase the Common Stock of
MicroTel International, Inc. issued in connection
with the sale of Series A Convertible Preferred
Stock. (11)
10.48 Amended Certificate of Designations, Preferences and
Rights of Preferred Stock of MicroTel International,
Inc. a Delaware Corporation. (11)
10.49 Employment Agreement between MicroTel International,
Inc. and James P. Butler dated May 1, 1998. (11)
10.50 Lease agreement between MicroTel International Inc.
and Property Reserve Inc. dated September 16, 1999.
(14)
10.51 Lease agreement between XIT, Inc. and Ranch Cucamonga
Development Company dated August 30, 1999. (14)
10.52 Asset Purchase Agreement between HyComp, Inc. and
HyComp Acquisition Corp., c/o SatCon Technology
Corporation, dated March 31, 1999. (13)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
-------
<S> <C>
23.1 Consent of Independent Certified Public Accounts.(#)
24.1 Power of Attorney (included as part of the original
signature page).(#)
---------------------
(#) Filed herewith.
(*) Previously filed.
(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-8 No. 333-29925.
(10) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December 31,
1997 (File No. 1-10346).
(11) Incorporated by reference to MicroTel International, Inc.
interim report on Form 10-Q for the six months ended June 30,
1998 (File No. 1-10346).
(12) Incorporated by reference to MicroTel International, Inc.
Registration Statement on Form S-1 No. 333-64695.
(13) Incorporated by reference to MicroTel International, Inc.
interim report on Form 10-Q for the three months ended March
31, 1999 (File No. 1-10346).
(14) Incorporated by reference to MicroTel International Inc.
interim report on Form 10-Q for the nine months ended
September 30, 1999. ( File No. 1-10346)
(15) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December 31,
1999 (File No. 1-10346).
</TABLE>
II-8
<PAGE>
UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described above in Item 14, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned Registrant hereby undertakes that, for purpose of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rancho Cucamonga, State of
California, on this 17th day of July, 2000.
MicroTel International Inc.
By: /s/ Carmine T. Oliva
-------------------------------------
Carmine T. Oliva
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by or on behalf of the following
persons in the capacities and on the dates indicated.
Each person, in so signing, also makes, constitutes and appoints
Carmine T. Oliva, Chairman and Chief Executive Officer, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
Registration Statement, with all exhibits and any and all documents required to
be filed with respect thereto, and to do and perform each and every act and
thing necessary to effectuate the same.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Carmine T. Oliva
------------------------------ Chairman of the Board of Directors,
Carmine T. Oliva President, Chief Executive Officer
(Principal Executive Officer) July 17, 2000
/s/ Laurence P. Finnegan, Jr.
------------------------------ Director July 17, 2000
Laurence P. Finnegan, Jr.
/s/ Robert B. Runyon
------------------------------ Director July 17, 2000
Robert B. Runyon
/s/ Randolph D. Foote
------------------------------ Chief Financial Officer July 17, 2000
Randolph D. Foote (Principal Accounting and
Financial Officer)
</TABLE>
II-10
