<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 2000
REGISTRATION NO. 333-41580
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MICROTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3825 77-0226211
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CA 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, CA 91730
(909) 297-2699
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
LARRY A. CERUTTI, ESQ.
CRISTY LOMENZO PARKER, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, 14TH FLOOR
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) 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 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box: / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Each Class of To Be Offering Price Aggregate Amount of
Securities To Be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee(3)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $.0033 par value 1,980,506(4) $0.58 $1,148,693 $560.92
======================================================================================================================
</TABLE>
<PAGE>
(1) In the event of a stock split, stock dividend, anti-dilution adjustment or
similar transaction involving common stock of the registrant, in order to
prevent dilution, the number of shares registered shall be automatically
increased to cover the additional shares in accordance with Rule 416(a)
under the Securities Act. Pursuant to Rule 429, includes 1,195,000 shares
being carried forward from the Registrant's Registration Statement No.
333-64695 and 785,506 shares that are not presently covered by any other
registration statement.
(2) Estimated solely for purposes of determining the registration fee for the
shares covered by this registration statement that are not presently
covered by any other registration statement. Calculated pursuant to Rule
457(c) under the Securities Act, on the basis of the average of the high
and low prices per share as reported for such securities on the NASD's OTC
Bulletin Board on July 13, 2000.
(3) A registration fee in the amount of $502.21 was paid upon the initial
filing of this registration statement, $120.26 of which was paid to cover
the 785,506 shares that are covered by this registration statement and are
not presently covered by any other registration statement. This fee was
based upon an average of the bid and asked prices per share of $0.58 as
reported for such securities on the NASD's OTC Bulletin Board on July 13,
2000 and a fee rate of 0.00264. A registration fee of $2,105.92 was paid
by the Registrant under Registration Statement No. 333-64695 covering the
5,710,967 shares originally registered thereunder, $440.66 of which fee
relates to the 1,195,000 shares being carried forward which had a proposed
maximum offering price per share of $1.25 based upon the exercise price of
the warrants to which the registered shares relate.
(4) Includes 1,758,006 shares of common stock issuable upon exercise of
warrants.
Pursuant to Rule 429, this registration statement contains a combined
prospectus that covers 1,195,000 shares being carried forward from the
Registrant's Registration Statement No. 333-64695, in addition to the 785,506
shares being registered for the first time hereunder.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 29, 2000
PROSPECTUS
1,980,506 SHARES
MICROTEL INTERNATIONAL, INC.
COMMON STOCK
The shares of our Company's common stock being offered pursuant to this
prospectus are being offered by certain of our security holders identified
herein for their own accounts. Our common stock trades on the NASD's OTC
Bulletin Board under the symbol "MCTL." On December 19, 2000, the high and low
prices for a share of our common stock were $0.32 and $0.23, respectively.
The mailing address and the telephone number of our principal executive
offices are 9485 Haven Avenue, Suite 100, Rancho Cucamonga, California 91730,
(909) 297-2699.
--------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------
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 and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
----------- --------
<S> <C>
Prospectus Summary.................................................................. 3
Risk Factors........................................................................ 7
Special Note Regarding Forward-Looking Statements................................... 15
Use of Proceeds..................................................................... 16
Dividend Policy..................................................................... 16
Price Range of Common Stock......................................................... 17
Capitalization...................................................................... 18
Selected Consolidated Financial Data................................................ 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 21
Business............................................................................ 36
Management.......................................................................... 57
Certain Relationships and Related Transactions...................................... 68
Principal and Selling Security Holders.............................................. 72
Plan of Distribution................................................................ 75
Description of Capital Stock........................................................ 77
Legal Matters....................................................................... 81
Experts............................................................................. 81
Additional Information.............................................................. 81
Index to Financial Statements and Financial Statement Schedule...................... F-1
</TABLE>
-2-
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
it is a summary, it necessarily does not contain all of the information
necessary to your investment decision. To understand this offering fully, you
should read carefully the entire prospectus.
OUR COMPANY
We are a Delaware corporation that was formed July 14, 1989 under the
name CXR Corp. We amended our certificate of incorporation to change our name to
CXR Corporation in October 1989 and then to MicroTel International, Inc. in
March 1995.
Through our three direct wholly-owned operating subsidiaries, XIT
Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and
subsidiaries of our subsidiaries, we design, manufacture, assemble, and market
products and services in the following two material business segments:
Telecommunications
-- Telecommunications Test Instruments (analog and digital test
instruments used in the installation, maintenance,
management and optimization of public and private
communication networks)
-- Transmission and Network Access Products (range of products
for accessing public and private networks for the
transmission of data, voice and video)
Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 2000 were to customers in the telecommunications
industry, we also have significant sales to industrial, medical, aerospace and
military customers.
3
<PAGE>
THE OFFERING
Common stock offered by selling security holders 1,980,506 (1)
Common stock outstanding prior to this offering 20,569,759 (2)
Common stock outstanding following this offering 22,327,765 (1)(2)
if all shares are sold
Use of Proceeds All proceeds of this
offering will be
received by selling
security holders
(other than amounts,
if any, received by
us upon exercise of
warrants whose
underlying shares of
common stock are
covered by this
prospectus).
Risk Factors You should read the
"Risk Factors"
section
beginning on
page 7, as well as
other cautionary
statements
throughout this
prospectus, before
investing in shares
of our common stock.
-------------------
(1) Assumes exercise of all of the warrants whose underlying shares of
common stock are covered by this prospectus in exchange for 1,758,006 shares
of common stock and immediate resale of all of such shares.
(2) As of December 19, 2000, a total of 20,569,759 shares of common stock were
issued and outstanding, excluding :
-- 1,745,100 shares reserved for issuance under our stock option plans,
of which options to purchase 1,586,689 shares are outstanding;
-- 616,765 shares issuable upon conversion of our Series A Preferred
Stock;
-- 1,500,000 shares to become issuable upon conversion of our Series B
Preferred Stock;
-- 1,592,685 shares issuable upon exercise of outstanding warrants, other
than the warrants whose underlying shares of common stock are covered
by this prospectus; and
-- any additional shares of common stock we may issue from time to time
after December 19, 2000.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following selected consolidated financial data is qualified in its
entirety by and should be read in conjunction with the consolidated financial
statements and the notes to those statements and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations and comprehensive income data set forth below with respect to the
years ended December 31, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 are derived from, and are qualified by reference
to, the consolidated audited financial statements included elsewhere in this
prospectus. The consolidated statements of operations and comprehensive income
data set forth below with respect to the nine month periods ended September 30,
1999 and 2000 and the consolidated balance sheet data at September 30, 2000 are
derived from unaudited financial statements included elsewhere in this
prospectus, which, in the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial data for such periods. The historical results are not necessarily
indicative of results to be expected for any future periods.
<TABLE>
<CAPTION>
THREE
CONSOLIDATED STATEMENTS OF MONTHS
OPERATIONS AND COMPREHENSIVE ENDED NINE MONTHS ENDED
INCOME DATA: YEAR ENDED SEPT. 30, DEC. 31, YEAR ENDED DEC. 31, SEPT. 30,
-------------------- -------- ----------------------------- -------------------
1995 1996 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 13,737 $14,270 $ 3,100 $27,251 $ 30,100 $ 25,913 $ 19,444 $19,559
Cost of sales.................... 10,218 9,442 2,332 18,069 17,353 17,066 12,269 10,645
-------- --------- --------- --------- --------- ---------- ---------- --------
Gross profit..................... 3,519 4,828 768 9,182 12,747 8,847 7,175 8,914
Selling, general and
administrative expenses....... 3,585 3,426 1,045 8,608 10,202 10,132 8,494 6,923
Engineering and product
development expenses.......... -- -- -- 1,797 2,202 1,841 1,462 772
Write-down of goodwill........... -- -- -- 5,693 -- -- -- --
--------- --------- ---------- ---------- --------- ---------- ---------- -------
Income (loss) from operations.... (66) 1,402 (277) (6,916) 343 (3,126) (2,781) 1,219
Total other income............... 484 304 49 (627) (643) (193) 501 118
-------- --------- ---------- ---------- --------- ---------- ---------- -------
Income (loss) from continuing
operations before income taxes 418 1,706 (228) (7,543) (300) (3,319) (2,280) 1,337
Income tax expense............... (41) 20 30 97 101 128 25 13
--------- --------- --------- --------- --------- ---------- ---------- --------
Income (loss) from continuing
operations.................... 459 1,686 (258) (7,640) (401) (3,447) (2,305) 1,324
Discontinued operations:
Loss from operations of
discontinued segment....... (122) (603) (647) (2,053) (1,364) (1,146) $ (949) $ (276)
Gain (loss) on disposal of
discontinued segment
including provision for
phase out period of
$158 in 2000 .............. -- -- -- -- 580 (3) $ 331 $ (634)
-------- --------- --------- ---------- --------- ----------- ----------- --------
Net income (loss)................ $ 337 $ 1,083 $ (905) $(9,693) $ (1,185) $ (4,596) $ (2,923) $ 414
Foreign currency translation
adjustment................. 10 $ (89) $ 126 $ (260) $ 206 $ (325) $ (180) $ (435)
-------- ---------- --------- ---------- --------- ----------- ----------- ---------
Total comprehensive income (loss) $ 347 $ 994 $ (779) $(9,953) $ (979) $ (4,921) $ (3,103) $ (21)
======== ========= ========== ========== ========== =========== =========== =========
Basic earnings (loss) per share
from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.07
======== ========= ========== ========== ========== =========== =========== =========
Diluted earnings (loss) per share
from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.06
======== ========= ========== ========== ========== =========== =========== =========
Basic earnings (loss) per share
from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.05)
======== ========= ========== ========== ========== =========== =========== =========
Diluted earnings (loss) per share
from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.04)
======== ========= ========== ========== ========== =========== =========== =========
Basic earnings (loss) per share.. $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02
======== ========= ========== ========== ========== =========== =========== =========
Diluted earnings (loss) per share $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02
======== ========= ========== ========== ========== =========== =========== =========
Weighted average shares
outstanding, basic............ 4,995 5,841 6,064 10,137 11,952 16,638 16,192 19,141
======== ========= ========== ========== ========== =========== =========== =========
Weighted average shares
outstanding, diluted.......... 4,995 5,841 6,064 10,137 11,952 16,638 16,192 21,347
======== ========= ========== ========== ========== =========== =========== =========
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
AS OF SEPT. 30,
2000
----
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C>
Working capital................................................................. $ 2,717
Total assets.................................................................... 18,490
Total liabilities............................................................... 12,904
Total stockholders' equity...................................................... 5,310
Redeemable preferred stock...................................................... 276
</TABLE>
No cash dividends on our common stock were declared during any of the
periods presented above. 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.
The historical financial data above for periods prior to the merger is
that of XIT Corporation. In conjunction with the reverse acquisition accounting
treatment, XIT Corporation 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 Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS PROSPECTUS
BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
Our consolidated financial statements have been prepared assuming we
will continue as a going concern. We incurred significant net operating losses
in each of the years ended December 31, 1999, 1998 and 1997. We realized a net
loss of approximately $4.6 million for the twelve months ended December 31,
1999, as compared to incurring a net loss of approximately $1.2 million for the
twelve months ended December 31, 1998 and a net loss of approximately $9.7 for
the twelve months ended December 31, 1997. Additionally, we were in default of
our previously outstanding domestic credit facility agreement because we were
not in compliance with an adjusted net worth covenant contained in that
agreement. These factors raised substantial doubt about our ability to continue
as a going concern and led our independent certified public accountants to
modify their unqualified opinion to include an explanatory paragraph related to
our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
For the nine-month period ended September 30, 2000, we reported net
income of approximately $0.4 million. Our accumulated deficit and accumulated
comprehensive loss through September 30, 2000 were approximately $19.4 million
and $0.7 million, respectively, and as of that date we had a total stockholders'
equity of approximately $5.3 million. We expect to realize net income during the
quarter and year ended December 31, 2000. However, there is no assurance that we
actually will realize net income for these periods or maintain profitable
operations in the future. If we are unable to do so, there may be a material
adverse effect on our cash flows, which could cause us to violate covenants
under our credit facility and could impede our ability to raise capital, if
needed, through debt or equity financing.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY WHICH MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR
INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
7
<PAGE>
THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE. WE EXPECT THEM TO BECOME
MORE COMPETITIVE IN THE FUTURE, WHICH COULD RESULT IN SIGNIFICANT PRICE
COMPETITION, REDUCED REVENUES, LOWER PROFIT MARGINS OR LOSS OF MARKET SHARE.
The telecommunications and electronic components markets are highly
competitive. These markets may experience pricing and margin pressure that could
adversely affect our business, financial condition and operating results. A
number of development stage companies and major domestic and international
companies offer products and services within the same markets that we target.
Some of our competitors and potential competitors have larger technical staffs,
more established and larger marketing and sales organizations and significantly
greater financial resources than us. Our competitors may develop products and
services that are superior to ours or that achieve greater market acceptance.
Our future success will depend significantly upon our ability to increase our
share of our target markets and to sell additional products, product
enhancements and services to our customers. Competition may decrease:
-- our market share;
-- the prices we receive for our products and services;
-- our revenues; and/or
-- our profit margins.
Any of these decreases could adversely affect our business, financial condition
and operating results. As a result, we may not be able to compete successfully.
IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH THE RAPID CHANGES
INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES.
The electronic components and telecommunications industries are
characterized by rapid technological advances, changes in customer requirements,
evolving industry standards and frequent new product and services introductions
and enhancements. New products and services based on new technologies or new
industry standards may quickly render existing products and services obsolete.
Our future success will depend upon our ability to enhance our current products
and services and to develop and introduce new products and services that keep
pace with technological developments, respond to the growth in the markets in
which we compete, encompass evolving customer requirements and achieve market
acceptance. Any failure on our part to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in developing or introducing new products and services, could result in a loss
of competitiveness, revenues, profit margins or market share. There is no
assurance that any new products, services or enhancements which we develop will
achieve market acceptance.
WE RELY ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF ANY
SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION.
We derive a significant portion of our revenues from a relatively
limited number of customers. For the nine months ended September 30, 2000, our
ten largest customers accounted for approximately 36% of our revenues. We
anticipate that our ten largest customers will continue to account for a large
portion of our revenues for the foreseeable future. The loss of any one or more
of these major customers would likely have a material adverse effect on our
business, prospects, financial condition, results of operations and cash flows.
8
<PAGE>
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY AFFECT OUR BUSINESS IF
DEMAND IS REDUCED.
During the nine months ended September 30, 2000, the sale of
telecommunications equipment and related services accounted for approximately
55% of our total sales. In many cases we have long-term contracts with our
telecommunications customers but do not receive long-term purchase orders or
commitments under such contracts. Rather, we receive purchase orders for only
such quantities of telecommunications equipment as are required from time to
time by our customers.
During the nine months ended September 30, 2000, the sale of electronic
components accounted for approximately 45% of our total sales. In some cases we
have long-term contracts with our electronic components customers. However, in
most cases we receive purchase orders for only such quantities of electronic
components as are required from time to time by our customers.
Accordingly, we are highly dependent on the successful sales of our
telecommunications products and electronic components. A significant reduction
in sales of these products resulting from changes in industry, including the
entry of new competitors into the market, from the introduction of new or
improved technology or an unanticipated shift in the needs of our customers, or
for other reasons, would have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS
FROM OUTSIDE SUPPLIERS.
The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, certain components used in our
products are currently obtained from single or limited sources. Certain modem
chipsets used in our data communications products have been in short supply and
are frequently on allocation by semiconductor manufacturers. Similar to others
in the electronics industry, we recently have, from time to time, experienced
difficulty in obtaining certain components. We do not have guaranteed supply
arrangements with any of our suppliers, and there can be no assurance that these
suppliers will continue to meet our requirements. Shortages of components could
not only limit our production capacity but also could result in higher costs due
to the higher costs of components in short supply or the need to utilize higher
cost substitute components. An extended interruption in the supply of any of
these components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations.
While we believe that with respect to our single source components we could
obtain similar components from other sources, we could be required to alter
product designs to use alternative components. There can be no assurance that
severe shortages of components will not occur in the future that could increase
the cost or delay the shipment of our products and have a material adverse
effect on our financial condition and results of operations. Significant
increases in the prices of these components could also have a material adverse
effect on our results of operations because we may not be able to adjust product
pricing to reflect the increases in component costs.
OUR COMMITMENT OF SIGNIFICANT RESOURCES AND EXPANSION OF OUR ACTIVITIES ABROAD
COULD PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS
ACTIVITIES.
Sales of our products and services to customers located outside the
United States accounted for approximately 52% of our net sales for the nine
months ended September 30, 2000. We expect to commit significant resources in
the foreseeable future to expand our operations abroad. Accordingly, we are
9
<PAGE>
subject to a number of risks associated with international business activities
that could adversely affect our operations abroad and slow our growth. These
risks generally include, among others:
- foreign currency fluctuations; and
- differing technological advances, preferences or requirements;
- difficulties in managing and staffing our foreign operations;
- increased collection risks;
- tariffs and other trade restrictions; and
- general economic conditions.
Any of these risks could adversely affect our business, financial condition and
operating results.
THERE ARE RISKS THAT OUR PRODUCTS MAY BE RETURNED BY OUR CUSTOMERS.
We are exposed to the risk of product returns from our customers as a
result of returns due to defective products or product components. Generally,
our electronic components carry a one-year limited parts and labor warranty and
our telecommunications products carry a two-year limited parts and labor
warranty. Typically our telecommunications products may be returned within 30
days of purchase if a new order is received, and the new order will be credited
with 80% of the selling price of the returned item. Products returned under
warranty typically are tested and repaired or replaced at our option.
Historically, product returns have not had a material impact on our operations
or financial condition. While we believe that product returns should not be
material in future periods, it is expected that a relatively modest number of
returns will continue. However, there can be no assurance that significant
levels of product returns will not occur in the future, which may have a
material adverse effect on our operations.
IF WE ARE UNABLE TO SUCCESSFULLY CONSUMMATE ADDITIONAL ACQUISITIONS, OUR
LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy has included growth through acquisitions. We
consider acquisitions that improve our competitive capabilities in our
businesses or provide additional market penetration or business opportunities in
areas that are consistent with our business plan. Identifying and pursuing
strategic acquisition opportunities and integrating acquired products and
businesses requires a significant amount of management time and skill.
Acquisition transactions are accompanied by a number of risks, including, among
other things:
- the difficulty of assimilating the operations, technology and
personnel of the acquired companies;
- the potential disruption of our ongoing business;
- expenses associated with the transactions;
- additional expenses associated with amortization of acquired
intangible assets;
- the difficulty of maintaining uniform standards, controls,
procedures and policies;
- the impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
- the potential unknown liabilities associated with acquired
businesses.
If we proceed with future acquisitions, our failure to adequately address these
issues could have a material adverse effect on our business, results of
operations and financial condition.
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<PAGE>
WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key members
of our management, including our Chairman of the Board, President and Chief
Executive Officer, Carmine T. Oliva, and our Executive Vice President, Graham
Jefferies. The loss of Mr. Oliva, Mr. Jefferies or one or more other key members
of management could have a material adverse effect on us. Although we have
entered into employment agreements with several key employees, we have not
entered into any employment agreement with any executive officer of our company
other than with Mr. Oliva and Mr. Jefferies. We maintain key-man life insurance
on Mr. Oliva and Mr. Jefferies. However, we cannot assure you that we will be
able to maintain this insurance in effect or that the coverage will be
sufficient to compensate us for the loss of the services of Mr. Oliva or Mr.
Jefferies.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO FLUCTUATE.
Our quarterly operating results have varied in the past and may
continue to fluctuate significantly in the future due to a number of factors,
many of which are beyond our control. If our operating results do not meet the
expectations of investors, our stock price may decline. Fluctuations in our
operating results may result from a number of factors, including the following:
- the number of purchasers of our electronics hardware products and
the volume of products purchased by those purchasers;
- the demand for our electronics hardware products worldwide;
- the prices that we are able to charge for our products and
services;
- costs related to possible acquisitions of new technologies and
businesses;
- changes affecting the telecommunications industry, including
consolidations and restructuring of United States and foreign
telephone companies;
- changes affecting the electronics industry, including the
contraction of military, commercial, governmental and aerospace
spending;
- the amount and timing of capital expenditures and other costs
relating to the expansion of our business; and
- general economic conditions.
We believe that period-to-period comparisons of our operating results
will not necessarily be meaningful in predicting future performance.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Our strategy envisions a period of rapid growth that may put a strain
on our administrative and operational resources. While we believe that we have
established a significant infrastructure to support growth, our ability to
effectively manage growth will require us to continue to expand the capabilities
of our operational and management systems and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other management
personnel. There can be no assurance that we will be able to do so. If we are
unable to successfully manage our growth, our business, prospects, financial
condition, results of operations and cash flows could be adversely affected.
11
<PAGE>
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.
Our future success will be highly dependent on proprietary technology,
particularly in our telecommunications business. However, we do not hold any
patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology.
We may receive infringement claims from third parties relating to our
products and technologies. In such event, we intend to investigate the validity
of any such claims and, if we believe the claims have merit, we intend to
respond through licensing or other appropriate actions. Certain of these claims
may relate to technology included in components purchased by us from third party
vendors for incorporation into our products. In such event, we would forward
these claims to the appropriate vendor. If we or our component manufacturers
were unable to license or otherwise provide any such necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against us, all of which could have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT
LIABILITIES.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used in our
circuit board manufacturing processes. Any 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 have a
material adverse affect on us.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY STANDARDS
AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.
We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our telecommunications products must comply with
various regulations defined by the United States Federal Communications
Commission, or FCC, and Underwriters Laboratories as well as industry standards
established by Telcordia Technologies, Inc., formerly Bellcore, and the American
National Standards Institute. Internationally, our telecommunications products
must comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute, telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunications Union. The
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<PAGE>
failure of our products to comply, or delays in compliance, with the various
existing and evolving standards could negatively impact our ability to sell
our products.
THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS.
We have substantial net operating loss, or NOL, carryforwards for
federal and state tax purposes. Because of our ownership changes resulting from
a merger in 1997, the use of these NOL carryforwards to offset future taxable
income will be limited. To the extent we are unable to fully use these NOL
carryforwards to offset future taxable income, we will be subject to income
taxes on such future taxable income, which will negatively impact our results of
operations and cash flows.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES OFFERED BY THIS PROSPECTUS.
The market prices of securities of technology-based companies,
including electronics hardware companies, currently are highly volatile. The
market price of our common stock has fluctuated significantly in the past. The
market price of our common stock may continue to exhibit significant
fluctuations in response to the following factors, many of which are beyond our
control:
- variations in our quarterly operating results;
- changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
- economic conditions specific to the electronics hardware
industry;
- announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
- regulatory developments;
- additions or departures of key personnel; and
- future sales of our common stock or other securities.
The price at which you purchase shares of common stock offered by this
prospectus may not be indicative of the price of our stock that will prevail in
the trading market. You may be unable to sell your shares of common stock at or
above your purchase price, which may result in substantial losses to you.
Moreover, in the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and
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<PAGE>
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market,
and monthly account statements showing the market value of each penny stock
held in the customer's account. In addition, broker-dealers who sell these
securities to persons other than established customers and "accredited
investors" must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. Consequently, these requirements may have the
effect of reducing the level of trading activity, if any, in the secondary
market for a security subject to the penny stock rules, and investors in our
common stock may find it difficult to sell their shares.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE
AVAILABLE.
Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any such additional financing will be available to us on acceptable terms,
or at all. If additional funds are raised by issuing equity securities, further
dilution to the existing stockholders may result. If adequate funds are not
available, we may be required to delay, scale back or eliminate our marketing
efforts or to obtain funds through arrangements with partners or others that may
require us to relinquish rights to certain of our technologies or potential
products, services or other assets. Accordingly, the inability to obtain such
financing could adversely affect our business, financial condition and results
of operations.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD
ADVERSELY AFFECT OUR STOCK PRICE.
Sales of a substantial number of shares of our common stock in the
public market, or the perception that sales could occur, could adversely affect
the market price for our common stock. This offering will result in additional
shares of our common stock being available on the public market. In addition,
our current stockholders beneficially own a large number of shares of common
stock that are outstanding or are issuable upon exercise of options or warrants
or upon conversion of preferred stock, which shares of common stock they are
able to sell in the public market. These sales also might make it difficult for
us to sell equity securities in the future at a time and at a price that we deem
appropriate.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap
Market. We were unable to maintain the minimum bid price of $1.00 per share and
our stock was delisted from that market. Since May 13, 1999, our common stock
has been traded under the symbol "MCTL" on the OTC Bulletin Board. Because our
stock trades on the OTC Bulletin Board rather than on a national securities
exchange, you may find it difficult to either dispose of, or to obtain
quotations as to the price of, our common stock.
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<PAGE>
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY POSSIBLY
PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES.
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 250 have been designated as
Series A Preferred, 200 of which were issued and 25 of which are currently
outstanding. In addition, 150,000 shares have been designated as Series B
Preferred Stock, 150,000 of which have been issued and are currently
outstanding. The rights of the holders of our common stock are subject to the
rights of the holders of our currently outstanding preferred stock and will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that we may issue in the future. The issuance of preferred
stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, thereby delaying, deferring or preventing a change in control of our
company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and, as a result, the issuance
thereof could adversely affect the market value of our common stock.
THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE
OF OUR STOCK.
Section 203 of the General Corporation Law of Delaware prohibits us
from engaging in certain business combinations with interested stockholders, as
defined by statute. These provisions may have the effect of delaying or
preventing a change in control of our company without action by our
stockholders, even if a change in control would be beneficial to our
stockholders, and therefore could adversely affect the price of our common
stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, including
among others:
- the projected growth in the telecommunications and electronic
components;
- our business strategy for expanding our presence in these
markets;
- anticipated trends in our financial condition and results of
operations; and
- our ability to distinguish ourselves from our current and future
competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Business," as well as
captions elsewhere in this prospectus. A number of factors could cause results
to differ materially from those anticipated by such forward-looking statements,
including those discussed under "Risk Factors" and "Business."
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other
15
<PAGE>
factors that may cause actual results to differ in significant ways from any
future results expressed or implied by the forward-looking statements.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares
of common stock offered pursuant to this prospectus by the selling security
holders. Rather, the selling security holders will receive those proceeds
directly. However, we will receive cash infusions of capital if and when the
selling security holders exercise warrants with cash in exchange for shares
of common stock offered pursuant to this prospectus. On December 19, 2000,
the high and low prices for a share of our common stock were $0.32 and $0.23,
respectively. The warrants whose underlying 1,758,006 shares of common stock
are being offered pursuant to this prospectus have exercise prices ranging
from $0.25 to $2.50. We intend to use proceeds, if any, from the exercise of
these warrants for working capital, business development and general
corporate purposes.
DIVIDEND POLICY
No dividends on our common stock have been paid by us to date. Our line
of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designation related to our
Series A Preferred Stock and our Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by our board of directors.
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<PAGE>
PRICE RANGE OF COMMON STOCK
Until May 12, 1999, our common stock was traded on the Nasdaq SmallCap
Market. On May 13, 1999, the listing of our common stock on the Nasdaq SmallCap
Market was discontinued, and thereafter our common stock has been traded on the
NASD's OTC Bulletin Board under the symbol "MCTL." The table below shows for
each fiscal quarter indicated the high and low bid prices per share of our
common stock. The prices shown reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Price Range
Low High
--- ----
<S> <C> <C>
1998:
First Quarter (January 1 - March 31)............................. $ .875 $ 1.625
Second Quarter (April 1 - June 30)............................... .75 1.28125
Third Quarter (July 1 - September 30)............................ .4375 1.00
Fourth Quarter (October 1 - December 31)......................... .375 .84375
1999:
First Quarter.................................................... .375 1.125
Second Quarter................................................... .1875 .5625
Third Quarter.................................................... .18 .40
Fourth Quarter................................................... .16 .44
2000:
First Quarter.................................................... .42 2.8125
Second Quarter................................................... .4375 1.25
Third Quarter.................................................... .4375 .8438
</TABLE>
As of December 19, 2000, we had 20,569,759 shares of common stock
outstanding held of record by approximately 3,576 stockholders, and the high and
low prices of our common stock on the OTC Bulletin Board on that date were $0.32
and $0.23, respectively.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2000. You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
SEPT. 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C>
Cash and cash equivalents.......................................... $ 694
-----------
Long-term debt, less current portion............................... 1,186
Convertible redeemable convertible preferred stock, $10,000 unit
value. Authorized 250 shares; issued and outstanding 25 shares
(aggregate liquidation preference of $250)..................... 276
Stockholders' equity:
Preferred Stock, $0.01 par value. Authorized 10,000,000 shares
Convertible Series B preferred stock, $0.01 par value, 150,000
shares authorized, 150,000 shares issued and outstanding (aggregate
liquidation preference of $960)................................ 938
Common Stock, $0.0033 par value. Authorized 25,000,000 shares; issued
and outstanding, 20,569,711...................................... 68
Additional paid-in capital......................................... 24,379
Accumulated deficit................................................ (19,414)
Accumulated other comprehensive loss............................... (661)
-----------
Total stockholders' equity...................................... 5,310
---------
Total capitalization............................................ $ 6,772
========
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified in its
entirety by and should be read in conjunction with the consolidated financial
statements and the notes to those statements and the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The consolidated statements
of operations and comprehensive income data set forth below with respect to the
years ended December 31, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999 are derived from, and are qualified by reference
to, the consolidated audited financial statements included elsewhere in this
prospectus. The consolidated statements of operations and comprehensive income
data set forth below with respect to the nine month periods ended September 30,
1999 and 2000 and the consolidated balance sheet data at September 30, 2000 are
derived from unaudited financial statements included elsewhere in this
prospectus, which, in the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial data for such periods. The historical results are not necessarily
indicative of results to be expected for any future periods.
<TABLE>
<CAPTION>
THREE
CONSOLIDATED STATEMENTS OF MONTHS
OPERATIONS AND COMPREHENSIVE ENDED NINE MONTHS ENDED
INCOME DATA: YEAR ENDED SEPT. 30, DEC. 31, YEAR ENDED DEC. 31, SEPT. 30,
------------------- --------- --------------------------- -----------------------
1995 1996 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Net sales........................ $ 13,737 $14,270 $ 3,100 $27,251 $ 30,100 $ 25,913 $ 19,444 $19,559
Cost of sales.................... 10,218 9,442 2,332 18,069 17,353 17,066 12,269 10,645
-------- --------- --------- --------- --------- ---------- ---------- --------
Gross profit..................... 3,519 4,828 768 9,182 12,747 8,847 7,175 8,914
Selling, general and
administrative expenses....... 3,585 3,426 1,045 8,608 10,202 10,132 8,494 6,923
Engineering and product
development expenses.......... -- -- -- 1,797 2,202 1,841 1,462 772
Write-down of goodwill........... -- -- -- 5,693 -- -- -- --
----------- --------- ----------- --------- --------- ---------- ---------- ---------
Income (loss) from operations.... (66) 1,402 (277) (6,916) 343 (3,126) (2,781) 1,219
Total other income............... 484 304 49 (627) (643) (193) 501 118
-------- --------- ---------- --------- --------- ---------- ---------- ---------
Income (loss) from continuing
operations before income taxes 418 1,706 (228) (7,543) (300) (3,319) (2,280) 1,337
Income tax expense............... (41) 20 30 97 101 128 25 13
--------- --------- --------- --------- --------- ---------- ---------- --------
Income (loss) from continuing
operations.................... 459 1,686 (258) (7,640) (401) (3,447) (2,305) 1,324
Discontinued operations:
Loss from operations of
discontinued segment....... (122) (603) (647) (2,053) (1,364) (1,146) $ (949) $ (276)
Gain (loss) on disposal of
discontinued segment including
provision for phase out period
of $158 in 2000 ........... -- -- -- -- 580 (3) $ 331 $ (634)
---------- -------- ---------- --------- ---------- ------------ -------- ---------
Net income (loss)................ $ 337 $ 1,083 $ (905) $(9,693) $ (1,185) $ (4,596) $ (2,923) $ 414
Foreign currency translation
adjustment................. 10 $ (89) $ 126 $ (260) $ 206 $ (325) $ (180) $ (435)
-------- ---------- ---------- --------- --------- ----------- ----------- ---------
Total comprehensive income (loss) $ 347 $ 994 $ (779) $(9,953) $ (979) $ (4,921) $ (3,103) $ (21)
======== ========= ========== ========= ========== =========== =========== =========
Basic earnings (loss) per share
from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.07
========= ========== ========== ========== ========== =========== =========== ========
Diluted earnings (loss) per share
from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.06
========= ========== ========== ========== ========== =========== =========== ========
Basic earnings (loss) per share
from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.05)
========= ========== ========== ========== ========== =========== =========== =========
Diluted earnings (loss) per share
from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.04)
========= ========== ========== ========== ========== =========== =========== =========
Basic earnings (loss) per share.. $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02
========= ========== ========== ========== ========== =========== =========== ========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02
========= ========== ========== ========== ========== =========== =========== ========
Weighted average shares
outstanding, basic............ 4,995 5,841 6,064 10,137 11,952 16,638 16,192 19,141
========= ========== ========== ========== ========== =========== =========== ========
Weighted average shares
outstanding, diluted.......... 4,995 5,841 6,064 10,137 11,952 16,638 16,192 21,347
========= ========== ========== ========== ========== =========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
------------------- ------------------------------------------ AS OF SEPT. 30,
1995 1996 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (in thousands)
Working capital..................... $ 1,809 $ 3,911 $ 3,554 $ 4,095 $ 4,107 $ 1,080 $ 2,717
Total assets........................ 11,006 12,870 12,316 18,224 18,633 15,468 18,490
Total liabilities................... 5,569 7,384 7,563 12,213 11,635 11,079 12,904
Total stockholders' equity.......... 5,437 5,486 4,753 6,011 5,482 3,801 5,310
Redeemable preferred stock.......... -- -- -- 714 1,516 588 276
</TABLE>
No cash dividends on our common stock were declared during any of the
periods presented above. 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.
The historical financial data above for periods prior to the merger is
that of XIT Corporation. In conjunction with the reverse acquisition accounting
treatment, XIT Corporation 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 Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
20
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AND THE INFORMATION
INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a Delaware corporation that was formed July 14, 1989 under the
name CXR Corp. to hold the shares of two of our three present direct
wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware
corporation and CXR, S.A., a company organized under the laws of France. These
two subsidiaries manufacture, assemble and distribute transmission and network
access products and telecommunications test instruments. We amended our
certificate of incorporation to change our name to CXR Corporation in October
1989 and then to MicroTel International, Inc. in March 1995.
On March 26, 1997 we acquired our third present direct wholly-owned
operating subsidiary, XIT Corporation. XIT Corporation was a private,
closely-held New Jersey corporation that was formed in 1983 and had been
operating in the United States, England and Japan as a designer, manufacturer
and marketer of information display and input products and printed circuit
boards for the international telecommunications, medical, industrial, military
and aerospace markets.
Our acquisition of XIT Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of our company with and into XIT
Corporation. The merger involved an exchange by the former shareholders of XIT
Corporation of all of the outstanding shares of XIT Corporation for newly issued
shares of MicroTel International, Inc. representing a majority ownership
interest in MicroTel International, Inc. Because the merger resulted in a change
in control of MicroTel International, Inc., the merger was accounted for as a
reverse acquisition, and historical financial information of XIT Corporation is
used as the historical financial information of MicroTel International, Inc.
We previously organized our operations in three business segments:
-- Instrumentation and Test Equipment;
-- Components and Subsystem Assemblies; and
-- Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of XIT Corporation. We intend to
retain our Monrovia, California circuit board manufacturing facility as a
captive supplier of circuit boards to XIT Corporation's Digitran Division.
Consequently, through our three direct wholly-owned operating
subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through
the divisions and subsidiaries of our subsidiaries,
21
<PAGE>
we presently design, manufacture, assemble, and market products and services
in the following two material business segments:
Telecommunications
-- Telecommunications Test Instruments (analog and
digital test instruments used in the installation,
maintenance, management and optimization of public
and private communication networks)
-- Transmission and Network Access Products (range of
products for accessing public and private networks
for the transmission of data, voice and video)
Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 1999 were to customers in the telecommunications
industry, we also have significant sales to industrial, medical, aerospace and
military customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 66.3 57.7 65.9 63.1 54.4
---------------------------------------------------------------------------
Gross profit........................ 33.7 42.3 34.1 36.9 45.6
Selling, general and admini-
strative expenses................ 31.6 33.9 39.1 43.7 35.4
Engineering and product
development expenses............. 6.6 7.3 7.1 7.5 3.9
Writedown of goodwill 20.9 -- -- -- --
---------------------------------------------------------------------------
Operating income (loss)............. (25.4) 1.1 (12.1) (14.3) 6.2
Interest expense.................... (2.0) (1.7) (1.1) (1.1) (1.3)
Other income (expense).............. (0.2) (0.4) 0.4 3.7 1.9
---------------------------------------------------------------------------
Income (loss) from continuing
operations before income
taxes............................ (27.6) (1.0) (12.8) (11.7) 6.7
Income taxes........................ 0.4 0.3 (0.5) (0.2) --
---------------------------------------------------------------------------
Income (loss) from continuing
operations....................... (28.0) (1.3) (13.3) (11.9) 6.7
Loss from discontinued
operations....................... (7.5) (4.5) (4.4) (4.9) (1.4)
Gain (loss) on disposal of
discontinued segment............. -- 1.9 -- 1.7 (3.2)
---------------------------------------------------------------------------
Net income (loss)................... (35.5)% (3.9)% (17.7)% (15.0)% 2.1%
---------------------------------------------------------------------------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
CONTINUING OPERATIONS
NET SALES. Net sales for the nine months ended September 30, 2000
increased by $115,000 (0.6%) to $19,559,000 as compared to $19,444,000 for the
nine months ended September 30, 1999.
Net sales of our telecommunications products and services for the nine
months ended September 30, 2000 decreased by $599,000 (5.3%) to $10,680,000, as
compared to $11,279,000 for the comparable period in 1999 primarily due to a
$1,765,000 decrease in sales of our CXR, S.A. subsidiary from $7,651,000 during
the nine months ended September 30, 1999 to $5,886,000 during the comparable
period in 2000. This decrease in CXR, S.A. sales was primarily due to the late
release of budgets of some of CXR, S.A.'s customers. This overall decline in net
sales was partially offset by an increase of $485,000 in net sales for CXR
Telcom Corporation, or CXR Telcom, our subsidiary located in Fremont,
California, and the addition of $681,000 in sales for T-Com, LLC, or T-Com, a
company located in Sunnyvale, California whose assets we acquired as of August
2000 in order to expand our
23
<PAGE>
telecommunications test equipment products to include central office
equipment. The increase in sales for CXR Telcom primarily resulted from the
new CXR HALCYON 700 series test equipment that replaced the older CXR 5200
model that was being phased out in the prior year. The sales of test
equipment increased by $1,030,000 in the first nine months of 2000 as
compared to the comparable period in 1999.
Net sales of electronic components for the nine months ended September
30, 2000 increased by $714,000 (8.7%) to $8,879,000 as compared to $8,165,000
for the comparable period in 1999 primarily due to an increase in sales of
$619,000 of XIT Corporation's Digitran Division. Contributing to this increase
was a large order for switches placed by BAE Systems, Canada, which accounted
for $646,000 of this increase.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 45.6% for the nine months ended September 30, 2000 as compared to 36.9% for
the comparable period in 1999. In dollar terms, total gross profit increased by
$1,739,000 (24.2%) to $8,914,000 for the nine months ended September 30, 2000 as
compared to $7,175,000 for the comparable period in 1999.
Gross profit for our telecommunications segment increased in dollar
terms by $464,000 (10.8%) to $4,766,000 for the nine months ended September 30,
2000 as compared to $4,302,000 for the comparable period in 1999 and increased
as a percentage of related net sales from 38.1% in 1999 to 44.6% in 2000 due
largely to a more favorable gross profit on sales of products by newly acquired
T-Com, and higher gross profit on new CXR Telcom products.
Gross profit for our electronic components segment increased in total
dollar terms by $1,275,000 (44.4%) to $4,148,000 for the nine months ended
September 30, 2000 as compared to $2,873,000 for the comparable period in 1999
and increased as a percentage of related net sales from 35.2% in 1999 to 46.7%
in 2000 primarily due to improved profit margins in connection with sales made
by XIT Corporation which resulted from manufacturing efficiencies, reduced
overhead in connection with the move from the Ontario facility to our Rancho
Cucamonga facility, higher production volumes and a larger percentage of higher
margin night vision switches. These increases were slightly offset by a decline
in profit margin of sales of our U.K. subsidiary due to lower sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $1,571,000 (18.5%) to $6,923,000 for the
nine months ended September 30, 2000 as compared to $8,494,000 for the
comparable period in 1999. This decrease is attributable to a reduction in
selling expenses of $414,000 and a reduction in our general and administrative
expenses of $1,157,000 (21.6%) to $4,208,000 for the nine months ended September
30, 2000 as compared to $5,365,000 for the comparable period in 1999. The
decrease in general and administrative expense was primarily due to the fact
that certain expenses incurred in the comparable period of 1999 were not
incurred in 2000. These expenses include a $466,000 expense related to the
establishment of a reserve for a note receivable, a $522,000 charge related to
our investor relations efforts and a $193,000 charge related to a contingent
stock agreement. In addition, during the first nine months of 2000 we continued
in our overall cost cutting efforts.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment and decreased by $690,000 (47.2%)
to $772,000 for the nine months ended September 30, 2000 as compared to
$1,462,000 for the comparable period in 1999. The majority of this reduction is
due to eliminating the CXR engineering function in Fremont, California for test
instruments and concentrating our engineering efforts in our St. Charles,
Illinois facility and the transfer of transmission and network access product
engineering to CRS S.A. in France with no additional staffing.
24
<PAGE>
OTHER INCOME AND EXPENSE. Interest expense was $263,000 for the nine
months ended September 30, 2000 as compared to $209,000 for the comparable
period in 1999. This increase in interest expense was primarily a result of
higher interest rates and fees associated with our new credit facility with
Wells Fargo Business Credit, Inc. Other income, net of $381,000 in the 2000
period included a $197,000 gain on the sale of stock of Wi-Lan, Inc., and
$727,000 of recorded earnings based on the equity method as a result of earnings
related to our former investment in Digital Transmission Systems, Inc., which
investment we made in January 1999 in connection with our entry into the
wireless telecommunications business and a $83,000 loss on the sale of a
partnership interest. This expense was offset with the net effect of the equity
in earnings of the unconsolidated subsidiary and the write-down of our
investment in this subsidiary.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes.
DISCONTINUED OPERATIONS
As a result of our decision in October 2000 to discontinue our last
remaining material circuits business, which operated within the XCEL Etch Tek
Division of our XIT Corporation subsidiary, our circuits segment has been
accounted for as discontinued operations. We reported a net loss from
discontinued operations of $910,000 for the nine months ended September 30, 2000
as compared to a net loss of $618,000 for the nine months ended September 30,
1999. The nine months ended September 30, 2000 included a loss of $634,000 from
the disposal of our discontinued operations as compared to a gain of $331,000
for the comparable period in 1999 for the sale of HyComp, Inc., a subsidiary in
our circuits segment.
Net sales for our circuits business for the nine months ended September
30, 2000 increased by $122,000 (6.2%) to $2,088,000 as compared to $1,966,000
for the comparable period in 1999 primarily due to our efforts to increase sales
in this area to unrelated third parties in connection with a reduction in
intercompany sales.
Selling, general and administrative expenses related to our
discontinued operations declined by $298,000 (39.6%) to $454,000 for the nine
months ended September 30, 2000 as compared to $752,000 for the comparable
period in 1999 primarily due to the sale of HyComp, Inc. in 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 1999 decreased by
$4,187,000 (13.9%) to $25,913,000 as compared to $30,100,000 for the year ended
December 31, 1998.
Net sales of our telecommunications products and services decreased by
$1,866,000 (10.6%) to $15,666,000 for 1999, as compared to $17,532,000 for 1998.
This decrease was primarily due to reduced sales of our older CXR 5200 series of
telecommunications test sets which we were in the process of replacing with our
new CXR HALCYON 700 series of equipment because the older models were not
computer compatible and were larger and heavier than the newer models. Sales of
our older models, which totaled $15,000 during 1999, declined at a faster rate
than the increase in sales of our new models, which sales totaled $1,940,000
during 1999. The decrease in net sales attributable to the decline in sales of
our older model test equipment was partially offset by a $937,000 increase in
U.S. sales of our transmission products. An increase in sales by CXR, S.A. was
not fully recognized by us as a result of a
25
<PAGE>
13.9% decline in the value of the French Franc in relation to the U.S.
dollar. The net sales of CXR, S.A. in its functional currency of French
Francs were 16.9% greater in 1999 than in 1998. However, because of the
decline in the value of the French Franc in relation to the U.S. dollar, CXR,
S.A. net sales in U.S. dollars were 1.5% less in 1999 than in 1998.
Net sales of electronic components decreased by $2,321,000 (18.5%) to
$10,247,000 for 1999 as compared to $12,568,000 for 1998 primarily due to the
discontinuance of our XCEL-Lite products, which represented no sales in 1999 as
compared to sales of $576,000 in 1998, and discontinuance of low margin
subsystem assembly business, which represented sales of $404,000 in 1999 as
compared to $696,000 in 1998.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 34.1% for 1999 as compared to 42.4% for 1998. In dollar terms, total gross
profit decreased by $3,900,000 (30.6%) to $8,847,000 for 1999 as compared to
$12,747,000 for 1998.
Gross profit for our telecommunications segment decreased in dollar
terms by $2,836,000 (35.2%) to $5,216,000 for 1999 as compared to $8,052,000 for
1998 and decreased as a percentage of related net sales from 45.9% in 1998 to
33.3% in 1999 due largely to a 48% reduction in sales of our older test
equipment that had a higher margin than early initial production runs of our
newer products and due to a 77% increase in sales of our lower margin
transmission products. Our gross profit in this segment was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, because of our cash flow constraints, we were unable to pay
many of our suppliers in a timely fashion. As a result, we were forced to use
higher cost suppliers for some of our parts. However, margins on the new test
instruments are expected to meet or exceed the margins of older products as
production lot sizes increase and other efficiencies are achieved as the
products mature. As of April 2000, all lower margin transmission products had
been transferred from California to France, where those products are more
efficiently produced, thus achieving a higher margin on the same products now
being exported from France for resale in the U.S.
Gross profit for our electronic components segment decreased in total
dollar terms by $1,064,000 (22.7%) to $3,631,000 for 1999 as compared to
$4,695,000 for 1998 and decreased as a percentage of related net sales from
37.3% in 1998 to 34.1% in 1999 primarily due to additional costs incurred in
connection with the move from the Ontario facility to our Rancho Cucamonga
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $70,000 (0.7%) to $10,132,000 for 1999 as
compared to $10,202,000 for 1998. Our general and administrative expenses
increased by $400,000 (7.0%) to $6,094,000 for 1999 as compared to $5,694,000
for 1998 primarily due to the non-cash expense of $522,000 in shares of our
common stock and warrants to purchase our common stock to our investor relations
firms in connection with our plan to increase our company's visibility within
the investment community. Offsetting such increases in general and
administrative expenses were reductions in expenses due to the transfer of the
administrative functions of CXR Telcom to our corporate office.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses, which consist primarily of research and product
development activities of our telecommunications segment, decreased by $361,000
(16.4%) to $1,841,000 in 1999 as compared to $2,202,000 for 1998. This reduction
was primarily due to elimination of the CXR engineering function in Fremont,
California in May 1999, which reduced engineering expenses by $294,000. The
engineering staff for our United States-based test equipment products is
primarily housed in our St. Charles, Illinois facility. We believe that
engineering and product development are important to our future profitability.
26
<PAGE>
All engineering for our instrumentation products has been consolidated in France
at our CXR, S.A. facility.
OTHER INCOME AND EXPENSE. Interest expense was $297,000 in 1999 as
compared to interest expenses of $507,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.
Other expenses, net of $194,000 in 1999 includes the net effect of the equity in
earnings of the unconsolidated subsidiary and the write-down of our investment
in this subsidiary.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes. At December 31, 1999, we had 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 our recurring
losses from operations.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $1,149,000 for 1999 as compared to a net loss of $784,000 for 1998.
Net sales for our circuits business for 1999 decreased by $4,774,000
(66.7%) to $2,388,000 as compared to $7,162,000 for 1998 primarily due to the
sale of HyComp, Inc. on March 31, 1999 and the sale of XCEL Arnold Circuits,
Inc. on March 31, 1998, which accounted for $3,880,000 of the reduction, as well
as a lack of working capital to acquire materials necessary to support customer
delivery requirements in the remaining XCEL Etch Tek Division because available
working capital was dedicated to higher margin components and telecommunications
products.
Gross profit for our circuits business decreased in total dollar terms
by $598,000 (93%) to $45,000 in 1999 as compared to gross profit of $643,000 in
1998 and decreased as a percentage of related net sales from 9.0% in 1998 to
1.9% in 1999 primarily due to the sale of HyComp, Inc. in 1999, which accounted
for $1,042,000 of the reduction, and the booking of a reserve in the amount of
$250,000 to cover potential warranty claims associated with products sold by
HyComp, Inc. prior to its sale.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 1998 increased by
$2,849,000 (10.5%) to $30,100,000 as compared to $27,251,000 for the year ended
December 31, 1997.
Net sales for our telecommunications segment for 1998 increased by
$2,478,000 (16.5%) to $17,532,000 as compared to $15,054,000 for 1997 primarily
due to increased sales by our subsidiary CXR, S.A. This increase in CXR, S.A.'s
net sales was partially offset by a slight decline in sales of our CXR Telcom
business unit as a result of the earliest growth in sales of the new test
instruments we acquired through our acquisition of Critical Communications
Incorporated in October 1997.
Net sales for our electronic components segment for 1998 increased
slightly by $371,000 (3.0%) to $12,568,000 as compared to $12,197,000 for 1997
primarily due to an increase in sales of digital
27
<PAGE>
switch products of $1,434,000. This increase offset a $756,000 decline in
sales of custom engineered subsystem components.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 42.4% for 1998 as compared to 33.7% for 1997. In dollar terms, total gross
profit increased by $3,565,000 (38.8%) to $12,747,000 for 1998 as compared to
$9,182,000 for 1997.
Gross profit for our telecommunications segment increased in dollar
terms by $1,733,000 (27.4%) to $8,052,000 for 1998 as compared to $6,319,000 for
1997 and increased as a percentage of related net sales from 42.0% in 1997 to
45.9% in 1998 primarily due to the fact that a larger portion of total sales in
this segment came from high margin products, including our new line of test
instruments at our CXR Telcom subsidiary. In addition, the sales mix at our CXR,
S.A. subsidiary shifted to higher margin, internally manufactured products.
Gross profit for our electronic components segment increased in dollar
terms by $1,832,000 (64.0%) to $4,695,000 for 1998 as compared to $2,863,000 for
1997 and increased as a percentage of related net sales from 23.4% in 1997 to
37.3% in 1998 primarily due to a favorable shift in product mix to higher margin
digital switch products and custom power supply products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,594,000 (18.5%) to $10,202,000 for 1998
as compared to $8,608,000 for 1997. This increase was primarily due to an
increase in selling expense, which includes sales and marketing expenses
associated with the inclusion of operations of CXR Telcom and CXR, S.A. for the
entire twelve months of 1998 as compared to nine months in 1997, which increase
was offset by lower commission expenses in 1998 as compared to 1997. In
addition, general and administrative expenses increased by $569,000 (12.0%) to
$5,581,000 for 1998 as compared to $4,984,000 for 1997 primarily due to the
inclusion of operations of CXR Telcom and CXR, S.A. for the entire twelve months
of 1998 as compared to only nine months in 1997 and due to increased legal fees.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment and increased by $405,000 (22.5%)
to $2,202,000 in 1998 as compared to $1,797,000 in 1997 primarily due to an
increase in our engineering staff associated with the introduction of new test
instruments.
OTHER INCOME AND EXPENSE. Interest expense decreased $43,000 from
$550,000 for 1997 to $507,000 for 1998 primarily due to a decrease in average
borrowings during 1998. Fluctuations in other expense (income), net resulted
principally from differences in foreign currency exchange gains and losses
incurred during the respective periods.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consists primarily of foreign taxes as we are in a loss carryforward position
for federal income tax purposes. At December 31, 1998, we had total net deferred
income tax assets of approximately $16,591,000. These potential income tax
benefits, a significant portion of which relate 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 our recurring
losses from operations.
28
<PAGE>
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $784,000 for 1998 as compared to a net loss of $2,053,000 for 1997.
Net sales of our circuits business for 1998 decreased by $8,684,000
(54.8%) to $7,162,000 as compared to $15,846,000 for 1997 primarily due to the
sale of XCEL Arnold Circuits, Inc. on March 31, 1998 as well as a decrease in
sales for XIT Corporation's XCEL Etch Tek Division of approximately $1,033,000.
This decrease in sales was due in large part to our inability to obtain
sufficient working capital to acquire the necessary raw materials and process
supplies to accept higher levels of "quick-turn" order commitments.
Gross profit for our circuits business decreased in dollar terms by
$600,000 (48.3%) to $643,000 for 1998 as compared to $1,243,000 for 1997 and
increased as a percentage of related net sales from 7.8% in 1997 to 9.0% in 1998
primarily due to higher costs of sales for XIT Corporation's XCEL Etch Tek
Division in 1998 as compared to 1997 due to the underabsorption of fixed
manufacturing costs related to declining sales levels.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, we funded our operations
primarily through proceeds from our prior line of credit with Congress Financial
Corporation or Congress Financial, and revenue generated from our operations.
During the nine months ended September 30, 2000, we continued to fund our
operations through revenue generated from our operations and through a new line
of credit with Wells Fargo Business Credit, Inc.
During the latter part of 1999, we embarked on a cost reduction program
in an effort to improve our cash flow position and profitability. This program
included a significant reduction in personnel, the downsizing and relocation of
our corporate headquarters and the sale of investments we had in other
companies. As described below, these cost measures, together with our new line
of credit, have had a positive impact on our company.
As of December 31, 1999 we had working capital of $1,080,000 and an
accumulated deficit of $19,759,000. As of that date, we had $480,000 in cash and
cash equivalents and $6,168,000 of accounts receivable. As of September 30, 2000
we had working capital of $2,717,000 and an accumulated deficit of $19,414,000.
As of that date, we had $694,000 in cash and cash equivalents and $5,804,000 of
accounts receivable.
Cash used in our operating activities totaled $619,000 for the nine
months ended September 30, 2000 as compared to cash provided by operating
activities of $579,000 for the nine months ended September 30, 1999. This
decrease in cash provided by operations during the nine months ended September
30, 2000 resulted primarily from payments of $2,668,000 to reduce accounts
payable and accrued expenses. This decrease was partially offset by our vigorous
accounts receivable collection efforts which provided cash of $1,179,000 during
this period.
Cash provided by our investing activities totaled $791,000 for the nine
months ended September 30, 2000 as compared to cash used in investing activities
of $121,000 for the nine months ended September 30, 1999. Included in the
current period's results is $520,000 from the sale of shares of common stock we
held in Digital Transmission Systems, Inc. and $918,000 from the sale of shares
of
29
<PAGE>
common stock we held in Wi-Lan, Inc. Partially offsetting this investing cash
flow was the acquisition of Belix, Inc. which used net cash of $592,000 and
the acquisition of the assets of T-Com which used $83,000 in cash.
Cash provided by financing activities totaled $389,000 for the nine
months ended September 30, 2000 as compared to cash used of $685,000 for the
nine months ended September 30, 1999 primarily due to the reduction in notes
payable and long term debt.
On June 23, 2000, our credit facility with Congress Financial expired
while we were out of compliance with the adjusted net worth covenant of this
facility. Congress Financial extended this facility through August 14, 2000. On
August 16, 2000, we obtained a credit facility from Wells Fargo Business Credit,
Inc. This facility provides for a revolving loan of up to $3,000,000 secured by
our inventory and accounts receivable and a term loan in the amount of $687,000
secured by our machinery and equipment. The annual interest rate on both
portions of the credit facility is the prime rate plus 2%. The facility contains
a performance-based interest reduction feature. Based upon our current and
expected financial performance, we anticipate a reduction in the interest rate
to the prime rate plus 1% upon completion of the audit of our financial
statements for the year ended December 31, 2000. The balance outstanding under
this credit facility was $2,144,000 on September 30, 2000. There was $342,000 of
additional borrowings available as of September 30, 2000. The credit facility
expires on August 23, 2003. Our foreign subsidiaries have obtained credit
facilities with Lloyds Bank in England, Banc National du Paris, Societe General
and Banque Hervet in France and Johan Tokyo Credit Bank in Japan.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our credit facility with Wells Fargo Business Credit, Inc., will be
adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. If, however, our capital
requirements or cash flow vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing sooner than
we anticipate. Failure to raise necessary capital could restrict our growth,
limit our development of new products or hinder our ability to compete.
The consolidated financial statements included in this prospectus have
been prepared assuming we will continue as a going concern. During the years
ended December 31, 1999, 1998 and 1997, we experienced significant operating
losses. Additionally, we were in default of our previously outstanding domestic
credit facility agreement because we were not in compliance with an adjusted net
worth covenant contained in that agreement. These factors raised substantial
doubt about our ability to continue as a going concern and led our independent
certified public accountants to modify their unqualified opinion to include an
explanatory paragraph related to our ability to continue as a going concern. The
consolidated condensed financial statements included in this prospectus do not
include any adjustments that might result from the outcome of this uncertainty.
Although we have reported income from continuing operations for the nine months
ended September 30, 2000 and we have replaced our previous domestic credit
facility, there can be no assurance that we will continue to be profitable or
that we will be able to generate necessary additional capital in the future.
30
<PAGE>
IMPACT OF YEAR 2000
To date, we have not experienced any material effects related to
computer operations and the arrival of the year 2000. Management does not expect
any disruptions due to the year 2000, because management believes all its
current systems are year 2000 compliant.
At some of our domestic facilities, we installed accounting and
operations management computer applications that are year 2000 compliant and
operate on computer operating systems that are also year 2000 compliant. We did
not initiate these 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 our selection criteria,
we considered the impact of the year 2000 issue. We have not experienced year
2000 disruptions with our suppliers or customers, and management believes that
our suppliers and customers are year 2000 compliant with respect to their
systems that could affect us.
Although no significant problems have materialized to date, we will
continue to monitor our systems throughout the year 2000.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either us or our operating
subsidiaries.
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 36% of our total net sales
for the nine months ended September 30, 2000. Net sales from the French
subsidiary participating in the Euro conversion were 27% of our net sales for
the nine months ended September 30, 2000. We continue to review the impact of
the Euro conversion on our operations.
In 1998, our 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 because such systems already were capable of using multiple
currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate risk as nominal.
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<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
eleven quarters ended September 30, 2000. This quarterly information is
unaudited, has been prepared on the same basis as our annual financial
statements, and, in our opinion, reflects all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the information
for periods presented. Operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE QUARTER ENDED
INCOME DATA -------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $6,715 $7,524 $7,852 $8,009 $ 6,677 $ 6,319 $6,448 $ 6,469 $5,860 $6,828 $6,871
Cost of sales............ 4,376 4,413 4,477 4,087 4,127 3,938 4,203 4,798 3,534 4,032 3,080
------ ------ ------ ------ ------- ------- ------ ------- ------ ------ -----
Gross profit............. 2,339 3,111 3,375 3,922 2,550 2,381 2,245 1,671 2,326 2,796 3,791
Selling, general and
administrative expenses 2,497 2,461 2,413 2,831 3,408 2,235 2,385 2,104 2,110 2,346 2,467
Engineering and product
development expenses... 504 506 573 619 526 477 459 379 243 253 277
------ ------ ------ ------ ------- ------- ------ ------- ------ ------ -----
Income (loss) from (662) 144 389 472 (1,384) (331) (599) (812) (27) 197 1,047
operations.............
Other income (expenses),
net.................... (90) (130) (201) (222) 391 218 (131) (671) 20 31 67
------ ------ ------ ------ ------- ------- ------ ------- ------ ------ -----
Income (loss) from
continuing operations (752) 14 188 250 (993) (113) (730) (1,483) (7) 228 1,114
before income taxes....
Income tax expense....... 15 22 5 59 8 5 12 103 7 4 2
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ -----
Income (loss) from
continuing operations.. (767) (8) 183 191 (1,001) (118) (742) (1,586) (14) 224 1,112
Discontinued operations:
Loss from operations of
discontinued segment (851) (119) (249) (145) (304) (462) (292) (88) (76) (116) (84)
Gain (loss) on disposal
of discontinued segment 670 (90) -- -- 331 (334) -- - -- -- (634)
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ -----
Net income (loss)........ $ (948) $ (217) $ (66) $ 46 $ (974) $ (914) $(1,034) $(1,674) $ (90) $ 108 $ 394
Other comprehensive gain
(loss), net........... 102 (54) (118) 276 (263) (161) 244 (145) 296 (433) (218)
------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------
Total comprehensive gain
(loss)................. $ (846) $(271) $ (184) $ 322 $(1,237) $(1,075) $ (790) $(1,819) $ 206 $(325) $ 176
======= ====== ====== ====== ======= ======= ======= ======= ====== ===== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE AS A PERCENTAGE OF NET SALES
INCOME DATA ----------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales............ 65% 59% 57% 51% 62% 62% 65% 74% 60% 59% 45%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross profit............. 35% 41% 43% 49% 38% 38% 35% 26% 40% 41% 55%
Selling, general and
administrative expenses 37% 33% 31% 35% 51% 43% 37% 33% 36% 34% 36%
Engineering and product
development expenses... 8% 7% 7% 8% 8% 8% 7% 6% 4% 4% 4%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from (10%) 1% 5% 6% (21%) (13%) (9%) (13%) -- 3% 15%
operations.............
Other income (expenses),
net.................... (1%) (2%) (3%) (3%) 6% 3% (2%) (10%) -- -- 1%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from (11%) (1%) 2% 3% (15%) (10%) (11%) (23%) -- 3% 16%
continuing operations
before income taxes....
Income tax expense....... -- -- -- 1% -- -- -- 2% -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from
continuing operations.. (11%) (1%) 2% 2% (15%) (10%) (11%) (25%) -- 3% 16%
Discontinued operations:
Loss from operations of
discontinued segment (13%) (1%) (3%) (2%) (5%) (5%) (5%) (1%) (1%) (2%) (1%)
Gain (loss) on disposal
of discontinued segment 10% (1%) -- -- 5% -- -- -- -- -- (9%)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net income (loss)............. (14%) (3%) (1%) --% (15%) (15%) (16%) (26%) (1%) 1% 6%
Other comprehensive gain (loss),
net........... 1% (1%) (1%) 4% (4%) (2%) 4% (2%) 5% (6%) (3%)
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total comprehensive gain
(loss)................. (13%) (4%) (2%) 4% (19%) (17%) (12%) (28%) 4% (5%) 3%
===== ==== ==== ==== ===== ===== ===== ===== ==== ==== ====
</TABLE>
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
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For the quarter ended March 31, 1998, our discontinued operations
included a gain of $670,000 on the sale of XCEL Arnold Circuits, Inc. In the
quarter ended June 30, 1998, we had an improvement in net sales of $809,000
(12.1%) to $7,524,000 from $6,715,000 for the quarter ended March 31, 1998. This
improvement in net sales was primarily due to a $604,000 increase in net sales
of our electronic components segment. This improvement in sales assisted us in
reducing our loss from continuing operations to a loss of $8,000 for the quarter
ended June 30, 1998 from a loss of $767,000 in the prior quarter.
For the three months ended September 30, 1998, our net sales from
continuing operations increased by $328,000 (4.4%) to $7,852,000 from $7,524,000
in the quarter ended June 30, 1998. The improvement was due to an increase in
net sales of our electronic components segment, which more than offset a slight
decrease in net sales of our telecommunications segment. The improvement in net
sales was a primary factor in our generating income of $183,000 from continuing
operations in the third quarter of 1998.
Net sales from continuing operations climbed in the quarter ended
December 31, 1998 by $157,000 (2.0%) to $8,009,000 as compared to sales of
$7,852,000 in the quarter ended September 30, 1998. Income from continuing
operations rose slightly to $192,000 in the three months ended December 31, 1998
from $183,000 in the three months ended September 30, 1998.
Net sales from continuing operations for the quarter ended March 31,
1999 were slightly below net sales from continuing operations for the quarter
ended March 31, 1998. However the loss from continuing operations for the
quarter ended March 31, 1999 increased by $234,000 (30.5%) to $1,001,000 from
$767,000 in the quarter ended March 31, 1998. The primary reason for the
increase in the loss from continuing operations was $522,000 of expense related
to our investor relations efforts. A gain of $331,000 was recorded for the gain
on the sale of HyComp, Inc. in the first quarter of 1999 and included in
discontinued operations.
Net sales from continuing operations for the quarter ended June 30,
1999 declined by $1,205,000 (16.0%) to $6,319,000 from $7,524,000 for the
quarter ended June 30, 1998. Gross margins declined slightly to 37.7% for the
quarter ended June 30, 1999 from 41.3% for the quarter ended June 30, 1998. The
decrease in net sales was due to declines in sales in both the
telecommunications segment and the electronic components segment. The loss from
discontinued operations for the quarter ended June 30, 1999 includes $440,000 of
a net write-off, included in other income and expenses, for a note receivable
received as part of the proceeds from the sale of XCEL Arnold Circuits, Inc.
Net sales from continuing operations for the quarter ended September
30, 1999 declined $1,404,000 (17.9%) to $6,448,000 from $7,852,000 for the
quarter ended September 30, 1998. The primary reason for the reduction in net
sales was the reduced sales of our older CXR 5200 series telecommunications test
sets that we were in the process of replacing with our new CXR HALCYON 700
series of equipment because the older models were not computer compatible and
were larger and heavier than the new models. Sales of our older models, which
totaled $12,658 during the quarter ended September 30, 1999, declined at a
faster rate than the increase in sales of our new models, which sales totaled $
757,746 during the quarter ended September 30, 1999. A loss of $742,000 from
continuing operations was incurred in the third quarter of 1999.
Net sales of continuing operations for the quarter ended December 31,
1999 declined by $1,540,000 (19.2%) to $6,469,000 from $8,009,000 in the fourth
quarter of 1998. The primary reason for the decline was lower sales for our
telecommunications segment, which lower sales mainly resulted from
33
<PAGE>
reduced sales of our older CXR 5200 series telecommunications test sets that
we were in the process of replacing with our new CXR HALCYON 700 series of
equipment. We wrote down the carrying value of our Digital Transmission
System, Inc. stock by $419,000 to the value received in consideration for the
sale of the stock in January 2000. This amount was included in other expense
and contributed to the loss from continuing operations of $1,586,000 for the
quarter ended December 31, 1999.
Net sales from continuing operations for the quarter ended March 31,
2000 declined by $817,000 (12.2%) to $5,860,000 from $6,677,000 for the quarter
ended March 31, 1999. The primary cause of the sales reduction was the decline
in sales of our electronic components segment of $654,000 during the quarter
ended March 31, 2000. The majority of the decline in the electronic components
segment net sales resulted from short-term delays in production releases of
certain contracts at our U. K. facility that manufactures power supplies.
However, due to a reduction in administrative expenses, we were able to limit
our loss from continuing operations to only $14,000 despite a considerable
reduction in sales in the first quarter of 2000 as compared to the first quarter
of 1999. Administrative expense in the quarter ended March 31, 1999 included
$522,000 of expenses related to our investor relations efforts.
Net sales from continuing operations for the quarter ended June 30,
2000 increased by $509,000 (8.1%) to $6,828,000 from $6,319,000 for the quarter
ended June 30, 1999. This increase was primarily the result of the acquisition
of Belix Ltd., or Belix, a power supply manufacturer based in the U. K. The
Belix acquisition was effective March 31, 2000 and contributed $658,000 of
revenue in the second quarter of 2000. Income from continuing operations in the
quarter ended June 30, 2000 was $224,000 as compared to a loss from continuing
operations of $118,000 in the quarter ended June 30, 1999. The primary
contributor to the improved profit was an overall increase in gross margins in
both our telecommunications and electronic components segments resulting in a
gross margin of 41.0% for the quarter ended June 30, 2000 as compared to a gross
margin of 37.7% for the quarter ended June 30, 1999. Gross margins were improved
by moving our U. S. electronic components segment manufacturing operation to a
smaller facility and improving the efficiency of manufacturing the new CXR
HALCYON test sets in our telecommunications segment.
Net sales from continuing operations for the quarter ended September
30, 2000 increased by $422,000 (6.6%) to $6,871,000 from $6,448,000 for the
quarter ended September 30, 1999. Our electronic components segment provided
an increase of $858,000 primarily due to a larger order for digital switches
from BAE Systems, Canada which accounted for $504,000 of this increase. The
increase in sales of our electronic component segment was offset by a
$435,000 decrease in sales of our telecommunications segment mainly due to
lower sales reported by our facility in France which resulted from late
approvals of the capital budgets of some of its customers. Gross margins
improved to 55% in the third quarter of 2000 from 34.8% in the third quarter
of 1999. Contributing to the gross profit increase was the high gross profit
generated by the assets of T-Com that were newly acquired for our
telecommunications segment. In addition, efficiencies due to the relocation
of our Digitran Division of XIT Corporation improved overall margins in our
electronic components segment. These improvements in operating performance
resulted in income from continuing operations of $1,112,000 for the quarter
ended September 30, 2000 as compared to a loss from continuing operations of
$742,000 for the quarter ended September 30, 1999.
During the quarter ended September 30, 2000 we sold XCEL Etch Tek, the
last of our former circuits segment operations, and we reported the $634,000
loss on the sale of XCEL Etch Tek and the $84,000 operating losses of XCEL Etch
Tek as losses from discontinued operations.
34
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
35
<PAGE>
BUSINESS
CORPORATE OVERVIEW
We are a Delaware corporation that was formed July 14, 1989 under the
name CXR Corp. to hold the shares of two of our three present direct
wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware
corporation formed in 1984 and based in the United States, and CXR, S.A., a
company organized under the laws of France in 1973 and based in France. These
two subsidiaries manufacture, assemble and distribute transmission and network
access products and telecommunications test instruments. We amended our
certificate of incorporation to change our name to CXR Corporation in October
1989 and then to MicroTel International, Inc. in March 1995.
On March 26, 1997 we acquired our third present direct wholly-owned
operating subsidiary, XIT Corporation. XIT Corporation was a private,
closely-held New Jersey corporation that was formed in 1983 and had been
operating in the United States, England and Japan as a designer, manufacturer
and marketer of information display and input products and printed circuit
boards for the international telecommunications, medical, industrial, military
and aerospace markets.
Our acquisition of XIT Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of our company with and into XIT
Corporation. The merger involved an exchange by the former shareholders of XIT
Corporation of all of the outstanding shares of XIT Corporation for newly issued
shares of MicroTel International, Inc. representing a majority ownership
interest in MicroTel International, Inc. Because the merger resulted in a change
in control of MicroTel International, Inc., the merger was accounted for as a
reverse acquisition, and historical financial information of XIT Corporation is
used as the historical financial information of MicroTel International, Inc.
We previously organized our operations in three business segments:
-- Instrumentation and Test Equipment;
-- Components and Subsystem Assemblies; and
-- Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of XIT Corporation. We intend to
retain our Monrovia, California circuit board manufacturing facility as a
captive supplier of circuit boards to XIT Corporation's Digitran Division.
Consequently, through our three direct wholly-owned operating
subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through
the divisions and subsidiaries of our subsidiaries, we presently design,
manufacture, assemble, and market products and services in the following two
business segments:
36
<PAGE>
Telecommunications
-- Telecommunications Test Instruments (analog and
digital test instruments used in the installation,
maintenance, management and optimization of public
and private communication networks)
-- Transmission and Network Access Products (range of
products for accessing public and private networks
for the transmission of data, voice and video)
Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 1999 were to customers in the telecommunications
industry, we also have significant sales to industrial, medical, aerospace and
military customers. Our objective in our telecommunication test instrument and
transmission business is to become a leader in quality, cost effective solutions
to meet the requirements of telecommunications customers. We believe that we can
achieve this objective through customer-oriented product development, superior
product solutions, and excellence in local market service and support. Our
objective in our electronic components business is to maintain our current
market-leading position as the supplier of choice for harsh environment switch
and custom power supplies and to use revenues from this segment to fund growth
in our test instruments and transmission and network access products segment.
INDUSTRY OVERVIEW
TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
PRODUCTS
Over the past decade, telecommunications and data communications
networks have undergone major growth and have become a critical part of the
global business and economic infrastructure. Many factors have contributed to
this growth, including:
-- a surge in demand for both analog and high-speed Internet
access and data transmission service; among other uses,
high-speed access enables consumers to access bandwidth
intensive content and services, such as highly graphical web
sites and audio, video and software downloads, and enables
businesses to implement e-commerce strategies, to access the
Internet for a variety of purposes and to provide employees
with telecommuting capabilities;
-- the enactment of the Telecommunications Act of 1996, which has
allowed competitive local exchange carriers in the United
States to compete with incumbent local exchange carriers,
including the regional Bell operating companies, or RBOCs, for
local carrier services; and
-- an apparent worldwide trend toward deregulation of the
communications industry, which may enable a large number of
new communications service providers to enter the market.
Responding to the growing demand for communications services and
increased competitive pressures, telecommunications companies and other
businesses that rely heavily on information technology are devoting significant
resources to the purchase of transmission instruments, such as high-speed
modems, through which data and voice information may be transmitted, and test
equipment, with which to test, deploy, manage and optimize their communications
networks, equipment and services.
37
<PAGE>
Communications networks historically were based on a limited number of
technologies, many of which were designed by a single vendor. Consequently,
service providers did not require a wide array of instruments or systems to test
and manage their performance. With the deployment of new types of communications
equipment, such as broadband, cable and wireless technologies, and the emergence
of multi-vendor environments, the process of deploying, testing and managing
communications networks has become increasingly complex.
To support the rapidly changing needs of telecommunications companies
and information technology dependent businesses, we believe that
telecommunications test instruments, transmission and network access products
must offer high levels of functional integration, automation and flexibility to
operate across a variety of network protocols, technologies and architectures.
Because the competition for subscribers for high-speed bandwidth access is
intense, the quality and reliability of network service has become critical to
telecommunications companies due to the expense, loss of customers and negative
publicity resulting from poor service. Quality and reliability of network
service are also important to information technology dependent businesses that
rely on the Internet or intranets for a variety of purposes.
Technicians who use service verification equipment in the field or in
central or branch offices allow businesses to verify and repair service problems
effectively and, thus, increase the quality and reliability of their networks.
We believe that as broadband services are deployed further and as competition
for telecommunications subscribers and e-commerce customers proliferates,
telecommunications companies and other information technology reliant businesses
will increasingly depend on new and improved transmission and integrated access
devices and advanced field and central or branch office testing and monitoring
solutions. Also, we believe that as multimedia companies and information
technology dependent companies emerge and expand, there will be an increased
demand for our turnkey solutions that include network design, installation and
maintenance.
ELECTRONIC COMPONENTS
Electronic components are the building blocks for the high technology
applications that feed the information hungry society that is driving today's
world economy. The electronic components industry comprises three basic
segments, which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, medical, aerospace, military, commercial, industrial and
other environments, each of which places constraints defining performance and
permitted use of differing grades of components.
We are active only in the industry segments that are characterized by
low volume, high margin and long lead times, namely the aerospace, military,
medical and telecommunications segments. To support the myriad industrial,
commercial and government entities and agencies that rely on digital switches
and electronic power supplies, we believe that our electronic components must
offer high levels of reliability and in many cases must be tailored to the size,
appearance, functionality and pricing needs of each particular customer.
The military market, which is a predominant market for our electronic
components, makes use of sophisticated electronic subsystems in diverse
applications that involve both original equipment and retrofit of existing
equipment. In their 1999 annual forecast of the worldwide defense electronics
market, the Electronic Industry Association, or EIA, predicted an increase in
military electronics spending over the next ten years, while predicting a
decline in total defense spending over the same period. The EIA also predicted
in that same forecast that beginning in 1998, annual military spending on
electronics and
38
<PAGE>
information systems would increase by 13% year on year, over the next ten
years. The same report estimated that the United States military market,
which is a key market for our electronic components business, represents an
annual $51.5 billion of spending on electronics and information systems. The
market segments are clearly defined, and all are experiencing high growth
which is forecast to continue. This has lead to an ever-increasing demand for
our electronic components to be delivered in harsh environments,
necessitating custom solutions to meet both mechanical and electrical
constraints.
The Digitran Division of our subsidiary XIT Corporation, which was
acquired by XIT Corporation from Becton Dickinson in 1985, has been
manufacturing digital switches since the division was formed in the 1960s.
XCEL Power Systems Ltd., a subsidiary of our subsidiary XCEL Corporation
Ltd., has been manufacturing electronic power supplies since 1989.
OUR SOLUTION
We develop, manufacture and market a broad range of test instruments
used by the manufacturers of communications equipment and the operators of
public and private telecommunications networks for the installation,
maintenance and optimization of advanced communications networks. We develop,
manufacture and market various transmission and network access devices used
by businesses to efficiently transmit data, voice and video information to
destinations within and outside of their respective networks. In addition, we
provide customers with turnkey solutions that include network design,
installation and maintenance and often incorporate our own networking
products with products that we purchase from third-party vendors. We also
manufacture and sell electronic components such as digital switches for
aerospace and military use and custom electronic power supplies used
primarily by aerospace, military and telecommunications customers.
Our extensive industry knowledge and understanding of our customers'
environments, together with our hardware, software and firmware engineering
skills and the broad capabilities of our transmission and network access
products, test instrumentation products and our sophisticated electronic
components, enable us to provide the following features and benefits to our
customers:
HANDHELD DESIGN OF FIELD TEST EQUIPMENT. We design many of our test
equipment products to be used in the field. Most of our digital and analog
products weigh less than four pounds and offer handheld convenience. The
compact, lightweight design of these products enable field technicians to
access problems and verify line operation quickly.
RAPID AND EFFICIENT DIGITAL SERVICES DEPLOYMENT. Our test equipment
products allow field and office technicians to test lines rapidly and
efficiently to ensure that they are properly connected to the central office
and that they can support a specific type and speed of service. In a single
device, our products can be used to pre-qualify facilities for services,
identify the source of problems and verify the proper operation of newly
installed service before handing service over to customers.
IMPROVED NETWORK QUALITY AND RELIABILITY. Field and office
technicians use our test equipment products to diagnose and locate a variety
of problems and degradations in telecommunications service. For example, our
Sentinel product allows extensive diagnosis and analysis of T-1 lines, which
allows service providers to identify and repair problems and to restore
service efficiently. As a result, our test equipment products support our
customers' need to provide high quality and reliable service.
BROAD RANGE OF TRANSMISSION AND NETWORK ACCESS PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of industrial grade
transmission products that are capable of connecting to a wide range of remote
monitoring devices and equipment. Many of these products are
39
<PAGE>
designed to operate in extended temperatures and harsh environments and
generally exceed the surge protection standards of the industry and are
adaptive to wide ranges of AC or DC power inputs. The design of many of our
data transmission products enables them to either interface or complement one
another. The versatility of this concept has enabled us to offer numerous
different product combinations to our customers. These variations include
customized selection of data speeds, data interfaces, power inputs, operating
temperatures, data formats and power consumption. In addition, our desktop
and rack mount transmission product lines allow us to serve both central site
data communications needs and remote access and transmission sites on both
the enterprise-wide and single location level.
COMPREHENSIVE CONNECTIVITY. Our telecommunications test instruments,
transmission and network access products are the result of significant
product research and engineering and are designed to connect to a broad range
of operation configurations and to connect over a wide range of prevailing
transmission conditions. Our products incorporate a wide range of standard
international connectivity protocols as well as proprietary protocols.
CUSTOMER-DRIVEN FEATURES. Many of our digital switches and each of
our power supplies is highly tailored to our customers' needs. We manufacture
digital switches for insertion into new equipment as well as for retrofit
into existing equipment. Our engineers continually interact with our
customers during the design process to ensure that our electronic components
are the best available solution for them. For example, based on conversations
with our customers, we delivered a compact multiple output power supply to
allow BAE Systems to produce a single-heads up display suitable for fitting
on a large range of commercial and military aircraft.
CUSTOMER RELATIONS. Our electronic components business currently
enjoys a preferred supplier status with several key accounts, which means
that we work in close association with the customer to develop custom
products specifically addressing their needs. Our electronic components also
are considered qualified products with several key accounts, which means that
our products are designed into equipment specifications of some of our
customers for the duration of their production of the equipment.
LONG-TERM RELATIONSHIPS. Market procurement methods encourage
long-term relationships between electronic components suppliers and
customers, with customers committing to a single source of supply, because of
the high cost involved in qualifying a product or its alternative for use. A
large proportion of XCEL Power Systems Ltd.'s products are qualified products
that have been involved in many hours of flight trials.
OUR STRATEGY
Our objective is to become a leading provider of telecommunications
test instruments, transmission and network access products for a broad range
of applications within the global telecommunications industry, in addition to
maintaining our market-leading position for our electronic switch and power
supply products in the aerospace, military and telecommunications markets.
The following are the key elements of our strategy to achieve these
objectives:
CONTINUE TO FOCUS ON TRANSMISSION AND NETWORK ACCESS PRODUCTS AND
TEST INSTRUMENT MARKETS. We will continue to focus and expand our efforts in
the telecommunications market and develop new products and enhancements to
meet or exceed the evolving requirements of both central office and field
applications of our technologies. The telecommunications segment constitutes
the core of our business and the focus of our growth strategy.
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CONTINUE TO MARKET ELECTRONIC COMPONENTS. We plan to continue to
market our electronic components products to their established market niches
while identifying opportunities to broaden our customer base for our power
supply products.
CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH
GROWTH MARKET OPPORTUNITIES. We plan to continue investing in markets and
technologies that we believe offer substantial growth prospects. For example,
we intend to expand our line of universal test equipment products that enable
customers to perform digital and analog tests with a single piece of
equipment. We believe that the expertise we have developed in creating our
existing products will permit us to enhance these products, develop new
products and respond to emerging technologies in a cost-effective and timely
manner.
LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our
existing customers will continue to purchase transmission and network access
products and test instrument products and services. We intend to aggressively
market new and enhanced products and services to our existing customers. We
also believe that our existing customer base represents an important source
of references and referrals for new customers.
PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to
increase the functionality of our telecommunications products, enabling
products to be upgraded by the downloading of software or the addition of
hardware to an existing unit, allowing customers to protect their investment
in test equipment and generating follow-on sales opportunities as we develop
new modules in the future. We plan to continue to approach our existing
digital switch customers to determine whether they need additional switches
that we do not already manufacture for them.
DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. We plan to continue to
develop our strategic relationships with transmission and test instrument
vendors in order to enhance our product development activities and leverage
shared technologies and marketing efforts to build recognition of our brands.
In particular, in Europe, we intend to continue to expand our relationships
with offshore vendors as a reseller of their products to enhance our position
and reputation as a provider of a comprehensive line of test equipment
products.
PURSUE STRATEGIC ACQUISITIONS. The telecommunications test
instruments, transmission and network access products markets are large and
highly fragmented. We plan to extend our market position by acquiring or
investing in complementary businesses or technologies on a selected basis. We
believe that acquisitions and joint ventures, such as our acquisition of our
CXR HALCYON 700 series of telecommunications test sets in 1997 and our
acquisition of T-Com central office telecommunications test sets in 2000,
provide an efficient way of expanding our business, product offerings and
access to different customers and market niches.
PURSUE TECHNOLOGY TRANSFER AND LICENSING. We plan to continue our
established practice of purchasing or licensing core technologies where this
reduces time and cost to market, such as the base platform for our remote
access server products purchased from Hayes Corporation.
DEVELOP CUSTOMER-FOCUSED SOLUTIONS. We design, develop, and
manufacture many products and provide services that are tailored to the
specific needs of our customers with an emphasis on ease of use. We intend to
continue to adapt our core telecommunications technologies to deliver focused
products that improve our customers' ability to test and manage increasingly
large and complex networks and that are easily used by field technicians and
central office personnel.
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EXTEND OUR GLOBAL PRESENCE. Our customers' needs evolve through
industry expansion and consolidation as well as with the deployment of new
technologies and services. To support our customers more effectively, we
intend to augment our sales, marketing and customer support organizations. In
particular, we plan to extend the capabilities of our professional services
and customer support operations to provide higher levels of consultative
services, enhanced application engineering services and access to a wider
array of instrument, systems, software and services.
PRODUCTS AND SERVICES
Our products and services are divided into two main business segments:
Telecommunications
-- Telecommunications Test Instruments (analog and digital
test instruments used in the installation, maintenance,
management and optimization of public and private
communication networks)
-- Transmission and Network Access Products (range of products
for accessing public and private networks for the
transmission of data, voice and video)
Electronic Components (digital switches and electronic power
supplies)
During the years ended December 31, 1999, 1998 and 1997, our total
sales were $25,913,000, $30,100,000 and $27,251,000, respectively, and the
percentages of total sales contributed by each product group within our two
main business segments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SEGMENT AND PRODUCT TYPE 1999 1998 1997
------------------------ ---- ---- ----
<S> <C> <C> <C>
Telecommunications
Test Instruments 27.88% 26.37% 18.55%
Transmission and Network Access Products 27.88% 29.79% 37.39%
Electronic Components
Digital Switches 21.65% 19.31% 13.56%
Electronic Power Supplies 18.55% 14.13% 15.59%
Other Products and Services 4.04% 10.41% 14.91%
</TABLE>
42
<PAGE>
OUR TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS
PRODUCTS BUSINESS
Our telecommunications business comprises telecommunications test
equipment and transmission and network access products. During the nine
months ended September 30, 2000 and 1999, the sale of telecommunications
products, equipment and related services accounted for approximately 55% and
58% of our total revenues, respectively. These equipment and products, many
of which are described below, are configured in a variety of models designed
to perform analog and digital measurements or to transmit data at speeds
varying from low-speed voice grade transmission to high-speed broadband
Internet access, including:
-- Traditional telephone services, such as modems and plain old telephone
service, or POTS
-- Competitive local exchange carriers, or CLECs
-- Bite error rate test, or BERT
-- Dial tone multi-frequency, or DTMF
-- Transmission impairment measurement, or TIMS
-- Central office and private business exchange, or CO/PBX, services, where
the central office houses the local exchange equipment that routes calls
to and from customers, and to Internet service providers and
long-distance carriers
-- Digital data services, or DDS, including the USA and worldwide standards
described below:
I.USA standards, including:
-- ISDN, which is an enhanced digital network that offers more
bandwidth and faster speed than the traditional telephone network
-- Caller identification or caller-ID services
-- Digital subscriber line technology, or DSL, which transmits data up
to 50 times faster than a conventional dial-up modem using existing
copper telephone wires
-- Multi-rate symmetric DSL, or MSDSL, which allows the transmission
of data over longer distances than single-rate technologies by
adjusting automatically or manually the transmission speed
-- T-1, which is a standard for digital transmission in North America
used by large businesses for broadband access
-- FT-1, or fractional T-1, which uses only a selected number of
channels from a T-1
-- T-3, which is the transmission rate of 44 megabytes per second, or
44 Mbps, with 672 channels
-- Digital signal level 0, or DS0, which is 64 kilobytes per second,
or 64 kbps, with one channel of a T-1, E-1, E-3 or T-3
-- Digital signal level 1, or DS1, which is the T-1 transmission rate
of 1.54 Mbps, with 24 channels
-- Digital signal level 3, or DS3, which is the T-3 transmission rate
of 44 Mbps, with 672 channels
-- Router, or an intelligent device used to connect local and remote
networks
-- Terminal adapter, which is situated between telephones or other
devices and an ISDN line and allows multiple voice/data to share
an ISDN line
-- Transmission control protocol/Internet protocol, or TCP/IP
II. Worldwide standards, including:
-- E-1, which is the European standard for international digital
transmission used by large businesses for broadband access, with
2.108 Mbps, with 30 channels
-- FE-1, or fractional E-1, which uses only a selected number of
channels from an E-1
-- E-3, which is the European standard for T-3, with 34.368 Mbps and
480 channels
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TELECOMMUNICATIONS TEST INSTRUMENTS
Our primary field test instruments are our CXR HALCYON 700 series of
products, which we believe provide performance and value in integrated
installation, maintenance and testing of telecommunications services. These
test instruments are modular, rugged, lightweight, hand-held products used
predominantly by telephone and Internet companies to pre-qualify facilities
for services, verify proper operation of newly installed services and
diagnose problems. Original equipment manufacturers also use service
verification equipment to test simulated networks during equipment
development and to verify the successful production of equipment.
We acquired our CXR HALCYON 700 series of telecommunications test
sets in 1997 with the goal of gradually replacing our CXR 5200 series of
telecommunications test sets that are larger, heavier and not computer
compatible. The unique modular nature of our CXR HALCYON 700 series test
equipment provides an easy configuration and upgrade path for testing of the
specific services offered by the various national and international service
providers. Recent key performance enhancements to this product family address
the trend toward conversion of analog service installations to high-speed
digital access lines. Some of these key features include:
-- ability to conduct the 23-tone test, which is an automated
single key-stroke test that performs the equivalent of over 12
individual test sequences;
-- load-coil analysis, which identifies the presence of voice
coils that prevent high-speed digital access;
-- installation and testing of DS3, which is a very high-speed
digital transmission service that is equivalent to 28 T-1
circuits; and
-- voice analysis and testing of individual T-1 channels.
We believe that these enhancements will allow further penetration of
CXR HALCYON 700 series test equipment into the large telecommunications
services market. Some of the key test equipment products we offer are
described below:
<TABLE>
<CAPTION>
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
<S> <C>
HALCYON 704A-400 series -- handheld transmission and signaling wideband
test set for ISDN, HDSL, DDS and ADSL facility
testing
-- optimized for use in installation and maintenance
of analog voice and data services
-- provides users with single-button test execution,
which allows quick circuit diagnosis and repair
without extensive training
HALCYON 704A-456 -- universal data test set
-- handheld wideband test set for installation and
maintenance of analog voice and data and digital
data circuits including Switched 56K
-- expands upon the features of the 704A-400 to add
DDS BRI/ISDN and DS1/T-1/FT-1 test functions
HALCYON 756A -- handheld integrated test set for installation and
maintenance of digital data circuits, including DDS,
Switched 56K, 2-wire Datapath, ISDN, T-1 and FT-1
-- provides users with intuitive user interface
allowing quick circuit diagnosis and repair without
extensive training
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
<S> <C>
HALCYON 764A -- handheld integrated test set for installation and
maintenance of T-1 facilities
-- can be used for T-1 and FT-1 access and testing
-- T-1 monitor testing occurs automatically upon
plugging in the test set and returns information
such as framing, line coding, test pattern, customer
data detected and errors, if any
-- T-1 BERT testing can be accomplished in automatic
mode, which automatically frames and detects
pattern if present and displays an all clear
message or the type and count of errors, or in the
manual mode, which allows the technician to do a
simple set up where the technician dictates the
variety of test patterns and measurements used
CXR 110A/111A -- combination test line that provides a remote DTMF
controlled transmission impairment tone source
that enables rapid data impairment testing of
subscriber data loops without technician
assistance at the central office
-- one-way transmissions tests can be made using any
transmission test set with the required functional
capability, such as HALCYON 704A
CXR 156B -- this far-end responder is a microprocessor-based
mini-responder used to terminate test calls for
automatic testing of PBX connecting trunks
-- designed for desk or bench-top use
-- provides automatic, totally unattended two-way
transmission testing of voice grade circuits
-- includes self-test routines to check calibration
of the responder during each test sequence, which
avoids the need for frequent maintenance
</TABLE>
TRANSMISSION AND NETWORK ACCESS PRODUCTS
Our subsidiaries, CXR Telcom Corporation and CXR, S.A., develop,
market and sell a broad line of transmission and network access products that
are manufactured in France by CXR, S.A. and sold under the name "CXR Anderson
Jacobson." These products include high-quality integrated access devices such
as modems, ISDN terminal adapters, ISDN concentrators, remote access servers
and networking systems.
Modems
------
Our customers use our high-quality professional grade modems
worldwide for networking and for central office telecommunications
applications such as voicemail and billing systems and secure communications.
These modems are sold as stand-alone devices for remote sites or as
rack-mountable versions for central sites. Our 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 our modems the modems of choice for voicemail
applications throughout the United States. Our modems are also available in
more rugged versions for industrial applications such as telemetry and remote
monitoring in harsh environments.
ISDN Terminal Adapters
----------------------
Together with modems, we offer a line of ISDN terminal adapters,
which are the digital equivalent of analog modems. These terminal adapters
are used in a broad range of applications, including point-of-sale and
videoconferencing, and are available in standalone as well as rack-mountable
versions.
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<PAGE>
ISDN Concentrators
------------------
We also manufacture and offer a line of ISDN intelligent concentrators
called CB2000. These products, which were designed primarily for the European
market, allow for better use of ISDN resources.
The following are descriptions of a few of our more prominent modems,
ISDN terminal adapters and ISDN concentrators:
<TABLE>
<CAPTION>
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
<S> <C>
POWER MODEMS A family of products that allow asynchronous and synchronous
transmission over dial-up or leased lines; asynchronous
transmission is a very high speed transfer mode that allows
telephone companies to mix formerly incompatible signals,
such as voice, video and data.
-- in dial-up applications, a unique line qualification
mechanism assesses the quality of the line and
automatically redials before entering the
transmission mode when a poor line in detected,
which avoids having to transmit in a degraded mode
and leads to money savings in long transmission
sessions
-- available in standalone units or as rack mountable
cards to be inserted into our Smart Rack
-- industrial versions designed for harsh environments
are available with features such as extra line
protection, metallic enclosures, extended temperature
ranges and high humidity protection
MD 2000 A multi-rate MSDSL modem that has the ability to manually or
automatically adjust line transmission speed to provide the
optimum performance for a particular pair of copper wires.
-- operates over a single twisted pair of copper wires,
which allows telecommunications companies to take
advantage of the large installed base of copper
twisted pairs that has been deployed around the
world over many years and upon private copper wire
infrastructures that exist for networking purposes
in locations such as universities, hospitals,
military bases, power plants and industrial complexes
-- allows data transmission over a single copper pair
at E-1 speed over a distance of up to 8.0 miles
-- available as both a standalone unit and as a
rack-mountable card
CB2000 The primary function of this unit is to split one or two
primary rate interface links, or PRIs, into multiple basic rate
interfaces, or BRIs.
-- this allows substantial cost savings by allowing
more effective use of available ISDN resources
without the limitations of conventional voice PBX
-- this allows for migration from BRI to PRI when the
number of ports needs to be increased while
preserving the user's investment in existing
BRI-based terminal equipment
-- this unit can be used in a wide variety of
situations where multiple BRI and PRI access
is required, such as:
- videoconferencing, where the unit can be used to
aggregate bandwidth of multiple BRI lines to provide
the necessary bandwidth, and to connect the
videoconferencing system to the ISDN network through
a PRI access while still providing connectivity to
other ISDN devices, or to connect two or more
videoconferencing systems together within the same
building or campus without going through the ISDN
public network
- ISDN network simulation, which can be used in places
such as
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
<S> <C>
showrooms, exhibition and technical training centers
to eliminate the need to have access to, and pay for
access to, the ISDN public network for telephone or
data calls
- remote access servers, which usually use multiple
BRIs, often need a method for migration from
multiple BRIs to a single PRI as traffic and the
number of users expands
ISDN TERMINAL ADAPTERS These devices are the ISDN equivalent of a modem.
-- these devices connect non-ISDN devices to the ISDN
via a network termination unit, or NT1, which
converts the "U" interface from the telephone company
into a 4-wire S/T interface
-- allow users to access the data rates of the
digital network
-- available as both a standalone unit and as a
rack-mountable card
ROUTERS A router provides connection between the primary rate ISDN
and local area networks.
-- dynamically route incoming and outgoing data packets
to the appropriate destination
-- available as both a standalone unit and as a
rack-mountable card to supplement the functions of
our Smart Rack system
</TABLE>
Remote Access Servers
---------------------
In addition to the products described above, we market a line of remote
access servers targeted toward Internet service providers and corporate users.
In a corporate environment, these products are used to connect remote users to
the corporate local area network, commonly called the LAN, via the telephone
network or via the ISDN network using analog modems or ISDN terminal adapters.
Remote access server systems range from 8 to 64 ports, with built-in security
and full remote manageability.
Networking Systems
------------------
We also provide several lines of products used to build
telecommunication networks to provide efficient transmission of data, voice and
video for organizations with multiple physical locations. These products are all
purchased from third-party vendors under original equipment manufacturer or
distributorship agreements. These network products are sold to customers in a
turnkey solution that includes network design, installation and maintenance and
often incorporates our own products. These product lines are divided into three
main categories:
-- multiplexers that are used to transport voice, data and video
over point-to-point lease lines or frame relay networks;
-- ISDN routers, which are used to connect remote offices to central
corporate offices; and
-- terminal servers and remote access servers, which are used to
connect local and remote users to the corporate LAN.
Smart Rack
----------
Our modem cards and our ISDN terminal adapter cards generally are
available in standalone versions or in versions that can be mounted in our Smart
Rack, our universal card cage that provides remote management through a
menu-driven user interface. Each part of the framework, or chassis, of the Smart
Rack has slots to house up to 16 cards (or up to 4 cards in a smaller
installation) plus one optional management card. Each slot can be used to insert
any member of our transmission products family, such
47
<PAGE>
as analog modems, ISDN terminal adapters, ISDN digital modems and new
high-speed MSDSL modems. The optional management card that can be inserted
into each chassis can be used to configure any card in the chassis and can
provide additional features, including alarm reporting, tracking of
configurations, running of diagnostic routines and generation of statistics.
Up to eight chassis can be linked together to form a fully-managed node with
128 slots. Our Smart Rack arrangement allows each chassis to be used to its
full capacity while reducing floor space needed to house complex systems.
OUR ELECTRONIC COMPONENTS BUSINESS
Our electronic components segment includes digital switches and
electronic power supplies. During the nine month periods ended September 30,
2000 and 1999, this segment accounted for approximately 41% and 38%,
respectively, of our net sales.
DIGITAL SWITCHES
XIT Corporation's Digitran Division manufactures, assembles and
sells digital switch products serving aerospace, military, communications,
medical, industrial and commercial applications. Thumbwheel, push button and
lever actuated modules, together with assemblies comprised of multiple
modules, are manufactured in 16 different model families. The Digitran
Division also offers a wide variety of custom keypads and digital switches
for unique applications.
Our digital switches may be ordered with different combinations of a
variety of features and options, including:
-- 8, 10, 11, 12, 16 or a special number of dial positions;
-- special markings and dial characters;
-- fully sealed, dust sealed or panel (gasket) sealed switch
chambers to increase resistance to the elements in hostile
environments, such as dust, sand, oils, salt spray, high humidity
and temperature and explosive atmospheres;
-- available with radio frequency interference shielding;
-- rear mount (flush) or front mount switches that are sold with the
needed installation hardware, or snap in mount switches that do
not require installation hardware;
-- provision for mounting components on output terminals on special
personal computer boards;
-- wire wrap terminals, pin terminals or special terminations; and
-- night vision compatibility.
ELECTRONIC POWER SUPPLIES
XCEL Power Systems Ltd., based in Ashford, Kent, England, produces a
range of high and low voltage, high specification, high reliability custom
power conversion products designed for hostile environments and supplied to
an international customer base, predominantly in the civil and military
aerospace, military vehicle and telecommunications markets.
Power conversion units supplied by XCEL Power Systems Ltd. range
from 10VA to 1.5 KVA power ratings, low voltage (1V) to high voltage (20KV+),
and convert alternating current, or AC, to direct current, or DC, convert DC
to AC and convert DC to DC. Units can be manufactured to satisfy input
requirements determined by military, civil aerospace, telecommunications or
industrial businesses,
48
<PAGE>
and sophisticated built-in test equipment, or BITE, and control circuitry
often is included. Operating environments for our units are diverse and range
from fighter aircraft to roadside cabinets.
BACKLOG
Our business is not generally seasonal, with the exception that
telecommunications test instruments, transmission and network access products
purchases by telecommunications customers tend to be lower than average
during the first quarter of each year because capital equipment budgets
typically are not approved until late in the first quarter. At September 30,
2000 and 1999, our backlog of firm, unshipped orders was approximately $11.1
million and $7.4 million, respectively. Our September 30, 2000 backlog is
related approximately 80% to our electronic components business, which tends
to provide us with long lead times for our manufacturing processes due to the
custom nature of the products, and 20% to our telecommunications business,
the majority of which portion relates to our data transmission and network
access products. Of these backlog orders, we anticipate fulfilling
approximately 21% of our electronic components orders and 60% of our
telecommunications orders within the current fiscal year. However, we cannot
assure you that we will be successful in fulfilling these orders in a timely
manner or that we will ultimately recognize as revenue the amounts reflected
as backlog.
WARRANTIES
Generally, our electronic components carry a one-year limited parts
and labor warranty and our telecommunications products carry a two-year
limited parts and labor warranty. Typically our telecommunications products
may be returned within 30 days of purchase if a new order is received, and
the new order will be credited with 80% of the selling price of the returned
item. Products returned under warranty typically are tested and repaired or
replaced at our option. Historically, product returns have not had a material
impact on our operations or financial condition. However, we cannot assure
you that this will continue to be the case or that disputes over components
or other materials or workmanship will not arise in the future.
CUSTOMERS
TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION
AND NETWORK ACCESS PRODUCTS
We market our telecommunications test instruments and transmission
and network access products primarily to telecommunications service
providers, communications equipment manufacturers and end users.
Telecommunications service providers offer telecommunications, wireless and,
increasingly, data communication services to end users, enterprises or other
service providers. Typically, communications service providers use a variety
of network equipment and software to originate, transport and terminate
communications sessions. Communications service providers rely on our
products and services to configure, test and manage network elements and the
traffic that runs across them. Also, our products help to ensure smooth
operation of the network and increase the reliability of services to
customers.
The major communications service providers to whom we market our
telecommunications test instruments and transmission and network access
products and services include inter-exchange carriers, incumbent local
exchange carriers, competitive local exchange carriers, internet service
providers, integrated communications providers, cable service providers,
international post, telephone and telegraph companies, banks, brokerage
firms, government agencies and other service providers. Some of the more
prominent customers, among many others, to whom we market our
telecommunications test instruments
49
<PAGE>
and transmission and network access products include the Federal Aviation
Administration, all RBOCs and some CLECs, domestically, and France Telecom
and the French Post Office, in Europe.
Communications equipment manufacturers design, develop, install and
maintain voice, data and video communications equipment. Network equipment
manufacturers such as Carrier Access Corporation rely on our test equipment
products to verify the proper functioning of their products during final
assembly and testing. Increasingly, because communications service providers
are choosing to outsource installation and maintenance functions to the
equipment manufacturers themselves, equipment manufacturers are using our
instruments, systems and software to assess the performance of their products
during installation and maintenance of a customer's network.
We also sell our telecommunications test instruments and
transmission and network access products and services to industrial and
military customers such as the French Army. None of our telecommunications
test instruments, transmission or network access products customers
represented more than ten percent of our revenues during 1999.
ELECTRONIC COMPONENTS
We sell our components primarily to original equipment manufacturers
in the electronics industry, including manufacturers of aerospace and
military systems, communications equipment, medical devices, industrial
instruments and test equipment. Purchasers of our digital switches include
BAE Systems, Lockheed Martin Corporation, Raytheon Company, The Boeing
Company, Litton Industries Inc., Hewlett-Packard Company and Rockwell
International Inc. Purchasers of our electronic power supplies include BAE
Systems, Sagem, Marconi, Teldix, Alsthom, GEC and Ferranti. None of our
electronic components customers represented more than 10 percent of our total
revenues during 1999 or the nine months ended September 30, 2000.
SALES, MARKETING AND CUSTOMER SUPPORT
TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION
AND NETWORK ACCESS PRODUCTS
Our sales and marketing staff consists primarily of engineers and
technical professionals. They undergo extensive training and ongoing
professional development and education. We believe that the skill level of
our sales and marketing staff has been instrumental in building longstanding
customer relationships. In addition, our frequent dialogue with our customers
provides us with valuable input on systems and features they desire in future
products. We believe that our consultative sales approach and our product and
market knowledge differentiate our sales force from those of our competitors.
Our local sales forces are highly knowledgeable of their respective
markets, customer operations and strategies and regulatory environments. In
addition, our representatives' familiarity with local languages and customs
enables them to build close relationships with our customers.
We provide repair and training services to enable our customers to
improve performance of their networks. We also offer on-line support services
to supplement our on-site application engineering support. Customers can also
access information regarding our products remotely through our domestic,
European and Japanese technical assistance center.
We sell many of our telecommunications test instruments and
transmission and network access products to large telecommunications service
providers. These prospective customers generally commit significant resources
to an evaluation of our and our competitors' products and require each vendor
to
50
<PAGE>
expend substantial time, effort and money educating the prospective customer
about the value of the vendor's solutions. Consequently, sales to this type
of customer generally require an extensive sales effort throughout the
prospective customer's organization and final approval by an executive
officer or other senior level employee. The result is lengthy sales and
approval cycles, which make sales forecasting difficult. In addition, even
after a large telecommunications service provider has approved our product
for purchase, their future purchases are uncertain because while we do enter
into long-term supply agreements with those parties, these agreements do not
require specific levels of purchases. Delays associated with potential
customers' internal approval and contracting procedures, procurement
practices, testing and acceptance processes are common and may cause
potential sales to be delayed or foregone. As a result of these and related
factors, the sales cycle of new products for large customers typically ranges
from six to twelve months.
ELECTRONIC COMPONENTS
We market and sell our electronic components through XIT
Corporation's Digitran Division, based in Rancho Cucamonga, California, XCEL
Corporation Ltd., a wholly-owned subsidiary of XIT Corporation based in
England, XCEL Power Systems, Ltd., a wholly-owned subsidiary of XCEL
Corporation Ltd. based in England, and XCEL Japan, Ltd., a wholly-owned
subsidiary of XIT Corporation based in Japan. In some European countries and
the Pacific Rim, these products are sold through a combination of direct
sales and through third-party distributors. As of September 30, 2000, we
employed in our electronic components business approximately eight direct
sales personnel.
We sell our electronic components primarily to original equipment
manufacturers in the electronics industry, including manufacturers of
aerospace and military systems, communications equipment, medical devices,
industrial instruments and test equipment. Our efforts to market our
electronic components generally are limited in scope.
XCEL Japan Ltd. resells the switch and keypad products of the
Digitran Division and other third-party United States-sourced components
primarily into Japan and also into other highly industrialized Asian
countries. Other marketing of our electronic components is primarily through
referrals from our existing customers, with sales either direct or via a
small number of selected representatives.
We rely on long-term orders and repeat business from our existing
customers. We also approach our existing customers and their competitors to
discuss opportunities for us to provide them with additional types of
switches they may need. Also, Digitran Division's reputation spanning over 40
years in the electronic components industry and the fact that major original
equipment manufacturers have designed many of our switches into their product
specifications has frequently resulted in customers seeking us out to
manufacture for them unique and standard digital switches.
COMPETITION
TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION
AND NETWORK ACCESS PRODUCTS
The market for our telecommunications test instruments, transmission
and network access products and services is fragmented and intensely
competitive, both inside and outside the United States, and is subject to
rapid technological change, evolving industry standards and regulatory
developments. We believe that the principal competitive factors affecting our
telecommunications test instruments, transmission and network access products
business include:
-- quality and breadth of product offerings;
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<PAGE>
-- adaptability to evolving technologies and standards;
-- ability to address and adapt to individual customer requirements;
-- speed of new product introductions to market;
-- depth and breadth of customer relationships;
-- price and financing terms;
-- research and design capabilities;
-- strength of distribution channels;
-- ability to attract and retain qualified management and technical
personnel;
-- ease of installation, integration and use of products;
-- system reliability and performance; and
-- compliance with government and industry standards.
Our principal competitors for our telecommunications test
instruments, transmission and network access products include Patton
Electronics Corporation, Adtran, Digital Engineering. Ltd. and GDC for
transmission and network access products and TTC Corporation (a subsidiary of
Dynatech Corporation), Ameritech Corporation, Fluke and Sunrise Telecom, Inc.
for test instruments. Many of our competitors have greater sales, marketing,
technological, research and financial resources than we do. Although we
believe we generally compete favorably with respect to the above factors,
existing or new competitors with significant market presence and financial
resources may reduce our market share.
ELECTRONIC COMPONENTS
The market for our components is highly fragmented and composed of a
diverse group of original equipment manufacturers, including Celab Ltd. and
Interpoint/Grenson for power supplies and EECO Switch Division, Transico
Inc., C&K Components, Inc., Greyhill Inc., Omron Electronics and Janco Inc.
for digital switches. We believe that the principal competitive factors
affecting our components business include:
-- capability and quality of product offerings;
-- status as qualified products;
-- reliable delivery;
-- depth and breadth of customer relationships;
-- ability to attract and retain qualified management and technical
personnel; and
-- compliance with government and industry standards.
We have developed the necessary expertise and reputation for quality
and have made substantial investments in machinery and equipment tooling, and
this expertise and these investments act as barriers to entry for other
potential competitors, making us a sole source supplier for approximately 30%
to 50% of the digital switches that we sell.
MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE
Our telecommunications test instruments, transmission and network
access products generally are assembled from outsourced components, with
final assembly, configuration and quality testing performed in house.
Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature
and small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are
built to customer order. This
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<PAGE>
approach, which avoids the need to maintain a finished goods inventory, is
possible because long lead times for delivery are often available. Typically,
our electronic components segment produces products in 1 to 300 piece
batches, with a ten- to thirty-week lead time. The lead time is predominately
to source sub-component piece parts such as electronic components, mechanical
components and services. Typical build time is six to eight weeks from
receipt of external components.
We operate four manufacturing and assembly facilities worldwide.
Three of these facilities are certified as ISO 9002-compliant. We have
consolidated all of our transmission and modem manufacturing for our North
American and European markets at our French manufacturing facility at CXR,
S.A. We manufacture all of our test equipment products at the Fremont,
California facility of CXR Telcom Corporation. We manufacture all of our
digital switches in our Rancho Cucamonga, California facility. We manufacture
our electronic power supplies in Ashford, Kent, England.
The purchased components we use to build our products are generally
available from a number of suppliers. We rely on a number of limited-source
suppliers for specific components and parts. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
components to ensure an adequate supply, particularly for products that
require lead times of up to nine months to manufacture. If we were required
to locate new suppliers or additional sources of supply, we could experience
a disruption in our operations or incur additional costs in procuring
required materials.
We intend to increase the use of outsource manufacturing for our
telecommunications products. We believe that outsourcing will lower our
manufacturing costs, in particular our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.
PRODUCT DEVELOPMENT AND ENGINEERING
We believe that our continued success depends on our ability to
anticipate and respond to changes in the electronics hardware industry and
anticipate and satisfy our customers' preferences and requirements.
Accordingly, we continually review and evaluate technological and regulatory
changes affecting the electronics hardware industry and seek to offer
products and capabilities that solve customers' operational challenges and
improve their efficiency.
Accordingly, for the years ended December 31, 1999, 1998 and 1997,
our engineering and product development costs were approximately $1.84
million, $2.02 million and $1.80 million, respectively. The decline in these
expenses in 1999 as compared to 1998 was primarily due to the termination of
engineering activities at our Fremont, California facility and the
consolidation of engineering activities at our St. Charles, Illinois facility.
Our product development costs in 1999, 1998 and 1997 were related
primarily to development of new telecommunications test equipment, trunk
testing system products and data communications equipment. Current research
expenditures are directed principally toward enhancements to the current test
instrument product line and development of increased bandwidth, or faster
speed, transmission products. These expenditures are intended to improve
market share and gross profit margins, although we cannot assure you that we
will achieve such improvements.
We strive to take advantage of the latest computer aided engineering
and engineering design automation workstation tools to design, simulate and
test advanced product features or product enhancements. Our use of these
tools helps us to speed product development while maintaining high standards
of quality and reliability for our products. Our use of these tools also
allows us to efficiently
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<PAGE>
offer custom designs for original equipment manufacturer customers whose
needs require the integration of our electronic components with their own
products.
INTELLECTUAL PROPERTY
We regard our software, hardware and manufacturing processes as
proprietary and rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We seek to protect our 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 our
proprietary rights to the same extent as do the laws of the United States.
Our research and development and manufacturing process typically involves the
use and development of a variety of forms of intellectual property and
proprietary technology. In addition, we incorporate technology and software
that we license from third party sources into our products. These licenses
generally involve a one-time fee and no time limit. We believe that
alternative technologies for this licensed technology are available both
domestically and internationally.
We may receive in the future notices from holders of patents that
raise issues as to possible infringement by our products. As the number of
test equipment products and transmission instruments increases and the
functionality of these products further overlaps, we believe that we may
become subject to allegations of infringement given the nature of the
telecommunications and information technology industries and the high
incidence of these kinds of claims. Questions of infringement and the
validity of patents in the fields of telecommunications and information
technology involve highly technical and subjective analyses. These kinds of
proceedings are time consuming and expensive to defend or resolve, result in
substantial diversion of management resources, cause product shipment delays
or could force us to enter into royalty or license agreements rather than
dispute the merits of the proceeding initiated against us.
GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS
We design our products to comply with a significant number of
industry standards and regulations, some of which are evolving as new
technologies are deployed. In the United States, our products must comply
with various regulations defined by the United States Federal Communications
Commission, or FCC, and Underwriters Laboratories as well as industry
standards established by Telcordia Technologies, Inc., formerly Bellcore, and
the American National Standards Institute. Internationally, our products must
comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute, telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunications Union. The failure of our products to
comply, or delays in compliance, with the various existing and evolving
standards could negatively impact our ability to sell our products.
Our product lines are subject to statutes governing safety and
environmental protection. We believe that we are in substantial compliance
with these statutes and are not aware of any proposed or pending safety or
environmental rule or regulation which, if adopted, would have a material
impact on our business or financial condition.
EMPLOYEES
As of September 30, 2000, we employed a total of 251 persons in our
various divisions and subsidiaries. Of these persons, approximately 37 were
engaged in administration, 36 were engaged in
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sales and marketing, 27 were engaged in engineering and 151 were engaged in
production operations. Of these persons, 126 were employed in the United
States, 72 were employed in England, 49 were employed in France and 4 were
employed in Japan. None of our employees are represented by labor unions, and
there have not been any work stoppages at any of our facilities. We believe
that our relationship with our employees is good.
FACILITIES
As of December 8, 2000, we leased or owned approximately 80,000
square feet of administrative, production, storage and shipping space. All of
this space was 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
(electronic components) Monrovia, California
XCEL Power Systems, Ltd. Ashford, United Kingdom Administrative/
and XCEL Corporation Ltd. Wales, United Kingdom Manufacturing
(electronic components)
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales
(electronic components)
CXR, S.A Paris, France Administration/Sales
(telecommunications test instruments,
transmission and network access products)
CXR, S.A Abondant, France Manufacturing/Engineering
(telecommunications test instruments,
transmission and network access products)
CXR Telcom Corporation Fremont, California Administrative/
(telecommunications test instruments, Manufacturing
transmission and network access products)
CXR Telcom Corporation St. Charles, Illinois Research, Development and
(test instruments) Engineering/Customer Service
</TABLE>
The lease for the Fremont, California facility expires in October
2002, with one five-year renewal option. We have subleased to an unrelated
party approximately 12,000 square feet of this facility. The lease for the
Paris, France facility expires in April 2007. The lease for the Monrovia,
California facility expires in February 2002. The lease for the Concord,
California facility expires April 30, 2001, with options to renew until April
2016. The lease for the Ashford, United Kingdom facility is a fifteen-year
lease that expires in September 2011, subject to the rights of the landlord
or us to terminate the lease after ten years.
55
<PAGE>
In December 1996, XIT Corporation acquired a 50% interest in Capital
Source Partners, a California general partnership that owned a 63,000
square-foot facility in Ontario, California. Our corporate headquarters and
XIT Corporation and its Digitran Division operated from that facility from
September 1990 through November 1999. To reduce our utility and monthly
rental expenses, we relocated our headquarters to a 5,400 square foot office
suite and relocated the Digitran Division's electronic components
manufacturing operations to a 15,745 square foot manufacturing facility,
which office suite and manufacturing facility are located within
approximately one mile of each other in the City of Rancho Cucamonga,
California. The lease on the manufacturing facility expires in November 2004,
and the lease on the headquarters facility expires in October 2002.
Concurrent with the relocation, XIT Corporation sold its interest in Capital
Source Partners in exchange for assumption of our 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 us from our future
lease obligations consisting of seven remaining years and approximately
$3,000,000 of future lease payments regarding the property. As part of the
mutual release, we relinquished our claim on a $51,000 deposit and a $115,000
note receivable from the lessor.
We believe the listed facilities are adequate for our current
business operations.
LEGAL MATTERS
We are not a party to any material pending legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions held by our directors and executive
officers as of November 14, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLES
---- --- ------
<S> <C> <C>
Carmine T. Oliva 58 Chairman of the Board, President,
Chief Executive Officer and Director
Graham Jefferies 43 Executive Vice President and Chief Operating Officer
of our Telecommunications Group and Managing
Director of various subsidiaries
Randolph D. Foote 52 Senior Vice President and Chief Financial Officer
Robert B. Runyon (1)(2) 75 Secretary and Director
Laurence P. Finnegan, Jr. (1)(3) 63 Director
</TABLE>
-----------
(1) Member of the executive compensation and management development committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.
CARMINE T. OLIVA has been Chairman of the Board, President and Chief
Executive Officer and a Class III director of our company since March 26,
1997 and of our subsidiary, XIT Corporation, since he founded XIT Corporation
in 1983. Mr. Oliva is Chairman of the Board of XCEL Corporation Ltd since
1985, Chairman and Chief Executive Officer of CXR Telcom Corporation since
March 1997 and Chairman of CXR S.A. since March 1997. From 1980 to 1983, Mr.
Oliva was Senior Vice President and General Manager, ITT Asia Pacific Inc.
Prior to holding that position, Mr. Oliva held a number of executive
positions with ITT Corporation and its subsidiaries over an eleven-year
period. Mr. Oliva attained the rank of Captain in the United States Army and
is a veteran of the Vietnam War. Mr. Oliva earned a B.A. degree in Social
Studies/Business from Seton Hall University in 1964 and an M.B.A. degree in
Business from The Ohio State University in 1966.
GRAHAM JEFFERIES was appointed Executive Vice President and Chief
Operating Officer of our worldwide Telecommunications Group on October 21,
1999. Mr. Jefferies served as Executive Vice President of our company from
April 1999 through October 1999. Mr. Jefferies has served as a director of
CXR, S.A. since March 1997, as Managing Director of Belix Power Conversions
Ltd. since our acquisition of Belix Power Conversions Ltd. in April 2000, as
Managing Director of XCEL Power Systems, Ltd. since September 1996 and as
Managing Director of XCEL Corporation. Ltd. since March 1992. Prior to
joining us in 1992, he was Sales and Marketing Director of Jasmin Electronics
PLC, a major United Kingdom 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 earned a B.S. degree in Engineering from
Leicester University in 1978, and has experience in mergers and acquisitions.
Mr. Jefferies is a citizen and resident of the United Kingdom.
RANDOLPH D. FOOTE was appointed as our Senior Vice President and
Chief Financial Officer on October 4, 1999. Mr. Foote has been Vice President
and Chief Financial Officer of CXR Telcom Corporation and XIT Corporation
since March 2000 and has been Chief Financial Officer of CXR Anderson
Jacobson Inc., a California corporation that is a subsidiary of CXR, S.A.,
since February 2000. Mr. Foote was the Corporate Controller of Unit
Instruments, Inc., a publicly traded semiconductor
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<PAGE>
equipment manufacturer, from October 1995 to May 1999. From March 1985 to
October 1995, Mr. Foote was the Director of Tax and Financial Reporting at
Optical Radiation Corporation, a publicly traded company that designed and
manufactured products using advanced optical technology. Prior to 1985, Mr.
Foote held positions with Western Gear Corporation and Bucyrus Erie Company,
which were both publicly traded companies. Mr. Foote earned a B.S. degree in
Business Management from California State Polytechnic University, Pomona in
1973 and an M.B.A. degree in Tax/Business from Golden Gate University in 1979.
ROBERT B. RUNYON was elected as a Class III director and appointed
as our Secretary on March 26, 1997. He has been the owner and principal of
Runyon and Associates, a human resources and business advisory firm, since
December 1987. He has acted as President and Chief Executive Officer of Sub
Hydro Dynamics Inc., a privately held marine services company based in Hilton
Head, South Carolina, since September 1995. Prior to our merger with XIT
Corporation, Mr. Runyon served XIT Corporation both as a director since
August 1983 and as a 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. Mr. Runyon earned a B.S. degree in Economics/Industrial
Management from University of Pennsylvania in 1950.
LAURENCE P. FINNEGAN, JR. was elected as a Class II director on
March 26, 1997. In addition to being a director of XIT Corporation since
1985, Mr. Finnegan was XIT Corporation's Chief Financial Officer from 1994 to
1997. 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 August 1995, he has been a principal of GwynnAllen Partners, Bethlehem,
Pennsylvania, an executive management consulting firm. Since December 1996,
Mr. Finnegan has been President of GA Pipe, Inc., a manufacturing company
based in Langhorne, Pennsylvania. Since September 1997, Mr. Finnegan has been
Vice President Finance and Chief Financial Officer of QuestOne Decision
Sciences, an efficiency consulting firm based in Pennsylvania. Mr. Finnegan
earned a B.S. degree in Accounting from St. Joseph's University in 1961.
Our bylaws provide that the board of directors shall consist of at
least four directors. The board of directors is divided into three classes.
The term of office of each class of directors is three years, with one class
expiring each year at the annual meeting of stockholders. There are currently
three directors, one of which is a Class II director whose term expires in
2001, and two of which are Class III directors whose term expires in 2002.
Officers are appointed by, and serve at the discretion of, our board of
directors.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning compensation paid
to our Chief Executive Officer and each of our other executive officers who
received an annual salary and bonus of more than $100,000 for services rendered
to us during the years ended December 31, 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARD
-------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION(1)
--------------------------- ---- ------ ----------- ---------------
<S> <C> <C> <C> <C>
Carmine T. Oliva.................. 1999 $198,872 -- --
President and Chief Executive 1998 $198,872 -- --
Officer (2) 1997 $214,301 -- --
James P. Butler................... 1999 $122,769 -- --
Former Chief Financial Officer (3) 1998 $125,000 40,000 --
1997 $ 44,377 75,000 --
Graham Jefferies.................. 1999 $114,192 60,000 $5,116
Executive Vice President and Chief 1998 $ 98,918 30,000 $5,567
Operating Officer of Telecommuni- 1997 $ 95,755 -- $6,527
cations Group (4)
Randolph D. Foote................. 1999 $ 23,267 50,000 --
Senior Vice President, Chief 1998 -- -- --
Financial Officer (5) 1997 -- -- --
</TABLE>
---------------
(1) Consists of contributions to Mr. Jefferies' retirement plan.
(2) Carmine T. Oliva became Chairman and Chief Executive Officer on March 26,
1997, upon Jack Talan's resignation concurrent with the merger of MicroTel
International, Inc. with XIT. Mr. Oliva's salary does not include payments
of $45,333 in 1997 of voluntarily deferred salary from years prior to 1997.
(3) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.
(4) Mr. Jefferies was appointed Executive Vice President and Chief Operating
Officer of our worldwide Telecommunications Group on October 21, 1999. Mr.
Jefferies is based in the United Kingdom and receives his remuneration in
British pounds. The compensation amounts listed for Mr. Jefferies are shown
in United States dollars, converted from British pounds using the average
conversion rates in effect during the time periods of compensation.
(5) Randolph D. Foote was appointed Senior Vice President and Chief Financial
Officer on October 4, 1999, following receipt of notification of the
resignation of our former Chief Financial Officer, James P. Butler.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding option grants in the
year ended December 31, 1999 to the named executive officers. We did not grant
any stock appreciation rights in the year ended December 31, 1999.
<TABLE>
<CAPTION>
PERCENT POTENTIAL
OF TOTAL REALIZABLE VALUE
OPTIONS AT ASSUMED ANNUAL
NUMBER OF GRANTED RATES OF STOCK
SECURITIES TO ALL PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
GRANT OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM(2)
NAME DATE GRANTED YEAR ($/SHARE)(1) DATE 5% ($) 10% ($)
---- ---- ------- --------- ------------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Carmine T. Oliva......... -- -- -- -- -- -- --
Randolph D. Foote........ 11/15/1999 50,000 11.6% 0.20 11/15/2009 6,289 15,937
Graham Jefferies......... 11/15/1999 60,000 14.0% 0.20 11/15/2006 7,547 19,125
James P. Butler(3)....... -- -- -- -- -- -- --
</TABLE>
---------------
(1) The option was granted at an exercise price equal to the closing price of a
share of common stock on the grant date.
(2) Pursuant to applicable regulations, these amounts represent certain assumed
rates of appreciation only. Actual gain, if any, on stock option exercises
are dependent on the future performance of the common stock and overall
stock market conditions. The amounts reflected in this table may not
necessarily be achieved.
(3) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding option exercises in
the year ended December 31, 1999 by the named executive officers and the value
of unexercised options held by the named executive officers as of December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ON VALUE ------------------- ---------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carmine T. Oliva..... -- -- 130,633 -- -- --
Randolph D. Foote.... -- -- 25,000 25,000 5,938 5,938
Graham Jefferies..... -- -- 96,287 30,000 7,125 7,125
James P. Butler(2)... -- -- 115,000 -- -- --
</TABLE>
--------------
(1) The closing price of our common stock on December 31, 1999 on the OTC
Bulletin Board was $.4375 per share.
(2) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999.
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<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
CARMINE T. OLIVA
Pursuant to an employment agreement dated January 1, 1996, 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 Corporation's salary abatement program then in effect. On
May 6, 1997, our board of directors voted to assume the obligations of XIT
Corporation 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 our
company on March 26, 1997.
On October 15, 1997, we entered into a replacement agreement with Mr.
Oliva on substantially the same terms and conditions as the prior agreement. The
replacement agreement is subject to automatic renewal for three successive
two-year terms commencing on October 15, 2002, unless, during the required
notice periods (which run from August 15 to October 15 of the year preceding the
year in which a two-year renewal period is to begin), either party gives written
notice of its desire not to renew. The agreement provides that Mr. Oliva's
salary was to continue at the abated amount of $198,865 per annum until such
time as we have reported two consecutive profitable quarters during the term of
the agreement or any renewals thereof, at which time his salary was to increase
to its pre-abatement level of $250,000 per annum. Based on our unaudited
quarterly financial statements, this increase to $250,000 occurred effective as
of November 1, 2000.
If the board of directors makes a substantial addition to or reduction
of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Oliva
the value of three years of his annual salary.
If we terminate Mr. Oliva for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of such termination. If we terminate Mr. Oliva without
cause (including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. If the termination without cause occurs prior to
the expiration of the initial term of the agreement on October 15, 2002, Mr.
Oliva will be entitled to be paid his annual salary for two and one-half years
following the termination. If the termination occurs during a renewal period,
Mr. Oliva will be entitled to be paid his annual salary through the expiration
of the particular renewal period, and to be paid all other amounts payable under
the agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:
-- if the termination occurs prior to the expiration of the
initial term of the agreement on October 15, 2002, Mr. Oliva
will be entitled to be paid his annual salary and all other
amounts payable under the agreement for two and one-half years
following the termination, which amounts shall be payable at
his election in a lump sum within 30 days
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<PAGE>
after the termination or in installments;
-- if the termination occurs during a renewal period, Mr. Oliva
will be entitled to be paid his annual salary through the
expiration of the particular renewal period, and to be paid
all other amounts payable under the agreement;
-- Mr. Oliva will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under
the same conditions as his annual salary;
-- Mr. Oliva will be entitled to receive any executive bonus
awarded but not yet paid; and
-- Mr. Oliva will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial term
or renewal term in which the termination occurred and the date
he receives equivalent coverage and benefits under plans and
programs of a subsequent employer.
If Mr. Oliva dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Oliva will continue to be
payable to Mr. Oliva's designee or legal representatives for one year following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability; provided, however, that we must continue to pay amounts
payable under the agreement to or for the benefit of Mr. Oliva for two years
following the effective date of the termination.
If the agreement is terminated for any reason and unless otherwise
agreed to by Mr. Oliva and us, then in addition to any other severance payments
to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual
salary until:
-- all obligations incurred by Mr. Oliva on our behalf, including
any lease obligations signed by Mr. Oliva related to the
performance of his duties under the agreement, have been
voided or fully assumed by us or our successor;
-- all loan collateral pledged by Mr. Oliva has been returned to
Mr. Oliva; and
-- all personal property of Mr. Oliva has been returned to Mr.
Oliva's principal place of residence at our expense.
The agreement provides that we will furnish a life insurance policy on
Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in
the event of his death during the term of the agreement. This benefit is in
return for, and is intended to protect Mr. Oliva's estate from financial loss
arising from any and all personal guarantees that Mr. Oliva provided in favor of
us, as required by various corporate lenders. This benefit is also intended to
enable Mr. Oliva's estate to exercise all warrants and options to purchase
shares of our common stock.
As a condition to his entry into the employment agreement, Mr. Oliva
received a warrant to purchase up to 250,000 shares of our common stock at an
exercise price of $3.45 per share, exercisable at any time prior to 5:00 p.m.
New York City time on October 14, 2002. In February 2000, Mr. Oliva exchanged
this warrant for a warrant to purchase up to 125,000 shares of common stock at
an exercise price of $1.725 per share in an exchange offer made to all holders
of warrants with exercise prices exceeding $1.00.
GRAHAM JEFFERIES
On May 1, 1998, we entered into an employment agreement with Mr.
Jefferies for a term of two years at an initial annual salary of 67,000 British
pounds (approximately $106,500 at the then current
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exchange rates) that is subject to automatic renewal for two successive
one-year terms commencing on May 1, 2000. Mr. Jefferies was to act as
Managing Director of XCEL Corporation, Ltd. and to perform additional
services as may be approved by our board of directors.
If the board of directors makes a substantial addition to or reduction
of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given
within 30 days of the change in duties. Within 30 days after the effective date
of a resignation under these circumstances, we will be obligated to pay to Mr.
Jefferies the value of one year of his annual salary.
If we terminate Mr. Jefferies for cause, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of such termination. If we terminate Mr.
Jefferies without cause (including by ceasing our operations due to bankruptcy
or by our general inability to meet our obligations as they become due), we must
provide him with 60 days' prior written notice. Mr. Jefferies will be entitled
to be paid his annual salary through the expiration of the current renewal
period, and to be paid all other amounts payable under the agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:
-- Mr. Jefferies will be entitled to be paid his annual salary
through the expiration of the current renewal period, and to
be paid all other amounts payable under the agreement;
-- Mr. Jefferies will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under
the same conditions as his annual salary;
-- Mr. Jefferies will be entitled to receive any executive bonus
awarded but not yet paid; and
-- Mr. Jefferies will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the current
renewal term and the date he receives equivalent coverage and
benefits under plans and programs of a subsequent employer.
If Mr. Jefferies dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Jefferies will continue to be
payable to Mr. Jefferies' designee or legal representatives for one year
following his death. If Mr. Jefferies is unable to substantially perform his
duties under the agreement for an aggregate of 180 days in any 18-month period,
we may terminate the agreement by ten days' prior written notice to Mr.
Jefferies following the 180th day of disability; provided, however, that we must
continue to pay amounts payable under the agreement to or for the benefit of Mr.
Jefferies for one year following the effective date of the termination.
BOARD COMMITTEES
The board of directors currently has an audit committee, an executive
compensation and management development committee and a nominating committee.
The audit committee makes recommendations to our board of directors
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by our
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independent auditors, reviews our financial statements for each interim
period, and reviews and evaluates our internal audit and control functions.
From January 1, 1999 through June 25, 1999, this committee consisted of David
Barrett, a former director of our company, and Laurence Finnegan. Since June
26, 1999, this committee has consisted of Laurence Finnegan.
The executive compensation and management development committee is
responsible for establishing and administering our policies involving the
compensation of all of our executive officers and establishing and recommending
to our board of directors the terms and conditions of all employee and
consultant compensation and benefit plans. From January 1, 1999 through June 25,
1999, this committee consisted of David Barrett, a former director of our
company, and Robert B. Runyon. Since June 26, 1999, this committee has consisted
of Robert B. Runyon and Laurence Finnegan.
The nominating committee selects nominees for the board of directors.
During 2000, the nominating committee has consisted of Robert B. Runyon.
COMPENSATION OF DIRECTORS
Each non-employee director is entitled to receive $1,000 per quarter as
compensation for their services. We reimburse all directors for out-of-pocket
expenses incurred in connection with attendance at board and committee meetings.
We may periodically award options or warrants to our directors under our
existing option and incentive plans and otherwise.
Mr. Runyon acts as a consultant to our company in the areas of strategy
development business and organization planning, human resources recruiting and
development and administrative systems. During 1999, Mr. Runyon received
approximately $1,670 in consulting fees and expenses. Also, additional
consulting fees and expenses totaling $9,441 were accrued during 1999 but have
not yet been paid. During 1999, we also paid premiums of $2,793 for life
insurance on Mr. Runyon for the benefit of his spouse, $30 for life insurance on
Mr. Runyon's spouse for the benefit of Mr. Runyon, and $3,534 for health
insurance.
On July 25, 2000, Mr. Runyon and Mr. Finnegan each received an option
to purchase 100,000 shares of common stock at $0.50 per share under our 1997
Plan, which options vest in two equal semi-annual installments commencing on
January 25, 2001 and expires on July 25, 2010.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity.
STOCK OPTION PLANS
We currently have four stock option plans: the 1993 Stock Option Plan,
the Employee Stock and Stock Option Plan, the 1997 Stock Incentive Plan and the
2000 Stock Option Plan. These plans are administered by our executive
compensation and management development committee, which currently consists of
Robert Runyon and Laurence Finnegan, our two non-employee directors.
The 1993 Stock Option Plan authorizes the issuance of incentive stock
options and non-qualified stock options to our employees and independent
contractors for the purchase of up to 300,000 shares of our common stock. The
1993 Stock Option Plan terminates on August 31, 2003. Our board does not intend
to issue any additional options under the 1993 Stock Option Plan in the future.
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The Employee Stock and Stock Option Plan authorizes the issuance of
non-qualified stock options and restricted and unrestricted stock grants to our
employees (including officers and directors who are employees) and consultants
for up to an aggregate of 520,000 shares of common stock. The Employee Stock and
Stock Option Plan terminates on July 1, 2004. Our board does not intend to issue
any additional options or make any additional stock grants under the Employee
Stock and Stock Option Plan.
The 1997 Stock Incentive Plan authorizes the issuance of incentive
stock options, stock appreciation rights or stock awards to our employees and
directors for up to an aggregate of 1,600,000 shares of common stock, except
that incentive stock options may not be granted to non-employee directors. Our
board of directors' adoption of the 1997 Stock Incentive Plan was ratified by
our stockholders at our 1998 annual meeting of stockholders. The 1997 Stock
Incentive Plan terminates on June 15, 2007. As of November 14, 2000, options to
purchase up to 1,441,596 shares of common stock were outstanding under the 1997
Stock Incentive Plan.
Our 2000 Stock Option Plan was adopted by our board of directors in
November 2000 and is subject to stockholder approval. We intend to submit the
2000 Stock Option Plan for stockholder approval at a special meeting of
stockholders that is planned to be held in January 2001. The 2000 Stock Option
Plan authorizes the issuance of incentive stock options and non-qualified
options to our employees, officers, directors and consultants and to employees
of companies that do business with us for the purchase of up to 2,000,000 shares
of common stock. As of November 14, 2000, we had approximately 253 employees,
officers and directors eligible to receive options under the 2000 Stock Option
Plan, and no options had been issued under this plan. The following description
of the terms of the 2000 Stock Option Plan is qualified in its entirety by
reference to the full text of the 2000 Stock Option Plan, a copy of which is an
exhibit to the registration statement of which this prospectus is a part.
SHARES SUBJECT TO THE 2000 STOCK OPTION PLAN
A total of 2,000,000 shares of our common stock are authorized for
issuance under the 2000 Stock Option Plan. Any shares of common stock which are
subject to an award but are not used because the terms and conditions of the
award are not met, or any shares which are used by participants to pay all or
part of the purchase price of any option, may again be used for awards under the
2000 Stock Option Plan.
ADMINISTRATION
It is the intent of the 2000 Stock Option Plan that it be administered
in a manner such that option grants and exercises would be "exempt" under Rule
16b-3 of the Securities Exchange Act of 1934, as amended. The executive
compensation and management development committee is empowered to select those
eligible persons to whom options shall be granted under the 2000 Stock Option
Plan; to determine the time or times at which each option shall be granted,
whether options will be ISOs or NQOs, and the number of shares to be subject to
each option; and to fix the time and manner in which each such option may be
exercised, including the exercise price and option period, and other terms and
conditions of such options, all subject to the terms and conditions of the 2000
Stock Option Plan. The committee has sole discretion to interpret and administer
the 2000 Stock Option Plan, and its decisions regarding the 2000 Stock Option
Plan are final, except that our board of directors can act in place of the
committee as the administrator of the 2000 Stock Option Plan at any time or from
time to time, in its discretion.
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OPTION TERMS
ISOs granted under the 2000 Stock Option Plan must have an exercise
price of not less than 100% of the fair market value of a share of common stock
on the date the ISO is granted and must be exercised, if at all, within ten
years from the date of grant. In the case of an ISO granted to an optionee who
owns more than 10% of the total voting securities of our company on the date of
grant, such exercise price shall be not less than 110% of fair market value on
the date of grant, and the option period may not exceed five years. NQOs granted
under the 2000 Stock Option Plan must have an exercise price of not less than
85% of the fair market value of a share of common stock on the date the NQO is
granted.
Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than ten years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.
AMENDMENT AND TERMINATION
The 2000 Stock Option Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time and from time to time by
our board of directors. However, our board of directors may not materially
impair any outstanding options without the express consent of the optionee or
materially increase the number of shares subject to the 2000 Stock Option Plan,
materially increase the benefits to optionees under the 2000 Stock Option Plan,
materially modify the requirements as to eligibility to participate in the 2000
Stock Option Plan or alter the method of determining the option exercise price
without stockholder approval. No option may be granted under the 2000 Stock
Option Plan after November 14, 2010.
FEDERAL INCOME TAX CONSEQUENCES
NQOs
----
Holders of NQOs do not realize income as a result of a grant of the
Option, but normally realize compensation income upon exercise of an NQO to the
extent that the fair market value of the shares of common stock on the date of
exercise of the NQO exceeds the exercise price paid. We will be required to
withhold taxes on ordinary income realized by an optionee upon the exercise of a
NQO.
In the case of an optionee subject to the "short-swing" profit
recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes
income only upon the lapse of the six-month period under Section 16(b), unless
the optionee elects to recognize income immediately upon exercise of his or her
Option.
ISOs
----
Holders of ISOs will not be considered to have received taxable
income upon either the grant of the option or its exercise. Upon the sale or
other taxable disposition of the shares, long-term capital gain will normally
be recognized on the full amount of the difference between the amount
realized and the option exercise price paid if no disposition of the shares
has taken place within either two years from the date of grant of the option
or one year from the date of transfer of the shares to the optionee upon
exercise. If the shares are sold or otherwise disposed of before the end of
the one-year or two-year periods, the holder of the ISO must include the gain
realized as ordinary income to the extent of the lesser of the fair market
value of the option stock minus the
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option price, or the amount realized minus the option price. Any gain in
excess of these amounts, presumably, will be treated as capital gain. We will
be entitled to a tax deduction in regard to an ISO only to the extent the
optionee has ordinary income upon the sale or other disposition of the option
shares.
Upon the exercise of an ISO, the amount by which the fair market value
of the purchased shares at the time of exercise exceeds the option price will be
an "item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year or two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.
POSSIBLE ANTI-TAKEOVER EFFECTS
Although not intended as an anti-takeover measure by our board of
directors, one of the possible effects of the 2000 Stock Option Plan could be to
place additional shares, and to increase the percentage of the total number of
shares outstanding, in the hands of the directors and officers of our company.
Such persons may be viewed as part of, or friendly to, incumbent management and
may, therefore, under certain circumstances be expected to make investment and
voting decisions in response to a hostile takeover attempt that may serve to
discourage or render more difficult the accomplishment of such attempt.
In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of our assets, or
other attempted changes in the control of our company. In the opinion of our
board of directors, such an acceleration provision merely ensures that optionees
under the 2000 Stock Option Plan will be able to exercise their options as
intended by the board of directors and stockholders prior to any such
extraordinary corporate transaction which might serve to limit or restrict such
right. Our board of directors is, however, presently unaware of any threat of
hostile takeover involving our company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS
On December 23, 1999, Orbit II Partners, L.P., Samuel J. Oliva, Samuel
G. Oliva and Carmine T. Oliva, or the Series A Purchasers, purchased an
aggregate of 39.5 shares of Series A Preferred Stock and accompanying warrants
to purchase up to an aggregate of 197,500 shares of common stock from two of the
three original holders of shares of our Series A Preferred Stock, or the Series
A Sellers, for an aggregate consideration of approximately $400,000 in cash.
Orbit II Partners, L.P. is a Delaware limited partnership that as of November
20, 2000 beneficially owned more than five percent of our outstanding common
stock. Carmine T. Oliva is our President, Chief Executive Officer and Chairman
of the Board. Samuel J. Oliva and Samuel G. Oliva are the brother and son,
respectively, of Carmine T. Oliva.
When issued to the three original holders, or the Series A Original
Holders, on June 29, 1998 and July 9, 1998 at a price of $10,000 per share, the
shares of Series A Preferred Stock were convertible into common stock at the
option of the Series A Original Holders at per share conversion prices of
$0.9375 and $0.875, respectively, which prices were equal to $10,000 divided by
the lesser of $1.26 and 100% of the arithmetic average of the three lowest
closing bid prices over the respective previous 40 trading days.
On November 3, 1998, the Series A Original Holders and our company
agreed to modify the conversion price of the Series A Preferred Stock to a fixed
factor so that for so long as our common stock continued to be listed on the
Nasdaq SmallCap Market, each share of Series A Preferred Stock was to be
convertible into 20,000 shares of common stock. The modified conversion price
was calculated by dividing $10,000 by $0.50 per share of Series A Preferred
Stock. The Series A Original Holders and our company also agreed on November 3,
1998 that the exercise price of the related warrants would be reduced from $1.25
per share to $0.75 per share. As of November 3, 1998, under the original
conversion price formula each share of Series A Preferred Stock would have been
convertible into approximately 24,615 shares of common stock at a per share
conversion price of $0.40625, and the closing price of a share of our common
stock on the Nasdaq SmallCap Market was $0.4375. We agreed to adjust the
conversion price of the Series A Preferred Stock and the exercise price of the
related warrants because the prices at which our common stock were trading had
been declining at least since the shares of Series A Preferred Stock were
issued, and we believed that setting a floor for the conversion price might help
to minimize future dilution to our common stockholders.
Following the delisting of our common stock from the Nasdaq SmallCap
Market, the November 1998 modification to the conversion price of the Series A
Preferred Stock was discontinued on August 15, 1999, and the conversion price
was again to be equal to $10,000 divided by the lesser of $1.26 and 100% of the
arithmetic average of the three lowest closing bid prices over the 40 trading
days prior to conversion.
As described above, on December 23, 1999, the Series A Purchasers
purchased an aggregate of 39.5 shares of Series A Preferred Stock and the
related warrants to purchase up to an aggregate of 197,500 shares of common
stock from the Series A Sellers. In conjunction with the purchase and sale, the
holders of the Series A Preferred Stock and our company agreed to modify the
conversion price of the Series A Preferred Stock to a fixed factor so that each
share of Series A Preferred Stock was to be convertible into 50,530 shares of
common stock. This fixed factor was calculated by dividing $10,000 by
approximately $0.1979 per share of Series A Preferred Stock. Also in conjunction
with the purchase and sale, the holders of the Series A Preferred Stock and our
company agreed that all of the outstanding warrants that had been issued to the
Series A Original Holders in 1998, including both the warrants
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that were transferred to the Series A Purchasers and the warrants that were
retained by the Series A Sellers because they related to shares of Series A
Preferred Stock that already had been converted by the Series A Sellers into
shares of common stock, were amended to reduce the exercise price from $0.75
per share to $0.25 per share and to extend the expiration date from May 22,
2001 to December 22, 2002.
On December 23, 1999, the closing price of a share of our common stock
on the OTC Bulletin Board was $0.30, and each share of Series A Preferred Stock
would have been convertible into approximately 52,632 shares of common stock at
a per share conversion price of $0.19 if the December 1999 modification to the
conversion price was not taken into account. The modifications to the exercise
price of the warrants and the conversion price of the Series A Preferred Stock
were intended to induce the sale of all of the Series A Sellers' unconverted
shares of Series A Preferred Stock to the Series A Purchasers. We believed that
this sale would benefit our company and its stockholders because the Series A
Purchasers had indicated an interest in voluntarily holding the Series A
Preferred Stock as a long-term investment rather than converting the Series A
Preferred Stock into shares of common stock that would further dilute existing
common stockholders and that could be sold in the public market at the low
prices at which our shares of common stock were trading.
In November 2000, we determined that because the modifications to the
conversion price in November 1998 and December 1999 had not been submitted to
and approved by our stockholders in accordance with the Delaware General
Corporation Law, all conversions from November 1998 through July 1999 and in
December 1999 should have been made at the original conversion rate of $10,000
divided by the lesser of $1.26 and 100% of the arithmetic average of the three
lowest closing bid prices over the 40 trading days prior to the conversions.
Under the original conversion terms, we would have issued approximately 250,000
additional shares of common stock for some conversions and approximately 90,000
less shares of common stock for other conversions. No modifications have been
made to our consolidated financial statements to reflect the potential issuance
of these additional shares of common stock because we are still in the process
of working with the holders of the Series A Preferred Stock to reach a
satisfactory resolution to this matter.
We have submitted to our stockholders for approval at a special meeting
to be held on January 16, 2001 an amendment to the certificate of designations,
preferences and rights relating to the Series A Preferred Stock. If approved by
the holders of our common stock and Series A Preferred Stock , the amendment
will modify the conversion rate for conversions occurring after the amendment is
filed with the Delaware Secretary of State so that each share of Series A
Preferred Stock will be convertible into 50,530 shares of common stock, which is
the same number of shares into which each shares of Series A Preferred Stock
would now be convertible if the attempted modifications to the conversion prices
had been approved by our stockholders in accordance with the Delaware General
Corporation Law.
WARRANT EXCHANGE OFFER
Between February and April 2000, we made an offer to all holders of
warrants to purchase shares of our common stock at exercise prices of $1.00 or
more pursuant to which these holders could elect to surrender their outstanding
warrants with exercise prices of $1.00 or more in exchange for the issuance to
them of warrants to purchase a number of shares equal to one-half of the number
of shares underlying the surrendered warrants at an exercise price of one-half
of the exercise price of the surrendered warrants. The primary reason for the
offer was to reduce the quantity of shares allocated to warrants so that we
would have sufficient authorized stock for our needs until an increase in our
authorized stock could be voted on by our stockholders. A total of 2,769,201
warrants with exercise prices ranging from $1.21 to $3.79 were surrendered in
exchange for 1,384,602 warrants with exercise prices ranging from $0.605 to
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$1.895. The majority of warrants exchanged were held by persons or entities who
were not employees or directors of our company or its subsidiaries. However,
exchanges were made with the following related parties:
<TABLE>
<CAPTION>
Shares Exercise Shares Exercise
Underlying Price of Underlying Price of
Warrants Warrants Warrants Warrants
Warrant Holder Surrendered Surrendered Received Received
-------------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C>
Carmine T. Oliva, Chairman of the 250,000 $3.45 125,000 $1.73
Board, President and Chief Executive 362,870 $3.44 181,435 $1.72
Officer 5,878 $1.21 2,939 $0.61
3,096 $3.79 1,548 $1.90
33,674 $3.79 16,837 $1.90
6,659 $3.79 3,330 $1.90
43,544 $2.58 21,772 $1.29
108,861 $1.38 54,431 $0.69
29,030 $1.89 14,515 $0.95
21,772 $1.89 10,886 $0.95
Carmine T. Oliva and Georgeann Oliva, 11,103 $3.79 5,552 $1.90
Chairman of the Board, President and 3,629 $1.89 1,815 $0.95
Chief Executive Officer and his
spouse
Laurence P. Finnegan, 17,418 $2.58 8,709 $1.29
Director 7,257 $1.89 3,629 $0.95
5,443 $1.89 2,722 $1.89
Robert B. Runyon, 2,903 $2.58 1,452 $1.29
Director and Secretary 55,400 $2.58 27,700 $1.29
9,677 $2.58 4,839 $1.29
14,515 $1.89 7,258 $0.95
6,169 $1.89 3,085 $0.95
483 $1.29 242 $1.29
Samuel J. Oliva, 14,515 $1.89 7,258 $0.95
Brother of Carmine T. Oliva 30,481 $1.89 15,241 $0.95
3,919 $1.21 1,960 $0.61
5,008 $1.89 2,504 $0.95
11,103 $3.79 5,552 $1.90
3,629 $1.89 1,815 $0.95
Rose Oliva, 4,354 $1.89 2,177 $0.95
Mother of Carmine T. Oliva
Ronald & Betty Jane Oliva, 11,102 $3.79 5,551 $1.90
Brother and sister-in-law of Carmine 3,628 $1.89 1,814 $0.95
T Oliva
David Barrett, 14,515 $2.58 7,258 $1.29
Former Director 13,789 $1.89 6,895 $0.95
5,443 $1.89 2,722 $0.95
</TABLE>
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The exchange did not result in a modification of the expiration dates
or any other terms of the warrants other than the numbers of shares and exercise
prices. All of the warrants received in exchange for the surrendered warrants
have expired except for the first warrant listed for Carmine T. Oliva, which
warrant expires on October 14, 2002.
OTHER TRANSACTIONS
We are or have been a party to employment and consulting arrangements
with related parties, as more particularly described above under the headings
"Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" and "Compensation of Directors."
In June 2000, we issued 5,000 shares of common stock to Carmine T.
Oliva, 10,000 shares of common stock to Samuel J. Oliva and 10,000 shares of
common stock to Samuel G. Oliva in connection with their exercise of warrants
with an exercise price of $0.25 per share.
In August 2000, Carmine T. Oliva and his spouse, Georgeann, provided a
limited personal guarantee and a waiver of spouse equity rights in order to
assist us in obtaining our credit facility with Wells Fargo Business Credit,
Inc. Our board of directors believed it was advantageous for us to obtain a new
credit line from a bank-related lending institution rather than from an
independent asset lender such as our previous lender, Congress Financial
Corporation. However, Wells Fargo Business Credit, Inc. was unwilling to provide
us with the credit line unless Mr. Oliva provided the guarantee and Mrs. Oliva
provided the waiver. In recognition of Mr. and Mrs. Oliva's agreement to risk
their personal net worth to provide the guarantee and waiver despite significant
risk based upon our prior history of losses, the executive compensation and
management development committee of the board of directors awarded Mr. Oliva a
special bonus of $30,000 which was paid over a three-month period. Wells Fargo
Business Credit, Inc. has agreed to release the guarantee at the end of 2000 if
we reach specific profitability goals. If, however, we do not reach those goals,
the executive compensation and management development committee has authorized
payment to Mr. Oliva of up to an additional $30,000 to be paid in twelve equal
payments, twice per month, for so long as the guarantee remains in place or
until March 31, 2001, whichever comes first.
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PRINCIPAL AND SELLING SECURITY HOLDERS
As of November 20, 2000, a total of 20,569,759 shares of our common
stock were outstanding. The following table sets forth information as of
November 20, 2000 regarding the beneficial ownership of our common stock both
before and immediately after the offering by:
-- each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our
common stock as of the date of the table;
-- each selling security holder;
-- each of our directors;
-- each named executive officer in the Summary Compensation Table
contained elsewhere in this prospectus; and
-- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission, and generally includes voting or
investment power with respect to securities. Except as indicated in the
footnotes to the table, we believe each selling security holder possesses
sole voting and investment power with respect to all of the shares of common
stock owned by such selling security holder, subject to community property
laws where applicable. In computing the number of shares beneficially owned
by a selling security holder and the percentage ownership of that selling
security holder, shares of common stock subject to options or warrants held
by that person that are currently exercisable or are exercisable within 60
days after the date of the table are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person or group.
The shares of common stock being offered pursuant to this prospectus
may be offered for sale from time to time during the period the registration
statement of which this prospectus is a part remains effective, by or for the
accounts of the selling security holders described in the table below. All of
the shares being offered pursuant to this prospectus were issued or are
issuable upon exercise of common stock purchase warrants that were acquired
by the selling security holders from us in the following private placement
transactions:
-- Warrants to purchase up to 152,381 shares of common stock at
an exercise price of $0.66 per share, which warrants were
issued in December 1998 to one entity in exchange for an
option to purchase from the entity an ownership interest in
Digital Transmission Systems, Inc.;
-- Warrants to purchase an aggregate of 722,500 shares of
common stock, which warrants have an exercise price of $0.25
and were issued to three investors in connection with our
July 1998 private placement of Series A Preferred Stock;
-- 222,500 shares of common stock that we issued to three
individuals and two entities upon exercise of warrants with
exercise prices of $0.25, which warrants were issued in
connection with our July 1998 private placement of Series A
Preferred Stock;
-- Warrants to purchase an aggregate of 250,000 shares of
common stock at an exercise price of $1.25 per share, which
warrants were issued to our placement agent in connection
with our July 1998 private placement of Series A Preferred
Stock; and
-- Warrants to purchase an aggregate of 633,125 shares of
common stock at exercise prices ranging from $0.63 to
$2.50, which warrants were issued by us to one entity and
nine individuals in private placement transactions for
services rendered.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders, but we will receive
proceeds from the exercise for cash of warrants to purchase common stock to the
extent that such common stock is included in the shares being offered pursuant
to this prospectus.
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING (1)
TITLE --------------------------- SHARES BEING ---------------------------
NAME OF BENEFICIAL OWNER OF CLASS NUMBER % OF CLASS OFFERED NUMBER % OF CLASS
------------------------ -------- ------ ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Albanese Placedo Common 15,000 (2) * 15,000 (2) -- --
Amberbrook II Common 66,532 (3) * 8,798 (3) 57,734 *
Bankers Trust, Trustee Jack Eckerd Corp.
Pension Trust Common 44,355 (4) * 5,865 (4) 38,490 *
James P. Butler (5) Common -- -- -- -- --
Chase Manhattan Bank N.A. - Trustee *
IBM Retirement Plan Common 44,355 (6) * 5,865 (6) 38,490 *
Chemical Bank Retirement Plan Common 88,711 (7) * 11,730 (7) 76,981 *
C.P. & Co. Venture Partners, L.P. Common 22,180 (8) * 2,933 (8) 19,247 *
Robert Crane Common 2,360 (9) * 312 (9) 2,048 *
Crossroads Capital Limited Partnership Common 9,902 (10) * 9,902 (10) -- --
The Equitable Life Assurance Society of
the United States Common 71,767 (11) * 9,490 (11) 62,277 *
George Farndell Common 37,500 (12) * 37,500 (12) -- --
Laurence P. Finnegan, Jr. (13) Common 44,171 * -- 44,171 *
Randolph D. Foote Common 55,000 (14) * -- 55,000 *
Fortune Fund Limited Seeker III Common 810,695 (15) 3.89% 250,000 (16) 560,695 2.69%
Series A
Preferred 20 80.00% -- 20 80.00%
Raymond Jacobson Common 42,000 (17) * 32,000 (17) 10,000 *
Steven Jacobus Common 50,000 (18) * 50,000 (18) -- --
Graham Jefferies Common 129,563 (19) * -- 129,563 *
Frank LaHaye Common 26,135 (20) * 3,457 (20) 22,678 *
Landmark Equity Partners II, L.P. Common 44,355 (21) * 5,865 (21) 38,490 *
Landmark Equity Partners V, L.P. Common 133,066 (22) * 17,595 (22) 115,471 *
Landmark Venture Partners L.P. Common 88,711 (23) * 11,730 (23) 76,981 *
Herb Lanzet Common 50,000 (24) * 50,000 (24) -- --
Gene Miller Common 26,135 (25) * 3,457 (25) 22,678 *
Montgomery Securities Common 62,006 (26) * 8,199 (26) 53,807 *
Charles Mugrdechian, Jr. Common 20,000 (27) * 20,000 (27) -- --
NY State Common Retirement Fund Common 88,711 (28) * 11,730 (28) 76,981 *
Northern Trust Company as trustee for
United System Master Trust Common 133,068 (29) * 17,596 (29) 115,472 *
Carmine T. Oliva Common 1,585,806 (30) 7.53% 355,185 (31) 1,230,621 5.84%
Series A
Preferred 1 4.00% -- 1 4.00%
Jason Oliva Common 133,515 (32) * 133,500 (32) 15 *
Ronald Oliva Common 37,500 (33) * 37,500 (33) -- --
Samuel G. Oliva Common 151,002 (34) * 46,000 (35) 105,002 *
Series A
Preferred 2 8.00% -- 2 8.00%
Samuel J. Oliva Common 105,928 (36) * 83,500 (37) 22,428 *
Series A
Preferred 2 8.00% -- 2 8.00%
Orbit II Partners, L.P. Common 2,838,810 (38) 13.77% 215,625 (38) 2,623,185 12.73%
Pacific Continental Securities
Corporation Common 230,000 (39) 1.11% 230,000 (39) -- --
Portland General Holdings, Inc. Common 88,711 (40) * 11,730 (40) 76,981 *
Rana General Holding, Ltd. Common 127,500 (41) * 127,500 (41) -- --
Resonance, Ltd. Common 365,000 (42) 1.74% 365,000 (42) -- --
Robert B. Runyon Common 238,155 (43) 1.15% -- 238,155 1.15%
William Setteducato Common 125,000 (44) * 125,000 (44) -- --
Donald Skipwith Common 1,982 (45) * 262 (45) 1,720 *
Xerox Corporation Common 44,355 (46) * 5,865 (46) 38,490 *
All executive officers and directors Common 2,052,695 (47) 9.64% 10,000 (48) 2,042,695 9.59%
as a group (6 persons) Series A
Preferred 1 4.00% -- 1 4.00%
</TABLE>
------------------------
* Less than 1.00%
(1) Assumes all shares being offered are sold.
(2) Represents shares of common stock underlying warrants.
(3) Includes 8,798 shares of common stock underlying warrants.
(4) Includes 5,865 shares of common stock underlying warrants.
(5) Mr. Butler is our former Chief Financial Officer and is named as an
executive officer in the Summary Compensation Table.
(6) Includes 5,865 shares of common stock underlying warrants.
(7) Includes 11,730 shares of common stock underlying warrants.
(8) Includes 2,933 shares of common stock underlying warrants.
(9) Includes 312 shares of common stock underlying warrants.
(10) Represents shares of common stock underlying warrants.
(11) Includes 9,490 shares of common stock underlying warrants. Beneficial
owner is affiliated with the following NASD members: Sanford C.
Bernstein & Co., LLC, Alliance Fund Distributors, Inc., Equitable
Distributors, Inc. and AXA Advisors, LLC.
(12) Represents shares of common stock underlying warrants. Mr. Farndell is
a brother-in-law of Carmine T. Oliva.
(13) Mr. Finnegan is a director of our company.
(14) Includes 50,000 shares of common stock underlying options. Mr. Foote
is the Senior Vice President and Chief Financial Officer of our
company.
(15) Includes 250,000 shares of common stock underlying warrants, which
shares are carried forward from Registration Statement No. 333-64695.
Also includes 560,695 shares of common stock issuable upon conversion
of Series A Preferred Stock.
(16) Includes 250,000 shares of common stock underlying warrants, which
shares are carried forward from Registration Statement No. 333-64695.
(17) Includes 32,000 shares of common stock underlying warrants.
(18) Includes 50,000 shares of common stock underlying warrants.
(19) Includes 126,287 shares of common stock underlying options. Mr.
Jefferies is the Executive Vice President and Chief Operating Officer
of our Telecommunications Group.
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(20) Includes 3,457 shares of common stock underlying warrants.
(21) Includes 5,865 shares of common stock underlying warrants.
(22) Includes 17,595 shares of common stock underlying warrants.
(23) Includes 11,730 shares of common stock underlying warrants.
(24) Includes 50,000 shares of common stock underlying warrants.
(25) Includes 3,457 shares of common stock underlying warrants.
(26) Includes 8,199 shares of common stock underlying warrants.
(27) Includes 20,000 shares of common stock underlyling warrants, which
shares are carried forward from Registration Statement No. 333-64695.
(28) Includes 11,730 shares of common stock underlying warrants.
(29) Includes 17,596 shares of common stock underlying warrants.
(30) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 81,889 shares of common stock held
individually by Mr. Oliva's spouse, 130,633 shares of common stock
underlying options, 345,185 shares of common stock underlying warrants
and 11,214 shares of common stock issuable upon conversion of Series A
Preferred Stock. Mr. Oliva is a director and the Chairman of the
Board, President and Chief Executive Officer of our company. The
address for Mr. Oliva is 9485 Haven Avenue, Suite 100, Rancho
Cucamonga, California 91730.
(31) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695.
(32) Includes 133,500 shares of common stock underlying warrants. Jason
Oliva is the son of Carmine T. Oliva.
(33) Represents 37,500 shares of common stock underlying warrants. Ronald
Oliva is the brother of Carmine T. Oliva.
(34) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 72,287 shares of common stock underlying
warrants, 36,287 shares of common stock underlying options, and 22,428
shares of common stock issuable upon conversion of Series A Preferred
Stock. Samuel G. Oliva is the son of Carmine T. Oliva.
(35) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 36,000 shares of common stock underlying
warrants.
(36) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 73,500 shares of common stock underlying
warrants and 22,428 shares of common stock issuable upon conversion of
Series A Preferred Stock. Samuel J. Oliva is the brother of Carmine T.
Oliva.
(37) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 73,500 shares of common stock underlying
warrants.
(38) Includes 172,500 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 43,125 shares of common stock underlying
warrants. Alan S. MacKenzie, Jr., David N. Marino and Joel S. Kraut
are: the managing partners of Orbit II Partners, L.P., a broker-dealer
and member of the American Stock Exchange; the managing members of MKM
Partners, LLC, an NASD-registered broker-dealer and member of the
Pacific Stock Exchange; and general partners of OTAF Business
Partners, a general partnership that owns over 10% of the outstanding
membership interests in Blackwood Securities, LLC, an NASD member. The
address for Orbit II Partners, L.P. is 2 Rector Street, 16th Floor,
New York, New York 10006.
(39) Represents 230,000 shares of common stock underlying warrants, which
shares are carried forward from Registration Statement No. 333-64695.
(40) Includes 11,730 shares of common stock underlying warrants.
(41) Includes 20,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 107,500 shares of common stock underlying
warrants, which shares are carried forward from Registration Statement
No. 333-64695.
(42) Represents 365,000 shares of common stock underlying warrants, which
shares are carried forward from Registration Statement No. 333-64695.
(43) Includes 58,060 shares of common stock underlying options. Mr. Runyon
is a director and the Secretary of our company.
(44) Represents 125,000 shares of common stock underlying warrants.
(45) Includes 262 shares of common stock underlying warrants.
(46) Includes 5,865 shares of common stock underlying warrants.
(47) Includes 10,000 shares of common stock issued upon exercise of
warrants, which shares are carried forward from Registration Statement
No. 333-64695. Also includes 345,185 shares of common stock underlying
warrants, 364,980 shares of common stock underlying options, 81,889
shares of common stock held individually by Mr. Oliva's wife and
11,214 shares of common stock issuable upon conversion of Series A
Preferred Stock.
(48) Includes 10,000 shares of common stock underlying warrants, which
shares are carried forward from Registration Statement No. 333-64695.
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PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of our common stock being offered pursuant to this
prospectus on any stock exchange, market or trading facility on which the shares
are traded or in private transactions. These sales, which may include block
transactions, may be at fixed or negotiated prices. The selling security holders
may use any one or more of the following methods when selling shares:
-- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
-- block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
-- an exchange distribution in accordance with the rules of the
applicable exchange;
-- privately negotiated transactions;
-- short sales or transactions to cover short sales;
-- broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
-- a combination of any of these methods of sale; or
-- any other method permitted by applicable law
The sale price to the public may be:
-- the market price prevailing at the time of sale;
-- a price related to such prevailing market price;
-- at negotiated prices; or
-- such other price as the selling security holder determines
from time to time.
The shares may also be sold pursuant to Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling security
holders shall have the sole and absolute discretion not to accept any purchase
offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling security holders may also engage in short sales against the
box, puts and calls and other transactions in securities of our company or
derivatives of our company securities and may sell or deliver shares in
connection with these trades. The selling security holders may pledge their
shares to their brokers under the margin provisions of customer agreements. If a
selling security holder defaults on a margin loan, the broker may, from time to
time, offer and sell the pledged shares.
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<PAGE>
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated. The selling security holders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with these sales. In such event, any
commissions received by these broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling security holders, alternatively, may sell all or any part
of the shares offered in this prospectus through an underwriter. To our
company's knowledge, no selling security holder has entered into any agreement
with a prospective underwriter, and there is no assurance that any such
agreement will be entered into. If a selling security holder enters into such an
agreement or agreements, the relevant details will be set forth in a supplement
or revisions to this prospectus.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered pursuant to this prospectus will be
subject to applicable provisions of the Securities Exchange Act of 1934 and the
rules and regulations under such act, including, without limitation, Regulation
M. These provisions may restrict certain activities of, and limit the timing of
purchases and sales of any of the shares by, the selling security holders or any
other such person. Furthermore, under Regulation M, persons engaged in a
distribution of securities are prohibited from simultaneously engaging in market
making and certain other activities with respect to such securities for a
specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of the
warrants held by the selling security holders or the issuance of shares of
common stock to holders of warrants upon exercise. If a selling security holder
transfers its warrants prior to exercise, the transferee of the warrants may not
sell the shares of common stock issuable upon exercise of the warrants under the
terms of this prospectus unless this prospectus is appropriately amended or
supplemented by us.
For the period a holder holds our warrants, the holder has the
opportunity to profit from a rise in the market price of our common stock
without assuming the risk of ownership of the shares of common stock issuable
upon exercise of the warrants. The holders of the warrants may be expected to
voluntarily exercise their warrants when the exercise price is less than the
market price for our common stock. Further, the terms on which we could obtain
additional capital during the period in which the warrants remain outstanding
may be adversely affected.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation, as amended, authorizes the issuance
of up to 25,000,000 shares of common stock, $.0033 par value per share, and
10,000,000 shares of preferred stock, $.01 par value per share, 250 of which has
been designated Series A Preferred Stock, and 150,000 of which have been
designated Series B Preferred Stock. As of November 20, 2000, there were
20,569,759 shares of common stock issued and outstanding, 25 shares of Series A
Preferred Stock issued and outstanding, and 150,000 shares of Series B Preferred
Stock issued and outstanding.
COMMON STOCK
All outstanding shares of common stock are, and the common stock to be
issued upon exercise of warrants and resold by the selling security holders in
this offering will be, fully paid and nonassessable. The following summarizes
the rights of holders of our common stock:
-- each holder of common stock is entitled to one vote per share
on all matters to be voted upon generally by the stockholders;
-- subject to preferences that may apply to shares of preferred
stock outstanding, the holders of common stock are entitled to
receive such lawful dividends as may be declared by our board
of directors, see "Dividend Policy";
-- upon our liquidation, dissolution or winding up, the holders
of shares of common stock are entitled to receive a pro rata
portion of all our assets remaining for distribution after
satisfaction of all our liabilities and the payment of any
liquidation preference of any outstanding preferred stock;
-- there are no redemption or sinking fund provisions applicable
to our common stock; and
-- there are no preemptive or conversion rights applicable to our
common stock.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of our authorized but unissued shares of preferred stock with any dividend,
redemption, conversion and exchange provision as may be provided in that
particular series.
The rights of the holders of our common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. Issuance of a new series of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of our outstanding voting
stock. We have no present plans to issue any shares of or to designate any
series of preferred stock.
The following are summaries of the terms of the Series A Preferred
Stock and the Series B Preferred Stock, and are qualified in their entirety by
reference to our certificate of incorporation, as amended, which is filed as an
exhibit to the registration statement of which this prospectus is a part.
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SERIES A PREFERRED STOCK
DIVIDEND RIGHTS
The holders of our Series A Preferred Stock are not entitled to receive
dividends.
LIQUIDATION PREFERENCE
Holders of our Series A Preferred Stock will receive, prior and in
preference to any distribution of any of our assets to the holders of our Series
B Preferred Stock and the holders of our common stock by reason of their share
ownership, $10,000 per share.
MANDATORY AND OPTIONAL REDEMPTION
On May 22, 2003, we must redeem all shares of Series A Preferred Stock
then outstanding by payment in cash of the redemption price of $11,500 per share
(which price equals 115% of the liquidation preference for the Series A
Preferred Stock). Prior to that date, we may redeem outstanding and unconverted
shares of Series A Preferred Stock at the redemption price by giving 20 days'
prior written notice to the holders of shares of Series A Preferred Stock to be
redeemed. If less than all of the shares of Series A Preferred Stock are to be
optionally redeemed, the particular shares to be redeemed shall be selected by
lot or by such other equitable manner determined by our board of directors. We
may not, however, redeem shares of Series A Preferred Stock if there is an
insufficient number of authorized and reserved shares of common stock for this
purpose, or to the extent we receive a conversion notice for the shares of
Series A Preferred Stock prior to the redemption date. If we fail to pay the
redemption price after calling any shares of Series A Preferred Stock for
optional redemption, we will have no further option to redeem shares of Series A
Preferred Stock.
CONVERSION RIGHTS
Subject to adjustments for stock dividends, stock splits, share
combinations, recapitalizations and the like, each share of Series A Preferred
Stock may be converted into shares of our common stock at a conversion price
equal to $10,000 divided by the lesser of $1.26 and 100% of the arithmetic
average of the three lowest closing bid prices over the 40 trading days
immediately prior to the date of conversion. At any time or from time to time
after the 90th day following the issuance of shares of Series A Preferred Stock,
a holder may elect to convert those shares by giving notice to us of the
holder's election to do so prior to the close of business on the business day
immediately prior to the date of conversion of the shares. However, no more than
20% of the aggregate number of shares of Series A Preferred Stock owned by any
single holder may be converted in any 30-day period.
VOTING RIGHTS
The certificate of designation relating to the Series A Preferred Stock
requires the affirmative vote of at least a majority of the Series A Preferred
Stock then outstanding before we can take certain actions which would adversely
affect the rights of these stockholders. To the extent that Delaware law
requires the vote of the holders of shares of Series A Preferred Stock, voting
separately as a class, approval of at least a majority of the outstanding shares
of Series A Preferred Stock will constitute approval. To the extent that
Delaware law requires a vote of the holders of Series A Preferred Stock, voting
together with the holders of common stock, each share of Series A Preferred
Stock will be entitled to a number of votes equal to the number of shares of
common stock into which it is then convertible, using the record date for the
taking of the vote as the date of determination.
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REACQUIRED SHARES
Any shares of Series A Preferred Stock converted, redeemed, purchased
or otherwise acquired by us shall be retired and cancelled and shall become
authorized but unissued shares of Series A Preferred Stock that may be reissued
by us subject to the conditions and restrictions contained in the certificate of
designation relating to the Series A Preferred Stock.
SERIES B PREFERRED STOCK
DIVIDEND RIGHTS
The holders of our Series B Preferred Stock are not entitled to receive
dividends.
LIQUIDATION PREFERENCE
Our certificate of designation relating to our Series B Preferred Stock
provides that the holders of our Series B Preferred Stock will receive, subject
to prior preference and distribution to holders of Series A Preferred Stock, but
prior and in preference to any distribution of any of our assets to the holders
of our common stock by reason of their share ownership, $6.40 per share.
OPTIONAL REDEMPTION
We may redeem outstanding and unconverted shares of Series B Preferred
Stock for cash at a price per share equal to $7.36 (which price equals 115% of
the liquidation preference for the Series B Preferred Stock), by giving 20 days'
prior written notice to the holders of Series B Preferred Stock to be redeemed.
If less than all of the shares of Series B Preferred Stock are to be optionally
redeemed, the particular shares to be redeemed shall be selected by lot or by
such other equitable manner determined by our board of directors. We may not,
however, redeem shares of Series B Preferred Stock if there is an insufficient
number of authorized and reserved shares of common stock for this purpose, to
the extent the Series B Preferred Stock is subject to a lock-up, or to the
extent we receive a conversion notice for the shares of Series B Preferred Stock
prior to the redemption date. If we fail to pay the redemption price after
calling any shares of Series B Preferred Stock for optional redemption, we will
have no further option to redeem shares of Series B Preferred Stock.
CONVERSION RIGHTS
Subject to adjustments for stock dividends, stock splits, share
combinations, recapitalizations and the like, each share of Series B Preferred
Stock may be converted into 10 shares of our common stock at the option of the
holder by giving notice to us of the holder's election to do so prior to the
close of business on the business day immediately prior to the redemption date,
if any, of the shares, and on or after the following dates:
-- On or after March 20, 2001 - a holder may convert up to 1/3 of
its shares of Series B Preferred Stock, subject, however, to
the limitation that all holders of Series B Preferred Stock
may not convert more than 50,000 shares of Series B Preferred
Stock in the aggregate at this time.
-- On or after September 20, 2001 - a holder may convert up to
2/3 of its shares of Series B Preferred Stock, subject,
however, to the limitation that all holders of Series B
Preferred Stock may not convert more than 100,000 shares of
Series B Preferred Stock in the aggregate at this time.
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-- On or after March 20, 2002 - a holder may convert all of its
shares of Series B Preferred Stock.
VOTING RIGHTS
The certificate of designation relating to the Series B Preferred Stock
requires the affirmative vote of at least a majority of the Series B Preferred
Stock then outstanding before we can take certain actions which would adversely
affect the rights of these stockholders. To the extent that Delaware law
requires the vote of the holders of shares of Series B Preferred Stock, voting
separately as a class, approval of at least a majority of the outstanding shares
of Series B Preferred Stock will constitute approval. To the extent that
Delaware law requires a vote of the holders of Series B Preferred Stock, voting
together with the holders of common stock, each share of Series B Preferred
Stock will be entitled to a number of votes equal to the number of shares of
common stock into which it is then convertible, using the record date for the
taking of the vote as the date of determination.
If the authorized number of shares of our common stock is not
sufficient as of March 20, 2001 to permit the conversion of the Series B
Preferred Stock, then each share of Series B Preferred Stock then outstanding
shall be entitled to the number of votes that would provide the aggregate number
of shares of Series B Preferred Stock then outstanding with voting rights equal
to 10% of the then outstanding shares of our common stock for any matter upon
which our stockholders are entitled to vote.
REACQUIRED SHARES
Any shares of Series B Preferred Stock converted, redeemed, purchased
or otherwise acquired by us shall be retired and cancelled and shall become
authorized but unissued shares of Series B Preferred Stock that may be reissued
by us subject to the conditions and restrictions contained in the certificate of
designation relating to the Series B Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which restricts certain transactions and business combinations between a
corporation and an "interested stockholder" owning 15% or more of the
corporation's outstanding voting stock for a period of three years from the date
the stockholder becomes an interested stockholder. Subject to certain
exceptions, unless the transaction is approved by our board of directors and the
holders of at least 66% of the outstanding voting stock of the corporation
(excluding shares held by the interested stockholder), Section 203 prohibits
significant business transactions such as a merger with, disposition of assets
to, or receipt of disproportionate financial benefits by the interested
stockholder, or any other transaction that would increase the interested
stockholder's proportionate ownership of any class or series of the
corporation's stock. The statutory ban does not apply if, upon consummation of
the transaction in which any person becomes an interested stockholder, the
interested stockholder owns at least 85% of the outstanding voting stock of the
corporation (excluding shares held by persons who are both directors and
officers or by certain stock plans).
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Investor Services. Its telephone number is (303) 986-5400.
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LEGAL MATTERS
The validity of the shares of common stock offered under this
prospectus will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements and schedule included in this
prospectus and in the registration statement of which this prospectus is a part
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 our ability to continue as a going concern),
appearing elsewhere in this prospectus and in the registration statement of
which this prospectus is a part, and are incorporated in this prospectus in
reliance upon such report given upon the authority of BDO Seidman, LLP as
experts in auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act, and the rules and
regulations promulgated under the Securities Act, with respect to the common
stock offered under this prospectus. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set forth
in the registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of such contract or other document which is filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. For further information with respect to us and the common stock
offered under this prospectus, reference is made to the registration statement
and its exhibits and schedules. The registration statement, including its
exhibits and schedules, may be inspected without charge at the public reference
facilities maintained by the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such documents may be obtained from the
Securities and Exchange Commission at its principal office in Washington, D.C.
upon the payment of the charges prescribed by the Securities and Exchange
Commission.
The Securities and Exchange Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's address on the world wide
web is http://www.sec.gov.
81
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Report of Independent Certified Public Accountants.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998................................................ F-3
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997 ....................................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999,
1998 and 1997 .......................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 .................. F-6
Notes to Consolidated Financial Statements.................................................................. F-8
FINANCIAL STATEMENT SCHEDULE
Consolidated Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997........................................................................ F-36
FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Consolidated Condensed Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999........................................................................................ F-37
Consolidated Condensed Statements of Operations and Comprehensive Income for the three and
nine months ended September 30, 2000 and l999 (unaudited)................................................ F-38
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and l999 (unaudited).................................................................. F-39
Notes to Consolidated Condensed Financial Statements (unaudited)............................................ F-40
FINANCIAL STATEMENTS OF T-COM, LLC AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND RELATED UNAUDITED PRO
FORMA INFORMATION
Report of Independent Certified Public Accountants.......................................................... F-49
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)........................................ F-50
Statements of Operations for the year ended December 31, 1999 and the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited)..................................................... F-51
Statements of Members' Deficit for the years ended December 31, 1999 and June 30, 2000 (unaudited).......... F-52
Statements of Cash Flows for the year ended December 31, 1999 and the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited)..................................................... F-53
Notes to Financial Statements............................................................................... F-54
Unaudited Pro Forma Condensed Combined Financial Information................................................ F-65
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors MicroTel International, Inc.
We have audited the accompanying consolidated balance sheets of
MicroTel International, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive income, 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, except as to
the penultimate paragraph of
Note 9 which is as of
November 17, 2000
F-2
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS (NOTES 7 AND 8)
Current assets:
Cash and cash equivalents $ 480 $ 450
Accounts receivable, net of allowance for doubtful accounts of
$180 and $250 6,168 6,504
Current portion of notes receivable (Notes 3 and 6) -- 291
Inventories (Note 4) 4,047 5,982
Prepaid and other current assets 427 770
Net assets of discontinued operations (Note 17) 112 --
------------------- -------------------
Total current assets 11,234 13,997
Property, plant and equipment, net (Note 765 885
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
------------------- -------------------
$ 15,468 $ 18,633
=================== ===================
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7) $ 1,781 $ 2,253
Current portion of long-term debt (Note 8) 1,056 529
Accounts payable 4,453 3,515
Accrued expenses 2,864 3,227
Net liabilities of discontinued operations (Note 17) -- 366
------------------- -------------------
Total current liabilities 10,154 9,890
Long-term debt, less current portion (Note 8) 143 783
Other liabilities 782 962
------------------- -------------------
Total liabilities 11,079 11,635
Convertible redeemable preferred stock, $10,000 unit value.
Authorized 250 shares; issued and outstanding 59.5 shares in
1999 and 161 shares in 1998 (aggregate liquidation preference of $595 588 1,516
and $1,610, respectively) (Note 9)
Commitment and contingencies (Notes 10, 14 and 16)
Subsequent event (Notes 3 and 17)
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
------------------- -------------------
$ 15,468 $ 18,633
=================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
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) $ 25,913 $ 30,100 $ 27,251
Cost of sales 17,066 17,353 18,069
----------------- ---------------- ------------------
Gross profit 8,847 12,747 9,182
Operating expenses:
Selling, general and administrative 10,132 10,202 8,608
Engineering and product development 1,841 2,202 1,797
Write-down of goodwill (Note 11) -- -- 5,693
----------------- ---------------- ------------------
Income (loss) from operations (3,126) 343 (6,916)
Other income (expense):
Interest expense (297) (507) (550)
Gain (loss) on sale of subsidiary/investment,
net (Notes 3 and 6) (90) -- --
Other, net (Note 3) 194 (136) (77)
----------------- ---------------- ------------------
Loss from continuing operations before income taxes (3,319) (300) (7,543)
Income taxes (Note 12) 128 101 97
----------------- ---------------- ------------------
Loss from continuing operations (3,447) (401) (7,640)
----------------- ---------------- ------------------
Discontinued operations (Note 17):
Loss from discontinued operations (1,146) (1,364) (2,053)
Gain (loss) on disposal of discontinued operations,
including provision for phase out period of $0 (3) 580 --
----------------- ---------------- ------------------
(1,149) (784) (2,053)
----------------- ---------------- ------------------
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 from
continuing operations $ (.21) $ (.03) $ (.76)
Basic and diluted loss per share from
discontinued operations (.07) (.07) (.20)
----------------- ---------------- ------------------
Basic and diluted loss per share (Note 13) $ (.28) $ (.10) $ (.96)
================= ================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<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 -- -- -- (41) -- (41)
stock
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.
F-5
<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)
Net loss from discontinued operations (1,149) (784) (2,053)
--------------- --------------- -----------------
Net loss from continuing operations (3,447) (401) (7,640)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 241 247 253
Amortization of intangible assets 540 449 358
Provision for doubtful accounts 29 79 234
Provision for inventory obsolescence 1,138 494 3,134
Write-down of goodwill -- -- 5,693
Provision for impairment of investment 419 -- --
Equity in earnings of unconsolidated investments (653) (24) 21
Gain (loss) on the sale of subsidiary/investment 90 -- --
Stock and warrants issued for services 1,146 85 22
Repricing of warrants 91 52 --
Changes in operating assets and liabilities:
Accounts receivable 554 (1,452) (1,017)
Inventories 797 (948) (1,248)
Prepaids and other assets 445 (106) 172
Accounts payable 938 (180) (287)
Accrued expenses and other liabilities (300) (375) (519)
--------------- --------------- -----------------
Net cash provided by (used in) continuing operations 2,028 (2,080) (824)
Net cash used in discontinued operations (1,293) (560) (1,489)
--------------- --------------- -----------------
Cash provided by (used in) operating activities 735 (2,640) (2,313)
--------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (121) (169) (124)
Cash received on sale of subsidiary/investment 118 -- --
Cash acquired in acquisition/merger -- -- 273
Cash collected on notes receivable 9 451 125
--------------- --------------- -----------------
Cash provided by investing activities 6 282 274
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (472) 212 (154)
Proceeds from long-term debt 84 1,542 298
Repayments of long-term debt -- (2,307) (1,283)
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 (386) 1,031 2,979
--------------- --------------- -----------------
Effect of exchange rate changes on cash (325) 206 57
--------------- --------------- -----------------
Net increase (decrease) in cash and cash equivalents 30 (1,121) 997
Cash and cash equivalents at beginning of year 450 1,571 574
--------------- --------------- -----------------
Cash and cash equivalents at end of year $ 480 $ 450 $ 1,571
=============== =============== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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.
F-7
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 two product line segments: Telecommunications and
Components. In October 2000 the Company decided to discontinue its circuits
segment operations (see Note 17). Accordingly, all current and prior financial
information related to the circuits segment operations have been presented as
discontinued operations in the accompanying consolidated financial statements.
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 if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
F-8
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes certain areas of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements and is effective for all quarters of fiscal years beginning after
December 15, 1999. The Company believes that its current revenue recognition
policies comply with SAB 101.
AVAILABLE-FOR-SALE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses the
accounting and reporting for investments in equity securities which have readily
determinable fair values and all investments in debt securities. The Company did
not have any available-for-sale securities as of December 31, 1999 or 1998 but
will account for its investment in Wi-Lan (Note 3) as available-for-sale. Under
SFAS 115, marketable equity securities are classified as available for sale and
reported at fair value, with changes in the unrealized holding gain or loss
included in stockholders' equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
an original maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the useful lives of the assets
(or lease term, if shorter) as follows:
<TABLE>
<S> <C>
Buildings 50 years
Machinery, equipment and fixtures 3-7 years
Leasehold improvements 5 years
</TABLE>
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired through business combinations accounted for as purchases and
is amortized on a straight-line basis over its estimated useful life. In
evaluating goodwill, the Company determines whether there has been an impairment
and the amount thereof, if any, by comparing the undiscounted future operating
income of the acquired business with the carrying value of the goodwill. 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).
F-9
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Company reviews the carrying value of its capitalized software
development costs for possible impairment at the end of each fiscal quarter by
comparing the unamortized capitalized software development costs to the net
realizable value of that asset. The Company has not recorded any significant
impairment loss related to capitalized software costs during 1999, 1998 or 1997.
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
Estimated warranty costs are recognized at the time of the sale. The
Company's electronic components carry a one-year limited parts and labor
warranty and the Company's telecommunications products carry a two-year limited
parts and labor warranty. The Company's telecommunications products may be
returned within 30 days of purchase if a new order is received, and the new
order will be credited with 80% of the selling price of the returned item.
Products returned under warranty typically are tested and repaired or replaced
at the Company's option. Historically, the Company has not experienced
significant warranty costs or returns.
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
F-10
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
F-11
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 two reportable segments:
Telecommunications and Components.
F-12
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 $ 30,247,000
================
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
F-13
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
See Note 17.
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
F-14
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$144,000 is included in current portion of notes receivable in the
accompanying 1998 consolidated balance sheet. See Note 17.
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
gain (loss) on disposal of discontinued operations in the accompanying 1999
consolidated statement of operations.
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.
Summarized financial data for DTS is as follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Current assets $ 1,472,000 $ 2,321,000
Noncurrent assets 1,401,000 1,486,000
----------- -----------
Total assets $ 2,873,000 $ 3,807,000
=========== ===========
Current liabilities $ 2,431,000 $ 4,108,000
Noncurrent liabilities 2,127,000 2,127,000
----------- -----------
Total liabilities $ 4,558,000 $ 6,235,000
=========== ===========
<CAPTION>
For the year ended For the year ended
December 31, 1999 June 30, 1999
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Net sales $ 7,256,000 $ 7,538,000
============ ============
Net income $ 213,000 $ (424,000)
============ =============
</TABLE>
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
F-15
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The 28,340 shares of Wi-LAN represents less than 1% of the total
outstanding shares of Wi-LAN common stock as of the date of acquisition. The
Company will account for these shares as available-for-sale securities.
(4) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Raw materials $ 1,619,000 $ 2,571,000
Work-in-process 1,174,000 2,286,000
Finished goods 1,254,000 1,125,000
------------------- -------------------
$ 4,047,000 $ 5,982,000
=================== ===================
</TABLE>
(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 2,803,000 391,000
Leasehold improvements 444,000 416,000
------------------- -------------------
3,553,000 1,155,000
Accumulated depreciation and amortization (2,788,000) (270,000)
------------------- -------------------
$ 765,000 $ 885,000
=================== ===================
</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
F-16
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $ 1,688,000 $ 1,359,000
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
-------------- -----------------
$ 1,781,000 $ 2,253,000
=============== =================
</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 for continuing operations under the revolving line of credit
provision of the Domestic Facility totaled $1,688,000 and $1,359,000 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.
In July 1999, the Company entered into an amendment of the Domestic
Facility related to an additional advance of $350,000. Under the terms of the
Amendment, the additional advance was repaid
F-17
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prior to September 30, 1999. In addition, such Amendment required the Company
to paydown $350,000 of the Domestic Facility's term loan upon the sale of the
property owned by Capital Source Partners. Such sale of property and a
resulting paydown was not completed (see Note 6). The Company obtained a
waiver of such default as of December 31, 1999 and made the required $350,000
paydown upon the closing of the sale of the DTS shares (see Note 3) in
January 2000. The Domestic Facility agreement requires compliance with
certain other covenants and conditions. The Company was in compliance with
all such covenants as of December 31, 1999, except for the adjusted net worth
covenant. The Domestic Facility also restricts payment of any dividends.
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). The note payable and note receivable related to XCEL Arnold Circuits
were entered into with an individual who beneficially owned approximately 5% of
the Company's common stock.
(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) $ 588,000 $ 633,000
Term note payable to bank (b) -- 135,000
Term notes payable to foreign banks (c) 108,000 101,000
Capitalized lease obligations (d) 236,000 350,000
Other promissory notes 267,000 93,000
-------- --------
1,199,000 1,312,000
Current portion (1,056,000) (529,000)
------------ ----------
$ 143,000 $ 783,000
============== ===============
</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
F-18
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(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 $ 1,056,000
2001 135,000
2002 8,000
---------------------
$ 1,199,000
=====================
</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).
F-19
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
(based upon a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 28%; risk-free interest rate of 5.1%; and
an expected life of 3 years) 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 are convertible into 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 Shares equal to
$10,000 divided by the lesser of (x) $1.26 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.
F-20
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The estimated fair values of the old and revised warrants
was calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield, expected volatility of 58%; a risk free interest
rate of 5%; and an expected life of 2.7 years.
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 $1.26 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. The estimated
fair values of the old and revised warrants was calculated using a Black-Scholes
pricing model with the following assumptions: no dividend yield, expected
volatility of 81%; a risk free interest rate of 6%; and an expected life of 1.5
and 3 years, respectively.
In November 2000, the Company determined that because the
modifications to the conversion rate in November 1998 and December 1999 had
not been submitted to and approved by the Company's shareholders in
accordance with the Delaware General Corporation Law, all conversions from
November 1998 through July 1999 and in December 1999 should have been made at
the original conversion rate of $10,000 divided by the lesser of (x) $1.26
and (y) one hundred percent (100%) of the arithmetic average of the three
lowest closing bid prices over the forty trading days prior to the exercise
date of any such conversion. Under the original conversion terms, the Company
would have issued approximately 250,000 additional common shares for certain
conversions and issued approximately 90,000 excess common shares for other
conversions. No modifications have been made to the accompanying consolidated
financial statements to reflect the potential issuance of these additional
shares because the Company is still in the process of working with the
holders of the New Preferred Shares to reach a satisfactory resolution to
this matter. The Company has submitted to the shareholders for approval at a
special meeting to be held on January 16, 2001 an amendment to the
certificate of designations, preferences and rights relating to the New
Preferred Shares. If approved, the amendment will modify the conversion rate
for conversions occurring after such amendment is filed with the Delaware
Secretary of State so that each of the New
F-21
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Shares will be convertible into 50,530 shares of common stock,
which is the same number of shares into which each of the New Preferred
Shares would now be convertible if the attempted modifications to the
conversion rate had been approved by the Company's shareholders in accordance
with the Delaware General Corporation Law.
The following table reflects the convertible redeemable preferred stock
activity:
<TABLE>
<CAPTION>
NUMBER
OF SHARES AMOUNT
<S> <S> <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
F-22
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
administering the 1997 Plan may permit. Up to 1,600,000 stock options
may be granted under the 1997 Plan. All outstanding options of former
optionholders under the XIT 1987 Employee Stock Option Plan were
converted to options under the 1997 Plan as of the date of the merger
between the Company and XIT at the exchange rate of 1.451478 (see Note
2).
The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for these
plans and arrangements for current employees whose grants provide for exercise
prices at or above the market price on the date of grant. Compensation or other
expense is recorded based on intrinsic value (excess of market price over
exercise price on date of grant) for employees, and fair value of the option
awards for others.
The following table shows activity in the outstanding options 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
AVERAGE
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING CONTRACTUAL WEIGHTED EXERCISABLE WEIGHTED
EXERCISE DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE
PRICE 1999 (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>
F-23
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
F-24
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
During 1999, the Company issued 1,716,000 shares of common stock as
compensation for various services rendered. The fair value of such expense
(based upon the market price of the common stock on the date of issuance) was
approximately $1,077,000. Of the shares issued, 555,641 shares valued at
$365,000 were issued to employees (non-officers) of the Company as a bonus.
During 1998, the Company issued warrants to purchase 552,381 shares of
the Company's common stock at exercise prices ranging from $0.6563 to $1.26 per
share for various consulting services. The estimated fair values of the warrants
was calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield, expected volatility ranging from 24-59%; a
risk-free interest rate of 5%; and expected lives of 1.5 to 5 years.
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
certificate 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.
F-25
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
F-26
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
Income (loss) from continuing operations before income taxes was taxed
under the following jurisdictions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Domestic $ (2,805,000) $(306,000) $ (7,668,000)
Foreign (514,000) 6,000 125,000
--------------------- --------------------- ----------------------
Total $ (3,319,000) $ (300,000) $ (7,543,000)
===================== ===================== ======================
Income tax expense consists of the following:
<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 from continuing
operations before income taxes as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate $(1,128,000) $ (102,000) $(2,565,000)
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 1,058,000 4,000 398,000
Permanent differences 157,000 70,000 98,000
Other -- -- 74,000
--------------------------------------------------
$ 128,000 $ 101,000 $ 97,000
==================================================
</TABLE>
F-27
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
----------------------------
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.
F-28
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
(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>
F-29
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
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
F-30
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(based on the closing market price of the common stock on the settlement
date). 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 estimated fair values of the old and new options or warrants
were calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield, expected volatility of 81%; a risk-free
interest rate of 5%; and expected lives of 2.8 and 2 years, respectively. 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 two reportable segments: Telecommunications and
Components. The Telecommunications 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 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 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.
F-31
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Telecommunications $15,666,000 $17,532,000 $15,054,000
Components 10,247,000 12,568,000 12,197,000
----------------- -------------------- --------------------
$25,913,000 $30,100,000 $27,251,000
================= ==================== ====================
INTERSEGMENT SALES:
Telecommunications $ -- $ 17,000 $ 133,000
Components 279,000 635,000 957,000
----------------- -------------------- --------------------
$ 279,000 $ 652,000 $ 1,090,000
================= ==================== ====================
INTEREST EXPENSE:
Telecommunications $ 110,000 $ 79,000 $ 109,000
Components 75,000 323,000 396,000
----------------- -------------------- --------------------
$ 185,000 $ 402,000 $ 505,000
================= ==================== ====================
DEPRECIATION AND AMORTIZATION:
Telecommunications $ 490,000 $ 265,000 $ 164,000
Components 101,000 241,000 284,000
----------------- -------------------- --------------------
$ 591,000 $ 506,000 $ 448,000
================= ==================== ====================
SEGMENT PROFITS (LOSSES):
Telecommunications $(1,376,000) $ 367,000 $ 536,000
Components 1,341,000 2,473,000 794,000
----------------- -------------------- --------------------
$ (35,000) $ 2,840,000 $ 1,330,000
================= ==================== ====================
SEGMENT ASSETS:
Telecommunications $ 7,960,000 $10,234,000 $ 9,691,000
Components 5,213,000 7,193,000 6,946,000
----------------- -------------------- --------------------
$13,173,000 $17,427,000 $16,637,000
================= ==================== ====================
</TABLE>
F-32
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $26,192,000 $30,752,000 $28,341,000
Elimination of intersegment sales (279,000) (652,000) (1,090,000)
------------------ ------------------ ------------------
Total consolidated revenues $25,913,000 $30,100,000 $27,251,000
================== ================== ==================
PROFIT (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
Total profit (loss) for reportable segments $ (35,000) $ 2,840,000 $ 1,330,000
Write-down of goodwill -- -- (5,693,000)
Unallocated amounts:
General corporate expenses (3,284,000) (3,140,000) (3,180,000)
------------------ ------------------ ------------------
Consolidated loss from continuing operations before
income taxes $(3,319,000) $ (300,000) $(7,543,000)
================== ================== ==================
ASSETS
Total assets for reportable segments $13,173,000 $17,427,000 $16,637,000
Other assets 2,295,000 1,206,000 1,587,000
------------------ ------------------ ------------------
Total consolidated assets $15,468,000 $18,633,000 $18,224,000
================== ================== ==================
INTEREST EXPENSE
Interest expense for reportable segments $ 185,000 $ 402,000 $ 505,000
Other interest expense 112,000 105,000 45,000
------------------ ------------------ ------------------
Total interest expense $ 297,000 $ 507,000 $ 550,000
================== ================== ==================
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense
for reportable segments $ 591,000 $ 506,000 $ 448,000
Other depreciation and amortization expense 190,000 190,000 163,000
------------------ ------------------- ------------------
Total depreciation and amortization $ 781,000 $ 696,000 $ 611,000
================== =================== ==================
</TABLE>
F-33
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $ 9,490,000 $12,804,000 $12,251,000
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
------------------ ------------------- ------------------
$25,913,000 $30,100,000 $27,251,000
================== =================== ==================
Long-lived assets:
United States $ 1,905,000 $ 2,602,000 $ 2,626,000
Japan 16,000 13,000 12,000
France 257,000 458,000 807,000
United Kingdom 190,000 133,000 296,000
------------------ ------------------- ------------------
$ 2,368,000 $ 3,206,000 $ 3,741,000
================== =================== ==================
</TABLE>
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
F-34
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
(17) DISCONTINUED OPERATIONS
In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted
of XCEL Etch Tek, a wholly-owned subsidiary. During 1998 and 1999, the
Company sold substantially all of the assets of two other circuits
operations, HyComp and XCEL Arnold Circuits (see Note 3). Accordingly, all
current and prior financial information related to the circuits segment
operations (XCEL Etch Tek, HyComp and XCEL Arnold) have been presented as
discontinued operations in the accompanying consolidated financial
statements. The net assets and liabilities relating to the circuits segment
have been included in net assets (liabilities) of discontinued operations in
the accompanying consolidated balance sheet, including the following debt
obligations which relate to the discontinued segment which were repaid from
the proceeds of the related sale (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Line of credit with a commercial lender (Note 7) $ 326 $1,126
Term notes payable with commercial lender (Note 7) 366 893
------ -------
$ 692 $2,019
====== =======
</TABLE>
The Company anticipates the sale of substantially all of the assets
of XCEL Etch Tek in November 2000 for consideration of $260,000 in cash, a
$50,000 note and the assumption of $75,000 in liabilities. The sale is
expected to result in a loss of approximately $476,000. As of December 31,
1999, the Company has not accrued for the loss on sale nor the loss of
approximately $158,000 related to the operations of XCEL Etch Tek from
October 2, 2000 through November 22, 2000 (the anticipated sale date).
F-35
<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 $ 250,000 29,000 (99,000) 180,000
Year ended December 31, 1998 225,000 79,000 (54,000) 250,000
Year ended December 31, 1997 51,000 234,000 (60,000) 225,000
================ ================ ================ ================
</TABLE>
F-36
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
---------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 694 $ 480
Accounts receivable, net 5,804 6,168
Inventories 6,198 4,047
Net assets of discontinued operations -- 112
Other current assets 1,116 427
---------------- ------------
Total current assets 13,812 11,234
Property, plant and equipment-net 867 765
Goodwill, net 3,186 1,507
Investment in unconsolidated affiliates -- 1,240
Other assets 625 722
---------------- ------------
$ 18,490 $ 15,468
================ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,556 $ 1,781
Current portion of long-term debt 732 1,056
Accounts payable 4,822 4,453
Accrued expenses 2,806 2,864
Net liabilities of discontinued operations 179 --
---------------- ------------
Total current liabilities 11,095 10,154
Long-term debt, less current portion 1,186 143
Other liabilities 623 782
---------------- ------------
Total liabilities 12,904 11,079
Convertible redeemable preferred stock, $10,000 unit value.
Authorized 250 shares; issued and outstanding 25 shares
and 59.5 shares (aggregate liquidation preference of $250
and $595, respectively) 276 588
Stockholders' equity:
Preferred Stock, $0.01 par value. Authorized 10,000,000 shares
Convertible Series B preferred stock, $0.01 par value,
150,000 and 0 issued and outstanding (aggregate liquidation
preference of $960 and $0, respectively) 938 --
Common stock, $0.0033 par value. Authorized 25,000,000 shares;
issued and outstanding 20,570,000 and 18,152,000 68 60
Additional paid-in capital 24,379 23,726
Accumulated deficit (19,414) (19,759)
Accumulated other comprehensive loss (661) (226)
---------------- ------------
Total stockholders' equity 5,310 3,801
---------------- ------------
$ 18,490 $ 15,468
================ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-37
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts)
Net sales $ 6,871 $ 6,448 $ 19,559 $ 19,444
Cost of sales 3,080 4,203 10,645 12,269
-------- --------- -------- ---------
Gross profit 3,791 2,245 8,914 7,175
Operating expenses:
Selling, general and administrative 2,467 2,385 6,923 8,494
Engineering and product development 277 459 772 1,462
-------- --------- -------- ---------
Income (loss) from operations 1,047 (599) 1,219 (2,781)
Other income (expense):
Interest expense (110) (80) (263) (209)
Equity in earnings of unconsolidated affiliates -- 28 -- 755
Other 177 (79) 381 (45)
-------- --------- -------- ---------
Income (loss) from continuing operations
before income taxes 1,114 (730) 1,337 (2,280)
Income tax expense 2 12 13 25
-------- --------- -------- ---------
Income (loss) from continuing operations 1,112 (742) 1,324 (2,305)
-------- --------- -------- ---------
Discontinued operations:
Loss from operations of discontinued segment (84) (292) (276) (949)
Gain (loss) on disposal of discontinued
segment, including provision for phase out
period of $158 in 2000 periods (634) -- (634) 331
-------- --------- -------- ---------
(718) (292) (910) (618)
-------- --------- -------- ---------
Net income (loss) 394 (1,034) 414 (2,923)
Other comprehensive income (loss):
Foreign currency translation adjustment (218) 244 (435) (180)
-------- --------- -------- ---------
Total comprehensive income (loss) $ 176 $ (790) $ (21) $ (3,103)
======== ========= ======== =========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.05 $ (0.04) $ 0.07 $ (0.14)
======== ========= ======== =========
Diluted $ 0.05 $ (0.04) $ 0.06 $ (0.14)
======== ========= ======== =========
Discontinued operations:
Basic $ (0.03) $ (0.02) $ (0.05) $ (0.04)
======== ========= ======== =========
Diluted $ (0.03) $ (0.02) $ (0.04) $ (0.04)
======== ========= ======== =========
Net income (loss):
Basic $ 0.02 $ (0.06) $ 0.02 $ (0.18)
======== ========= ======== =========
Diluted $ 0.02 $ (0.06) $ 0.02 $ (0.18)
======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-38
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
--------- --------
<S> <C> <C>
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 414 (2,923)
Net loss from discontinued operations (910) (618)
--------- --------
Net income (loss) from continuing operations 1,324 (2,305)
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 230 275
Amortization of intangibles 282 243
Write-off of note receivable -- 753
Gain on the sale of fixed assets (43) --
Gain on sale of Wi-LAN, Inc. stock (197) --
Equity in earnings of unconsolidated entities -- (735)
Stock and warrants issued as compensation 130 1,220
Other noncash items 648 967
Changes in operating assets and liabilities:
Accounts receivable 1,179 294
Inventories (987) 344
Other assets (60) 262
Accounts payable and accrued expenses (2,668) (278)
--------- --------
Net cash provided by (used in) continuing operations (162) 1,040
Net cash used in discontinued operations (457) (461)
--------- --------
Cash provided by (used in) operating activities (619) 579
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (15) (130)
Proceeds from sale of fixed assets 43 --
Proceeds from sale of DTS stock 520 --
Proceeds from sale of Wi-LAN, Inc. stock 918 --
Investment in Belix Ltd. companies (592) --
Acquisition of T-Com, LLC assets (83) --
Cash received from note receivable -- 9
--------- --------
Cash provided by (used in) investing activities 791 (121)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of notes payable and long-term debt 301 (687)
Proceeds from exercise warrants and employee stock options 88 --
Proceeds from sale of common stock -- 2
--------- --------
Cash provided by (used in) financing activities 389 (685)
--------- --------
Effect of exchange rate changes on cash (348) (180)
--------- --------
Net increase (decrease) in cash and cash equivalents 213 (407)
--------- --------
Cash and cash equivalents at beginning of period 481 582
--------- --------
Cash and cash equivalents at end of period $ 694 $ 175
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-39
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
<S> <C> <C>
Interest $ 245 $ 219
====== ======
Income taxes $ 13 $ 108
====== ======
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES:
Common stock issued upon conversion of preferred stock $ 381 $ 924
====== ======
Accretion of preferred stock $ 69 $ 69
====== ======
Issuance of common stock and warrants in connection with acquisitions $1,000 $1,000
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-40
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 United States, France, England and Japan.
The Company is organized into two segments - Telecommunications and
Electronic Components. Through the sale of various subsidiaries in 1998 and
1999, the Company has divested a majority of its circuits operations.
In October 2000 the Company decided to discontinue its circuits segment
operations. At that time the circuits segment operations consisted of XCEL Etch
Tek, a wholly owned subsidiary. XCEL Etch Tek was offered for sale, see note 6.
Accordingly, all current and prior financial information related to the circuits
segment operations have been presented as discontinued operations in the
accompanying consolidated condensed financial statements.
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 September 30, 2000 and the results of operations and cash flows
for the related interim periods ended September 30, 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.
F-41
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(2) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- ------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 394 $ (1,034) $ 414 $ (2,923)
Less: accretion of the excess of the
redemption value over the carrying value of
redeemable preferred stock 23 24 69 69
-------- --------- -------- ---------
Income (loss) attributable to common
stockholders 371 (1,058) 345 (2,992)
-------- --------- -------- ---------
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 20,537 17,200 19,141 16,192
Incremental shares from assumed conversions
of warrants, options and preferred stock 1,921 -- 2,206 --
-------- --------- -------- ---------
Adjusted weighted average shares 22,458 17,200 21,347 16,192
-------- --------- -------- ---------
Basic earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18)
======== ========= ======== =========
Diluted earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18)
======== ========= ======== =========
</TABLE>
The computation of diluted loss per share for the nine and three month
periods ended September 30, 1999 excludes the effect of incremental common
shares attributable to the exercise of outstanding common stock options and
warrants because their effect was antidilutive due to losses incurred by the
Company or such instruments had exercise prices greater than the average market
price of the common shares during the periods presented.
F-42
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
Raw materials $2,472,000 $1,623,000
Work-in-process 1,942,000 1,174,000
Finished goods 1,784,000 1,250,000
--------- ---------
$6,198,000 $4,047,000
========== ==========
</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) ACQUISITION AND DISPOSITION OF BUSINESSES
On January 7, 2000, the Company sold all of its interest in the common
stock in Digital Transmission Systems, Inc. ("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 Stock
Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of
the transaction. The Company was restricted from selling the Wi-LAN stock until
July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock
obtained in an acquisition related transaction.
On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $917,000. The sale resulted in a gain of approximately
$197,000 which is included in the Company's results of operations for the third
quarter of 2000.
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 and an earn-out for the former
stockholders based on sales. The Company has recorded an estimated earn-out
accrual of approximately $800,000. In addition, the Company has recorded an
additional accrual of approximately $384,000 for certain severance and
relocation costs related to Belix. The Company has included accruals in the
calculation of the cost of the acquisition. The acquisition of Belix has been
accounted for as a purchase by the Company and resulted in approximately $1.8
million of goodwill. Belix is located in England, U. K. and is in the business
of manufacturing power supplies for various applications. Belix has been
integrated into the Company's existing power supply producer, XCEL Power
Systems, Ltd. Belix's assets consist mostly of accounts receivable, inventories
and fixed assets. All dollar amounts indicated in this paragraph are derived
from the conversion of British pounds into U. S. dollars at the conversion rate
in effect at the time of the acquisition.
F-43
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
On September 22, 2000, the Company completed the acquisition, effective
as of August 1, 2000, of substantially all of the assets of T-Com, LLC, a
Delaware limited liability company ("T-Com"), and assumed certain liabilities of
T-Com. The liabilities assumed consisted mostly of accounts payable, accrued
payroll expenses and accrued commissions. The assets purchased are valued at
approximately $1,496,000, and the liabilities assumed are approximately
$496,000. T-Com is a manufacturer of high performance digital transmission test
instruments used for the installation and maintenance of high speed telephone
line services for telephone central offices, competitive local exchange carriers
and private communications networks. The Company intends to use the acquired
assets for substantially the same purposes as such assets were used by T-Com.
The Company paid to T-Com for the net assets consideration valued at
$1,000,000, as itemized below:
- 150,000 shares of Series B Preferred Stock of the Company
("Series B Shares"). The Series B Shares become convertible
into shares of common stock of the Company in three equal lots
of 50,000 Series B Shares each at the end of six, twelve and
eighteen months, respectively, following the acquisition
closing date of September 22, 2000. Each Series B Share will
be convertible into ten common shares, and conversion rights
will be cumulative, with all 150,000 Series B Shares being
convertible into common stock after eighteen months. The
Series B Shares have a liquidation preference of $6.40 per
share. The Company may redeem outstanding and unconverted
Series B Shares for cash at a price per share equal to $7.36
by giving 20 days' prior written notice to the holders of
Series B Shares to be redeemed. If less than all of the Series
B Shares are to be optionally redeemed, the particular Series
B Shares to be redeemed shall be selected by lot or by such
other equitable manner determined by the Company's board of
directors. The Company may not, however, redeem Series B
Shares if there is an insufficient number of authorized and
reserved shares of common stock for this purpose, to the
extent the Series B Shares are subject to a lock-up, or to the
extent the Company receives a conversion notice for Series B
Shares prior to the redemption date. If the Company fails to
pay the redemption price after calling any Series B Shares for
optional redemption, the Company will have no further option
to redeem Series B Shares.
- Warrants to purchase up to 250,000 shares of the Company's
common stock at a fixed exercise price of $1.25 per share,
which are exercisable for a period of twenty-four months
following the acquisition closing date of September 22, 2000.
The warrants contain a cashless exercise feature.
The consideration described above is valued at approximately $938,000
for the Series B Shares based on a value of $0.6253 per common share, the market
value of the Company's common stock at the time the agreement in principal was
signed, multiplied by the 1,500,000 common shares into which the preferred
shares can be converted. The warrants have been valued at approximately $62,000
based on a calculation using the Black-Scholes valuation formula.
F-44
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following represents the unaudited pro forma results of operations
as if the acquisition of T-Com had occurred on January 1, 1999:
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
-------- -------
<S> <C> <C>
Net sales $ 21,189 $22,081
======== =======
Income (loss) from continuing operations $ 722 $(2,888)
======== =======
Earnings (loss) per share from continuing operations:
Basic $ 0.03 $ (0.18)
======== =======
Dilutd $ 0.03 $ (0.18)
======== =======
</TABLE>
(6) DISCONTINUED OPERATIONS
In October 2000, the Company decided to discontinue its circuits
segment operations. At that time the circuits segment operations consisted of
XCEL Etch Tek, a wholly owned subsidiary. Accordingly, current and prior
financial information related to the circuits segment operations have been
presented as discontinued operations in the accompanying consolidated condensed
financial statements. The Company anticipates the sale of substantially all of
the assets of XCEL Etch Tek in November 2000 for consideration of $260,000 in
cash, a $50,000 note and the assumption of $75,000 in liabilities. The sale is
expected to result in a loss of approximately $476,000. As of September 30, 2000
the Company has accrued for the expected loss on sale and a loss of
approximately $158,000 related to the operations of XCEL Etch Tek from October
1, 2000 through November 15, 2000.
While the Company has entered into a letter of intent for the sale of
XCEL EtchTek and expects the transaction to close on November 21, 2000, there
can be no assurance that the sale will be completed. If the sale does not occur,
the Company may need to record an additional loss related to XCEL Etch Tek in
the fourth quarter of 2000.
In March 1999, the Company sold substantially all of the assets and
liabilities of HyComp, a wholly owned circuits operations subsidiary, for
$750,000 in cash and a royalty on 1999 revenues generated from HyComp's customer
base in excess of a specified amount. The sale resulted in a gain of $331,000.
(7) WARRANT EXERCISES
In August and September 2000, warrants to purchase a total of 60,000
shares of the Company's common stock for $0.25 per share were exercised.
(8) DOMESTIC CREDIT FACILITY
On June 23, 2000, the Company's credit facility with Congress Financial
expired. Congress Financial extended this facility through August 14, 2000. On
August 16, 2000, the Company obtained a credit facility from Wells Fargo
Business Credit, Inc. This facility provides for a revolving loan of up to
$3,000,000 secured by the Company's inventory and accounts receivable and a term
loan in the amount of $687,000 secured by the Company's machinery and equipment.
The annual interest rate on both portions
F-45
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
of the credit facility is the prime rate plus 2%. The facility contains a
performance-based interest reduction feature. Based upon the Company's
current and expected financial performance, the Company anticipates a
reduction in the interest rate to the prime rate plus 1% upon completion of
the audit of the Company's financial statements for the year ended December
31, 2000. The balance outstanding under this credit facility was $2,144,000
on September 30, 2000. There was $342,000 of additional borrowing available
as of September 30, 2000. The credit facility expires on August 23, 2003. The
Company's foreign subsidiaries have obtained credit facilities with Lloyds
Bank in England, Banque National du Paris, Societe General and Banque Hervet
in France and Johan Tokyo Credit Bank in Japan.
(9) REPORTABLE SEGMENTS
The Company has two reportable segments: Telecommunications and
Electronic Components. The Telecommunications segment operates principally in
the U.S. and European markets and designs, manufactures and distributes
telecommunications test instruments and voice and data transmission and network
equipment. The Electronic Components segment operates in the U.S., European and
Asian markets and designs, manufactures and markets digital switches,
information technology products, including input and display components,
subsystem assemblies, and power supplies.
In October 2000 the Company decided to discontinue its circuits segment
operations. At that time the circuits segment operations consisted of XCEL Etch
Tek, a wholly owned subsidiary. XCEL Etch Tek was offered for sale, see note 6.
Accordingly, all current and prior financial information related to the circuits
segment operations have been presented as discontinued operations in the
accompanying consolidated condensed financial statements.
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 other 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. However, in this report, the two segments have been renamed to
better describe the respective businesses. The Instrumentation and Test
Equipment segment is now referred to as the Telecommunications segment, and the
Components and Subsystems Assemblies segment is now named the Electronic
Components segment.
F-46
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Selected financial data for each of the Company's operating segments is
shown below.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
SALES TO EXTERNAL CUSTOMERS:
Telecommunications $ 10,680,000 $ 11,279,000
Components 8,879,000 8,165,000
------------- ------------
$ 19,559,000 $ 19,444,000
============= ============
INTERSEGMENT SALES:
Telecommunications $ -- $ --
Components -- 217,000
------------- ------------
$ -- $ 217,000
============= ============
SEGMENT PRETAX INCOME (LOSS):
Telecommunications 468,000 $ (2,120,000)
Components 2,157,000 189,000
------------- ------------
2,625,000 $ (1,931,000)
============= ============
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
SEGMENT ASSETS:
Telecommunications $ 8,433,000 $ 8,070,000
Components 9,201,000 5,766,000
----------- -----------
$17,634,000 $13,836,000
=========== ===========
</TABLE>
F-47
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------- --------------------
<S> <C> <C>
Pretax income (loss) from continuing operations:
Total income (loss) for reportable segments $ 2,625,000 $ (1,931,000)
Unallocated amounts:
Gain on sale of Wi-LAN, Inc. stock 197,000 --
Equity in earnings of unconsolidated
affiliates -- 755,000
Warranty reserve reversal 110,000 --
Unallocated general corporate expenses (1,595,000) (1,104,000)
-------------- --------------
Consolidated income (loss) from continuing
operations before income taxes $ 1,337,000 $ (2,280,000)
============== ==============
September 30, 2000 December 31, 1999
------------------- --------------------
ASSETS
Total assets for reportable segments $ 17,634,000 $ 13,836,000
Other assets 856,000 1,632,000
-------------- --------------
Total consolidated assets $ 18,490,000 $ 15,468,000
============== ==============
</TABLE>
F-48
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Members
T-COM, LLC
We have audited the accompanying balance sheet of T-COM, LLC as of December 31,
1999 and the related statements of operations, members' deficit and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of T-COM, LLC at December 31, 1999
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred significant operating
losses and negative cash flows from operations during the year ended December
31, 1999. As discussed in Notes 9 and 10, the Company has sold substantially all
of its assets and certain liabilities and essentially remains as a holding
company for certain equity investments. The Company does not expect to generate
any future operating revenues subsequent to September 2000 but will continue to
incur certain administrative expenses. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 10. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Costa Mesa, California
December 4, 2000
F-49
<PAGE>
T-COM, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------------ ---------------
(unaudited)
<S> <C> <C>
ASSETS (NOTES 4, 5 AND 9)
Current assets:
Cash and cash equivalents $ 172,427 $ 26,855
Accounts receivable 231,272 481,130
Inventories (Note 2) 653,731 796,021
Prepaid and other current assets 3,875 5,315
------------------ ---------------
Total current assets 1,061,305 1,309,321
Property and equipment, net (Note 3) 166,751 160,575
Other assets 16,010 16,010
------------------ ---------------
$ 1,244,066 $ 1,485,906
================== ===============
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable $ 166,622 $ 334,026
Accrued payroll and commissions (Note 7) 278,314 377,788
Other accrued expenses 86,420 53,339
------------------ ---------------
Total current liabilities 531,356 765,153
Line of credit (Notes 4 and 9) 505,176 508,262
Note payable (Notes 5 and 9) 2,053,333 2,053,333
------------------ ---------------
Total liabilities 3,089,865 3,326,748
------------------ ---------------
Commitment and contingencies (Notes 7 and 10)
Subsequent events (Notes 6 and 9)
Members' deficit (Notes 6 and 9):
Members' capital 3,079,230 3,553,813
Accumulated deficit (4,925,029) (5,394,655)
------------------ ---------------
Total members' deficit (1,845,799) (1,840,842)
================== ===============
$ 1,244,066 $ 1,485,906
================== ===============
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
T-COM, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Net sales $ 3,239,376 $ 1,430,678 $ 1,649,941
Cost of sales 1,441,888 627,370 816,941
----------------- --------------- ---------------
Gross profit 1,797,488 803,308 833,000
Operating expenses:
Selling, general and administrative 1,605,901 602,411 816,573
Engineering and product development 1,001,227 524,592 531,760
Write-down of goodwill (Note 8) 3,424,569 - -
----------------- --------------- ---------------
Loss from operations (4,234,209) (323,695) (515,333)
Other income (expense):
Interest expense (280,325) (149,304) (141,315)
Other, net 14,809 8,632 9,208
----------------- --------------- ---------------
Loss before income taxes (4,499,725) (464,367) (647,440)
Income taxes (4,000) (5,259) (1,685)
----------------- --------------- ---------------
Net loss $ (4,503,725) $ (469,626) $ (649,125)
================= =============== ===============
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
T-COM, LLC
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
Members' Accumulated
Capital Deficit Total
-------------- ----------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ 3,025,479 $ (421,304) $ 2,604,175
Options issued as compensation (Note 6) 53,751 - 53,751
Net loss - (4,503,725) (4,503,725)
-------------- ----------------- --------------
Balance at December 31, 1999 3,079,230 (4,925,029) (1,845,799)
Contribution 450,000 - 450,000
Options issued as compensation (Note 6)
(unaudited) 24,583 - 24,583
Net loss (unaudited) - (469,626) (469,626)
-------------- ----------------- --------------
Balance at June 30, 2000 (unaudited) $ 3,553,813 $ (5,394,655) $ (1,840,842)
============== ================= ==============
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
T-COM, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1999 2000 1999
---- ---- ----
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,503,725) $ (469,626) $ (649,125)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 54,752 16,979 26,654
Amortization of intangible assets 123,037 - 123,037
Provision for inventory obsolescence 8,000 23,451 4,000
Write-down of goodwill 3,424,569 - -
Options issued as compensation 53,751 24,583 28,238
Changes in operating assets and liabilities:
Accounts receivable 322,359 (249,858) 121,156
Inventories 11,288 (165,741) 6,502
Prepaids and other assets 12,356 (1,440) 19,734
Accounts payable 7,983 167,404 145,706
Accrued payroll and commissions 151,185 99,474 82,244
Other accrued expenses (11,733) (33,081) (19,016)
---------------- -------------- --------------
Cash used in operating activities (346,178) (587,855) (110,870)
---------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property and equipment (13,585) (10,803) (7,544)
---------------- -------------- --------------
Cash used in investing activities (13,585) (10,803) (7,544)
---------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit 11,581 3,086 8,495
Proceeds from sale of member units - 450,000 -
---------------- -------------- --------------
Cash provided by financing activities 11,581 453,086 8,495
---------------- -------------- --------------
Net decrease in cash and cash equivalents (348,182) (145,572) (109,919)
Cash and cash equivalents at beginning of period 520,609 172,427 520,609
---------------- -------------- --------------
Cash and cash equivalents at end of period $ 172,427 $ 26,855 $ 410,690
================ ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 282,447 $ 123,900 $ 143,437
================ =============== ===============
Income taxes $ 4,800 $ 6,090 $ 4,700
================ =============== ===============
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
T-COM, LLC (the "Company") was organized in Delaware in April 1998. The
Company designs, develops, manufactures and markets telecommunications test
equipment. The Company has sales throughout the United States, with sales
offices in four states. According to the Company's Limited Liability Company
Agreement (the "LLC Agreement"), the term of the Company has been set at
approximately 20 years and will continue until December 31, 2018.
As further defined in the LLC, the Company was originally capitalized with
contributions in cash to the Company as follows:
(a) Five Members contributed a total of $25,479 in exchange for 3,925,000
units. These Members are hereinafter referred to as
Non-Investor Members.
(b) Fourteen Members contributed a total of $2,500,000 in exchange for
5,000,000 units. These Members are hereinafter referred to as
Investor Members.
PROFIT AND LOSS ALLOCATIONS
As further defined in the LLC Agreement, net losses of the Company, as defined,
shall be allocated as follows:
(a) First, until losses allocated to Investor Members equal the Investor
Member's aggregate capital contributions (i) 1% to Non-Investor
Members pro rata based upon their percentage interests and (ii) 99%
to Investor Members, pro rata based upon their percentage interests.
(b) Next, on a pro rata basis to all Members based upon their percentage
interest.
As further defined in the LLC Agreement, net profits of the Company, as defined,
shall be allocated as follows:
(a) First, until the cumulative amounts of profits are equal to the
cumulative allocations of previous losses, pro rata to all Members
based on such previous allocations
(b) Next, on a pro rata basis to all Members based upon their percentage
interest.
MEMBER DISTRIBUTIONS
As further defined in the LLC Agreement, all distributions of cash of the
Company shall be distributed among the Members, as follows:
(a) First, until the capital contributions of the Investor Members have
been returned, the Company will distribute 47% of the estimated
annual profits, as defined, to each Non-Investor Member, on a pro
rata basis based upon their percentage interest.
F-54
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Next, until capital contributions of the Investor Members have been
returned, on a pro rata basis based upon their percentage interest
until the amount of all distributions in (a) and (b) results in all
distributions being in accordance with the percentage interests of
the Non-Investor and Investor Members.
(c) Next, to all Members on a pro rata basis based upon the aggregate of
their unreturned capital contributions, until such amount has been
returned to zero.
(d) Next, to all Members on a pro rata basis based upon their percentage
interest.
In connection with the December 1998 investment (Note 6) by Investor Members
(the "1998 Investor Members"), the 1998 Investor Members will receive a
preferred return of $500,000 prior to (b) above.
In connection with the January 2000 investment (Note 6) by Investor Members (the
"2000 Investor Members"), the 2000 Investor Members will receive a preferred
return of $1,350,000 prior to all of the distributions noted above.
The LLC agreement was amended in September 2000 (Note 9).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market (net
realizable value).
PROPERTY AND EQUIPMENT
Property 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 ranging from 3 to 5
years. Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
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. See Note 8.
F-55
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are recorded when products are shipped. All sales are made under the
terms of FOB shipping point.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods of
generally one or two years. Estimated warranty expense is recognized at the time
of the sale.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
approximately $43,000, $30,000 (unaudited) and $22,000 (unaudited) for the year
ended December 31, 1999 and the six months ended June 30, 2000 and 1999,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company has been organized as a Limited Liability Company ("LLC").
Accordingly, the Company has not provided for Federal income taxes since the
liability is that of the individual members. The Company is subject to a nominal
amount of state income taxes.
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 June 30, 2000, 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 line of credit and note payable approximate fair value because
the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
F-56
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentration of
credit risk, consist primarily of cash and accounts receivable. The Company
places its cash with 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. The Company has not experienced significant write-offs or bad debt
and actual credit losses are provided for in the financial statements and
consistently have been within management's expectations.
The Company had sales to one customer which represented approximately 10% of
net sales for the year ended December 31, 1999. The accounts receivable
balance from this and one other customer was approximately 22% and 12%,
respectively of the Company's accounts receivable at December 31, 1999.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company had no comprehensive income items to report for all
periods presented.
SEGMENT INFORMATION
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No.131 requires that companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial
statements. The Company operates solely in one operating segment; the design,
development, manufacture and sale of telecommunications test equipment.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30,
2000, and the results of operations and cash flows for the six months ended June
30, 2000 and 1999. The results of operations for the six months ended June 30,
2000 and 1999, are not necessarily indicative of the results to be expected for
the full year.
F-57
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS No. 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collective referred to as derivatives), and for
hedging activities. SFAS No 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
currently does not engage in, nor does it expect to engage in, derivative or
hedging activities and, accordingly, the Company anticipates there will be no
impact to its financial statements.
In April 1998, the American Institute of Certified Public Accountants issued SOP
No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires that all start-up costs related to new operations must be expensed as
incurred. In addition, all start-up costs that were capitalized in the past must
be written off when SOP 98-5 is adopted. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB
101 summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company believes that its current revenue recognition policies comply with SAB
101.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
----------------- -----------------
(unaudited)
<S> <C> <C>
Raw materials $ 115,767 $ 194,035
Work-in-process 176,164 255,731
Finished goods 361,800 346,255
----------------- -----------------
$ 653,731 $ 796,021
================== =================
</TABLE>
F-58
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------------ -----------------
(unaudited)
<S> <C> <C>
Computers and software $ 176,181 $ 187,003
Machinery and equipment 99,350 99,350
------------------ -----------------
275,531 286,353
Accumulated depreciation (108,780) (125,778)
------------------ -----------------
$ 166,751 $ 160,575
================== =================
</TABLE>
(4) LINE OF CREDIT
The Company has a line of credit with a bank. The credit line is collateralized
by substantially all assets of the Company, bears interest at the bank's prime
rate (8.5% at December 31, 1999) plus 2% and is payable on demand. Borrowings
are based upon the lesser of $800,000 or 80% of eligible accounts receivable and
40% of net inventory, as defined.
The line of credit originally expired in June 1999 but was extended to January
2000 and then again to April 2000. The line of credit requires maintenance of
certain financial ratios and contains other restrictive covenants. The Company
was not in compliance with certain of such covenants throughout 1999 and 2000.
In connection with the extensions, the covenant violations were waived through
the extension periods. However, no additional borrowings were available and the
Company was required to paydown a portion of the debt with a portion of any net
income, as defined during the extension period. No such paydowns occurred due to
continuing losses. In September 2000, the obligation under the line of credit
and note payable (Note 5) was forgiven by the bank in exchange for a 33%
interest in the Company (Note 9). Due to the transaction described in Note 9,
the entire balance under the line of credit has been classified as a
long-term liability on the accompanying balance sheets.
(5) NOTE PAYABLE
The note payable relates to a $2,200,000 note payable to bank with an
outstanding balance of $2,053,333 at December 31, 1999 and June 30, 2000
(unaudited). The note bears interest at the bank's prime rate (8.5% at
December 31, 1999) plus 2.5%. The note is collateralized by substantially all
assets of the Company and is payable in monthly principal installments of
approximately $37,000, plus interest through maturity in June 2002. As a
result of the Company's non-compliance with certain financial covenants and
as the Company was unable to make the required monthly payments in 1999 and
2000, the note is due on demand. In September 2000, the obligation under the
note and line of credit (Note 4) was forgiven by the bank in exchange for a
33% interest in the Company (Note 9). Due to the transaction described in Note
9, the entire balance under the note payable has been classified as a
long-term liability on the accompanying balance sheets.
F-59
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT
CONTRIBUTIONS
In December 1998, a contribution of $500,000 was made by Investor Members in
exchange for 4,651,515 units.
As of December 31, 2000, a total of 13,576,515 units were outstanding.
In January 2000, a contribution of $450,000 was made by Investor Members in
exchange for $1,350,000 preferred return.
VOTING RIGHTS
Investor Members shall have the right to vote only upon certain significant
matters, including any amendments to the original LLC Agreement, admission of a
new Member or dissolution of the Company.
OPTIONS
The Company's LLC Agreement includes a provision to issue an additional
1,000,000 units to key employees. The Company has chosen to issue options
underlying these units instead of issuing the units outright. A summary of the
option activity is as follows:
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
------------------------------- ---------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Units Price Units Price
-------------- -------------- --------------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Outstanding,
beginning of period 752,970 $ 0.0977 834,970 $ 0.0886
Granted 300,000 0.0052 75,000 0.0052
Cancelled (218,000 ) 0.0052 - -
-------------- -------------- --------------- ---------------
Outstanding,
end of period 834,970 $ 0.0886 909,970 $ 0.0830
============== ============== =============== ===============
Options exercisable
at period-end 410,970 487,470
============== ===============
Weighted-average fair value of options
granted during period $ 0.3158 $ 0.1031
============== ===============
</TABLE>
F-60
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT (CONTINUED)
Information relating to options at December 31, 1999 summarized by exercise
price is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted
Average Average
Exercise Price Per Exercise Exercise
Unit Units Life (Years) Price Units Price
--------------------- ------------- ------------- ------------- ----------------- --------------
$ 0.0052 538,000 4.13 $ 0.0052 114,000 $ 0.0052
0.1075 196,970 6.00 0.1075 196,970 0.1075
0.5000 100,000 5.41 0.5000 100,000 0.5000
-------- ------------- ------------- ------------- ----------------- --------------
$ 0.0052
to 0.5000 834,970 4.73 $ 0.0886 410,970 $ 0.2849
-------- ------------- ------------- ------------- ----------------- --------------
</TABLE>
During the year ended December 31, 1999 and the six months ended June 30,
2000 and 1999, the Company recognized compensation expense of approximately
$54,000, $25,000 (unaudited) and $28,000 (unaudited), respectively related to
options issued.
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation", requires the Company to provide pro forma
information regarding net income as if such compensation cost for the Company's
options had been determined in accordance with the fair value of each option at
the grant date by using the present value approach with the following
assumptions for grants in 1999: 0% dividend yield; a risk free interest rate of
5.5%; and expected lives of 2 years.
Under the accounting provisions of SFAS 123 the Company's net loss for the year
ended December 31, 1999 would have been decreased to the pro forma amount
indicated below:
<TABLE>
<S> <C>
As reported $ (4,503,725)
Pro forma $ (4,503,801)
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from a leased facility under an
operating lease which expires in December 2000. The Company also has an
operating lease for a phone system which expires in August 2003. Total rent
expense for the year ended December 31, 1999 was approximately $69,000. Total
rent expense for the six months ended June 30, 2000 and 1999 was
approximately $53,000 (unaudited) and $103,000 (unaudited), respectively.
F-61
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The future minimum rental payments required under the two operating leases are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------- ------
<S> <C>
2000 $ 49,725
2001 2,939
2002 2,939
2003 1,714
2004 -
-----------
$ 57,317
===========
</TABLE>
EMPLOYMENT AGREEMENT
The Limited Liability Company Agreement includes a commitment to pay a
Non-Investor Member $150,000 per year as compensation for services as an
employee of the Company. As of December 31, 1999 and June 30, 2000, the Company
has approximately $174,000 and $255,000 (unaudited), respectively, accrued
related to this commitment. Such amount has been included in accrued payroll and
commissions on the accompanying balance sheets.
LITIGATION
The Company is, 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 financial
position, results of operations or cash flows.
EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan ("401(k) Plan") covering the
majority of its employees. Participants may make voluntary pretax contributions
to such plans up to the limit as permitted by law. Annual contributions to the
plan by the Company, if any, is discretionary. The Company made no contributions
to the 401(k) Plan during the year ended December 31, 1999 or the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited), respectively.
F-62
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(8) 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) may not be sufficient to
support recorded goodwill. During 1999, due to a significant decrease in sales,
declines in profit margins and continuing operating losses, the Company
wrote-off the carrying value of goodwill originating with a June 1998
acquisition. This write-down totaled $3,424,569 and was charged to operations.
The Company was previously amortizing the goodwill over 15 years using the
straight-line basis. The statement of operations for the year ended December 31,
1999 and the six months ended June 30, 1999 (unaudited) each includes
approximately $123,000 of goodwill amortization prior to the write-off.
(9) SUBSEQUENT EVENTS
In September 2000, the Company amended its LLC Agreement (the "Amendment") and
concurrently completed the sale of substantially all of its assets and certain
of its liabilities to MicroTel International, Inc. ("MicroTel"), effective
August 1, 2000.
In accordance with the terms of the sales agreement with MicroTel, the Company
received 150,000 Series B Convertible Shares (the "Series B") of MicroTel.
Series B have a liquidation preference of $6.40, are convertible into common
stock of MicroTel at a rate of 10 common shares per Series B and are convertible
in 3 equal lots of 50,000 at six, twelve and eighteen months after the closing
of the sale. The Series B have no dividend rights. In addition, the Company
received warrants to purchase 250,000 common shares of MicroTel for $1.25 per
share, which are exercisable for twenty-four months. The sale excluded any
obligations under the line of credit (Note 4), note payable (Note 5) and
Non-Investor Member payroll accrual (Note 7).
The Company has determined the fair value of the proceeds received and net
assets sold to be approximately equal in value. As such, no significant gain or
loss is expected to be recorded in connection with this sale. The warrants were
valued using a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 95%; risk-free interest rate of 6%; and
an expected life of two years.
In accordance with the Amendment, the percentage interest of the Company was
amended to:
- 33% allocated to the Non-Investor Members as a group,
- 33% allocated to the Investor Members as a group,
- 33% to a bank.
The 33% interest and $25,000 was allocated to a bank in exchange for the
forgiveness of the line of credit (Note 4) and note payable (Note 5).
Outstanding principal and interest under the line of credit and note payable
totaled $2,620,025 as of the date of exchange. As the only remaining significant
assets of the Company will be the proceeds received on the sale to MicroTel, the
Company will record debt forgiveness of approximately $2.2 million (unaudited)
for the difference between the balance of the debt of $2,620,025 and the bank's
interest in the proceeds received in September 2000.
F-63
<PAGE>
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENTS (CONTINUED)
The Amendment includes a provision that a Non-Investor Member will forgive his
rights to the accrued payroll liability ($207,907 as of the date of the
Amendment). The Amendment also redefines the purpose of the Company from
designing, developing and selling telecommunications test equipment to holding
the MicroTel Series B and warrants for investment.
(10) GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred significant operating
losses and negative cash flows from operations during the year ended December
31, 1999. As discussed in Notes 9, the Company sold substantially all of its
assets and certain liabilities and essentially remains as a holding company for
certain equity investments. The Company does not expect to generate any future
operating revenues subsequent to September 2000 but will continue to incur
certain administrative expenses. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company expects to be able to fund the limited administrative expenses
through the remaining cash not sold as part of the transaction detailed in Note
9 and possible additional member contributions. While the Company is unsure as
to the future distribution of any remaining assets, the MicroTel Series B
Preferred Shares and warrants cannot be fully distributed to the Members until
March 2002.
F-64
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The Unaudited Pro Forma Condensed Combined Financial information reflects
financial information which gives effect to MicroTel International, Inc.'s
("MicroTel" or the "Company") acquisition (the "Acquisition") of
substantially all of the assets and certain liabilities of T-COM, Inc.
("T-COM"), which provided for the issuance of 150,000 shares of MicroTel
Series B Preferred Stock and 250,000 MicroTel warrants. The Acquisition
closed on September 22, 2000. The Pro Forma Financial Information included
herein reflects the use of the purchase method of accounting, after giving
effect to the pro forma adjustments discussed in the accompanying notes. The
aggregate value of the consideration given was approximately $1,000,000 which
approximates the fair value of the net assets acquired. Such financial
information has been prepared from, and should be read in conjunction with,
the historical consolidated financial statements and notes thereto of
MicroTel and T-COM.
The Pro Forma Condensed Combined Statements of Operations gives effect to the
Acquisition as if it had occurred at the beginning of the earliest period
presented, combining the results of MicroTel for the year ended December 31,
1999 and for the six months ended June 30, 2000 with those of T-COM, for the
same periods.
The Pro Forma Condensed Combined Statements of Operations presented do not
include any potential cost savings. The Company believes that it may be able to
reduce salaries and related costs and office and general expenses as it
eliminates duplications of overhead. However, there can be no assurance that the
Company will be successful in effecting any such cost savings.
The Pro Forma Condensed Combined Financial Information is unaudited and is not
necessarily indicative of the consolidated results which actually would have
occurred if the above transactions had been consummated at the beginning of the
periods presented, nor does it purport to present the future financial position
and results of operations for future periods. A pro forma balance sheet has not
been provided herein as the Acquisition has been reflected in the Company's
September 30, 2000 balance sheet on Form 10-Q filed on November 20, 2000.
F-65
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro-Forma
Year Ended December 31, 1999 MicroTel T-COM Adjustments Combined
-------------- ------------ -------------- -------------------
(a)
<S> <C> <C> <C> <C>
Net sales $ 25,913 $ 3,239 $ -- $ 29,152
Cost of sales 17,066 1,442 -- 18,508
-------------- ------------ -------------- -------------------
Gross profit 8,847 1,797 -- 10,644
Operating expenses:
Selling, general and administrative 10,132 1,606 -- 11,738
Engineering and product development 1,841 1,001 -- 2,842
Write-down of goodwill - 3,425 3,425
-------------- ------------ -------------- -------------------
Loss from operations (3,126) (4,235) -- (7,361)
Other income (expense):
Interest expense (297) (280) -- (577)
Other, net 104 15 -- 119
-------------- ------------ -------------- -------------------
Loss from continuing operations before
income taxes (3,319) (4,500) -- (7,819)
Income taxes 128 4 (4)(b) 128
============== ============ ============== ===================
Loss from continuing operations $ (3,447) $ (4,504) $ 4 $ (7,947)
============== ============ ============== ===================
Basic and diluted earnings per share from
continuing operations $ (0.21) $ (0.48)
============== ===================
Basic and diluted weighted average shares
outstanding 16,638 16,638
============== ===================
</TABLE>
See notes to pro forma condensed combined income statements on pages F-65 and
F-67.
F-66
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Pro-Forma
Six Months Ended June 30, 2000 MicroTel T-COM Adjustments Combined
-------------- -------------- ----------------- -------------------
(a)
<S> <C> <C> <C> <C>
Net sales $ 12,688 $ 1,430 $ -- $ 14,118
Cost of sales 7,565 627 -- 8,192
-------------- -------------- ----------------- -------------------
Gross profit 5,123 803 -- 5,926
Operating expenses:
Selling, general and administrative 4,364 602 -- 4,966
Engineering and product development 496 525 -- 1,021
-------------- -------------- ----------------- -------------------
Income (loss) from operations 263 (324) -- (61)
Other income (expense):
Interest expense (153) (149) -- (302)
Other, net 242 9 -- 251
-------------- -------------- ----------------- -------------------
Income (loss) from continuing operations
before income taxes 352 (464) -- (112)
Income taxes 10 5 (5)(b) 10
============== ============== ================= ===================
Income (loss) from continuing operations $ 342 $ (469) $ 5 $ (122)
============== ============== ================= ===================
Earnings per share from continuing
operations:
Basic $ 0.02 $ 0.00
============== ===================
Diluted $ 0.01 $ 0.00
============== ===================
Weighted average shares outstanding:
Basic 18,443 18,443
============== ===================
Diluted 20,476 18,443
============== ===================
</TABLE>
See notes to pro forma condensed combined income statements on page F-65.
(a) The operating results of MicroTel have been reclassified to reflect the
effect of MicroTel's decision, in October 2000, to discontinue its
circuits segment.
(b) To eliminate T-COM state income tax expense related to Limited Liability
Company tax status.
F-67
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration $ 561
NASD Fees --
Accounting Fees and Expenses 85,000
Legal Fees and Expenses 150,000
Blue Sky Fees and Expenses 5,000
Printing Costs 1,000
Miscellaneous Expenses 5,000
------------------
TOTAL $ 246,561
==================
</TABLE>
All of the above estimated expenses have been or will be paid by the
Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at its request in such capacity in another corporation or
business association, against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, or (d) for any transaction
from which the director derived an improper personal benefit.
Article Fifth of the Registrant's Certificate of Incorporation, as
amended, provides for the elimination of personal liability for a director for
breach of fiduciary duty as permitted by 102(b)(7) of the Delaware General
Corporation Law.
Article XI of the Registrant's Bylaws provides for the indemnification
of officers, directors and certain other persons acting on behalf of the
Registrant:
II-1
<PAGE>
(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 Registrant, in connection
with a threatened, pending or completed proceeding other than an action by or in
the right of the Registrant, 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 Registrant, 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
proceeding by or in the right of the Registrant, by reason of the fact such
person was or is an authorized representative of the Registrant, 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 Registrant (or if so found liable, if a proper court found such person to be
fairly and reasonably entitled to indemnification).
The Registrant's Bylaws further provide for mandatory indemnification
of authorized representatives of the Registrant who have been successful in
defense of any proceeding described above or in defense of any claim, issue or
matter therein, against expenses actually and reasonably incurred in connection
with such defense.
Article XI of the Registrant's Bylaws also provides that the Registrant
may purchase and maintain insurance on behalf of directors and officers to cover
any liability arising out of their status as directors and officers, whether or
not the Registrant would have the power to indemnify such directors and officers
against such liability under the provisions of the Delaware General Corporation
Law. The Registrant does not maintain directors' and officers' liability
insurance on behalf of its executive officers and directors.
Section 7.5 of the Employment Agreement dated as of October 15, 1997
between the Registrant and Carmine T. Oliva, and Section 7.5 of the Employment
Agreement dated as of May 1, 1998 between the Registrant and Graham Jefferies
provide that the Registrant shall indemnify Mr. Oliva and Mr. Jefferies to the
maximum extent permitted by applicable law and the Registrant's Bylaws against
all costs, charges and expenses incurred or sustained by them in connection with
any action, suit or other proceeding by reason of either of them being an
officer, director or employee of the Registrant or any subsidiary or affiliate
of the Registrant.
As a result of the above-described provisions, the Registrant 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
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
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 Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant 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 Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
II-2
<PAGE>
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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Between January 1997 and March 1997, the Registrant issued an aggregate
of 173,500 shares of common stock with an aggregate value of $418,301 to a
non-employee director as compensation for his services as a director.
In January 1997, the Registrant issued 57,500 shares of common stock to
a non-employee director.
In March 1997, the Registrant issued an aggregate of 25,000 shares of
common stock with an aggregate value of $76,563 to two consultants in exchange
for services rendered.
In March 1997, the Registrant issued an aggregate of 6,119,130 shares
of common stock with an aggregate value of $18,739,836 to the former
stockholders of XIT Corporation in connection with the Registrant's acquisition
of all of the outstanding shares of common stock of XIT Corporation.
In April 1997, the Registrant issued 2,000,000 shares of common stock
and warrants to purchase up to an aggregate of 500,000 shares of common stock at
an exercise price of $3.45 per share to 16 investors in a private placement in
exchange for $4,258,000 in cash net of $742,000 of placement expenses. In May
1998, the Registrant issued to five of the investors replacement warrants to
purchase an aggregate of 85,000 shares of common stock at $2.00 per share, which
warrants were exercisable for a period of one year less than the original
warrants.
In July 1997, the Registrant issued 80,000 shares of common stock
valued at $1.06 per share to a consultant in connection with a settlement
relating to services rendered. In December 1998, these shares were cancelled
upon reversal of the settlement.
In October 1997, the Registrant issued 500,000 shares of common stock
valued at $1,125,000 in connection with the acquisition by the Registrant's CXR
Telcom subsidiary of all of the outstanding capital stock of Critical
Communications Incorporated.
In November 1997, the Registrant issued 30,000 shares of common stock
to one individual upon exercise of an option with an exercise price of $3.25 per
share.
In June and July 1998, the Registrant sold 200 shares of Series A
Preferred Stock for $10,000 per share to three institutional investors. Each
share of Series A Preferred Stock is convertible at a conversion price equal to
$10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the
three lowest closing bid prices over the 40 trading days immediately prior to
the date of conversion. The shares were accompanied by warrants to purchase up
to an aggregate of 1,000,000 shares of common stock at an exercise price of
$1.25 per share, which warrants were later modified in November 1998 and
December 1999 to provide for exercise prices of $0.75 per share and $0.25 per
share, respectively, and to extend their expiration dates from May 22, 2001 to
December 22, 2002. The Registrant's agent in the private placement received
warrants to purchase up to 250,000 shares of common stock at $1.25 per share.
The Registrant received net proceeds of approximately $1,847,000 after deduction
of commissions and transaction-related expenses.
II-3
<PAGE>
In November and December 1998, the Registrant issued an aggregate of
770,000 shares of common stock to three investors in connection with their
conversions of an aggregate of 38.5 shares of Series A Preferred Stock.
In December 1998, the Registrant issued warrants to purchase up to
152,381 shares of common stock at an exercise price of $0.66 per share to one
entity in exchange for an option to purchase from the entity an ownership
interest in Digital Transmission Systems, Inc. In January 1999, the Registrant
exercised its option by issuing 1,000,000 shares of common stock valued at
$1,000,000 in exchange for 41% of the outstanding common stock of Digital
Transmission Systems, Inc.
Between January and November 1999, the Registrant issued an aggregate
of 2,659,011 shares of common stock to three investors in connection with their
conversions of an aggregate of 102 shares of Series A Preferred Stock.
In January 1999, the Registrant issued 250,000 shares of common stock
valued at $225,675 to its then legal counsel in connection with legal services
rendered.
In January 1999, the Registrant issued 200,000 shares of common stock
valued at $193,140 to an investor relations consultant in exchange for services
rendered.
In March 1999, the Registrant issued an aggregate of 150,000 shares of
common stock valued at $72,510 to two individuals and one entity in connection
with the settlement of litigation.
In March and April 1999, the Registrant issued an aggregate of 635,000
shares of common stock valued at $263,435 to two individuals for investor
relations consulting services rendered.
In March 1999, the Registrant issued an aggregate of 75,000 shares of
common stock valued at $32,603 to three individuals for consulting services
rendered.
In June 1999, the Registrant issued an aggregate of 555,641 shares of
common stock valued at $362,667 to two employees who were former principals of
Critical Communications Incorporated in connection with an earn out arrangement.
Between February and April 2000, the Registrant made an offer to all
holders of warrants to purchase shares of common stock at exercise prices of
$1.00 or more pursuant to which these holders could elect to surrender their
outstanding warrants with exercise prices of $1.00 or more in exchange for the
issuance to them of warrants to purchase a number of shares equal to one-half of
the number of shares underlying the surrendered warrants at an exercise price of
one-half of the exercise price of the surrendered warrants. A total of 2,769,201
warrants with exercise prices ranging from $1.21 to $3.79 were surrendered in
exchange for 1,384,602 warrants with exercise prices ranging from $0.605 to
$1.895. The majority of warrants exchanged were held by persons or entities who
were not employees or directors of the Registrant or its subsidiaries.
In March 2000, the Registrant issued 306,148 shares of common stock in
connection with a cashless exercise of warrants to purchase 500,000 shares of
common stock at an exercise price of $.69 per share.
In March 2000, the Registrant issued an aggregate of 35,000 shares of
common stock to three employees upon exercise of warrants at an exercise price
of $0.20 per share.
II-4
<PAGE>
In March 2000, the Registrant issued 306,148 shares of common stock to
one entity in connection with the cashless exercise of a warrant to purchase up
to 500,000 shares of common stock, which warrant had been issued in connection
with settlement of litigation.
In June 2000, the Registrant issued an aggregate of 55,000 shares of
common stock to three employees upon exercise of warrants at an exercise price
of $0.20 per share.
In June 2000, the Registrant issued 1,743,285 shares of common stock to
one investor upon conversion of 34.5 shares of the Registrant's Series A
Preferred Stock.
In June 2000, the Registrant issued an aggregate of 217,500 shares of
common stock to five investors, including the Registrant's Chief Executive
Officer and his brother and son, in connection with the exercise of warrants
with an exercise price of $0.25 per share.
In July 2000, the Registrant issued options to purchase up to 100,000
shares of common stock at an exercise price of $0.50 per share to each of the
Registrant's two non-employee directors in connection with their service as
directors.
In August and September 2000, the Registrant issued an aggregate of
60,000 shares of common stock to one investor in connection with the exercise of
warrants with an exercise price of $0.25 per share.
In September 2000, the Registrant issued 150,000 shares of Series B
Preferred Stock ("Series B Shares") in connection with the acquisition of
substantially all of the assets of T-Com, LLC, a Delaware limited liability
company. The Series B Shares become convertible into shares of common stock of
the Registrant in three equal lots of 50,000 Series B Shares each at the end of
six, twelve and eighteen months, respectively, following the acquisition closing
date of September 22, 2000. Each Series B Share will be convertible into ten
common shares, and conversion rights will be cumulative, with all 150,000 Series
B Shares being convertible into common stock after eighteen months. The Series B
Shares have a liquidation preference of $6.40 per share. The Registrant may
redeem outstanding and unconverted Series B Shares for cash at a price per share
equal to $7.36 by giving 20 days' prior written notice to the holders of Series
B Shares to be redeemed. If less than all of the Series B Shares are to be
optionally redeemed, the particular Series B Shares to be redeemed shall be
selected by lot or by such other equitable manner determined by the Registrant's
board of directors. The Registrant may not, however, redeem Series B Shares if
there is an insufficient number of authorized and reserved shares of common
stock for this purpose, to the extent the Series B Shares are subject to a
lock-up, or to the extent the Registrant receives a conversion notice for Series
B Shares prior to the redemption date. If the Registrant fails to pay the
redemption price after calling any Series B Shares for optional redemption, the
Registrant will have no further option to redeem Series B Shares.
Exemption from the registration provisions of the Securities Act of
1933 for the transactions described above is claimed under Section 4(2) of the
Securities Act of 1933, among others, on the basis that such transactions did
not involve any public offering and the purchasers were sophisticated with
access to the kind of information registration would provide.
II-5
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Merger Agreement dated December 31, 1996 between XIT Corporation, XIT
Acquisition, Inc. and the Registrant (1)
2.2 Share Exchange Agreement among CXR Telcom Corporation, the Registrant
and Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson, Dated
October 17, 1997 (2)
2.3 Indemnity Escrow Agreement among CXR Telcom Corporation, the
Registrant, Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson
and Gallagher, Briody & Butler, Dated October 17, 1997 (2)
2.4 Form of Contingent Stock Agreement among CXR Telcom Corporation, the
Registrant, Critical Communications Incorporated, Mike B. Peterson,
Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997 (2)
2.5 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 (2)
2.6 Asset Purchase Agreement dated January 9, 1998 among Arnold Circuits,
Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XIT
Corporation and Mantalica & Treadwell (2)
2.7 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 (2)
2.8 Bill of Sale and Assignment and Assumption Agreement between XCEL
Arnold Circuits, Inc.and Arnold Circuits, Inc., Dated March, 31 1998
(2)
2.9 Guaranty of Robert Bertrand in favor of XCEL Arnold Circuits, Inc.,
Dated March 31, 1998 (2)
2.10 Warrant to Purchase Common Stock of the Registrant issued to BNZ
Incorporated (2)
2.11 Guaranty of BNZ Incorporated in favor of XCEL Arnold Circuits, Inc.,
Dated March 31, 1998 (2)
2.12 Pledge and Escrow Agreement between BNZ Incorporated and XCEL Arnold
Circuits, Inc., Dated March 31, 1998 (2)
2.13 Promissory Note between Arnold Circuits, Inc. and XCEL Arnold Circuits,
Inc. Dated March 31, 1998 (2)
2.14 Promissory Note between XIT Corporation and Arnold Circuits, Inc. Dated
March 31, 1998 (2)
II-6
<PAGE>
2.15 Security Agreement between Arnold Circuits, Inc and XCEL Arnold
Circuits, Inc. Dated March 31, 1998 (2)
2.16 Joint Marketing and Supply Agreement between Arnold Circuits, Inc and
XCEL Etch Tek, Dated March 31, 1998 (2)
2.17 Letter agreement dated October 19, 1998 between the Registrant and
Digital Transmission Systems, Inc.
2.18 Asset Purchase Agreement between HyComp, Inc. and HyComp Acquisition
Corp., c/o SatCon Technology Corporation, dated March 31, 1999 (3)
2.19 Share Purchase Agreement dated December 29, 1999 between the Registrant
and Wi-Lan Inc.
2.20 Share Purchase Agreement dated April 17, 2000 between XCEL Power
Systems Limited and the stockholders of The Belix Company Limited (4)
2.21 Asset Purchase Agreement effective September 1, 2000 by and among the
Registrant, CXR Telcom Corporation and T-Com, LLC (5)
2.22 Bill of Sale and Assignment and Assumption Agreement dated as of
September 22, 2000 between T-Com, LLC and CXR Telcom Corporation (5)
2.23 Letter agreement dated October 2, 2000 among the Registrant, CXR Telcom
Corporation and T-Com, LLC relating to Asset Purchase Agreement by and
among the same parties (5)
2.24 Asset Purchase Agreement dated as of November 15, 2000 by and among XIT
Corporation, the Registrant, Bryan Fuller, Tama-Lee Mapalo and Etch-Tek
Electronics Corporation (6)
3.1 Certificate of Incorporation of the Registrant, as filed with the
Delaware Secretary of State on July 14, 1989
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on October
12, 1989
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on October
16, 1991
3.4 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on April 19,
1994
3.5 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on March 6,
1995
3.6 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on August 28,
1996
3.7 Certificate of Designations, Preferences and Rights of Preferred Stock
of the Registrant, as filed with the Delaware Secretary of State on May
20, 1998
II-7
<PAGE>
3.8 Amended Certificate of Designations, Preferences and Rights of
Preferred Stock of the Registrant, as filed with the Delaware Secretary
of State on July 1, 1998
3.9 Certificate of Correction of Amended Certificate of Designations,
Preferences and Rights of Preferred Stock as filed with the Delaware
Secretary of State on November 20, 2000
3.10 Second Amended and Restated Certificate of Designations, Preferences
and Rights of Preferred Stock as filed with the Delaware Secretary of
State on December 28, 1999 (7)
3.11 Certificate of Correction of Second Amended Certificate of
Designations, Preferences and Rights of Preferred Stock as filed with
the Delaware Secretary of State on November 20, 2000
3.12 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock of the Registrant, as filed with the Delaware Secretary
of State on September 19, 2000 (5)
3.13 Bylaws of the Registrant
4.1 Form of Subscription Agreement for the sale of Series A Preferred
Stock of the Registrant (8)
4.2 Form of Warrant to Purchase Common Stock of the Registrant issued in
connection with the sale of Series A Preferred Stock (8)
4.3 Form of Warrant to Purchase Common Stock of the Registrant issued in
connection with the Digital Transmission Systems, Inc. investment
4.4 Form of Warrant to Purchase Common Stock of the Registrant issued in
connection with various private placements
5.1 Opinion of Rutan & Tucker, LLP (*)
10.1 1993 Stock Option Plan (#)
10.2 Employee Stock and Stock Option Plan (9) (#)
10.3 1997 Stock Incentive Plan (10) (#)
10.4 2000 Stock Option Plan (11) (#)
10.5 Employment Agreement dated October 15, 1997 between the Registrant and
Carmine T. Oliva (#)
10.6 Employment Agreement dated May 1, 1998 between the Registrant and
Graham Jefferies (#)
10.7 Credit and Security Agreement dated as of August 16, 2000 by and among
XIT Corporation, CXR Telcom Corporation and Wells Fargo Business
Credit, Inc. (5)
II-8
<PAGE>
10.8 Revolving Note dated August 16, 2000 in the principal sum of $3,000,000
made by CXR Telcom Corporation and XIT Corporation in favor of Wells
Fargo Business Credit, Inc. (5)
10.9 Term Note dated August 16, 2000 in the principal sum of $646,765 made
by XIT Corporation in favor of Wells Fargo Business Credit, Inc. (5)
10.10 Term Note dated August 16, 2000 in the principal sum of $40,235 made by
CXR Telcom Corporation in favor of Wells Fargo Business Credit,
Inc. (5)
10.11 Guarantee dated August 16, 2000 made by Carmine T. Oliva in favor of
Wells Fargo Business Credit, Inc. (5)
10.12 Waiver of Interest dated August 16, 2000 made by Georgeann Oliva in
favor of Wells Fargo Business Credit, Inc. (5)
10.13 Guarantee dated August 16, 2000 made by the Registrant in favor of
Wells Fargo Business Credit, Inc. (5)
10.14 Guarantor Security Agreement dated August 16, 2000 made by the
Registrant in favor of Wells Fargo Business Credit, Inc. (5)
10.15 Loan and Security Agreement between Congress Financial Corporation
(Western) and the Registrant, XIT Corporation, CXR Telcom Corporation
and HyComp, Inc. dated June 23, 1998 (8)
10.16 Security Agreement between Congress Financial Corporation (Western) and
XIT Corporation dated June 23, 1998 (8)
10.17 Lease agreement between the Registrant and Property Reserve Inc. dated
September 16, 1999 (12)
10.18 Lease agreement between XIT, Inc. and Rancho Cucamonga Development
dated August 30, 1999 (12)
10.19 Lease Agreement between SCI Limited Partnership-I and CXR Telcom
Corporation, Dated July 28, 1997 (13)
10.20 Lease agreement between XIT Corporation and P&S Development (14)
10.21 General Partnership Agreement between XIT Corporation and P&S
Development (14)
10.22 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR
Associates (14)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1) (*)
II-9
<PAGE>
24.1 Power of Attorney (included on the signature page of this registration
statement)
---------------
(*) To be filed by amendment.
(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.
(1) Incorporated by reference to the Registrant's current report on Form
8-K for January 6, 1997 filed January 21, 1997 (File No. 1-10346)
(2) Incorporated by reference to the Registrant's annual report on Form
10-K for the year ended December 31, 1997 (File No. 1-10346)
(3) Incorporated by reference to the Registrant's interim report on Form
10-Q for the three months ended March 31, 1999 (File No. 1-10346)
(4) Incorporated by reference to the Registrant's quarterly report on Form
10-Q for the quarter ended June 30, 2000 (File No. 1-10346)
(5) Incorporated by reference to the Registrant's quarterly report on Form
10-Q for the quarter ended September 30, 2000 (File No. 1-10346)
(6) Incorporated by reference to the Registrant's current report on Form
8-K for November 15, 2000 (File No. 1-10346)
(7) Incorporated by reference to the Registrant's annual report on Form
10-K for the year ended December 31, 1999 (File No. 1-10346)
(8) Incorporated by reference to the Registrant's interim report on Form
10-Q for the six months ended June 30, 1998 (File No. 1-10346)
(9) Incorporated by reference to the Registrant's registration statement on
Form S-8 (Registration Statement No. 333-12567)
(10) Incorporated by reference to the Registrant's definitive proxy
statement for the annual meeting of stockholders to be held June 11,
1998 (File No. 1-10346)
(11) Incorporated by reference to the Registrant's definitive proxy
statement for the special meeting of stockholders to be held January
16, 2001 (File No. 1-10346)
(12) Incorporated by reference to the Registrant's interim report on Form
10-Q for the nine months ended September 30, 1999 (File No. 1-10346)
(13) Incorporated by reference to the Registrant's registration statement on
Form S-8 (Registration Statement No. 333-29925)
(14) Incorporated by reference to the Registrant's annual report on Form
10-K/A for the year ended December 31, 1996 (File No. 1-10346)
II-10
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
The Consolidated Schedule II Valuation and Qualifying Accounts for the
years ended December 31, 1999, 1998 and 1997 included in the financial
statements beginning at page F-1 of the prospectus that is a part of this
registration statement is incorporated by reference into this Item 16(b).
ITEM 17. UNDERTAKINGS
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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described above in Item 14, or otherwise,
the Registrant 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
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant 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 Registrant 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-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant 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, December 29, 2000.
MICROTEL INTERNATIONAL, INC.
By: /s/ Carmine T. Oliva
-----------------------------------------
Carmine T. Oliva
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of MicroTel International, Inc., a Delaware corporation, which is
filing Amendment No. 1 to a Registration Statement on Form S-1 with the
Securities and Exchange Commission under the provisions of the Securities Act of
1933, as amended, hereby constitute and appoint Carmine T. Oliva his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all further amendments to the Registration Statement,
including a Prospectus or an amended Prospectus therein, and all other documents
in connection therewith to be filed with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all interests and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Carmine T. Oliva Chairman of the Board of Directors, December 29, 2000
------------------------------------ President, Chief Executive Officer
Carmine T. Oliva (Principal Executive Officer and Director)
/s/ Randolph D. Foote Chief Financial Officer December 29, 2000
----------------------------------- (Principal Accounting and
Randolph D. Foote Financial Officer)
/s/ Laurence P. Finnegan, Jr. Director December 29, 2000
---------------------------------
Laurence P. Finnegan, Jr.
/s/ Robert B. Runyon Director December 29, 2000
------------------------------------
Robert B. Runyon
</TABLE>
II-12
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
2.17 Letter agreement dated October 19, 1998 between the Registrant and
Digital Transmission Systems, Inc.
2.19 Share Purchase Agreement dated December 29, 1999 between the Registrant
and Wi-Lan Inc.
3.1 Certificate of Incorporation of the Registrant, as filed with the
Delaware Secretary of State on July 14, 1989
3.2 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on October
12, 1989
3.3 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on October
16, 1991
3.4 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on April 19,
1994
3.5 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on March 6,
1995
3.6 Certificate of Amendment of Certificate of Incorporation of the
Registrant, as filed with the Delaware Secretary of State on August 28,
1996
3.7 Certificate of Designations, Preferences and Rights of Preferred Stock
of the Registrant, as filed with the Delaware Secretary of State on May
20, 1998
3.8 Amended Certificate of Designations, Preferences and Rights of
Preferred Stock of the Registrant, as filed with the Delaware Secretary
of State on July 1, 1998
3.9 Certificate of Correction of Amended Certificate of Designations,
Preferences and Rights of Preferred Stock as filed with the Delaware
Secretary of State on November 20, 2000
3.11 Certificate of Correction of Second Amended Certificate of
Designations, Preferences and Rights of Preferred Stock as filed with
the Delaware Secretary of State on November 20, 2000
3.13 Bylaws of the Registrant
4.3 Form of Warrant to Purchase Common Stock of the Registrant issued in
connection with the Digital Transmission Systems, Inc. investment
4.4 Form of Warrant to Purchase Common Stock of the Registrant issued in
connection with various private placements
10.1 1993 Stock Option Plan
10.5 Employment Agreement dated October 15, 1997 between the Registrant and
Carmine T. Oliva
II-13
<PAGE>
10.6 Employment Agreement dated May 1, 1998 between the Registrant and
Graham Jefferies
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Certified Public Accountants
24.1 Power of Attorney (included on the signature page of this registration
statement)
</TABLE>
II-14
