Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-63024
PROSPECTUS
4,520,555 SHARES
MICROTEL INTERNATIONAL, INC.
COMMON STOCK
The shares of our common stock being offered under this prospectus are
being offered by some of our security holders identified in this prospectus for
their own accounts. Our common stock trades on the NASD's OTC Bulletin Board
under the symbol "MCTL." On July 23, 2001, the high and low sale prices for a
share of our common stock were $0.42 and $0.40, respectively.
The mailing address and the telephone number of our principal executive
offices are 9485 Haven Avenue, Suite 100, Rancho Cucamonga, California 91730,
(909) 987-9220.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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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 July 30, 2001.
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
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Prospectus Summary..............................................................................................3
Risk Factors....................................................................................................7
Special Note Regarding Forward-Looking Statements..............................................................14
Use of Proceeds................................................................................................15
Dividend Policy................................................................................................15
Price Range of Common Stock....................................................................................15
Capitalization.................................................................................................16
Selected Consolidated Historical Financial Data................................................................17
Management's Discussion and Analysis of Financial Condition and Results of Operations..........................19
Business.......................................................................................................33
Management.....................................................................................................54
Certain Relationships and Related Transactions.................................................................64
Principal And Selling Security Holders.........................................................................70
Plan of Distribution...........................................................................................76
Description of Capital Stock...................................................................................78
Legal Matters..................................................................................................82
Experts........................................................................................................82
Additional Information.........................................................................................82
Index to Financial Statements and Financial Statement Schedule................................................F-1
2
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.
MICROTEL INTERNATIONAL, INC.
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, XET
Corporation (formerly, 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:
o 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)
o 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, aerospace and military
customers.
3
THE OFFERING
Common stock offered by selling security holders 4,520,555(1)
Common stock outstanding prior to this offering 20,570,703(2)
Common stock outstanding following this offering if all 25,046,258(1)(2)
shares are sold
Use of Proceeds All proceeds of this offering will be
received by selling security holders for
their own accounts.
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.
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(1) Assumes exercise of all of the warrants whose underlying shares of
common stock are covered by this prospectus in exchange for 1,712,305
shares of common stock, conversion of all of the shares of Series A
Preferred Stock whose underlying shares of common stock are covered by
this prospectus in exchange for 1,263,250 shares of common stock,
conversion of all of the shares of Series B Preferred Stock whose
underlying shares of common stock are covered by this prospectus in
exchange for 1,500,000 shares of common stock, and immediate resale of
all of those 4,475,555 shares of common stock.
(2) As of July 24, 2001, a total of 20,570,703 shares of common stock were
issued and outstanding, excluding:
o 3,713,100 shares reserved for issuance under our stock option
plans, of which options to purchase 1,673,924 shares were
outstanding;
o 1,263,250 shares issuable upon conversion of our Series A
Preferred Stock, all of which shares of common stock are
covered by this prospectus;
o 1,500,000 shares issuable or to become issuable upon
conversion of our Series B Preferred Stock, all of which
shares of common stock are covered by this prospectus;
o 2,206,756 shares issuable upon exercise of outstanding
warrants, including the warrants whose underlying shares of
common stock are covered by this prospectus; and
o any additional shares of common stock we may issue from time
to time after July 24, 2001.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE THREE MONTHS ENDED
YEAR MONTHS YEARS ENDED MARCH 31,
ENDED ENDED DECEMBER 31, (UNAUDITED)
STATEMENTS OF OPERATIONS AND SEPT. 30, DEC. 31, ---------------------------------------- --------------------
COMPREHENSIVE INCOME DATA: 1996 1996 1997 1998 1999 2000 2000 2001
---- ---- ---- ---- ---- ---- ---- ----
Net sales........................ $14,270 $ 3,100 $27,251 $30,100 $25,913 $28,050 $5,860 $7,465
Income (loss) from operations.... 1,402 (277) (6,916) 343 (3,578) 1,527 (64) 175
Income (loss) from continuing
operations.................... 1,686 (258) (7,640) (562) (4,198) 1,703 (64) 110
Loss from discontinued operations (603) (647) (2,053) (623) (398) (699) (56) --
Net income (loss)................ 1,083 (905) (9,693) (1,185) (4,596) 1,004 (127) 107
Total comprehensive income (loss) 994 (779) (9,953) (979) (4,921) 499 169 (115)
Basic earnings (loss) per share.. $0.17 $(0.15) $(0.96) $(0.10) $(0.28) $0.05 $(0.01) $0.01
Diluted earnings (loss) per share $0.17 $(0.15) $(0.96) $(0.10) $(0.28) $0.04 $(0.01) $0.00
Weighted average shares
outstanding, basic............ 5,841 6,064 10,137 11,952 16,638 19,504 18,174 23,816
Weighted average shares
outstanding, diluted.......... 5,841 6,064 10,137 11,952 16,638 23,027 18,174 23,816
PRO FORMA STATEMENTS OF
OPERATIONS AND COMPREHENSIVE
INCOME DATA:
Net sales............................................................................ $29,680
Income from operations............................................................... 1,219
Income from continuing operations.................................................... 1,255
Loss from discontinued operations.................................................... (699)
Net income........................................................................... 556
Total comprehensive income........................................................... 51
Basic earnings per share............................................................. 0.03
Diluted earnings per share........................................................... 0.02
Weighted average shares outstanding, basic........................................... 19,504
Weighted average shares outstanding, diluted......................................... 23,904
MARCH 31, 2001
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BALANCE SHEET DATA: (unaudited)
Cash and cash equivalents........................................................................... $ 368
Working capital..................................................................................... 2,688
Total assets........................................................................................ 18,043
Long-term debt, net of current portion.............................................................. 225
Stockholders' equity................................................................................ 5,688
Convertible redeemable preferred stock.............................................................. 261
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 XET Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XET Corporation on March 26, 1997.
5
The historical financial data above for periods prior to the merger is
that of XET Corporation. In conjunction with the reverse acquisition accounting
treatment, XET 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 XET Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
The unaudited pro forma results of operations data for the year ended
December 31, 2000 set forth above gives pro forma effect to the acquisition of
T-Com, LLC, as if T-Com, LLC and MicroTel had been combined as of the beginning
of 2000. The pro forma results are not necessarily indicative of the results
which would have occurred if the business combination had been in effect at the
beginning of the period presented, nor does it purport to present results of
operations for future periods.
In October 2000, we decided to discontinue our circuits segment's
operations. Accordingly, all current and prior financial information related
to the circuits segment operations have been presented as discontinued
operations in historical financial data above.
6
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 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.
We incurred significant net operating losses in each of the years ended
December 31, 1999 and 1998 and incurred a net operating profit in the year ended
December 31, 2000 and the three months ended March 31, 2001. 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. For the twelve months ended December 31,
2000, we recorded net income of $1.0 million. For the three months ended March
31, 2001, we recorded net income of $107,000. Our accumulated deficit and
accumulated other comprehensive loss through March 31, 2001 were approximately
$18.7 million and $1.0 million, respectively, and as of that date we had a total
stockholders' equity of approximately $5.7 million. Although we recently
reported profitable operations, there is no assurance that we will continue to
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 through debt or equity financing to the extent we may need it for
our continued operations or for planned expansion. Consequently, future losses
may have a material adverse effect on our business, prospects, financial
condition, results of operations and cash flows.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY THAT 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. Sales
of our products and services to customers located outside of the United States
accounted for approximately 53% of our net sales for the year ended December 31,
2000 and approximately 57% of our net sales for the quarter ended March 31,
2001. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. 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
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE
SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND
RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND
TELECOMMUNICATIONS INDUSTRIES.
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
telecommunications and electronic components markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could cause us to reduce our
competitiveness, revenues, profit margins or market share.
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR
BUSINESS IF DEMAND IS REDUCED.
During the year ended December 31, 2000 and the quarter ended March 31,
2001, the sale of telecommunications equipment and related services accounted
for approximately 56% and 51%, respectively, of our total sales and the sale of
electronic components accounted for approximately 44% and 49%, respectively, of
our total sales. In many cases we have long-term contracts with our
telecommunications and electronic components customers that cover the general
terms and conditions of our relationships with them but that do not include
long-term purchase orders or commitments. Rather, our customers issue purchase
orders requesting the quantities of telecommunications equipment they desire to
purchase from us, and if we are able and willing to fill those orders, then we
fill them under the terms of the contracts. Accordingly, we cannot rely on
long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.
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, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. We have, from time to time,
experienced difficulty in obtaining some components. We do not have guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that our suppliers will continue to meet our requirements. If our existing
suppliers are unable to meet our requirements, we could be required to alter
product designs to use alternative components or, if alterations are not
feasible, we could be required to eliminate products from our product line.
Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could have a
material adverse effect on our results of operations because our products
compete on price, and therefore we may not be able to adjust product pricing to
8
reflect the increases in component costs. Also, an extended interruption in the
supply of components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations by
impairing our ability to timely deliver quality products to our customers.
Delays in deliveries due to shortages of components or other factors may result
in cancellation by our customers of all or part of their orders. Although
customers who purchase from us products, such as many of our digital switches,
that are not readily available from other sources would be less likely than
other customers of ours to cancel their orders due to production delays, we
cannot assure you that cancellations will not occur.
IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR COMPLETE STRATEGIC ACQUISITIONS,
OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy includes growth through acquisitions that we
believe will improve our competitive capabilities 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. Acquisitions may also require us to expend a
substantial amount of cash or other resources, not only as a result of the
direct expenses involved in the acquisition transaction but also as a result of
ongoing research and development activities that may be required to maintain or
enhance the long-term competitiveness of acquired products, particularly those
products marketed to the rapidly evolving telecommunications industry. If we are
unable to complete strategic acquisitions due to our inability to identify
appropriate targets or to manage the difficulties or costs involved in the
acquisitions, our long-term competitive positioning could suffer.
WE RELY HEAVILY ON OUR MANAGEMENT, 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. Mr. Oliva co-founded XET Corporation and has developed
personal contacts and other skills that we rely upon in connection with our
financing, acquisition and general business strategies. Mr. Jefferies is a
long-time employee of MicroTel who we have relied upon in connection with our
United Kingdom acquisitions and who fulfills significant operational
responsibilities in connection with our foreign operations. Consequently, 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 of our executive officers 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 OR DECLINE.
Our quarterly operating results have varied significantly in the past
and will likely continue to do so in the future due to a variety of factors,
many of which are beyond our control. Fluctuations in our operating results may
result from a variety of factors.
9
For example, changes affecting the telecommunications industry,
including consolidations and restructuring of United States and foreign
telephone companies, can cause our sales to decrease or increase. Our sales may
increase if we obtain new customers as a result of the consolidations or
restructurings. However, our sales may decrease, either temporarily to the
extent we have difficulty collecting monies due from our customers who are in
the process of reorganizing, or permanently to the extent our customers are
acquired by or combined with companies that are and choose to remain customers
of our competitors.
In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of the regional Bell operating companies, or RBOCs, has
had and will continue to have for the foreseeable future a significant impact on
our quarterly operating results. RBOCs generally obtain approval for their
annual budgets during the first quarter of each calendar year. If an RBOC's
annual budget is not approved early in the calendar year or is insufficient to
cover its desired purchases for the entire calendar year, we are unable to sell
products to the RBOC during the period of the delay or shortfall.
Due to these factors and other factors, including changes in general
economic conditions, we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful in predicting future
performance. If our operating results do not meet the expectations of investors,
our stock price may fluctuate or decline.
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS 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. Our financial condition would be adversely impacted if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.
BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER
RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY
IMPACT OUR FINANCIAL CONDITION.
During 1998 and 1999 we modified the terms of some of our outstanding
warrants and the terms of our Series A Preferred Stock. These transactions may
have been subject to the federal tender offer rules that would have required us
to make filings with the Securities and Exchange Commission and to conduct our
activities in a manner prescribed by the tender offer rules. We did not make any
of these filings nor did we comply with the other requirements of the tender
offer rules. Although we believe that our activities surrounding the
modifications to our warrants and Series A Preferred Stock are not subject to
the federal tender offer rules, the Securities and Exchange Commission, as well
as those security holders who participated in the modification transactions, may
disagree with us. If that were to happen, we may be subject to fines by the
Securities and Exchange Commission and may be required by the Securities and
Exchange Commission and/or the security holders to rescind the transactions. The
dollar amount of any fines and the costs associated with rescission, including
the related legal and accounting costs, are difficult for us to quantify, yet
they could be significant. If they are significant, our financial condition
would be adversely impacted.
10
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 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 suit is not
determinable and may have a material adverse effect 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 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, our 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 future taxable income, which will negatively impact our results of
operations and cash flows.
11
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:
o variations in our quarterly operating results;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the electronics hardware
industry;
o 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;
o regulatory developments;
o additions or departures of key personnel; and
o 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 some 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 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.
12
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE
AVAILABLE TO US ON ACCEPTABLE TERMS, OR AT ALL. IF WE OBTAIN FINANCING THROUGH
THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY
RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY
REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY
TECHNOLOGIES.
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 additional financing will be available to us on acceptable terms, or at
all. If we raise additional funds 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 portions of our operations and
product development and marketing efforts or to obtain funds through
arrangements with partners or others that may require us to relinquish rights to
some of our technologies or potential products, services or other assets.
Accordingly, the inability to obtain financing could result in a significant
loss of ownership and/or control of our proprietary technology and other
important assets and could also adversely affect our ability to fund our
continued operations and our product development and marketing efforts that
historically have contributed significantly to our competitiveness.
SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD
ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of July 24, 2001, we had outstanding 20,570,703 shares of common
stock, of which 20,353,203 shares were unrestricted or were eligible for resale
without registration under Rule 144 of the Securities Act of 1933, 45,000 shares
were being included for resale under this prospectus and an additional 1,743,285
shares were entitled to be registered for resale. As of July 24, 2001, we also
had outstanding options, warrants and preferred stock that were exercisable for
or convertible into 6,643,930 shares of common stock. Of these, 1,673,924 shares
of common stock underlying options were registered for resale, and 1,712,305
shares of common stock underlying warrants and 2,763,250 shares of common stock
underlying preferred stock were being included for resale under this prospectus.
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. Any adverse effect on the market price for
our common stock could make it difficult for us to sell equity securities 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 NASD's 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.
13
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF MICROTEL, 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, 200 have been designated as
Series A Preferred, of which 25 are currently outstanding. In addition, 150,000
shares have been designated as Series B Preferred Stock, all of which 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, which would delay, defer or prevent a change in control of MicroTel.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
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 business combinations with interested stockholders, as defined
by statute. These provisions may have the effect of delaying or preventing a
change in control of MicroTel without action by our stockholders, even if a
change in control would be beneficial to our stockholders. Consequently, these
provisions could adversely affect the price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among
others:
o the projected growth in the telecommunications and electronic
components markets;
o our business strategy for expanding our presence in these
markets;
o anticipated trends in our financial condition and results of
operations; and
o 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 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 factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
14
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus by the selling security holders.
Rather, the selling security holders will receive those proceeds directly. On
July 23, 2001, the high and low sale prices for a share of our common stock were
$0.42 and $0.40, respectively.
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.
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 as obtained from the Historical Research Department of The Nasdaq
Stock Market, Inc. and from Pink Sheets LLC. The prices shown reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
PRICE RANGE
---------------------
LOW HIGH
--- ----
1999:
First Quarter (January 1 - March 31).................................. .375 1.125
Second Quarter (April 1 - June 30).................................... .1875 .5625
Third Quarter (July 1 - September 30)................................. .18 .40
Fourth Quarter (October 1 - December 31).............................. .16 .44
2000:
First Quarter......................................................... .42 2.8125
Second Quarter........................................................ .4375 1.25
Third Quarter......................................................... .4375 .8438
Fourth Quarter........................................................ .20 .53
2001:
First Quarter......................................................... .34 .5625
Second Quarter......................................................... .35 .59
As of July 24, 2001, we had 20,570,703 shares of common stock
outstanding held of record by approximately 3,600 stockholders, and the high and
low sale prices of our common stock on the OTC Bulletin Board on that date were
$0.42 and $0.40, respectively.
15
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2001.
You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
MARCH 31, 2001
---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE DATA)
Cash and cash equivalents............................................. $368
----
Long-term debt, less current portion.................................. 225
Convertible redeemable preferred stock, $10,000 unit value. Authorized
200 shares; issued and outstanding 25 shares (aggregate liquidation
preference of $250)................................................. 261
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 50,000,000 shares; issued
and outstanding, 20,570,415....................................... 68
Additional paid-in capital............................................ 24,307
Accumulated deficit................................................... (18,672)
Accumulated other comprehensive loss.................................. (953)
----------
Total stockholders' equity.......................................... 5,688
----------
Total capitalization................................................ $ 6,542
==========
16
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated historical financial data 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 with respect to the years ended December 31, 1998, 1999 and 2000 and the
consolidated balance sheet data at December 31, 1999 and 2000 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 three month
periods ended March 31, 2000 and 2001 and the consolidated balance sheet data as
of March 31, 2001 are derived from unaudited financial statements included
elsewhere in the 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 these periods. The historical results are
not necessarily indicative of results to be expected for any future periods.
THREE THREE MONTHS
YEAR MONTHS ENDED
ENDED ENDED YEARS ENDED DECEMBER 31, MARCH 31,
SEPT. 30, DEC. 31, --------------------------------------------- ---------------------
1996 1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME DATA:
Net sales ........................... $ 14,270 $ 3,100 $ 27,251 $ 30,100 $ 25,913 $ 28,050 $ 5,860 $ 7,465
Cost of sales ....................... 9,442 2,332 18,069 17,353 17,066 15,529 3,534 4,350
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ........................ 4,828 768 9,182 12,747 8,847 12,521 2,326 3,115
Selling, general and administrative
expenses ......................... 3,426 1,045 8,608 10,202 10,584 9,827 2,147 2,581
Engineering and product development
expenses ......................... -- -- 1,797 2,202 1,841 1,167 243 359
Write-down of goodwill .............. -- -- 5,693 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ....... 1,402 (277) (6,916) 343 (3,578) 1,527 (64) 175
Total other income (expense) ........ 304 49 (627) (804) (492) 207 -- (65)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes ... 1,706 (228) (7,543) (461) (4,070) 1,734 (64) 110
Income tax expense .................. 20 30 97 101 128 31 7 3
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations .......................... 1,686 (258) (7,640) (562) (4,198) 1,703 (71) 107
Discontinued operations:
Loss from operations of
discontinued segment ........... (603) (647) (2,053) (1,203) (847) (212) (56) --
Gain (loss) on disposal of
discontinued segment including
provision for phase out period of
$158 in 2000 .................... -- -- -- 580 449 (487) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) ................... $ 1,083 $ (905) $ (9,693) $ (1,185) $ (4,596) $ 1,004 $ (127) $ 107
Foreign currency translation
adjustment ....................... $ (89) $ 126 $ (260) $ 206 $ (325) $ (505) $ 296 $ (222)
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive income (loss) ... $ 994 $ (799) $ (9,953) $ (979) $ (4,921) $ 499 $ 169 $ (115)
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share from
continuing operations ............ $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.09 $ (0.01) $ 0.01
Diluted earnings (loss) per share
from continuing operations ....... $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.07 $ (0.01) $ 0.00
Basic earnings (loss) per share from
discontinued operations .......... $ (0.10) $ (0.10) $ (0.20) $(0.05) $ (0.02) $ (0.04) $ (0.00) --
Diluted earnings (loss) per share
from discontinued operations ..... $ (0.10) $ (0.10) $ (0.20) $(0.05) $ (0.02) $ (0.03) $ (0.00) --
Basic earnings (loss) per share ..... $ 0.17 $ (0.15) (0.96) $(0.10) $ (0.28) $ 0.05 $ (0.01) $ 0.01
Diluted earnings (loss) per share ... $ 0.17 $ (0.15) $ (0.96) $(0.10) $ (0.28) $ 0.04 $ (0.01) $ 0.00
Weighted average shares outstanding,
basic ............................ 5,841 6,064 10,137 11,952 16,638 19,504 18,174 23,816
Weighted average shares outstanding,
diluted .......................... 5,841 6,064 10,137 11,952 16,638 23,027 18,174 23,816
17
YEARS ENDED DECEMBER 31
SEPTEMBER 30, -------------------------------------------------- MARCH 31,
1996 1996 1997 1998 1999 2000 2001
------------- ---- ---- ---- ---- ---- -----------
BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents...... $ 492 $ 574 $ 1,571 $ 450 $ 450 $ 756 $ 368
Working capital................ 3,911 3,554 4,625 4,999 1,080 2,780 2,688
Total assets................... 12,870 12,316 20,129 20,352 16,489 19,484 18,043
Long-term debt, net of current
portion..................... 1,755 2,019 2,012 1,175 143 282 225
Stockholders' equity........... 5,486 4,753 6,011 5,482 3,801 5,807 5,688
Convertible redeemable
preferred stock............. -- -- 1 1,516 588 259 261
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 XET Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XET Corporation on March 26, 1997.
The historical financial data above for periods prior to the merger is
that of XET Corporation. In conjunction with the reverse acquisition accounting
treatment, XET 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 XET Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
In October 2000, we decided to discontinue our circuits segment's
operations. Accordingly, all current and prior financial information related to
the circuits segment operations have been presented as discontinued operations
in historical financial data above.
18
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 previously organized our operations in three business segments:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o 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.
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com, a telecommunications field test instruments
manufacturer located in Sunnyvale, California. T-Com produced central office
equipment, which is equipment that is typically employed in switching centers
and network operating centers.
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 our wholly-owned subsidiary, XET
Corporation. We intend to retain our Monrovia, California circuit board
manufacturing facility as a small captive supplier of circuit boards to XET
Corporation's Digitran Division in our electronic components segment.
Through our three direct wholly-owned operating subsidiaries, XET
Corporation, CXR Telcom Corporation, or CXR Telcom, 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
material business segments:
o 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)
o 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, aerospace and military
customers.
19
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of total net sales.
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- ----------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
Net sales................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................ 57.7 65.9 55.4 60.3 58.3
------ ------ ------ ------ ------
Gross profit............................................. 42.3 34.1 44.6 39.7 41.7
Selling, general and administrative expenses............. 33.9 40.8 35.0 36.6 34.6
Engineering and product development expenses............. 7.3 7.1 4.2 4.1 4.8
------ ------ ------ ------ ------
Operating income (loss).................................. 1.1 (13.8) 5.4 (1.1) 2.3
Interest expense......................................... (2.2) (1.6) (1.5) (1.6) (1.2)
Other income (expense)................................... (0.4) (0.3) 2.3 1.6 (0.4)
------ ------ ------ ------ ------
Income (loss) from continuing operations before income
taxes................................................. (1.5) (15.7) 6.2 (1.1) 1.5
Income taxes............................................. 0.4 0.5 0.1 0.1 0.1
------ ------ ------ ------ ------
Income (loss) from continuing operations................. (1.9) (16.2) 6.1 (1.2) 1.4
Loss from discontinued operations........................ (4.0) (3.2) (0.8) (1.0) --
Gain (loss) on disposal of discontinued segment.......... 1.9 1.7 (1.7) -- --
------ ------ ------ ------ ------
Net income (loss)........................................ (3.9)% (17.7)% 3.6% (2.2)% 1.4%
====== ======= ====== ======= ======
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended March 31, 2001
increased by $1,605,000 (27.4%) to $7,465,000 as compared to $5,860,000 for the
three months ended March 31, 2000.
Net sales of our telecommunications products for the three months ended
March 31, 2001 increased by $217,000 (6.1%) to $3,772,000, as compared to
$3,553,000 for the comparable period in 2000. Net sales of our U. S.-based
telecom operation of CXR Telcom for the three months ended March 31, 2001
increased by $147,000 (11.2%) to $1,464,000, as compared to $1,317,000 for the
comparable period in 2000. This increase was mainly due to the addition of
$410,000 of net sales of T-Com products that more than offset a $263,000 decline
in sales of our CXR HALCYON 700 series field test equipment. Both the CXR
HALCYON 700 series field test equipment and the T-Com central office test
equipment had lower than expected sales in the first quarter of 2001 primarily
due to weak order entry in November and December 2000 and the fact that many of
CXR Telcom's customers did not have their capital budgets released until late in
February 2001. This led to a slow sales start in the first two months of the
quarter for CXR Telcom. Sales of our telecom test equipment have since returned
to a level more consistent with our expectations. Net sales of our transmission
and original equipment manufactured test instruments by our French subsidiary,
CXR, S.A., for the three months ended March 31, 2001 increased by $72,000 (3.1%)
to $2,309,000, as compared to $2,237,000 for the comparable prior year period.
This increase would have been larger if not for the decline in the value of the
French Franc in relation to the value of the U.S. Dollar in the quarter ended
March 31, 2001 as compared to their relative values for the quarter ended March
31, 2000. CXR, S. A. sales in CXR, S.A.'s functional currency, the French Franc,
actually increased by 14.4%. However, due to the decline in the value of the
French Franc in relation to the value of the U.S. Dollar, CXR S.A.'s sales show
only a slight increase when measured in U.S. Dollars.
20
Net sales of our electronic components for the three months ended March
31, 2001 increased by $1,388,000 (60.2%) to $3,693,000, as compared to
$2,307,000 for the comparable period in 2000, primarily due to an $873,000
increase in sales of power supplies manufactured by our U.K. subsidiary, XCEL
Corporation Ltd. This increase in net sales was primarily due to an increase in
deliveries of outstanding contracts and, to a lesser extent, to the acquisition
of Belix Power Supply Ltd. in April 2000 which provided $193,000 of this
increase. Also contributing to the increase in sales of our electronic
components segment was XET Corporation's Digitran Division in Rancho Cucamonga,
California, which increased its sales in the quarter ended March 31, 2001 by
$480,000 (39.6%) to $1,692,000, as compared to $1,212,000 for the comparable
prior year period. This increase was mainly due to shipments of digital switches
under its contract with BAE Systems, Canada. Although shipments under this
contract ended during the first quarter of 2001, we anticipate that higher
revenues from our power conversion products will offset completion of our
contract with BAE Systems, Canada.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 41.7% for the three months ended March 31, 2001, as compared to 39.7% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$789,000 (33.9%) to $3,115,000 for the three months ended March 31, 2001, as
compared to $2,326,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $37,000 (2.7%) to $1,388,000 for the three months ended March 31, 2001,
as compared to $1,351,000 for the comparable period in 2000, and decreased as a
percentage of net sales from 42.3% in 2000 to 36.8% in 2001. The decrease in
gross profit as a percentage of net sales was due primarily to the addition of
T-Com costs coupled with lower net sales of our CXR HALCYON 700 series test
instruments in the first quarter of 2001 as compared to the first quarter of
2000.
Gross profit for our electronic components segment increased in dollar
terms by $752,000 (77.2%) to $1,727,000 for the three months ended March 31,
2001, as compared to $975,000 for the comparable period in 2000, and increased
as a percentage of related net sales from 42.3% in 2000 to 46.8% in 2001. This
increase was primarily the result of improved profit margins in connection with
higher production volumes and a larger percentage of higher margin night vision
switch sales by XET Corporation's Digitran Division. Also contributing to the
increase in gross profit was increased production at XCEL Corporation Ltd. in
the U.K. due to substantially higher sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $434,000 (20.2%) to $2,581,000 for the
three months ended March 31, 2001, as compared to $2,147,000 for the comparable
period in 2000. The increase in these expenses was primarily due to an increase
in legal and accounting fees of $164,000 for various Securities and Exchange
Commission filings, increases in administrative expenses related to the T-Com
acquisition, increased legal fees related to the Belix acquisition, and
increases in wages and group insurance costs of $217,000.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$116,000 (47.7%) to $359,000 for the three months ended March 31, 2001, as
compared to $243,000 for the comparable prior year period. The increase
primarily was due to the addition of engineering staff and related costs at CXR
Telcom reflecting the T-Com acquisition.
21
OTHER INCOME AND EXPENSE. Interest expense was reduced slightly to
$93,000 for the three months ended March 31, 2001 from $96,000 in the comparable
period in 2000. Other income of $28,000 in the first quarter of 2001 declined
from $96,000 in the first quarter of 2000 primarily due to a $43,000 gain on the
sale of a fixed asset reported in the first quarter of 2000.
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 $56,000 for the three months ended March 31, 2000. Net sales, gross profit
and selling, general and administrative expenses for our circuits business for
the three months ended March 31, 2000 were $628,000, $580,000 and $103,000,
respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 2000 increased by
$2,137,000 (8.2%) to $28,050,000 as compared to $25,913,000 for the year ended
December 31, 1999.
Net sales of our telecommunications products and services during 2000
declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment
sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to
$4,983,000 for 1999. This increase in sales of test equipment was primarily due
to the positive market acceptance of our CXR HALCYON 704 series product line
which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this
increase was substantially attributable to additional test equipment sales as a
result of our acquisition of the business of T-Com in August 2000. This increase
in net sales of test equipment was offset by a reduction in sales of
transmission and networking equipment that are produced at our French
subsidiary, CXR S. A., of $2,931,000 (37.8%) from $10,683,000 during 1999 to
$7,752,000 for 2000. The decline in the net sales of these products was
primarily due to the conversion of sales amounts from French Francs to the U.S.
Dollars. The average U.S. Dollar value of the French Franc has declined
approximately 15% from 1999 to 2000. In addition, budget delays and reductions
within the French public sector also contributed to the reduction of
transmission equipment sales.
Net sales of electronic components for 2000 increased by $2,145,000
(20.9%) to $12,392,000 as compared to $10,247,000 for 1999. This increase was
primarily due to an increase in digital switch sales of XET Corporation's
Digitran Division of $2,905,000 (63%) for 2000 to $7,508,000 from $4,603,000 for
1999. Contributing to this increase was a large order for switches placed by BAE
Systems of Canada, which accounted for $1,656,000 of net sales in 2000. Sales
under our contract with BAE Systems Canada, Inc. ended during the first quarter
of 2001. This increase was offset by the termination of our subsystem assembly
business that accounted for $670,000 of sales in 1999.
GROSS PROFIT. Gross profit as a percentage of net sales increased to
44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit
increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to
$8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for
inventory obsolescence of $893,000 and $1,144,000, respectively. Provisions for
inventory obsolescence are recorded as necessary to reduce obsolete inventory to
estimated net realizable value or to specifically reserve for obsolete inventory
that we intend to dispose of. Upon disposal of obsolete inventory, the inventory
is written off and the allowance for inventory obsolescence is reduced.
22
Gross profit for our telecommunications segment increased in dollar
terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for
1999 and increased as a percentage of related net sales from 33.4% in 1999 to
41.5% in 2000. This increase in gross profit was primarily due to a larger
portion of telecommunications segment sales consisting of higher margin test
equipment in 2000 which included the new CXR HALCYON 704 series test equipment
and our T-Com test equipment. These products, each of which contributed a
greater proportion of sales to this segment in 2000 than in 1999, generate a
higher gross profit margin than the older model test equipment and generally
contribute a higher margin than the transmission products.
Gross profit of our electronic components segment increased in total
dollar terms by $2,382,000 (65.6%) to $6,013,000 for 2000 from $3,631,000 in
1999 and increased as a percentage of related net sales from 35.2% in 1999 to
48.5% in 2000. The increase in gross profit margin in 2000 as compared to 1999
was primarily due to improved profit margins in connection with sales made by
XET 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 volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as
compared to $10,584,000 for 1999 and decreased as a percentage of net sales from
40.8% in 1999 to 35.0% in 2000. This decrease is attributable to a reduction in
selling expenses of $291,000 and reduction in general and administrative
expenses of $466,000. The decrease in general and administrative expenses was
primarily due to continued cost cutting efforts and due to certain expenses
incurred in 1999 that were not incurred in 2000. These expenses include a
$452,000 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. Alternatively, there
were general and administrative expenses incurred in 2000 that were not incurred
in 1999 including approximately $200,000 of legal and accounting fees related to
the filing of a registration statement and other filings with the Securities and
Exchange Commission.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The
majority of this reduction is due to eliminating CXR Telcom's engineering
function in Fremont, California for test instruments and concentrating our
engineering efforts in only one location, our St. Charles, Illinois facility,
and the transfer of transmission and network access product engineering to CXR
S. A. in France with no additional staffing added there.
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$424,000 for 2000 as compared to $411,000 for 1999. Other income was $631,000
for 2000 as compared to an expense of $81,000 for 1999. Other income in 2000
included $197,000 of gain on the sale of common stock of Wi-LAN, Inc., $137,000
reduction in a warranty reserve, $90,000 for reductions in accruals for
settlements related to leased equipment and gain on foreign currency exchange of
$94,000.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes and U.S. alternative minimum tax as we are in
a loss carryforward position for federal income tax purposes. At December 31,
2000 we had total net deferred income tax assets of approximately $16,321,000.
These 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 these assets is not more likely than not in light
of our recurring losses from operations.
23
DISCONTINUED OPERATIONS
As a result of our decision in October 2000 to discontinue our last
remaining material circuits business, which operated as the XCEL Etch Tek
Division of our XET Corporation subsidiary, our circuits segment has been
accounted for as discontinued operations. We reported a net loss from
discontinued operations of $699,000 for 2000 as compared to a net loss of
$398,000 for 1999. The 2000 net loss included a loss of $487,000 from the
disposal of our discontinued operations, including $122,000 for phase out
period, as compared to a gain of $449,000 for 1999 relating to the sale of
HyComp, Inc., a subsidiary in our circuits segment, and the separate sale of its
corporate shell.
Net sales for our circuits business for 2000 decreased by $131,000
(5.5%) to $2,257,000 as compared to $2,388,000 for 1999 primarily due to the
sale of our circuits segment facility in November 2000, which resulted in 10 1/2
months of circuit segment sales during 2000.
Selling, general and administrative expenses related to our
discontinued operations declined by $288,000 (43.4%) to $375,000 for 2000 as
compared to $663,000 for 1999 primarily due to the sale of HyComp, Inc. in 1999
and cost reductions of Etch-Tek.
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 18.4% 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 15% 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, the discontinuance of low margin
subsystem assembly business, which represented sales of $670,000 in 1999 as
compared to $1,069,000 in 1998, a $1,199,000 decline in sales of our digital
switches. We believe that the reduction in digital switch sales in 1999 as
compared to 1998 was at least partially due to a preannounced price increase
effective in early 1999 that caused some customers to purchase switches in 1998
rather than in 1999 in order to avoid the 1999 price increase.
24
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 34.1% for 1999 as compared to 42.3% 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. For the years ended December 31, 1999 and 1998, cost of
sales included provisions for inventory obsolescence of $1,144,000 and $879,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that we intend to dispose of. Upon disposal of
obsolete inventory, the inventory is written off and the allowance for inventory
obsolescence is reduced.
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 new
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 increased by $382,000 (3.7%) to $10,584,000 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 visibility within the
investment community. Offsetting 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 now
housed only in our St. Charles, Illinois facility. We believe that engineering
and product development are important to our future profitability. All
engineering for our transmission products has been consolidated in France at our
CXR, S.A. facility.
OTHER INCOME AND EXPENSE. Interest expense was $411,000 in 1999 as
compared to interest expense of $675,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.
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. These 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 these assets is not more likely than not in light of our
recurring losses from operations.
25
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits operation in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $398,000 for 1999 as compared to a net loss of $623,000 for 1998.
Net sales for our circuits business for 1999 decreased by $4,773,000
(66.7%) to $2,388,000 as compared to $7,161,000 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 $848,000 (131.9%) to gross loss of $(205,000) 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 8.6% in 1999 primarily due to the sale of HyComp, Inc. in
1999, which accounted for $1,292,000 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.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, we funded our operations
primarily through revenue generated from our operations and through our 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 line of credit, have had a positive impact on
MicroTel.
As of December 31, 2000 we had working capital of $2,780,000 and an
accumulated deficit of $18,775,000. As of that date, we had $756,000 in cash and
cash equivalents and $7,440,000 of accounts receivable. As of March 31, 2001 we
had working capital of $2,688,000, an accumulated deficit of $18,672,000 and an
accumulated other comprehensive loss of $953,000. As of that date, we had
$368,000 in cash and cash equivalents and $6,876,000 of accounts receivable.
Cash provided by our operating activities totaled $142,000 and $14,000
for the three months ended March 31, 2001 and 2000, respectively. This increase
in cash provided by operations during the three months ended March 31, 2001
resulted primarily from a reduction in receivables and prepaid expenses
partially offset with a reduction in accounts payable and accrued expenses.
Cash used in our investing activities totaled $5,000 for the three
months ended March 31, 2001 as compared to cash provided by investing activities
of $557,000 for the three months ended March 31, 2000. Included in the prior
period's results is $520,000 from the sale of shares of common stock we held in
Digital Transmission Systems, Inc.
26
Cash used in financing activities totaled $339,000 for the three months
ended March 31, 2001 as compared to cash used in financing activities $252,000
for the three months ended March 31, 2000, primarily due to the reduction in
notes payable and long-term debt.
On June 23, 2000, our credit facility with our previous lender,
Congress Financial Corporation, or 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,
our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting
as guarantor, 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. As a condition of extending this credit
facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our
President and Chief Executive Officer, Carmine Oliva, to personally guaranty a
portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva
was released from this guaranty. 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 2000 financial
performance, we obtained a reduction in the interest rate to the prime rate plus
1% effective April 1, 2001. The balance outstanding under this credit facility
was $1,173,000 on March 31, 2001. There was $329,000 of additional borrowings
available as of March 31, 2001. The credit facility expires on August 16, 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. The balances outstanding under our U.K. and
France credit facilities were $1,607,000 and $655,000, respectively, on March
31, 2001.
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.
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 55% of our total net sales
for the three months ended March 31, 2001. Net sales from the French subsidiary
participating in the Euro conversion were approximately 31% of our net sales for
the three months ended March 31, 2001. We continue to review the impact of the
Euro conversion on our operations.
27
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 these 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.
SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected quarterly financial data for
each of the last eight fiscal quarters. 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.
QUARTER ENDED
-------------------------------------------------------------------------------------
JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC. 31, MAR 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales .................................. $ 6,319 $ 6,448 $ 6,469 $ 5,860 $ 6,828 $ 6,871 $ 8,491 $ 7,465
Cost of sales .............................. 3,938 4,203 4,798 3,534 4,032 3,080 4,883 4,350
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............................... 2,381 2,245 1,671 2,326 2,796 3,791 3,608 3,115
Selling, general and administrative
expenses ................................ 2,687 2,385 2,104 2,147 2,248 2,431 3,001 2,581
Engineering and product development
expenses ................................ 477 459 379 243 253 277 394 359
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations .............. (783) (599) (812) (64) 295 1,083 213 175
Other income (expenses), net ............... 164 (150) (885) -- 10 51 146 (65)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes .......... (619) (749) (1,697) (64) 305 1,134 359 110
Income tax expense ......................... 5 12 103 7 4 2 18 3
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations .............................. (624) (761) (1,800) (71) 301 1,132 341 107
Discontinued operations: Income (loss)
from operations of discontinued
segment ................................. (290) (273) 9 (56) (95) (68) 7 --
Gain (loss) on disposal of
discontinued segment .................... -- -- 118 -- -- (634) 147 --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .......................... $ (914) $(1,034) $(1,673) $ (127) $ 206 $ 430 $ 495 $ 107
Other comprehensive gain (loss), net ....... (161) 244 (145) 296 (436) (295) (70) $ (222)
-------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive gain (loss) ............ $(1,075) $ (790) $(1,818) $ 169 $ (230) $ 135 $ 425 $ 115
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations ................... (0.04) (0.05) (0.10) (0.01) 0.02 0.06 0.02 $ 0.01
Diluted earnings (loss) per share from
continuing operations ................... (0.04) (0.05) (0.10) (0.01) 0.02 0.05 0.01 $ 0.00
Basic earnings (loss) per share from
discontinued operations ................. (0.02) (0.01) 0.01 (0.00) (0.01) (0.04) 0.01 --
Diluted earnings (loss) per share from
discontinued operations ................. (0.02) (0.01) 0.01 (0.00) (0.01) (0.03) 0.01 --
Basic earnings (loss) per share ............ (0.06) (0.06) (0.09) (0.01) 0.01 0.02 0.03 $ 0.01
Diluted earnings (loss) per share .......... (0.06) (0.06) (0.09) (0.01) 0.01 0.02 0.02 $ 0.00
28
The following table sets forth a portion of the above unaudited
information as a percentage of net sales.
QUARTER ENDED
-------------------------------------------------------------------------------------
JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC. 31, MAR 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- -------- -------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales .................................. 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales .............................. 62 65 74 60 59 45 58 58
----- ----- ----- ----- ----- ----- ----- -----
Gross profit ............................... 38 35 26 40 41 55 42 42
Selling, general and administrative
expenses ................................ 43 37 33 37 33 35 35 35
Engineering and product development
expenses ................................ 7 7 6 4 4 4 5 5
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations .............. (12) (9) (13) (1) 4 16 2 2
Other income (expenses), net ............... 2 (3) (13) -- -- 1 2 (1)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes .......... (10) (12) (26) (1) 4 17 4 2
Income tax expense ......................... -- -- 2 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations .............................. (10) (12) (28) (1) 4 17 4 2
Discontinued operations:
Loss from operations of discontinued
segment ................................. (5) (4) -- (1) (1) (2) -- --
Gain (loss) on disposal of
discontinued segment .................... -- -- 2 -- -- (9) 2 --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) .......................... (15) (16) (26) (2) 3 6 6 2
Other comprehensive gain (loss), net ....... (2) 4 (2) 5 (6) (4) (1) (3)
----- ----- ----- ----- ----- ----- ----- -----
Total comprehensive gain (loss) ............ (17)% (12)% (28)% 3% (3)% 2% 5% (2)%
===== ===== ===== ===== ===== ===== ===== =====
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.
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.
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
declined to $13,000 during the quarter ended September 30, 1999, declined at a
faster rate than the increase in sales of our new models, which sales totaled $
758,000 during the quarter ended September 30, 1999. A loss of $761,000 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 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 after tax of $1,800,000 for the quarter ended
December 31, 1999.
29
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 some
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 $71,000 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 $301,000 as compared to a loss from continuing
operations of $624,000 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 $423,000 (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 large 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 XET Corporation improved overall
margins in our electronic components segment. These improvements in operating
performance contributed to income from continuing operations of $1,132,000 for
the quarter ended September 30, 2000 as compared to a loss from continuing
operations of $761,000 for the quarter ended September 30, 1999. The $1,132,000
income for the quarter ended September 30, 2000 includes $197,000 from the sale
of Wi-LAN, Inc. stock and $237,000 income contributed by T-Com, which was
acquired as of August 2000.
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 $68,000 operating losses of XCEL Etch
Tek as losses from discontinued operations.
Net sales from continuing operations for the three month period ended
December 31, 2000 increased $2,022,000 (31.3%) to $8,491,000 as compared to
$6,469,000 for the quarter ended December 31, 1999. The primary reasons for this
increase were $717,000 of sales due to the acquisition of T-Com and a $1,097,000
increase in digital switch sales. Gross profit, as a percentage of net sales,
increased from 25.8% for the quarter ended December 31, 1999 to 42.5% for the
quarter ended December 31, 2000 primarily due to higher volumes, reduced
overhead in connection with the move from the Ontario facility to the Rancho
Cucamonga facility and a larger percentage of higher margin night vision
switches. Gross margins declined to 42% in the fourth quarter of 2000 from 55%
30
in the third quarter of 2000. This reduction in gross margins was primarily due
to lower margins for our U.S.-based telecommunications equipment resulting from
our use of more costly contract manufactured circuit boards rather than circuit
boards that we previously assembled in-house. In addition to increased circuit
board costs, the cost of lost demo inventory and obsolete inventory contributed
to reduced gross margins. Also, the reduction in sales of U.S.
telecommunications test equipment from $2,086,000 during the third quarter to
$1,746,000 during the fourth quarter adversely affected gross margins due to
overhead expenses being applied to less units. Costs associated with the
integration of the T-Com acquisition and associated manufacturing consolidation
temporarily reduced efficiency and also was a factor in reducing gross margins
during the fourth quarter. Operating expenses increased to $3,001,000 during the
quarter ended December 31, 2001 as compared to $2,104,000 for the quarter ended
December 31, 1999 primarily due to higher legal and accounting fees and higher
expenses associated with the T-Com acquisition.
Net sales for the quarter ended March 31, 2001 declined $1,026,000
(12.1%) to $7,465,000 as compared to $8,491,000 for the three months ended
December 31, 2000. The majority of the reduction in sales was attributable to a
slowdown in sales for our U.S. produced telecommunication test equipment.
Management believes that the cause of this slowdown was primarily due to the
late release of capital budgets of our telecommunications customers. Gross
profit as a percentage of net sales declined slightly to 41.7% in the quarter
ended March 31, 2001 as compared to 42.5% in the quarter ended December 31,
2001. Gross profit in dollar terms declined $493,000 to $3,115,000 in the
quarter ended March 31, 2001 as compared to $3,608,000 in the quarter ended
December 31, 2000 primarily due to lower sales. Operating expenses declined
$455,000 (13.4%) in the quarter ended March 31, 2001 to $2,940,000 as compared
to $3,395,000 in the quarter ended March 31, 2000 primarily due to lower selling
expenses and legal accounting fees.
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.
31
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates. The following table provides information about our debt
obligations that are sensitive to changes in interest rates. Debt obligations
with fixed interest rates are not included as substantially all of such debt is
due in 2001. Accordingly, such debt does not expose us to significant interest
rate risk. All dollars are in thousands. The symbol "P" represents the prime
rate. The symbol "B" represents lender's base rate.
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
----------- ---- ---- ---- ---- ---- ---------- ----- --------
Line of Credit $1,798 $1,798 $1,798
(domestic)
Average Interest P+ 2%
Rate
Line of Credit $1,377 $1,377 $1,377
(Foreign)
Average Interest B+ 2.5%
Rate
Term Loan $137 $137 $83 $8 $5 $370 $370
Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2%
Rate
32
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 field and central office 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, XET Corporation (formerly, XIT Corporation). XET
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 XET Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of MicroTel with and into XET
Corporation. The merger involved an exchange by the former shareholders of XET
Corporation of all of the outstanding shares of XET Corporation for newly issued
shares of MicroTel representing a majority ownership interest in MicroTel.
Because the merger resulted in a change in control of MicroTel, the merger was
accounted for as a reverse acquisition, and historical financial information of
XET Corporation is used as the historical financial information of MicroTel.
We previously organized our operations in three business segments:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o 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.
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com. T-Com was a privately-held
telecommunications test instruments manufacturer located in Sunnyvale,
California. T-Com produced central office equipment, which is equipment that is
typically used in telephone switching centers and network operating centers.
Prior to the T-Com acquisition, our telecommunications test instruments product
line was limited to equipment used in remote field locations.
One of our main purposes for the T-Com acquisition was to acquire
rights to central office equipment products and access to customers who purchase
those products. We believe that on a long-term basis, telecommunications
companies and other purchasers of telecommunications test instruments may
attempt to enhance their efficiency by increasing reliance upon central office
equipment and decreasing reliance upon field equipment to the extent technology
and circumstances allow. We also believe that we may be able to take advantage
of cross-marketing opportunities for our central office and field equipment.
Further, we anticipated and have achieved initial success in increasing the
capacity of CXR Telcom Corporation's Fremont, California plant without
increasing our overhead by integrating T-Com's operations with those of CXR
Telcom Corporation.
33
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 XET Corporation. We intend to
retain our Monrovia, California circuit board manufacturing facility as a small
captive supplier of circuit boards to XET Corporation's Digitran Division in our
electronic components segment.
Consequently, through our three direct wholly-owned operating
subsidiaries, XET 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:
o 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)
o 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 and the first quarter of 2001 were to customers in
the telecommunications industry, we also have significant sales to industrial,
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 become
the supplier of choice for harsh environment switches 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:
o 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;
34
o 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
o 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.
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.
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, aerospace, military, commercial, industrial and other
environments, each of which places constraints defining performance and
permitted use of differing grades of components.
35
We are active only in the industry segments that are characterized by
low volume, high margin and long lead times, namely the aerospace, military 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.
The Digitran Division of our subsidiary XET Corporation, which was
acquired by XET 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. 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 knowledge and understanding of our customers' needs,
together with 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 a T-1 line, which is a type of
digital carrier system that transmits voice and data at high speed and is the
standard for digital transmission in North America used by large businesses for
broadband access. This product 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.
36
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 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. For example, 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
becoming the supplier of choice for harsh environment switch and customer power
supplies 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.
37
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.
38
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.
PRODUCTS AND SERVICES
Our products and services are divided into two main business segments:
o 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)
o Electronic Components (digital switches and electronic power
supplies)
During the years ended December 31, 2000, 1999 and 1998, our total
sales were $28,050,000, $25,913,000 and $30,100,000, respectively, and the
percentages of total sales contributed by each product group within our two main
business segments were as follows:
YEAR ENDED DECEMBER 31,
--------------------------
SEGMENT AND PRODUCT TYPE 2000 1999 1998
------------------------ ---- ---- ----
Telecommunications
Test Instruments 28.2% 19.2% 26.7%
Transmission and Network Access Products 26.2% 39.3% 29.9%
Other Products and Services 1.5% 1.9% 1.7%
------ ------ ------
55.9% 60.4% 58.3%
====== ====== ======
Electronic Components
Digital Switches 28.6% 20.5% 21.6%
Electronic Power Supplies 14.8% 15.8% 14.2%
Other Products and Services 0.7% 3.3% 5.9%
------ ------ ------
44.1% 39.6% 41.7%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
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 years ended
December 31, 2000 and 1999, the sale of telecommunications products, equipment
and related services accounted for approximately 55.9% and 60.4% of our total
revenues, respectively. These 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:
39
o Traditional telephone services, such as modems and plain old
telephone service, or POTS
o Competitive local exchange carriers, or CLECs o Bite error
rate test, or BERT
o Dial tone multi-frequency, or DTMF o Transmission impairment
measurement, or TIMS o 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
o 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 megabits, or
millions of bits, per second, or 44 Mbps, with 672 channels
-- Digital signal level 0, or DS0, which is 64 kilobits, or
thousands of bits, 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
-- E-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
TELECOMMUNICATIONS TEST INSTRUMENTS
Our primary field test instruments, built by our CXR Telcom subsidiary
in Fremont, California, 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.
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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:
o 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;
o load-coil analysis, which identifies the presence of voice
coils that prevent high-speed digital access;
o installation and testing of DS3, which is a very high-speed
digital transmission service that is equivalent to 28 T-1
circuits; and
o 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:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
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
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PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
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; 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
TRANSMISSION AND NETWORK ACCESS PRODUCTS
Our subsidiary, CXR, S.A., develops, markets and sells 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 we believe 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.
42
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.
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:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
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
43
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
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
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
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
44
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
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.
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 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 years ended December 31, 2000 and 1999,
this segment accounted for approximately 44.1% and 39.6%, respectively, of our
net sales.
DIGITAL SWITCHES
XET Corporation's Digitran Division, based in Rancho Cucamonga,
California, manufactures, assembles and sells digital switch products serving
aerospace, military and industrial applications. Digital switches are manually
operated electromechanical devices used for routing electronic signals.
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:
o 8, 10, 11, 12, 16 or a special number of dial positions;
o special markings and dial characters;
o 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;
o available with radio frequency interference shielding;
o 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;
o provision for mounting components on output terminals on
special personal computer boards;
45
o wire wrap terminals, pin terminals or special terminations; and
o 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, 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.
In April 2000, we finalized our acquisition of Belix Company, Ltd.,
including its two subsidiaries. Belix was a manufacturer of power supplies in
England and has been integrated into XCEL Power Systems Ltd. At the time we
acquired Belix, we believed based upon representations and warranties made by
Belix's management to us, that Belix would be profitable in its first year with
us. However, we subsequently became aware of what we believe to have been
significant misrepresentations made by Belix's management to us in connection
with the acquisition. We have filed suit in this matter. Despite our dispute
with Belix's management, the acquisition of Belix has had an overall positive
impact on our sales of power supplies.
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 March 31, 2001 and 2000, our
backlog of firm, unshipped orders was approximately $13.2 million and $6.0
million, respectively. Our March 31, 2001 backlog is related approximately 90%
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 10% 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 80% of our electronic components
orders and 100% 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.
46
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. During 2000, our top five telecommunications test instruments
and transmission and network access products customers in terms of revenues were
Verizon, Southeast Datacom Incorporated, La Poste (French post office), Nynex
and Bouygues Telecom. None of our telecommunications test instruments,
transmission or network access products customers represented more than ten
percent of our revenues during 2000.
Because we currently derive a significant portion of our revenues from
sales to RBOCs, we have experienced and will continue to experience for the
foreseeable future a significant impact on our quarterly operating results due
to the budgeting cycles of the RBOCs. RBOCs generally obtain approval for their
annual budgets during the first quarter of each calendar year. If an RBOC's
annual budget is not approved early in the calendar year or is insufficient to
cover its desired purchases for the entire calendar year, we are unable to sell
products to the RBOC during the period of the delay or shortfall.
In April 2000, CXR Telcom entered into a contract to sell our CXR
HALCYON 704A-400 combination test instruments to the Federal Aviation
Administration, or the FAA. The FAA had been a customer of CXR Telcom and its
predecessor since 1972. When we entered into the April 2000 contract, we
anticipated earning revenues under the contract of several million dollars over
several years. However, the FAA's planned upgrade of its communications system
has not progressed as rapidly as anticipated. To date, purchases under the
contract have been modest at approximately $250,000 for fiscal 2000 and
approximately $10,000 for the first quarter of 2001. However, the contract
remains in force and we anticipate that the FAA will continue to purchase
various telecommunications test instruments under the contract as its needs
arise.
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.
47
ELECTRONIC COMPONENTS
We sell our components primarily to original equipment manufacturers in
the electronics industry, including manufacturers of aerospace and military
systems, communications equipment, industrial instruments and test equipment.
During 2000, our top five electronic components customers in terms of revenues
were BAE Systems Ltd. (including other U. K. companies affiliated with BAE
Systems, Ltd.), BAE Systems Canada, Inc., Smiths Industries Aerospace,
Electrical Maintenance, Inc. and Raytheon Systems Company. None of our
electronic components customers represented more than ten percent of our total
revenues during 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 centers.
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
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 generally 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 XET Corporation's
Digitran Division, based in Rancho Cucamonga, California, XCEL Corporation Ltd.,
a wholly-owned subsidiary of XET 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 XET 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.
48
We sell our electronic components primarily to original equipment
manufacturers in the electronics industry, including manufacturers of aerospace
and military systems, communications equipment, 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 some third-party-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 as well as our 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:
o quality of product offerings;
o adaptability to evolving technologies and standards;
o ability to address and adapt to individual customer
requirements;
o price and financing terms;
o strength of distribution channels;
o ease of installation, integration and use of products;
o system reliability and performance; and
o 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.
The reputation in the telecommunications industry of our subsidiary,
CXR Telcom, spans over 35 years. We believe this reputation aids us in
establishing and maintaining both distribution channels and customers for our
products.
The design of many of our data transmission products enables us to
offer numerous different product combinations to our customers and to serve both
central site data communications needs and remote access and transmission sites
on both the enterprise-wide and single location level. We believe that this
design flexibility helps us to excel at many of the above competitive factors by
enabling us to offer quality products that meet and are adaptable to changing
customer requirements and to evolving technologies and government and industry
standards.
We currently derive a significant portion of our revenues from sales to
RBOCs. We believe that we derive a competitive advantage from the efforts we
have expended to establish many of our telecommunications products as approved
products for nearly all of the RBOCs and for other key customers in the United
States and abroad. Our products' approved status facilitates the ability of our
customers to order additional products from us as their needs arise without the
long delays that might otherwise be needed to obtain the approval of our
customers' upper management or governing body prior to each purchase.
49
Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.
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:
o capability and quality of product offerings;
o status as qualified products; and
o compliance with government and industry standards.
We have made substantial investments in machinery and equipment
tooling. In addition, our Digitran Division has a reputation spanning over 40
years in the electronic components industry, and major original equipment
manufacturers have designed many of our digital switches into their product
specifications. These factors have acted 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 and causing some customers to seek us
out to manufacture for them unique as well as our standard digital switches.
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 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 network access 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.
50
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, 2000, 1999 and 1998, our
engineering and product development costs were approximately $1.17 million,
$1.84 million and $2.20 million, respectively. The decline in these expenses in
2000 as compared to 1999 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 2000, 1999 and 1998 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
these 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 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.
51
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 May 15, 2001, we employed a total of 220 persons in our various
divisions and subsidiaries. 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 May 15, 2001, we leased or owned approximately 100,000 square
feet of administrative, production, storage and shipping space. All of this
space was leased other than the Abondant, France facility.
BUSINESS UNIT LOCATION FUNCTION
------------- -------- --------
MicroTel International, Inc. Rancho Cucamonga, California Administrative
(corporate headquarters)
XET Corporation/Digitran Rancho Cucamonga, California Manufacturing
(electronic components) Monrovia, California
XCEL Power Systems, Ltd. and XCEL Ashford, United Kingdom Administrative/Manufacturing
Corporation Ltd. Wales, United Kingdom
(electronic components)
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales
(electronic components)
CXR, S.A(telecommunications test Paris, France Administration/Sales
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/Manufacturing
(telecommunications test instruments,
transmission and network access products)
CXR Telcom Corporation St. Charles, Illinois Research, Development and
(test instruments) Engineering/Customer Service
52
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 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.
In December 1996, XET 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 XET
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, XET 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 some 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.
53
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions held by our directors and executive
officers as of July 24, 2001 are as follows:
NAME AGE TITLES
---- --- ------
Carmine T. Oliva....................... 58 Chairman of the Board, President, Chief Executive Officer and
Director
Graham Jefferies....................... 44 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)........ 64 Director
-------------
(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 MicroTel since March 26, 1997 and
of our subsidiary, XET Corporation, since he founded XET 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 January 1999 to January 2000, Mr.
Oliva served as a director of Digital Transmission Systems Inc. (DTSX), a
publicly held company, based in Norcross, Georgia. 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 MicroTel 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.
54
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 XET 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 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 Senior Vice President 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 XET Corporation, Mr. Runyon
served XET 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 XET Corporation from 1985 to March
1997, Mr. Finnegan was XET 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 2004,
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.
55
COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. These officers, directors and stockholders
are required by the Securities and Exchange Commission regulations to furnish
MicroTel with copies of all reports that they file.
Based solely upon a review of copies of the reports furnished to us
during our fiscal year ended December 31, 2000 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during our 2000 fiscal year, all Section 16(a)
filing requirements applicable to our reporting persons were complied with.
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, 2000, 1999 and 1998:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARD
----------
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
--------------------------- ---- ------ ----- ------- ------------
Carmine T. Oliva..................... 2000 $207,395 $80,000 -- $4,821(1)
President and Chief Executive 1999 $198,872 -- -- $4,821(1)
Officer 1998 $198,872 -- -- $2,411(1)
Graham Jefferies..................... 2000 $128,775 $35,000 -- $6,869(3)
Executive Vice President and Chief 1999 $114,192 -- 60,000 $5,116(3)
Operating Officer of 1998 $ 98,918 -- 30,000 $5,567(3)
Telecommunications Group(2)
Randolph D. Foote.................... 2000 $103,754 $20,000 -- --
Senior Vice President, Chief 1999 $ 23,267 -- 50,000 --
Financial Officer (4) 1998 -- -- -- --
---------------
(1) Represents the dollar value of insurance premiums we paid with respect to
term life insurance for the benefit of Mr. Oliva's spouse.
(2) 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.
(3) Represents contributions to Mr. Jefferies' retirement plan.
(4) Randolph D. Foote was appointed Senior Vice President and Chief Financial
Officer on October 4, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
During the year ended December 31, 2000, we did not grant any stock
options or stock appreciation rights to any of the named executive officers.
56
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding option exercises in
the year ended December 31, 2000 by the named executive officers and the value
of unexercised options held by the named executive officers as of December 31,
2000.
NUMBER OF
SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2000 DECEMBER 31, 2000(1)
ACQUIRED VALUE --------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
Carmine T. Oliva............. -- -- 130,633 -- -- --
Randolph D. Foote............ -- -- 50,000 -- 4,845 --
Graham Jefferies............. -- -- 126,287 -- 5,814 --
--------------
(1) Based on the last reported sale price of our common stock of $.2969 per
share on December 29, 2000 (the last trading day during fiscal 2000) as
reported on the OTC Bulletin Board, less the exercise price of the options.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
CARMINE T. OLIVA
Under an employment agreement dated January 1, 1996, Carmine T. Oliva
was employed as Chairman, President and Chief Executive Officer of XET
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 XET Corporation's salary abatement program then in effect. On
May 6, 1997, our board of directors voted to assume the obligations of XET
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
MicroTel 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 was subject to automatic renewal for three successive
two-year terms beginning 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 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.
As of January 1, 2001, we entered into a new employment agreement with
Mr. Oliva. The agreement is subject to automatic renewal for consecutive
two-year terms beginning on January 1, 2006, unless, during the required notice
periods (which run from September 1 to November 1 of the second 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 for a base
salary of $250,000 per year and states that Mr. Oliva is eligible to receive
merit or promotional increases and to participate in other benefit and incentive
programs we may offer.
57
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 or the value of his annual salary
that would have been due through January 1, 2006, whichever is greater.
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 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 December 31, 2005, Mr.
Oliva will be entitled to be paid his annual salary for three years following
the termination or until December 31, 2005, whichever is the longer period. 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
or for two years, whichever is the longer 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:
o If the termination occurs prior to the expiration of the
initial term of the agreement on December 31, 2005, Mr. Oliva
will be entitled to be paid his annual salary and all other
amounts payable under the agreement for three years following
the termination or until December 31, 2005, whichever is the
longer period, which amounts shall be payable at his election
in a lump sum within 30 days after the termination or in
installments;
o if the termination occurs during a renewal period, Mr. Oliva
will be entitled to be paid his annual salary through the
period ending two years after the expiration of the particular
renewal period, and to be paid all other amounts payable under
the agreement;
o 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;
o Mr. Oliva will be entitled to receive any executive bonus
awarded but not yet paid;
o Mr. Oliva will be entitled to receive a gross up of all
compensatory payments listed above so that he receives those
payments substantially free of federal and state income taxes;
and
o 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 two years 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
58
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability. However, 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:
o 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;
o all loan collateral pledged by Mr. Oliva has been returned to
Mr. Oliva; and
o all personal guarantees given by Mr. Oliva or his family on
our behalf are voided.
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 and any renewals 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.
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 exchange rates) that is
subject to automatic renewal for two successive one-year terms beginning 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 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:
o 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;
59
o 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;
o Mr. Jefferies will be entitled to receive any executive bonus
awarded but not yet paid; and
o 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 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 MicroTel,
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 MicroTel,
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.
Beginning in 2000, the nominating committee has consisted of Robert B. Runyon.
COMPENSATION OF DIRECTORS
During 2000, each non-employee director was entitled to receive $1,000
per quarter as compensation for their services. Beginning January 1, 2001, each
non-employee director is entitled to receive $12,000 per year 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.
60
Mr. Runyon acts as a consultant to MicroTel in the areas of strategy
development business and organization planning, human resources recruiting and
development and administrative systems. For 2000, Mr. Runyon became entitled to
receive approximately $9,744 in consulting fees and reimbursement of expenses.
During 2000, we also paid premiums of $2,823 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 $3,570 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 beginning on
January 25, 2001 and expires on July 25, 2010. On February 1, 2001, Mr. Oliva
received an option to purchase 100,000 shares of common stock at $0.50 per share
under our 1997 Plan, which option vests in two equal semi-annual installments on
July 31, 2001 and January 31, 2002 and expires on January 31, 2011.
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, commonly known as ISOs, and non-qualified stock options, commonly known
as NQOs, 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.
The Employee Stock and Stock Option Plan authorizes the issuance of
NQOs 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 ISOs, 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 ISOs 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. Our
board does not intend to issue any additional options under the 1997 Stock
Incentive Plan.
Our 2000 Stock Option Plan was adopted by our board of directors in
November 2000 and approved by our stockholders on January 16, 2001. The 2000
Stock Option Plan authorizes the issuance of ISOs and NQOs 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 June 29, 2001, we had approximately 222 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 is a description of some of the key
terms of the 2000 Stock Option Plan.
61
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 that are
subject to an award but are not used because the terms and conditions of the
award are not met, or any shares that 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, or the Exchange Act. 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 option may be
exercised, including the exercise price and option period, and other terms and
conditions of 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.
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 MicroTel on the date of
grant, the exercise price may 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.
62
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 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 MicroTel.
Those persons may be viewed as part of, or friendly to, incumbent management and
may, therefore, under some 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 the 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 MicroTel. In the opinion of our board
of directors, this 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 extraordinary corporate
transaction which might serve to limit or restrict that right. Our board of
directors is, however, presently unaware of any threat of hostile takeover
involving MicroTel.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
XCEL ARNOLD CIRCUITS, INC.
On April 9, 1998, our wholly-owned subsidiary XCEL Arnold Circuits,
Inc. sold substantially all of the assets used in its Arnold Circuits business
to Arnold Circuits, Inc., a company wholly-owned by Robert Bertrand. Mr.
Bertrand, as Trustee of The Bertrand Family Trust, was a beneficial owner of
more than five percent of our outstanding common stock as of December 31, 1998.
Mr. Bertrand had owned and operated the Arnold Circuits business until September
1995, when the assets of that business were acquired by XCEL Arnold Circuits,
Inc.
The purchase price for our sale of the assets to Mr. Bertrand was
$2,000,000 plus the assumption of liabilities of the Arnold Circuits business.
The cash portion of the purchase price was paid by a cash payment of $1,350,000
and delivery of a promissory note in the amount of $650,000, which had a
maturity date of March 31, 2000 and an annual interest rate of 8.5%. The cash
proceeds were used to retire bank debt and certain other debt, including debt
owed to Mr. Bertrand and a related entity. The debt owed to Mr. Bertrand and a
related entity comprised two notes to Mr. Bertrand in the aggregate principal
amount of $225,000 and one note to BNZ Incorporated in the principal amount of
$150,000, each of which notes had an interest rate of 10% per year and had been
issued during the second half of 1997 when Mr. Bertrand and BNZ Incorporated
loaned us $375,000 in cash to assist us in financing production of orders from
Motorola, Inc., our then largest customer.
As security for the note issued to XCEL Arnold Circuits, Inc. in the
sale of the Arnold Circuits business to Mr. Bertrand, XCEL Arnold Circuits, Inc.
received a second lien on substantially all of the assets of Arnold Circuits,
Inc. Mr. Bertrand and a related entity guaranteed payment of the promissory
note. Provisions of the transaction documents entitled XCEL Arnold Circuits,
Inc. to share in any subsequent gain on the sale of the Arnold Circuits business
while the note was outstanding.
The purchase price for the Arnold Circuits business was arrived at
through negotiation between Messrs. Oliva and Bertrand and was approved by our
board of directors. Prior to reaching agreement with Mr. Bertrand, we
unsuccessfully attempted for six months to locate a buyer for the Arnold
Circuits business. Given the extent of the operating losses of the Arnold
Circuits business in 1997, we believe the terms of the transaction with Mr.
Bertrand were no less favorable to us than would have been obtained in an
arm's-length transaction with a third party, assuming an interested third party
had been found.
Between September 1995 and April 1998, XCEL Arnold Circuits, Inc. had
engaged in inter-company transactions with us and our other subsidiaries. These
transactions resulted in an inter-company account balance of $350,000 being due
to XCEL Arnold Circuits, Inc. at the time we sold the Arnold Circuits business
to Mr. Bertrand. Consequently, we issued to Mr. Bertrand and an affiliated
entity two non-interest bearing promissory notes totaling $350,000 that were
payable on our completion of a financing transaction and, if no financing
transaction occurred by May 31, 1998, on demand. In July 1998, we made a payment
of $100,000 against the notes and no demand was made for the balance.
During 1999, Arnold Circuits, Inc. defaulted under the terms of the
note receivable. We offset the balance of the notes payable by us against the
note receivable from Mr. Bertrand and then wrote-off the unpaid balance of
$452,000 because the business' losses continued at a high rate and Arnold
Circuits, Inc. was insolvent. In addition, after unsuccessfully attempting to
recover the amount due under the guaranty of the note and in order to avoid a
potentially expensive lawsuit, we released Mr. Bertrand from his personal
guarantee of the $452,000 unpaid balance in exchange for a payment to us of
approximately $40,000 in cash. Also, warrants held by Mr. Bertrand to purchase
up to 250,000 shares of common stock at an exercise price of $2.125 per share
were automatically cancelled under the terms of the note receivable.
DANIEL DROR AND ELK INTERNATIONAL LITIGATION
In December 1996, we entered into a settlement agreement with Daniel
Dror, our former Chairman of the Board, in connection with his separation from
our company. In December 1997, Mr. Dror defaulted on the repayment of the first
installment of a debt obligation which was an obligation set forth in the
64
agreement. Also in December 1997, Mr. Dror filed suit in the District Court for
Galveston County, Texas alleging that we breached an alleged oral modification
of the agreement. In January 1998, we answered the complaint denying the
allegation, and litigation began in Texas.
In April 1998, we brought an action in California against Mr. Dror for
breach of the agreement and sought recovery of debt due us pursuant to the
agreement and recovery of all stock and warrants issued by us under to the
agreement to Mr. Dror and/or Elk International Corporation, Ltd., or Elk, a
company that was a ten percent stockholder of our company in 1997 and apparently
was a member of a control group with Mr. Dror. We obtained a judgment in the
amount of $211,000 against Mr. Dror in this litigation. In December 1997, Elk
brought an action in Texas against our current Chairman and an unrelated party
alleging that Elk received securities of our company in the merger between us
and XET Corporation and that misrepresentations relating to the financial and
operating condition of XCEL Arnold Circuits, Inc. had been made during the
merger discussions. In February 1999, Elk filed suit against us, the current
Chairman and counsel to us in connection with a stop transfer placed by us on
shares of common stock then held by Elk.
On March 1, 1999, the parties entered into a settlement agreement that
terminated all of the above actions. Under the terms of the settlement
agreement, we cancelled 750,000 options to purchase our common stock at an
exercise price of $2.375 per share that formerly were held by Elk and issued to
Elk warrants to purchase 1,000,000 shares of our restricted common stock at an
exercise price of $1.375 per share, all of which warrants were exercised in
March 2000. Also, we issued 100,000 shares of restricted common stock to Elk and
25,000 shares each to two other parties to the settlement agreement. We also
agreed to pay legal expenses totaling $60,000, over a period of six months. The
aggregated fair value of the settlement was approximately $130,000 and is
reflected in our consolidated financial statements for the period ended
December 31, 1998.
SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS
We sold an aggregate of 200 shares of Series A Preferred Stock for
$10,000 per share to Fortune Fund Ltd. Seeker III, or Fortune Fund, Rana General
Holding, Ltd., or Rana, and Resonance, Ltd., or Resonance. Fortune Fund, Rana
and Resonance, or the Series A Original Holders, were institutional investors
who participated in a private offering that had closings on June 29, 1998 and
July 9, 1998. At the time of the closings, 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 $10,000 divided by $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. The 200 shares of Series A Preferred
Stock 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.
Between June 29, 1998 and November 3, 1998, the prices at which shares
of our common stock were trading on the Nasdaq SmallCap Market generally had
declined. Specifically, the closing bid price of a share of common stock on June
29, 1998 was $0.90625, and the closing bid price of a share of common stock on
November 3, 1998 was $0.4375. Due to the decline in the prices at which shares
of our common stock were trading, the number of shares into which a share of
Series A Preferred Stock was convertible increased from 10,667 and 11,429 shares
at June 29, 1998 and July 9, 1998, respectively, to 24,615 shares at November 3,
1998. To avoid further significant dilution to our common stockholders that
could result from a continued decline in the trading prices of a share of our
common stock, we entered into an agreement with the Series A Original Holders on
November 3, 1998 that attempted to fix the conversion price of the Series A
Preferred Stock so that each share of Series A Preferred Stock would be
convertible into 20,000 shares of common stock.
65
The November 3, 1998 agreement provided that we would revise the
certificate of designations relating to the Series A Preferred Stock to provide
that the conversion price would be fixed at $10,000 divided by $0.50 for so
long as our common stock continued to be traded on the Nasdaq SmallCap Market
and we did not conduct a reverse split of our outstanding common stock, and that
we would not exercise our redemption rights for the outstanding shares of Series
A Preferred Stock for six months. The agreement also provided that the existing
restriction on each Series A Original Holder's right to convert more than 20% of
the aggregate number of shares of Series A Preferred Stock originally purchased
by such holder in any 30-day period would be eliminated. Also, the agreement
provided that we would replace the existing warrants, which warrants had an
exercise price of $1.25 per share, with warrants that had an exercise price of
$0.75 per share.
We inadvertently failed to obtain the required approval of our common
stockholders and to file an amended certificate of designations to effectuate
the amendments to the certificate of designations that were contained in the
November 3, 1998 agreement. However, between November 18, 1998 and March 26,
1999, the Series A Original Holders converted shares of Series A Preferred Stock
into shares of common stock at the rate of 20,000 shares of common stock per
share of Series A Preferred Stock, as agreed to in the November 3, 1998
agreement. Use of the $10,000 divided by $0.50 conversion price in four of the
conversions resulted in the Series A Original Holders receiving an aggregate of
46,437 more shares of common stock than they would have received under the
original conversion price formula that was contained in the certificate of
designations. We have determined, however, that the excess shares were in fact
validly issued under Delaware law.
In May 1999, our common stock was delisted from the Nasdaq SmallCap
Market due to a failure to meet Nasdaq's minimum closing bid price listing
requirement, and our common stock began trading on the OTC Electronic Bulletin
Board. Based upon the terms of the November 3, 1998 agreement, the conversion
price of the Series A Preferred Stock reverted back to the floating conversion
price shown in the certificate of designation, which conversion price was
$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 a conversion.
Following the delisting of our common stock from the Nasdaq SmallCap
Market, the trading prices of our common stock declined. We became concerned
that continued use of the floating conversion price for the Series A Preferred
Stock would cause substantial additional dilution to our common stockholders and
that resale of a large volume of shares received upon conversion at the floating
conversion price of the Series A Preferred Stock would result in further
declines in the trading prices of shares of our common stock.
Fortune Fund had informally indicated to us its willingness to
establish a fixed conversion price and to hold its shares of Series A Preferred
Stock as a long-term investment. On December 15, 1999, we entered into an
agreement with Fortune Fund. Under the agreement, we and Fortune Fund agreed to
the establishment of a fixed conversion price of $10,000 divided by $0.20 for
the 20 shares of Series A Preferred Stock held by Fortune Fund. On December 15,
1999, the floating conversion price would have been $10,000 divided by $0.19
under the terms of the certificate of designation that was then in effect.
Rana and Resonance had not indicated to us that they would be willing
to continue to hold their shares of Series A Preferred Stock or their shares of
common stock issued upon conversion of Series A Preferred Stock. Orbit II
Partners, L.P., or Orbit, an institutional investor that had acquired 4.9% of
our outstanding common stock, indicated to us that Orbit would be willing to
purchase 34.5 of the shares of Series A Preferred Stock held by Rana and
Resonance and hold any shares received upon conversion of those shares as a
long-term investment, provided that Carmine T. Oliva, Samuel J. Oliva and Samuel
G. Oliva would purchase and hold for investment the remaining five shares of
Series A Preferred Stock held by Rana and Resonance. 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.
66
On December 23, 1999, we entered into agreements with Rana, Resonance,
Orbit and the Olivas. Under the December 23, 1999 agreements, Rana and Resonance
sold their respective remaining 12.5 and 27 shares of Series A Preferred Stock
and accompanying warrants to purchase an aggregate of 197,500 shares of common
stock to Orbit and the Olivas for an aggregate consideration of approximately
$400,000 in cash. Under the agreements, the purchase price for each share of
Series A Preferred Stock and its accompanying warrants to purchase 5,000 shares
of common stock was $10,106. Orbit acquired 34.5 shares of Series A Preferred
Stock, Carmine T. Oliva acquired one share of Series A Preferred Stock and
Samuel J. Oliva and Samuel G. Oliva each acquired two shares of Series A
Preferred Stock under the agreements. The agreements provided for the
establishment of a fixed conversion price of $10,000 divided by $0.1979, so that
each share of Series A Preferred Stock was to be convertible into 50,530 shares
of common stock. On December 23, 1999, 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 $10,000 divided by $0.19 if the December 23,
1999 modification to the conversion price had not occurred.
In addition, the December 23, 1999 agreements provided that all of the
outstanding warrants that had been issued to Rana and Resonance, including the
Series A Warrants that were being transferred from Rana and Resonance to Orbit
and the Olivas, would be replaced with warrants that had a per share exercise
price that was reduced from $0.75 per share to $0.25 per share and an expiration
date that was extended from May 22, 2001 to December 22, 2002.
On December 23, 1999, our board of directors resolved by unanimous
written consent that the warrant for the purchase of up to 250,000 shares of
common stock that had been issued to Fortune Fund upon its purchase from us of
shares of Series A Preferred Stock in the 1998 private placement would be
replaced with a warrant that had a per share exercise price that was reduced
from $0.75 per share to $0.25 per share and an expiration date that was extended
from May 22, 2001 to December 22, 2002. This replacement was intended to provide
Fortune Fund with warrants that had the same terms as the replacement warrants
received by Rana, Resonance, Orbit and the Olivas under the December 23, 1999
agreements.
We filed an amended certificate of designation with the Delaware
Secretary of State to give effect to the December 1999 agreements by fixing the
conversion price of the Series A Preferred Stock at $10,000 divided by $0.1979.
However, because we inadvertently failed to obtain approval of our common
stockholders for the amendment to the certificate of designation, the amendment
was invalid under the Delaware General Corporation Law. However, on June 30,
2000, Orbit converted 34.5 shares of Series A Preferred Stock into 1,743,285
shares of common stock based upon the $10,000 divided by $0.1979 per share
conversion price that we, Orbit and the other present and former holders of
Series A Preferred Stock believed to be in effect. This conversion resulted in
the issuance of 1,048,654 more shares of common stock than would otherwise have
been issued upon conversion of the 34.5 shares of Series A Preferred Stock under
the certificate of designation that was then in effect. We have determined,
however, that the excess shares were in fact validly issued under Delaware law.
In November 2000, we realized that the modifications to the conversion
price of the Series A Preferred Stock were invalid because we had inadvertently
failed to obtain common stockholder approval for the modifications to the
certificate of designations and had also inadvertently failed to file an
amendment reflecting the November 1998 modifications. Our board of directors
distributed proxy materials requesting that holders of our common stock and
Series A Preferred Stock approve an amendment to the certificate of designations
that provided for a fixed conversion price of $10,000 divided by $0.1979 and an
amendment to the certificate of incorporation that increased the authorized
shares of common stock from 25,000,000 to 50,000,000. Our common and Series A
Preferred stockholders approved the amendments at a special meeting that was
held on January 16, 2001. We filed the amendments with the Delaware Secretary of
State on January 22, 2001, so that after that date, each outstanding share of
Series A Preferred Stock was convertible into 50,530 shares of common stock.
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WARRANT EXCHANGE OFFER
Between February and April 2000, we made an offer to all 31 holders of
warrants to purchase shares of our common stock at exercise prices of $1.00 or
more under 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 by 18
holders 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 MicroTel or its subsidiaries.
However, exchanges were made with the following related parties:
SHARES EXERCISE SHARES EXERCISE
UNDERLYING PRICE OF UNDERLYING PRICE OF
WARRANTS WARRANTS WARRANTS WARRANTS
WARRANT HOLDER SURRENDERED SURRENDERED RECEIVED RECEIVED
-------------- ----------- ----------- ------------ --------
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 1,4522 $1.29
Director and Secretary 55,400 $2.58 7,700 $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
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SHARES EXERCISE SHARES EXERCISE
UNDERLYING PRICE OF UNDERLYING PRICE OF
WARRANTS WARRANTS WARRANTS WARRANTS
WARRANT HOLDER SURRENDERED SURRENDERED RECEIVED RECEIVED
-------------- ----------- ----------- ------------ --------
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
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 by related parties 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 has, to date, awarded
and paid Mr. Oliva special bonuses totaling an aggregate of $35,000. On January
26, 2001, Wells Fargo Business Credit, Inc. released the guarantee.
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PRINCIPAL AND SELLING SECURITY HOLDERS
As of July 24, 2001, a total of 20,570,703 shares of our common stock
were outstanding. The following table sets forth information as of July 24, 2001
regarding the beneficial ownership of our common stock both before and
immediately after the offering by:
o 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;
o each selling security holder;
o each of our directors;
o each named executive officer in the Summary Compensation Table
contained elsewhere in this prospectus; and
o 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 holder possesses sole voting and investment power with
respect to all of the shares of common stock owned by that holder, subject to
community property laws where applicable. In computing the number of shares
beneficially owned by a holder and the percentage ownership of that holder,
shares of common stock subject to options or warrants or underlying preferred
stock held by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are deemed
outstanding. Those 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 under 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 under this prospectus were issued or are issuable upon exercise of
common stock purchase warrants or upon conversion of shares of Series B
Preferred Stock that were acquired by the selling security holders from us in
the following private placement transactions:
o In June and July 1998, we sold 200 shares of Series A
Preferred Stock to Fortune Fund Ltd. Seeker III, or Fortune
Fund, Rana General Holding, Ltd., or Rana, and Resonance,
Ltd., or Resonance, each of which entities was an
institutional investor. Each share of Series A Preferred Stock
is convertible into 50,530 shares of common stock. In the
offering of Series A Preferred Stock, we issued to the three
investors warrants to purchase up to an aggregate of 1,000,000
shares of common stock at an exercise price of $1.25 per
share. The warrant exercise price was adjusted to $0.75 in
November 1998 and to $0.25 in December 1999. In December 1999,
Rana and Resonance sold their remaining unconverted shares of
Series A Preferred Stock and related warrants to Orbit II
Partners, L.P., or Orbit, which was an institutional investor
that had acquired 4.9% of our outstanding common stock prior
to the transfer, Carmine T. Oliva, our President, Chief
Executive Officer and Chairman of the Board, and Samuel J.
Oliva and Samuel G. Oliva, who are the brother and son,
respectively, of Carmine T. Oliva. We have included for resale
under this prospectus an aggregate of 1,263,250 shares of
common stock underlying Series A Preferred Stock, 722,500
shares of common stock underlying the warrants held by Fortune
Fund, Rana and Resonance and 45,000 shares of common stock
that were issued upon exercise of warrants previously held by
the Olivas and Rana.
70
o In July 1998, we issued a warrant to purchase 250,000 shares
of common stock at an exercise price of $1.25 per share to one
entity in consideration for placement agent services rendered
to us in connection with our private placement of Series A
Preferred Stock. We have included for resale under this
prospectus 20,000 shares of common stock underlying the
portion of the warrant that subsequently was transferred by
the entity to one individual.
o In July 1998, we issued warrants to purchase an aggregate of
250,000 shares of common stock at an exercise price of $1.25
per share to one individual in consideration for investor
relations services rendered. The individual exchanged the
warrant in the exchange offer we conducted between February
and April 2000 for a warrant to purchase up to 125,000 shares
of common stock at an exercise price of $0.625 per share. We
have included for resale under this prospectus the 125,000
shares of common stock underlying the warrant.
o In December 1998, we issued warrants to purchase up to an
aggregate of 152,381 shares of common stock at an exercise
price of $0.65625 per share to one limited partnership in
exchange for an option to purchase from the limited
partnership an ownership interest in Digital Transmission
Systems, Inc. The limited partnership subsequently distributed
the warrants to fifteen entities that were its limited and
special limited partners and four individuals that were its
general partners. We have included for resale under this
prospectus an aggregate of 123,055 shares of common stock
underlying warrants that are held by thirteen entities and
four individuals. Two of the entities that are selling
security holders received their warrants from two of the
entities that were partners of the limited partnership.
o In the mid-1980s, XET Corporation issued warrants to purchase
an aggregate of 150,000 shares of common stock to Carmine T.
Oliva's father in connection with accounting services rendered
to XET Corporation. When we acquired XET Corporation in March
1997, the warrants were converted into warrants to purchase
shares of our common stock. Following the death of Carmine T.
Oliva's father, Carmine T. Oliva's mother gifted the warrants
to Carmine T. Oliva, Samuel J. Oliva, George Farndell, who is
Carmine T. Oliva's brother-in-law, and Ronald Oliva, who is
Carmine T. Oliva's brother. We have included for resale under
this prospectus 150,000 shares of common stock underlying the
warrants held by the four transferees.
o In March 1999, we issued warrants to purchase an aggregate of
15,000 shares of common stock at an exercise price of $0.75
per share to one individual in consideration for investment
banking services rendered to us. We have included for resale
under this prospectus the 15,000 shares of common stock
underlying the warrant.
o In March 1999, we issued warrants to purchase an aggregate of
50,000 shares of common stock at an exercise price of $0.75
per share to one individual in consideration for investor
relations services rendered to us. We have included for
resale under this prospectus the 50,000 shares of common stock
underlying the warrant.
o In March 1999, we issued two warrants to purchase 100,000
shares of common stock and 50,000 shares of common stock,
respectively, at an exercise price of $0.75 per share to Jason
Oliva, the son of Carmine T. Oliva, and another individual,
respectively, in consideration for consulting services
rendered to us. We have included for resale under this
prospectus the 150,000 shares of common stock underlying those
warrants.
71
o In May 2000, we issued warrants to purchase an aggregate of
100,500 shares of common stock at an exercise price of $1.00
per share to Samuel G. Oliva, Samuel J. Oliva and Jason Oliva
in connection with consulting services rendered to us. We have
included for resale under this prospectus the 100,500 shares
of common stock underlying those warrants.
o In May 2000, we issued warrants to purchase an aggregate of
49,375 shares of common stock at an exercise price of $1.00
per share to Orbit, Samuel J. Oliva, Samuel G. Oliva and
Carmine T. Oliva to induce Orbit and the Olivas to exercise
warrants they previously had purchased in connection with
their purchase of Series A Preferred Stock. We have included
for resale under this prospectus the 6,250 shares of common
stock underlying warrants held by the Olivas.
o In September 2000, we issued 150,000 shares of Series B
Preferred Stock and a warrant to purchase an aggregate of
250,000 shares of common stock to T-Com, LLC in a private
placement transaction in consideration for our receipt of the
assets and certain liabilities of T-Com, LLC. The warrant has
an exercise price of $1.25 per share of common stock, is
exercisable for a period of 24 months following September 22,
2000 and contains a cashless exercise feature. Each share of
Series B Preferred Stock is or will become convertible into
ten shares of common stock on the terms described in this
prospectus under the heading "Description of Capital Stock -
Series B Preferred Stock." Under those terms, 100,000 of the
150,000 shares of Series B Preferred Stock may be converted
into shares of common stock within 60 days after the date of
the table. However, we have included for resale under this
prospectus all of the 1,500,000 shares of common stock that
may become issuable upon conversion of the Series B Preferred
Stock, in addition to the shares of common stock issuable upon
exercise of the warrants. Consequently, the number of shares
of common stock being offered for resale by T-Com, LLC
exceeds the number of shares of common stock beneficially
owned by T-Com, LLC as of the date of the table.
The Equitable Life Assurance Society of the United States is affiliated
with members of the NASD. However, The Equitable Life Assurance Society of the
United States has represented to us that it is not acting as an underwriter in
this offering, it purchased the securities to be resold by it under this
prospectus in the ordinary course of business, and at the time of such purchase
it had no agreements or understandings, directly or indirectly, with any person
to distribute the securities.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders under this prospectus.
Unless otherwise indicated, "Shares Being Offered" are shares of common stock
underlying warrants.
72
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OFFERING OWNED AFTER THE OFFERING(1)
--------------------- SHARES ---------------------------
NAME OF BENEFICIAL OWNER NUMBER % OF CLASS BEING OFFERED NUMBER % OF CLASS
------------------------ ------ ---------- ------------- ------ ----------
Albanese Placedo 15,000 (2) * 15,000 -- --
Crossroads Capital Limited
Partnership 9,902 (2) * 9,902 -- --
George Farndell 37,500 (2) * 37,500 -- --
Herb Lanzet 50,000 (2) * 50,000 -- --
Charles Mugrdechian, Jr. 20,000 (2) * 20,000 -- --
Ronald Oliva 37,500 (2) * 37,500 -- --
Resonance, Ltd. 365,000 (2) 1.74% 365,000 -- --
William Setteducato 125,000 (2) * 125,000 -- --
Amberbrook II, LLC 66,532 (3) * 8,798 57,734 *
Bankers Trust, Trustee of the
Jack Eckerd Corporation
Pension Plan Trust 44,355 (4) * 5,865 38,490 *
Landmark Equity Partners II, L.P. 44,355 (4) * 5,865 38,490 *
Montauk Partners, L.P. 44,355 (4) * 5,865 38,490 *
Chase Manhattan Bank N.A. -
Trustee IBM Retirement Plan 44,355 (4) * 5,865 38,490 *
C.P. & Co. Venture Partners, L.P. 22,180 (5) * 2,933 19,247 *
Robert Crane 2,360 (6) * 312 2,048 *
The Equitable Life Assurance
Society of the United States 71,767 (7) * 9,490 62,277 *
Laurence P. Finnegan, Jr. 144,171 (8) * -- 144,171 *
Randolph D. Foote 55,000 (9) * -- 55,000 *
Fortune Fund Limited Seeker III 1,260,600 (10) 5.77% 1,260,600 (10) -- --
Steven Jacobus 100,801 (11) * 50,000 50,801 *
Graham Jefferies 129,563 (12) * -- 129,563 *
Frank LaHaye 26,135 (13) * 3,457 22,678 *
Gene Miller 26,135 (13) * 3,457 22,678 *
Landmark Equity Partners V, L.P. 133,066 (14) * 17,595 115,471 *
Landmark Venture Partners L.P. 88,711 (15) * 11,730 76,981 *
New York State Common Retirement
Fund 88,711 (15) * 11,730 76,981 *
Portland General Holdings, Inc. 88,711 (15) * 11,730 76,981 *
Montgomery Associates 1992, L.P. 62,006 (16) * 8,199 53,807 *
Carmine T. Oliva 1,498,688 (17) 7.15% 94,280 (18) 1,404,408 6.73%
Jason Oliva 133,515 (19) * 133,500 15 *
Samuel G. Oliva 311,510 (20) 1.50% 147,060 (21) 164,450 *
Samuel J. Oliva 817,560 (22) 3.94% 184,560 (23) 633,000 3.07%
Orbit II Partners, L.P. 3,058,810 (24) 14.84% -- 3,058,810 14.84%
Rana General Holding, Ltd. 127,500 (25) * 127,500 (25) -- --
Robert B. Runyon 338,145 (26) 1.63% -- 338,145 1.63%
Donald Skipwith 1,982 (27) * 262 1,720 *
T-Com, LLC 1,250,000 (28) 5.73% 1,750,000 (29) -- --
All executive officers and directors
as a group (5 persons) 2,165,567 (30) 10.12% 94,280 (21) 2,071,287 9.68%
73
---------------
* Less than 1.00%
(1) Assumes all shares being offered are sold.
(2) Represents shares of common stock underlying warrants. Power to vote or
dispose of the shares being offered by Crossroads Capital Limited
Partnership is held by Matt Mitchell. Mr. Farndell is a brother-in-law
of Carmine T. Oliva. Power to vote or dispose of the shares being
offered by Resonance, Ltd. is held by Moishe Bodner. Ronald Oliva is
the brother of Carmine T. Oliva.
(3) Includes 8,798 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by Amberbrook II, LLC is
held by M. Luisa Hunnewell.
(4) Includes 5,865 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by Bankers Trust, Trustee
of the Jack Eckerd Corporation Pension Plan Trust, is shared by John C.
Carcy, Dennis P. Miller and Robert E. Lewis as members of the Pension
Plan Committee. Power to vote or dispose of the shares being offered by
Landmark Equity Partners II, L.P., is shared by Stanley F. Aufeld, John
A. Griner and Timothy L. Havolen. Power to vote or dispose of the
shares being offered by Montauk Partners, L.P. is held by Brian Smith.
Chase Manhattan Bank shares voting and investment power with Credit
Suisse Warburg Pincus Asset Management. The signatory for Chase
Manhattan Bank is John Geronimo.
(5) Includes 2,933 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by C.P. & Co. Venture
Partners, L.P. is held by Ellen Lazarus.
(6) Includes 312 shares of common stock underlying warrants.
(7) Includes 9,490 shares of common stock underlying warrants. The
Equitable Life Assurance Society of the United States is affiliated
with the following NASD members: Sanford C. Bernstein & Co., LLC,
Alliance Fund Distributors, Inc., Equitable Distributors, Inc. and AXA
Advisors, LLC. Power to vote or dispose of the shares being offered by
The Equitable Life Assurance Society of the United States is held by
Basil Livanos.
(8) Includes 100,000 shares of common stock underlying options. Mr.
Finnegan is a director of MicroTel.
(9) Includes 50,000 shares of common stock underlying options. Mr. Foote is
the Senior Vice President and Chief Financial Officer of MicroTel.
(10) Includes 250,000 shares of common stock underlying warrants and
1,010,600 shares of common stock underlying Series A Preferred Stock.
Power to vote or dispose of the shares being offered by Fortune Fund
Limited Seeker III is shared by Patrick Siaretta, as fund manager, and
Greg Fenlon, as fund administrator. The address for Mr. Siaretta is Au
Republica Libano, 331, Sao Paulo, SP Brazil. The address for Mr. Fenlon
is Kaya Flamboyan #9, Willenstad, Curacao, Netherlands Antilles.
(11) Includes 50,000 shares of common stock underlying warrants.
(12) Includes 126,287 shares of common stock underlying options. Mr.
Jefferies is the Executive Vice President and Chief Operating Officer
of our Telecommunications Group and Managing Director of various
subsidiaries of MicroTel.
(13) Includes 3,457 shares of common stock underlying warrants.
(14) Includes 17,595 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by Landmark Equity Partners
V, L.P. is shared by James P. McConnell, Stanley F. Aufeld, John A.
Griner and Timothy L. Havolen.
(15) Includes 11,730 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by Landmark Venture
Partners L.P. is shared by Stanley F. Aufeld, John A. Griner and
Timothy L. Havolen. Power to vote or dispose of the shares being
offered by the New York State Common Retirement Fund is held by John E.
Hull, Deputy Comptroller as representative of H. Carl McCall,
Comptroller of the State of New York. Power to vote or dispose of the
shares being offered by Portland General Holdings, Inc. is held by
James Piro.
(16) Includes 8,199 shares of common stock underlying warrants. Power to
vote or dispose of the shares being offered by Montgomery Associates
1992, L.P. is shared by Bruce G. Potter and John K. Skeen.
74
(17) Includes 81,889 shares of common stock held individually by Mr. Oliva's
spouse, 180,633 shares of common stock underlying options, 163,750
shares of common stock underlying warrants and 50,530 shares of common
stock underlying Series A Preferred Stock. Mr. Oliva is a director and
the Chairman of the Board, President and Chief Executive Officer of
MicroTel. The address for Mr. Oliva is 9485 Haven Avenue, Suite 100,
Rancho Cucamonga, California 91730.
(18) Represents 5,000 outstanding shares of common stock, 38,750 shares of
common stock underlying warrants and 50,530 shares of common stock
underlying Series A Preferred Stock.
(19) Includes 133,500 shares of common stock underlying warrants. Jason
Oliva is the son of Carmine T. Oliva.
(20) Includes 36,000 shares of common stock underlying warrants, 36,287
shares of common stock underlying options and 101,060 shares of common
stock underlying Series A Preferred Stock. Samuel G. Oliva is the son
of Carmine T. Oliva.
(21) Represents 10,000 outstanding shares of common stock, 36,000 shares of
common stock underlying warrants and 101,060 shares of common stock
underlying Series A Preferred Stock.
(22) Includes 73,500 shares of common stock underlying warrants, 21,772
shares of common stock underlying options and 101,060 shares of common
stock underlying Series A Preferred Stock. Samuel J. Oliva is the
brother of Carmine T. Oliva.
(23) Represents 10,000 outstanding shares of common stock, 73,500 shares of
common stock underlying warrants and 101,060 shares of common stock
underlying Series A Preferred Stock.
(24) 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. Excludes 7,500 shares of common stock
held directly by Mr. MacKenzie. The address for Orbit II Partners, L.P.
is 2 Rector Street, 16th Floor, New York, New York 10006.
(25) Represents 20,000 outstanding shares of common stock and 107,500 shares
of common stock underlying warrants. Power to vote or dispose of the
shares being offered by Rana General Holding, Ltd. is held by Mazen
Hassounah.
(26) Includes 158,060 shares of common stock underlying options. Mr. Runyon
is a director and the Secretary of MicroTel.
(27) Includes 262 shares of common stock underlying warrants.
(28) Represents 250,000 shares of common stock underlying warrants and
1,000,000 shares of common stock underlying Series B Preferred Stock.
Voting and investment power over the MicroTel securities beneficially
owned by T-Com, LLC is held by E.T. Bahre and Roy Rogers, as
co-managers. The address for T-Com, LLC is c/o E.T. Bahre, 38 Third
Street #303, Los Altos, California 94025.
(29) Represents 250,000 shares of common stock underlying warrants and
1,500,000 shares of common stock underlying Series B Preferred Stock.
(30) Includes 163,750 shares of common stock underlying warrants, 614,980
shares of common stock underlying options, 81,889 shares of common
stock held individually by Mr. Oliva's wife and 50,530 shares of common
stock underlying Series A Preferred Stock.
75
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 under 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:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o 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;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of
stock that the seller does not own, or certificates for which
are not within his control, so as to be available for delivery
at the time when, under applicable rules, delivery must be
made;
o transactions to cover short sales;
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to
time.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders 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, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in securities of
MicroTel or derivatives of MicroTel 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.
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.
76
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 that 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
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 under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict 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 other activities with respect to
those 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 shares
of Series A or Series B Preferred Stock or the warrants held by the selling
security holders or the issuance of shares of common stock to the holders of
Series A or Series B Preferred Stock or warrants upon conversion or exercise. If
a selling security holder transfers its shares of Series A or Series B Preferred
Stock or warrants prior to conversion or exercise, the transferee of the shares
of Series A or Series B Preferred Stock or warrants may not sell the shares of
common stock issuable upon conversion of the shares of Series A or Series B
Preferred Stock or 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 shares of Series A or Series B
Preferred Stock or 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 conversion of the shares
of Series A or Series B Preferred Stock or upon exercise of the warrants. The
holders of the shares of Series A or Series B Preferred Stock and the warrants
may be expected to voluntarily convert their shares of Series A or Series B
Preferred Stock or exercise their warrants when the conversion price or 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 shares
of Series A or Series B Preferred Stock or the warrants remain outstanding may
be adversely affected.
77
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our certificate of incorporation, as amended, authorizes the issuance
of up to 50,000,000 shares of common stock, $.0033 par value per share, and
10,000,000 shares of preferred stock, $.01 par value per share, 200 of which has
been designated Series A Preferred Stock, and 150,000 of which have been
designated Series B Preferred Stock. As of July 24, 2001, there were 20,570,703
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:
o each holder of common stock is entitled to one vote per share
on all matters to be voted upon generally by the stockholders;
o subject to preferences that may apply to shares of preferred
stock outstanding, the holders of common stock are entitled to
receive lawful dividends as may be declared by our board of
directors, see "Dividend Policy";
o 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;
o there are no redemption or sinking fund provisions applicable
to our common stock; and
o 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. Copies of the full text of the various
documents comprising our certificate of incorporation are filed as exhibits to
the registration statement of which this prospectus is a part.
78
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 another 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 to permit
conversion by the holders of the redeemed shares of Series A Preferred Stock
during the 20-day notice period, 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 50,530 shares of our common 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.
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 adversely alter or change the rights,
preferences or privileges of the Series A Preferred Stock or do any act or thing
that would result in taxation of the holders of Series A Preferred Stock. Under
Delaware law, holders of the outstanding shares of a class of our capital stock
are entitled to vote as a class upon a proposed amendment to our certificate of
incorporation if the amendment would increase or decrease the aggregate number
of authorized shares of the class, increase or decrease the par value of the
shares of the class, or alter or change the powers, preferences, or special
rights of the shares of the class so as to affect them adversely. Delaware law
also provides that if any proposed amendment to our certificate of incorporation
would alter or change the powers, preferences or special rights of one or more
series of any class so as to affect them adversely, but not so as to affect the
entire class, then only the shares of the series affected by the amendment shall
be considered a separate class for the purpose of voting on the amendment. To
the extent that Delaware law requires the vote of the holders of shares of
79
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.
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
another 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 to permit conversion by
the holders of the redeemed shares of Series B Preferred Stock during the 20-day
notice period, 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. Currently, 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
80
Preferred Stock may not convert more than 100,000 shares of Series B Preferred
Stock in the aggregate at that time. On or after March 20, 2002, a holder may
convert all of its shares of Series B Preferred Stock without limitation.
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 adversely alter or change the rights,
preferences or privileges of the Series B Preferred Stock or do any act or thing
that would result in taxation of the holders of Series B Preferred Stock. Under
Delaware law, holders of the outstanding shares of a class of our capital stock
are entitled to vote as a class upon a proposed amendment to our certificate of
incorporation if the amendment would increase or decrease the aggregate number
of authorized shares of the class, increase or decrease the par value of the
shares of the class, or alter or change the powers, preferences, or special
rights of the shares of the class so as to affect them adversely. Delaware law
also provides that if any proposed amendment to our certificate of incorporation
would alter or change the powers, preferences or special rights of one or more
series of any class so as to affect them adversely, but not so as to affect the
entire class, then only the shares of the series affected by the amendment shall
be considered a separate class for the purpose of voting on the amendment. 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.
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 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 some exceptions, unless the transaction is
approved by our board of directors and the holders of at least 66 2/3% 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
completion 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 some stock plans).
81
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Investor Services. Its telephone number is (303) 986-5400.
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 consolidated financial
statement schedule of MicroTel as of and for the year ended December 31, 2000
and the financial statements of T-Com, LLC as of and for the year ended December
31, 1999 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 reports, 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 the reports given upon the authority of BDO Seidman,
LLP as experts in auditing and accounting. The report of BDO Seidman, LLP on the
financial statements of T-Com, LLC as of and for the year ended December 31,
1999 contains an explanatory paragraph regarding T-Com, LLC's ability to
continue as a going concern.
The financial statements of T-Com, LLC as of and for the period from
June 1, 1998 (date of inception) to December 31, 1998 included in this
prospectus and in the registration statement of which this prospectus is a part
have been audited by Ireland San Filippo, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report,
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 the report given upon the authority of Ireland San Filippo, 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 contained
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 the contract or other document which is filed as an exhibit to the
registration statement. 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 public may obtain information on the
operation of the public reference facilities by calling the Securities and
Exchange Commission at 1-800-SEC-0330.
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.
82
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Financial Statements As Of December 31, 2000 and 1999
And For The Years Ended December 31, 2000, 1999, and 1998
---------------------------------------------------------
Report of Independent Certified Public Accountants.............................................F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999...................................F-4
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 2000, 1999 and 1998 ..........................................................F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000,
1999 and 1998 .............................................................................F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.....F-8
Notes to Consolidated Financial Statements....................................................F-10
Financial Statement Schedule
----------------------------
Consolidated Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999, and 1998.........................................................F-44
Financial Statements As Of And For The Three Months Ended March 31, 2001 And 2000
---------------------------------------------------------------------------------
Consolidated Condensed Balance Sheets as of March 31, 2001 (unaudited) and
December 31, 2000.........................................................................F-45
Consolidated Condensed Statements of Operations and Comprehensive Income for
the three months ended March 31, 2001 and 2000 (unaudited) ...............................F-46
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 (unaudited).......................................................F-47
Notes to Consolidated Condensed Financial Statements (unaudited)..............................F-48
Financial Statements Of T-Com, LLC As And For The
Year Ended December 31, 1999 And Related Unaudited Pro Forma Information
------------------------------------------------------------------------
Report of Independent Certified Public Accountants............................................F-55
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)..........................F-54
Statements of Operations for the year ended December 31, 1999 and the six
months ended June 30, 2000 (unaudited) and 1999 (unaudited)...............................F-55
F-1
Statements of Members' Deficit for the years ended December 31, 1999
and June 30, 2000 (unaudited).............................................................F-56
Statements of Cash Flows for the year ended December 31, 1999 and the six
months ended June 30, 2000 (unaudited) and 1999 (unaudited)...............................F-57
Notes to Financial Statements.................................................................F-58
Unaudited Pro Forma Condensed Combined Financial Information..................................F-70
--------------------------------------------------------------------------------------------------
Financial Statements of T-Com, LLC As Of And For The
Period From June 1, 1998 (Date of Inception) to December 31, 1998
-----------------------------------------------------------------
Independent Auditors' Report..................................................................F-72
Balance Sheet as of December 31, 1998.........................................................F-73
Statement of Income and Expense for the period from June 1, 1998 (Date of Inception)
to December 31, 1998......................................................................F-75
Statement of Members' Equity for the period from June 1, 1998 (Date of Inception)
to December 31, 1998......................................................................F-76
Statement of Cash Flows for the period from June 1, 1998 (Date of Inception)
to December 31, 1998......................................................................F-77
Notes to Financial Statements.................................................................F-79
Schedule of Cost of Goods Sold for the period from June 1, 1998 (Date of Inception)
to December 31, 1998......................................................................F-82
Schedule of General and Administrative Expense for the period from June 1, 1998
(Date of Inception) to December 31, 1998..................................................F-83
F-2
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, 2000 and 1999, 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, 2000. We have also audited the information for each of the years in
the three-year period ended December 31, 2000 in the consolidated financial
statement schedule listed in the accompanying index. These consolidated
financial statements and the consolidated 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 consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the financial statements, the Company
restated the consolidated statements of operations for the years ended December
31, 1999 and 1998 to reflect the reclassification of certain items from
discontinued operations to continuing operations.
Also, in our opinion, the consolidated financial statement schedule
referred to above presents fairly, in all material respects, the information set
forth therein.
/S/ BDO Seidman, LLP
Orange County, California
March 3, 2001
F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS (NOTES 8 AND 9) 2000 1999
---- ----
Current assets:
Cash and cash equivalents $ 756 $ 480
Accounts receivable, net of allowance for doubtful accounts of
$111 and $191, respectively 7,440 6,168
Notes Receivable (Notes 4 and 7) 130 --
Inventories (Note 5) 6,298 4,047
Prepaid and other current assets 750 427
Net assets of discontinued operations (Note 16) -- 1,133
--------- ---------
Total current assets 15,374 12,255
Property, plant and equipment, net (Note 6) 809 765
Goodwill, net of accumulated amortization of $715 and $433,
respectively (Notes 3 and 4) 2,737 1,507
Investment in affiliates (Notes 4 and 7) -- 1,240
Other assets 564 722
--------- ---------
$ 19,484 $ 16,489
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 8) $ 3,661 $ 2,107
Current portion of long-term debt (Note 9) 614 1,388
Accounts payable 5,222 4,695
Accrued expenses 3,082 2,985
Net liabilities of discontinued operations (Note 16) 15 --
--------- ---------
Total current liabilities 12,594 11,175
Long-term debt, less current portion (Note 9) 282 143
Other liabilities 542 782
--------- ---------
Total liabilities 13,418 12,100
Convertible redeemable preferred stock, $10,000 unit value
Authorized 200 shares; issued and outstanding 25 shares in 2000 and 59.5
shares in 1999 (aggregate liquidation preference
of $250 and $595, respectively) (Note 10) 259 588
Subsequent events (Notes 11 and 14):
Commitments and contingencies (Notes 11 and 14) Stockholders' equity (Notes 3,
4, 10, 11 and 14):
Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred
Stock, $0.01 par value,
issued and outstanding 150,000 and 0 shares, respectively
(aggregate liquidation preference of $960 and $0, respectively) 938 --
Common stock, $.0033 par value. Authorized 50,000,000 shares;
issued and outstanding 20,570,000 and 18,152,000 shares 68 60
Additional paid-in capital 24,307 23,726
Accumulated deficit (18,775) (19,759)
Accumulated other comprehensive loss (731) (226)
--------- ---------
Total stockholders' equity 5,807 3,801
--------- ---------
$ 19,484 $ 16,489
========= =========
See accompanying notes to consolidated financial statements.
F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
---- ---- ----
(Restated) (Restated)
Net sales (Note 15) $ 28,050 $ 25,913 $ 30,100
Cost of sales 15,529 17,066 17,353
--------- --------- ---------
Gross profit 12,521 8,847 12,747
Operating expenses:
Selling, general and administrative 9,827 10,584 10,202
Engineering and product development 1,167 1,841 2,202
--------- --------- ---------
Income (loss) from operations 1,527 (3,578) 343
Other income (expense):
Interest expense (424) (411) (675)
Gain (loss) on sale of subsidiary/investment,
net (Notes 4 and 7) 197 (90) --
Other, net (Note 4) 434 9 (129)
--------- --------- ---------
Income (loss) from continuing operations before income 1,734 (4,070) (461)
taxes
Income taxes (Note 12) 31 128 101
--------- --------- ---------
Income (loss) from continuing operations 1,703 (4,198) (562)
--------- --------- ---------
Discontinued operations (Note 16):
Loss from discontinued operations (212) (847) (1,203)
Gain (loss) on disposal of discontinued operations,
including provision for phase out period of $122
in 2000 (487) 449 580
--------- --------- ---------
(699) (398) (623)
--------- --------- ---------
Net income (loss) $ 1,004 $ (4,596) $ (1,185)
--------- --------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment (505) (325) 206
--------- --------- ---------
Total comprehensive income (loss) $ 499 $ (4,921) $ (979)
========= ========= =========
Basic earnings (loss) per share from continuing
operations $ .09 $ (.26) $ (.05)
========= ========= =========
Diluted earnings (loss) per share from continuing
operations $ .07 $ (.26) $ (.05)
========= ========= =========
Basic loss per share from discontinued operations $ (.04) $ (.02) $ (.05)
========= ========= =========
Diluted loss per share from discontinued operations $ (.03) $ (.02) $ (.05)
========= ========= =========
Basic earnings (loss) per share (Note 13) $ .05 $ (.28) $ (.10)
========= ========= =========
Diluted earnings (loss) per share (Note 13) $ .04 $ (.28) $ (.10)
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Series B
Convertible Accumulated
Preferred Stock Common Stock Additional Other
---------------- ---------------- Paid-in Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
------ ------ ------ ------ ------- ------- ------------- -----
Balance at December 31, 1997 -- -- 11,925 $ 39 $ 19,960 $(13,877) $ (107) $ 6,015
Stock issued upon conversion of redeemable
preferred stock (Note 10) -- -- 770 3 364 -- -- 367
Repurchase of stock issued in connection with
settlement of dispute (Note 11) -- -- (80) -- (168) -- -- (168)
Stock issued under stock purchase plan -- -- 7 -- 7 -- -- 7
Warrants issued in connection with issuance of
redeemable preferred stock (Note 10) -- -- -- -- 163 -- -- 163
Warrants issued for services -- -- -- -- 85 -- -- 85
Repricing of warrants issued in connection with
issuance of redeemable preferred stock
(Note 10) -- -- -- -- 52 -- -- 52
Foreign currency translation adjustment -- -- -- -- -- -- 206 206
Accretion of redeemable 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 redeemable
preferred stock (Note 10) -- -- 2,659 9 960 -- -- 969
Stock issued in connection with acquisition
(Note 4) -- -- 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 15) -- -- 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 redeemable preferred stock
(Note 10) -- -- -- -- 91 -- -- 91
Foreign currency translation adjustment -- -- -- -- -- -- (325) (325)
Accretion of redeemable preferred stock -- -- -- -- -- (41) -- (41)
Net loss -- -- -- -- -- (4,596) -- (4,596)
-------------------------------------------------------------------------------------
Balance at December 31, 1999 0 0 18,152 60 23,726 (19,759) (226) 3,801
F-6
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT'D)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Series B
Convertible Accumulated
Preferred Stock Common Stock Additional Other
---------------- ---------------- Paid-in Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
------ ------ ------ ------ ------- ------- ------------- -----
Stock issued upon conversion of redeemable
preferred stock (Note 10) -- -- 1,743 6 343 -- -- 349
Warrant repricing offer (Note 11) -- -- -- -- 65 -- -- 65
Warrants issued for services -- -- -- -- 25 -- -- 25
Warrants issued with T-Com purchase (Note 4) -- -- -- -- 62 -- -- 62
Exercise of employee options -- -- 90 -- 18 -- -- 18
Warrants exercised -- -- 584 2 67 -- -- 69
Stock issued under stock purchase plan -- -- 1 -- 1 -- -- 1
Preferred Stock issued with T-Com purchase
(Note 4) 150 $ 938 -- -- -- -- -- 938
Foreign currency translation adjustment -- -- -- -- -- -- (505) (505)
Accretion of redeemable preferred stock -- -- -- -- -- (20) -- (20)
Net income -- -- -- -- -- 1,004 -- 1,004
-------------------------------------------------------------------------------------
Balance at December 31, 2000 150 $ 938 20,570 $ 68 $24,307 $(18,775) $ (731) $ 5,807
=====================================================================================
See accompanying notes to consolidated financial
statements.
F-7
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,004 $(4,596) $(1,185)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Depreciation and amortization 431 241 247
Amortization of intangible assets 352 540 449
Provision for doubtful accounts 47 42 80
Provision for inventory obsolescence 893 1,144 879
Gain on sale of fixed assets (43) -- --
Gain on sale of stock (197) -- --
Write off of uncollectible note receivable -- 452 --
Reversal of previously estimated accruals (399) -- --
Provision for impairment of investment -- 419 --
Equity in earnings of unconsolidated investments -- (653) (24)
Loss on the sale of subsidiary/investment -- 90 --
Stock and warrants issued for services 25 1,146 85
Repricing of warrants 65 91 52
Gain (loss) on disposal of discontinued operations 487 (449) (580)
Net change in operating assets of discontinued operations 401 167 (723)
Changes in operating assets and liabilities net of businesses acquired:
Accounts receivable (428) 294 (1,453)
Inventories (1,468) 791 (1,333)
Prepaids and other assets 274 567 (106)
Note receivable (130) 125 --
Accounts payable (1,120) 651 (260)
Accrued expenses and other liabilities (395) (333) (368)
-------- -------- --------
Cash provided by (used in) operating activities (201) 729 (4,240)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (158) (121) (169)
Cash received on sale of subsidiary/investment -- 118 --
Cash received from sale of stock - (DTS) 520 -- --
Cash received from sale of stock - (Wi-Lan) 918 -- --
Cash received from sale of discontinued operations 260 750 1,350
Cash received from sale of fixed assets 43 -- --
Cash paid, net of cash acquired in acquisition/Belix (592) -- --
Cash paid, net of cash acquired in acquisition/T-Com (82) -- --
Cash collected on notes receivable -- 9 451
-------- -------- --------
Cash provided by investing activities 909 756 1,632
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 1,131 (970) 658
Proceeds from long-term debt -- -- 1,542
Repayments of long-term debt -- (162) (2,503)
Repayment of notes payable (1,146) -- --
Proceeds from sale of preferred stock -- -- 2,000
Payment of preferred stock and debt issuance costs -- -- (423)
Proceeds from sale of common stock 88 2 7
-------- -------- --------
Cash provided by (used in) financing activities 73 (1,130) 1,281
-------- -------- --------
Effect of exchange rate changes on cash (505) (325) 206
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 276 30 (1,121)
Cash and cash equivalents at beginning of year 480 450 1,571
-------- -------- --------
Cash and cash equivalents at end of year $ 756 $ 480 $ 450
======== ======== ========
See accompanying notes to consolidated financial statements.
F-8
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 372 $ 443 $ 652
======== ======== ========
Income taxes $ 13 $ 124 $ 138
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Note receivable received upon sale of subsidiary $ -- $ -- $ 650
======== ======== ========
Warrants issued in connection with issuance of redeemable
preferred stock $ -- $ -- $ 163
======== ======== ========
Common stock issued upon conversion of redeemable
preferred stock $ 349 $ 969 $ 367
======== ======== ========
Accretion of redeemable preferred stock $ 20 $ 41 $ 60
======== ======== ========
Issuance of common stock and warrants in connection with
settlement of dispute $ -- $ 73 $ --
======== ======== ========
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 $ --
======== ======== ========
Issuance of preferred stock in connection with acquisition $ 938 $ -- $ --
======== ======== ========
Issuance of warrants in connection with acquisition $ 62 $ -- $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
F-9
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(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 XET Corporation
(formerly, XIT Corporation) ("XET"). CXR Telcom Corporation and CXR, S.A.
(collectively "CXR") design, manufacture and market electronic telecommunication
test equipment and transmission and network access products. XET and its
subsidiaries design, manufacture and market digital switches and power supplies.
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 Electronic Components. In October 2000 the Company
decided to discontinue its circuits segment operation (see Note 15).
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
The consolidated financial statements have been prepared in accordance
with the generally accepted accounting principals of the United States of
America and include the accounts of the Company and each of its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 4) and its 50% investment in a real estate
partnership (Note 7) were accounted for using the equity method.
REVENUE RECOGNITION
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
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, 2000 or 1999 but
has accounted for its investment in Wi-Lan (Note 4) 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 as a component of accumulated other comprehensive income 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.
F-10
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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:
Buildings 50 years
Machinery, equipment and fixtures 3-7 years
Leasehold improvements 5 years
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
LONG-LIVED ASSETS AND GOODWILL
The Company reviews the carrying amount of its long-lived assets and
intangible assets, including goodwill, for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
SOFTWARE DEVELOPMENT COSTS
Software development costs, including purchased technology, are
capitalized beginning when technological feasibility has been established or
when purchased from third parties and continues through the date of commercial
release. Amortization commences upon commercial release of the product and is
calculated using the greater of the straight-line method over three years or the
ratio of the products' current revenues divided by the anticipated total product
revenues. The carrying value of capitalized software development costs
aggregates $45,000 and $66,000 (net of accumulated amortization of $833,000 and
$763,000) at December 31, 2000 and 1999, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $70,000, $346,000 and $169,000 was charged to cost
of sales during 2000, 1999 and 1998, 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 2000, 1999 or 1998.
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.
F-11
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. During the second quarter of 2000, the
Company settled certain warranty claims related to its former HyComp subsidiary,
which was sold in March 1999 (see Note 4), for less than the amount originally
accrued. Accordingly, the Company reversed warranty accruals totaling $137,000
which were not deemed to be necessary.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the year and the change during the
year in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for its employee stock option plans, unless the exercise price of options
granted is less than fair market value on the date of grant. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings
(loss) per share includes no dilution and is computed by dividing net 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 the
Company.
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, 2000 and 1999, the fair value of all
financial instruments approximated carrying value.
F-12
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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. During 2000,
the Company reversed approximately $172,000 of previously estimated accruals
related to sales commissions and other accrued expenses which were no longer
deemed necessary. Of this amount, $90,000 relates to over-accrued commissions,
$49,000 relates to over-accrued accounts payable and $33,000 relates to the
settlement of a sales tax assessment. Throughout 2000, the Company reviewed its
accrual for sales commissions and its accounts payable and contacted the
appropriate vendors to verify the amounts outstanding. As outstanding amounts
due were verified for amounts less than the amount recorded, the Company
reversed the excess accrual. In the fourth quarter of 2000, the Company settled
an outstanding disputed sales tax assessment and the assessment was canceled.
The Company reversed the accrual for the sales tax assessment in the amount of
approximately $33,000 in the fourth quarter. These amounts are included in
other, net in the accompanying 2000 consolidated statement of operations.
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. At December 31, 2000, one customer accounted for 10% of net
accounts receivable.
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.
F-13
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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.
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 currently operates in two reportable segments:
Telecommunications and Components.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the 2000 presentation.
(2) RESTATEMENT OF FINANCIAL STATEMENTS
ACCOUNTING FOR WRITE OFF OF NOTE RECEIVABLE
In March 2001, it was determined that the write-off in 1999 of a note
receivable received in exchange for the sale of Arnold Circuits in 1998 should
have been accounted for as a selling, general and administrative expense in
continuing operations instead of included in discontinued operations.
Accordingly, the accompanying consolidated statement of operations as
of and for the year ended December 31, 1999 have been restated to reflect an
increase in selling, general and administrative expenses in continuing
operations of $452,000 and a corresponding increase in gain on disposal of
discontinued operations.
ACCOUNTING FOR ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
In March 2001, it was determined that interest expense allocated to
discontinued operations should be included in continuing operations in
accordance with EITF 87-24.
Accordingly, the accompanying consolidated statements of operations for
the years ended December 31, 1999 and 1998 have been restated to reflect an
increase in interest expense in continuing operations of $114,000 and $168,000,
respectively, with corresponding reductions in loss from operations of
discontinued operations.
F-14
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCOUNTING FOR ALLOCATION OF OTHER EXPENSES TO DISCONTINUED OPERATIONS
In March 2001, it was determined that certain other expenses allocated
to discontinued operations should have been included in continuing operations.
Accordingly, the accompanying consolidated statements of operations for
the years ended December 31, 1999 and 1998 have been restated to reflect an
increase in other expense in continuing operations of $185,000 and $7,000,
respectively, with corresponding reductions in loss from operations of
discontinued operations.
EFFECT
The effect of the above changes was to increase net loss from
continuing operations by $751,000 and $161,000 for the years ended December 31,
1999 and 1998, respectively. Basic and diluted loss per share from continuing
operations increased by $0.05 and $0.02 per share for the years ended December
31, 1999 and 1998, respectively. Loss from discontinued operations decreased by
$299,000 and $161,000 for the years ended December 31, 1999 and 1998,
respectively and increased gain on disposal of discontinued operations from a
($3,000) loss to a $449,000 gain for the year ended December 31, 1999. Basic and
diluted loss per share from discontinued operations decreased by $0.05 and $0.02
per share for the years ended December 31, 1999 and 1998, respectively. The
above changes did not impact net loss or basic and diluted loss per share for
the years ended December 31, 1999 and 1998.
(3) MERGER WITH XET CORPORATION
On March 26, 1997, privately held XET merged with a wholly-owned, newly
formed subsidiary of the Company, with XET as the surviving subsidiary. Pursuant
to the transaction, the former stockholders of XET 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 XET 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 XET
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.
The merger has been accounted for as a purchase of the Company by XET.
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.
F-15
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(4) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
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 were 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.
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 16.)
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.
(See Note 16.)
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, to Arnold
Circuits, Inc., a company wholly owned by Robert Bertrand. Mr. Bertrand, the
Trustee of The Bertrand Family Trust, was a beneficial owner of more than five
percent (5%) of the Company's outstanding common stock as of December 31, 1998.
On April 9, 1998, the Company completed the sale and received $1,350,000 in cash
and a note receivable ("Note") aggregating $650,000, which was payable over
three years. As security for the Note, XCEL Arnold Circuits, Inc. was granted a
second lien on substantially all the assets of Arnold Circuits, Inc. As further
security for the Note, XACI was granted a security interest in 250,000 warrants
to purchase the Company's common stock, which were held by Mr. Bertrand. Payment
of the Note was guaranteed by Mr. Bertrand and a related entity. The sale
resulted in a gain of $580,000. (See Note 16.)
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 8) against the note receivable and then wrote-off
the net unpaid balance of $452,000 which is included in selling, general and
administrative expenses in the accompanying 1999 consolidated statement of
operations. The warrants provided as collateral were cancelled and the Company
F-16
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
attempted to recover the amount due under the guarantees executed by Mr.
Bertrand and a related party. In order to avoid a potentially expensive lawsuit,
the Company agreed to cancel the guarantee in exchange for a $40,000 payment
from Mr. Bertrand, of which $20,000 was paid in December 1999 and the remainder
in the first quarter of 2000. This amount has been included in selling, general
and administrative expenses 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 wireless transmission products. 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:
December 31, 1999 June 30, 1999
(unaudited) (audited)
------------ ------------
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
============ ============
For the year ended For the year ended
December 31, 1999 June 30, 1999
(unaudited) (audited)
------------ ------------
Net sales $ 7,256,000 $ 7,538,000
Net income $ 213,000 $ (424,000)
On January 7, 2000, the Company sold all of its interest in the common
stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a
market value of $720,000 on the date of the transaction. Accordingly, as of
December 31, 1999, the Company wrote-down the carrying value of its investment
in the common stock of DTS to the value of the consideration received in January
2000. The write-down of $419,000 is included in other income (expense) in the
accompanying consolidated statement of operations for the year ended December
31, 1999. The Company was 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.
F-17
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $918,000. The sale resulted in a gain of approximately
$197,000 which is included in gain (loss) on sale of subsidiary/investment in
the accompanying consolidated statement of operations for the year ended
December 31, 2000.
BELIX COMPANY, LTD.
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, which totaled $252,000 at December 31, 2000. The
Company has incurred expenses of approximately $257,000 for severance and
relocation costs and has accrued an additional estimate of $49,000 for certain
severance and relocation costs related to Belix. The severance and relocation
affected various manufacturing, administrative and accounting personnel and was
substantially completed as of December 31, 2000. The Company also incurred
approximately $107,000 of legal and other expenses related to the acquisition.
The Company has included the expenses and accrual in the calculation of the cost
of the acquisition. Subsequent to the closing date, the purchase price was
reduced by $181,000 due to a shortfall in net assets per the purchase agreement.
Net assets acquired totaled $136,000, after such adjustment. The assets acquired
and liabilities assumed are as follows:
Cash $ 206,000
Accounts receivable 669,000
Inventory 881,000
Other assets 347,000
Fixed assets 181,000
-----------
Total assets acquired $2,284,000
===========
Accounts payable $1,382,000
Line of credit 419,000
Notes payable 347,000
-----------
Total liabilities assumed $2,148,000
===========
Net assets acquired $ 136,000
Accrual of severance and relocation costs (306,000)
Accrual of legal and other costs (107,000)
Goodwill 1,138,000
-----------
Adjusted purchase price $ 861,000
===========
Initial purchase price $ 790,000
Reduction due to shortfall in net assets (181,000)
Earn-out accrual 252,000
-----------
Adjusted purchase price $ 861,000
===========
F-18
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The acquisition of Belix has been accounted for as a purchase by the
Company and resulted in approximately $1.1 million of goodwill which is being
amortized on a straight-line basis over ten years. 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 with the
exception of the earn out which converted at the conversion rate at December 31,
2000. The Belix acquisition was not material to the financial statements and
accordingly the pro forma effect of the transaction is not provided.
T-COM, LLC
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 $1,322,000, and the liabilities assumed are approximately
$687,000. The assets acquired and liabilities assumed are as follows:
Accounts receivable $ 381,000
Inventory 787,000
Fixed assets 134,000
Other assets 20,000
------------
Total assets acquired $ 1,322,000
============
Bank overdraft $ 82,000
Accounts payable 338,000
Accrued compensation 122,000
Other accrued expenses 145,000
------------
Total liabilities assumed $ 687,000
============
Net assets acquired $ 635,000
Goodwill 365,000
------------
Purchase price $ 1,000,000
============
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
approximately $1,000,000, as itemized below:
F-19
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 to permit conversion by the holders of the Series B Shares
during the 20-day notice period, 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 pricing model with the following
assumptions: no dividend yield; expected volatility of 95%; a risk free rate of
6.3%; and an expected life of two years. The acquisition of T-Com has been
accounted for as a purchase by the Company and resulted in approximately
$365,000 of goodwill which is being amortized on a straight-line basis over ten
years.
Unaudited pro forma results of operations for the years ended December
31, 2000 and 1999, as if T-Com and the Company had been combined as of the
beginning of the year, follow. The pro forma results include estimates and
assumptions which management believes are reasonable. However, pro forma results
do not include any anticipated cost savings or other effects of the planned
integration of T-Com and the Company, and are not necessarily indicative of the
results which would have occurred if the business combination had been in effect
on the dates indicated, or which may result in the future.
F-20
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Pro forma Year
ended December 31
(thousands except per share data) 2000 1999
-------------------------------------------------------------------------------
Net sales $29,680 $29,152
Income (loss) from continuing operations 1,255 (8,734)
Net income (loss) 556 (9,132)
Net income per common share
Basic 0.03 (0.55)
Diluted 0.02 (0.55)
-------------------------------------------------------------------------------
XCEL ETCH-TEK
On November 15, 2000, the Company sold substantially all of the assets
of XCEL Etch-Tek ("Etch-Tek"), a wholly owned subsidiary of XET, to a former
employee in exchange for $260,000 in cash, a $50,000 note receivable and the
assumption of $75,000 of liabilities. The note receivable bears interest at 8%
per annum, with all principal and interest due in one year. The balance due
under the note receivable was $50,000 at December 31, 2000 and is included in
notes receivable in the accompanying 2000 consolidated balance sheet. The
transaction resulted in a loss of $365,000 which is included in gain (loss) on
disposal of discontinued operations in the accompanying 2000 consolidated
statement of operations. (See Note 16.)
(5) INVENTORIES
Inventories are summarized as follows:
2000 1999
---- ----
Raw materials..................................... $2,777,000 $1,619,000
Work-in-process................................... 1,914,000 1,174,000
Finished goods.................................... 1,607,000 1,254,000
----------- -----------
$6,298,000 $4,047,000
=========== ===========
Included in the amounts above is an allowance for inventory
obsolescence of $1,169,000 and $1,381,000 at December 31, 2000 and 1999,
respectively. Allowances for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that the Company intends to dispose of. The
inventory items identified for disposal at each year end are generally discarded
during the following year.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
2000 1999
---- ----
Land and buildings................................. $ 279,000 $ 306,000
Machinery, equipment and fixtures.................. 3,223,000 2,803,000
Leasehold improvements............................. 451,000 444,000
----------- -----------
3,953,000 3,553,000
Accumulated depreciation........................... (3,144,000) (2,788,000)
----------- -----------
$ 809,000 $ 765,000
=========== ===========
F-21
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(7) INVESTMENT IN PARTNERSHIP
On December 19, 1996, the Company's XET 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 XET's
Digitran Division under a long-term lease from the partnership. Immediately
following the formation of the partnership, XET obtained a loan from a bank for
$750,000, 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. XET's original investment
in the partnership is adjusted for the income (loss) attributable to XET's
portion of the partnership's results of operations.
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, which is included in gain (loss) on sale
of subsidiary/investment in the accompanying 1999 consolidated statement of
operations.
(8) NOTES PAYABLE
A summary of notes payable is as follows:
2000 1999
---- ----
Line of credit with a U.S. commercial lender $1,798,000 $2,014,000
Line of credit with foreign banks 1,863,000 93,000
----------- -----------
$3,661,000 $2,107,000
=========== ===========
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 $2,014,000 at December 31, 1999. The
credit line was collateralized by substantially all assets of the Company's
domestic subsidiaries, bore interest at the lender's prime rate (8.5% at
December 31, 1999) plus 1% and was 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. The line of credit expired on June 23, 2000, but was
extended to August 14, 2000.
F-22
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 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 7). 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 4) in January 2000. The Domestic Facility agreement
required 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 restricted payment of
any dividends. The Domestic Facility was replaced by a new credit facility on
August 16, 2000 (see below).
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 Company's President and CEO provided a limited personal guarantee on these
loans. As consideration for this guarantee, the President and CEO received a
guarantee fee, approved by the board of directors, in the amount of $35,000. On
January 26, 2001, Wells Fargo Business Credit Inc. released the guarantee. No
further amounts are due in connection with this guarantee. The annual interest
rate on both portions of the credit facility is the prime rate (9.5% at December
31, 2000) plus 2%. The facility contains a performance based interest reduction
feature. The terms of the agreement provide for a reduction in the interest rate
to the prime rate plus 1.5% if the consolidated net income of XET Corporation
and CXR Telcom exceeds $250,000 for the year ended December 31, 2000 or the
prime rate plus 1% if the consolidated net income of XET Corporation and CXR
Telcom exceeds $500,000 for the year ended December 31, 2000. The balance
outstanding under the revolving loan was $1,798,000 on December 31, 2000. There
was $1,202,000 of additional borrowings available as of December 31, 2000. The
credit facility expires on August 16, 2003. The Company's foreign subsidiaries
have obtained credit facilities with Lloyds Bank in England, Banc National de
Paris, Societe Generale and Banque Hervet in France and Johan Tokyo Credit Bank
in Japan.
The Company's French subsidiary has four bank lines of credit with a
total of $486,000 and $0 outstanding at December 31, 2000 and 1999,
respectively. Borrowings under the related agreements bear interest at 7.3% to
10% at December 31, 2000 and are based on eligible accounts receivable.
Approximately $94,000 of borrowings were available under the lines of credit at
December 31, 2000.
The Company's UK subsidiary has a bank line of credit with $1,377,000
and $93,000 outstanding at December 31, 2000 and 1999, respectively. Borrowings
under the related agreement bear interest at the bank's base rate (6% at
December 31, 2000) plus 2.5% and are based on eligible accounts receivable. No
additional borrowings were available under the line at December 31, 2000. The
Company's U.K. subsidiary is out of compliance with certain covenants at
December 31, 2000 and has received a waiver from its lender.
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.
F-23
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
subsidiary (Note 4). 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 4). 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.
(9) LONG-TERM DEBT
A summary of long-term debt follows:
2000 1999
---- ----
Term notes payable to commercial lender (a) $ 370,000 $ 955,000
Term notes payable to foreign banks (b) 41,000 108,000
Capitalized lease obligations (c) 129,000 201,000
Other promissory notes 356,000 267,000
------------ ------------
896,000 1,531,000
Current portion (614,000) (1,388,000)
------------ ------------
$ 282,000 $ 143,000
============ ============
---------------
(a) Two term notes payable to commercial lenders bearing interest
at the lender's prime rate (9.5% at December 31, 2000) plus
2%. The facility contains a performance-based interest
reduction feature. The terms of the agreement provide for a
reduction in the interest rate to the prime rate plus 1.5% if
the consolidated net income of XET Corporation and CXR Telcom
exceeds $250,000 for the year ended December 31, 2000 or the
prime rate plus 1% if the consolidated net income of XET
Corporation and CXR Telcom exceeds $500,000 for the year ended
December 31, 2000. The notes are collateralized by machinery
and equipment and are payable in total monthly principal
installments (aggregating $57,000 at December 31, 2000), plus
interest through final maturity date of September 1, 2005.
(b) The Company had 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.
(c) 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.
F-24
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Principal maturities related to long-term debt as of December 31, 2000
are as follows:
Year Ending December 31, Amount
------------------------ ------
2001 $ 614,000
2002 187,000
2003 82,000
2004 8,000
2005 5,000
----------
$ 896,000
==========
(10) 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
4).
The following table reflects the Series A and Series B redeemable
preferred stock activity:
Series A Redeemable Series B Redeemable
Preferred Stock Preferred Stock
-------------------------- --------------------------
Number Number
of Shares Amount of Shares Amount
---------- ---------- ---------- ----------
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, 1999 and 2000 .. -- $ -- -- $ --
========== ========== ========== ==========
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.
F-25
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. Under the
original certificate of designation, the New Preferred Shares were 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. Also under the original certificate of designation,
no more than 20% of the aggregate number of New Preferred Shares originally
purchased and owned by any single entity could be converted in any thirty (30)
day period after the ninetieth (90th) day from issuance. In the event of any
liquidation, dissolution or winding up of the Company, the holders of shares of
New Preferred Shares are entitled to receive, prior and in preference to any
distribution of any assets of the Company to the holders of the Company's common
stock, an amount per share equal to $10,000 for each outstanding New Preferred
Share. Any unconverted New Preferred Shares may be redeemed at the option of the
Company for cash at a per share price equal to $11,500 per New Preferred Share
and any New Preferred Shares which remain outstanding as of May 22, 2003 are
subject to mandatory redemption by the Company at the same per-share redemption
price. The excess of the redeemable value over the carrying value is being
accreted by periodic charges to retained earnings over the original life of the
issue.
In November 1998, the holders of the New Preferred Shares agreed to
revise the certificate of designations relating to the New Preferred Shares to
provide that: (i) the conversion price would be fixed at $10,000 divided by
$0.50 for so long as the Company's common stock continued to be traded on the
Nasdaq SmallCap Market and the Company did not conduct a reverse split of its
outstanding common stock; and (ii) the Company would not exercise its redemption
rights for the outstanding shares of the New Preferred Shares for six months.
The agreement also provided that the existing restriction on the right of each
holder of the New Preferred Shares to convert more than 20% of the aggregate
number of shares of the New Preferred Shares originally purchased by such holder
in any 30-day period would be eliminated. Also, the agreement provided that the
Company would replace the existing warrants, which warrants had an exercise
price of $1.25 per share, with warrants that had an exercise price of $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.
The Company inadvertently failed to obtain the required approval of the
Company's common stockholders and to file an amended certificate of designations
to effectuate the amendments to the certificate of designations that were
contained in the November 1998 agreement. However, between November 18, 1998 and
March 26, 1999, the holders of the New Preferred Shares converted shares of the
New Preferred Shares into shares of common stock at the rate of 20,000 shares of
common stock per share of the New Preferred Shares, as agreed to in the November
1998 agreement. Use of the $10,000 divided by $0.50 conversion price in four of
the conversions resulted in the stockholders receiving an aggregate of 46,437
more shares of common stock than they would have received under the original
conversion price formula that was contained in the certificate of designations.
The Company has determined, however, that the excess shares were in fact validly
issued under Delaware law.
F-26
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
In May 1999, the Company's common stock was delisted from the Nasdaq
SmallCap Market due to a failure to meet Nasdaq's minimum closing bid price
listing requirement, and the Company's common stock began trading on the OTC
Electronic Bulletin Board (See Note 11). Based upon the terms of the November
1998 agreement, the conversion price of the New Preferred Shares reverted back
to the floating conversion price shown in the certificate of designation, which
conversion price was $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 a 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 of $10,000 divided by $0.1979, or 50,530
shares of common stock per New Preferred Share, 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 the event a holder of the
New Preferred Shares had converted its New Preferred Shares to common stock
immediately before the December 1999 agreement, each New Preferred Share would
have been converted into approximately 52,632 shares of common stock at a per
share conversion price of $10,000 divided by $0.19, based on the original
conversion ratio. 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.
The Company filed an amended certificate of designation with the
Delaware Secretary of State to give effect to the December 1999 agreements by
fixing the conversion price of the New Preferred Shares at $10,000 divided by
$0.1979. However, because the Company inadvertently failed to obtain approval of
the Company's common stockholders for the amendment to the certificate of
designation, the amendment was invalid under the Delaware General Corporation
Law. However, in June 2000, a holder of New Preferred Shares converted 34.5
shares of the New Preferred Shares into 1,743,285 shares of common stock based
upon the $10,000 divided by $0.1979 per share conversion price that the Company
and the holders of the New Preferred Shares believed to be in effect. This
conversion resulted in the issuance of 1,048,654 more shares of common stock
than would otherwise have been issued upon conversion of the 34.5 shares of the
New Preferred Shares under the certificate of designation that was then in
effect. The Company has determined, however, that the excess shares were in fact
validly issued under Delaware law.
In November 2000, the Company realized that the modifications to the
conversion price of the New Preferred Shares were invalid because the Company
had inadvertently failed to obtain common stockholder approval for the
modifications to the certificate of designations and had also inadvertently
failed to file an amendment reflecting the November 1998 modifications. The
Company's board of directors distributed proxy materials requesting that holders
of the Company's common stock and the New Preferred Shares approve an amendment
to the certificate of designations that provided for a fixed conversion price of
$10,000 divided by $0.1979 and an amendment to the certificate of incorporation
that increased the authorized shares of common stock from 25,000,000 to
50,000,000. The amendments were approved at a special meeting of stockholders
that was held on January 16, 2001. The Company filed the amendments with the
Delaware Secretary of State on January 22, 2001, so that after that date, each
outstanding share of Series A Preferred Stock was convertible into 50,530 shares
of common stock.
F-27
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following table reflects the convertible redeemable preferred stock
activity:
Number
of Shares Amount
-------- ------------
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
Conversion to common stock ............... (34.5) (349,000)
Accretion of preferred stock ............. -- 20,000
-------- ------------
Balance at December 31, 2000 ............. 25.0 $ 259,000
======== ============
(11) STOCKHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS
The Company has the ability to issue options to purchase its common
stock under the following arrangements:
o Employee Stock and Stock Option Plan, effective July 1, 1994,
providing for non-qualified stock options as well as
restricted and non-restricted stock awards to both employees
and outside consultants. Up to 520,000 shares may be granted
or optioned under this plan. Terms of related grants under the
plan are at the discretion of the Board of Directors.
o Stock Option Plan adopted in 1993, providing for the granting
of up to 300,000 incentive stock options to purchase stock at
not less than the current market value on the date of grant.
Options granted under this plan vest ratably over three years
and expire 10 years after date of grant.
o The MicroTel International, Inc. 1997 Stock Incentive Plan
(the "1997 Plan") provides that options granted may be either
qualified or nonqualified stock options and are required to be
granted at fair market value on the date of grant. Subject to
termination of employment, options may expire up to ten years
from the date of grant and are nontransferable other than in
the event of death, disability or certain other transfers that
the committee of the Board of Directors administering the 1997
Plan may permit. Up to 1,600,000 stock options may be granted
under the 1997 Plan. All outstanding options of former
optionholders under the XET 1987 Employee Stock Option Plan
were converted to options under the 1997 Plan as of the date
of the merger between the Company and XET at the exchange rate
of 1.451478 (see Note 3).
F-28
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
o The 2000 Stock Option Plan (the "2000 Plan"), was adopted by
the board of directors in November 2000 and approved by the
stockholders on January 16, 2001. Under the 2000 Plan, options
granted may be either qualified or nonqualified options.
Qualified options must have an exercise price of not less than
the fair market value of a share of common stock on the date
of grant. Nonqualified options must have an exercise price of
not less than 85% of the fair market value of a share of
common stock on the date of grant. Up to 2,000,000 options may
be granted under the 2000 Plan. No option may be exercised
more than ten years after the date of grant.
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, 2000, 1999 and 1998:
Weighted
2000 Average Exercise 1999 1998
Shares Price Shares Shares
------ ----- ------ ------
Outstanding at beginning of year 1,602,000 $ 1.46 2,069,000 2,021,000
Granted 235,000 0.50 430,000 200,000
Exercised (90,000) 0.20 -- --
Canceled (293,000) 1.70 (897,000) (152,000)
------------------------------------------------------------------
Outstanding at end of year 1,454,000 $ 1.34 1,602,000 2,069,000
==================================================================
The following table summarizes information with respect to stock
options at December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Exercisable Weighted
Exercise December 31, Contractual Life Average December 31, Average
Price 2000 (Years) Price 2000 Price
----------- ---------------- ----------------------- ----------- ---------------- --------
$.20 to $1.00 565,000 9.1 $0.32 340,000 $0.20
$1.01 to $2.00 761,000 4.5 $1.80 761,000 $1.80
$2.01 to $3.00 35,000 4.8 $2.79 35,000 $2.79
$3.01 to $4.00 93,000 4.0 $3.17 93,000 $3.17
------------------ -----------------
$.20 to $4.00 1,454,000 6.3 $1.34 1,229,000 $1.49
================== =================
Weighted average exercise prices for 2000 are calculated at prices
effective as of December 31, 2000. The fair value of options granted during 2000
was $113,000, at a weighted average value of $0.48 per share. The fair value of
options granted during the years ended December 31, 1999 and 1998 were $63,000
and $112,000, at weighted average prices of $0.15 and $0.56 per share,
respectively.
F-29
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 2000, 1999 and 1998 has been estimated
based on a modified Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 101% in 2000, 85% in 1999 and 25% to
57% in 1998, 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 income (loss), net income (loss)
available for common stockholders and earnings (loss) per share amounts for the
periods presented as if the Company had elected the fair value method of
accounting for stock options.
2000 1999 1998
---- ---- ----
NET INCOME (LOSS)
As reported $ 1,004 $ (4,596) $ (1,185)
Pro forma $ 909 $ (4,628) $ (1,297)
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS
As reported $ 984 $ (4,637) $ (1,245)
Pro forma $ 889 $ (4,669) $ (1,357)
BASIC EARNINGS (LOSS) PER SHARE
As reported $ .05 $ (.28) $ (.10)
Pro forma $ .05 $ (.28) $ (.11)
DILUTED EARNINGS (LOSS) PER SHARE
As Reported $ .04 $ (.28) $ (.10)
Pro forma $ .04 $ (.28) $ (.11)
Additional incremental compensation expense includes the excess of fair
values of options granted during the year over any compensation amounts recorded
for options whose exercise prices were less than market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification
date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. The
above calculations include the effects of all grants in the years presented.
Because options often vest over several years and additional awards are made
each year, the results shown above may not be representative of the effects on
net income (loss) in future years.
F-30
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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:
Warrant Price
Number --------------------------
of Shares Per Share Total
--------- --------- -----
Balance outstanding, December 31, 1997 2,740,000 $1.21 to 3.79 $7,923,000
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 4,542,000 0.66 to 3.79 9,511,000
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 5,482,000 0.25 to 3.79 9,695,000
Warrants issued 1,784,000 0.61 to 1.90 2,023,000
Warrants expired/cancelled (4,317,000) 0.61 to 3.79 (9,602,000)
Warrants exercised (777,000) 0.25 to 0.69 (413,000)
-------------------------------------------------
Balance outstanding at December 31, 2000 2,172,000 $0.25 to 2.50 $1,703,000
=================================================
During 2000, the Company issued warrants to purchase 150,000 shares of
common stock at an exercise price of $1.00 as compensation for various services
rendered. The estimated fair value of the warrants was $25,000 and was
calculated using a Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 95%; a risk-free rate of 6.8%; and
expected lives of 1.5 to 2 years. During 2000, 584,000 shares of common stock
were issued in connection with the exercise of 777,000 warrants (277,000
warrants at an exercise price of $0.25 and 500,000 warrants exercised cashless
into 306,000 shares).
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 Telcom
subsidiary allowing eligible subsidiary employees to purchase shares of the
Company's common stock at 85% of market value. During 2000, 1999, and 1998,
1,000, 5,000, and 7,000 shares, respectively, had been issued pursuant to the
plan with 26,000 shares reserved for future issuance.
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of $1.00 or more and ranging as high as $3.79
the opportunity to exchange their warrants with new warrants for one half the
number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of $1.00 or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the stockholders as
part of the year 2000 Annual Meeting of Stockholders.
F-31
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. Expense of $65,000 was
recorded during year ended December 31, 2000, for the compensation expense for
the modification of the warrants. Based on the nature and timing of the original
grant of the warrants, the compensation expense was determined by various
methods. For warrants issued to employees and directors, compensation expense
was determined by the intrinsic value method and by treating the modified
warrants as variable from the date of modification in accordance with APB 25 and
FIN 44. For warrants issued to non-employees, compensation expense was
determined in accordance with FAS 123 by calculating the difference between the
fair value of the new warrant and the old warrant at the date of acceptance,
with the exception of warrants initially granted pre-FAS 123, in which case the
entire fair value of the new warrant was recorded as compensation expense. The
estimated fair values of the old and new warrants was calculated using a
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 93%; a risk-free interest rate of 6%; and expected lives
ranging from 0.1 to 5 years.
As of December 31, 2000, the Company has 20,569,759 shares of common
stock outstanding and potentially 5,021,702 shares of common stock issuable
pursuant to the exercise of outstanding stock options and warrants and
conversion of convertible redeemable preferred stock. As of December 31, 2000,
in accordance with its certificate of incorporation, the Company was authorized
to issue 25,000,000 shares of common stock. On January 22, 2001, the Company's
authorized capital was increased to 50,000,000 shares of common stock.
DIVIDENDS
No dividends on the Company's common stock have been paid to date. The
Company's line of credit with Wells Fargo Business Credit, Inc. prohibits the
payment of cash dividends on its common stock. The certificates of designation
related to the Company's Series A Preferred Stock and Series B Preferred Stock
provide that shares of those series of preferred stock are not entitled to
receive cash dividends. The Company currently intends to retain future earnings
to fund the development and growth of its business and, therefore, does not
anticipate paying cash dividends on its common stock within the foreseeable
future. Any future payment of dividends on the Company's common stock will be
determined by the Company's board of directors and will depend on the Company's
financial condition, results of operations, contractual obligations and other
factors deemed relevant by the Company's board of directors.
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.
F-32
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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.
(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:
2000 1999 1998
---- ---- ----
Domestic $2,658,000 $(3,556,000) $(467,000)
Foreign (924,000) (514,000) 6,000
--------------------------------------------------
Total $1,734,000 $(4,070,000) $(461,000)
==================================================
Income tax expense consists of the following:
2000 1999 1998
---- ---- ----
Current
Federal $20,000 $ -- $ --
State 3,000 30,000 8,000
Foreign 8,000 98,000 93,000
--------------------------------------------------
$31,000 $128,000 $101,000
==================================================
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:
2000 1999 1998
---- ---- ----
Tax at U.S. federal statutory rate $ 590,000 $ (1,384,000) $ (157,000)
State taxes, net of federal income tax benefit 3,000 30,000 8,000
Foreign income taxes 8,000 98,000 93,000
Losses with no current benefit -- 1,314,000 59,000
Permanent differences 88,000 70,000 98,000
Utilization of net operating losses (658,000) -- --
--------------------------------------------------
$ 31,000 $ 128,000 $ 101,000
==================================================
F-33
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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:
2000 1999
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 14,000 $ 37,000
Inventory reserves and uniform capitalization 312,000 254,000
Other accrued liabilities 387,000 140,000
Deferred compensation 241,000 326,000
Research credit carryforwards 256,000 256,000
Alternative Minimum Tax credit carryforwards 154,000 134,000
Net operating loss carryforwards 14,957,000 17,436,000
----------------------------------
Total deferred tax assets 16,321,000 18,583,000
Valuation allowance for deferred tax assets (16,321,000) (18,335,000)
----------------------------------
Net deferred tax assets -- 248,000
----------------------------------
Deferred tax liabilities:
Depreciation -- (166,000)
Gain on sale of investment -- (82,000)
----------------------------------
Total deferred tax liabilities -- (248,000)
----------------------------------
Net deferred taxes $ -- $ --
==================================
As of December 31, 2000, the Company has a federal net operating loss
carryforward of approximately $43,000,000 which expires at various dates between
2001 and 2019 and a state net operating loss carryforward of approximately
$3,000,000 which expires at various dates through 2004.
As a result of the merger with XET (Note 3), 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-34
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(13) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
2000 1999 1998
---- ---- ----
NUMERATOR:
Net income (loss) $ 1,004,000 $ (4,596,000) $ (1,185,000)
Less: accretion of the excess of the redemption value over
the carrying value of redeemable preferred stock 20,000 41,000 60,000
--------------------------------------------------
Income (loss) attributable to common stockholders $ 984,000 $ (4,637,000) $ (1,245,000)
==================================================
DENOMINATOR:
Weighted average number of common shares outstanding during the
period 19,504,000 16,638,000 11,952,000
Incremental shares from assumed conversions of warrants,
options and preferred stock 3,523,000 -- --
--------------------------------------------------
Adjusted weighted average shares 23,027,000 16,638,000 11,952,000
==================================================
Basic earnings (loss) per share $ 0.05 $ (.28) $ (.10)
==================================================
Diluted earnings (loss) per share $ 0.04 $ (.28) $ (.10)
==================================================
The computation of diluted loss per share for 1999 and 1998 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 11.
(14) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through 2005. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2000, 1999 and 1998, was $956,000, $1,454,000 and
$1,674,000, respectively.
F-35
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year are as
follows:
Year Ending December 31, Amount
------------------------ ------
2001 $ 995,000
2002 757,000
2003 255,000
2004 205,000
------------------
$ 2,212,000
==================
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. During the fourth quarter of 2000, the Company settled
two outstanding lawsuits for approximately $90,000 less than the amount
previously accrued. Accordingly, the Company reversed a portion of the accruals
related to the lawsuits in the amount of $90,000 which were determined to no
longer be necessary. Currently, there are no legal proceedings pending.
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 9) in the accompanying
1999 consolidated balance sheet. The balance was paid in full in 2000.
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
F-36
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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 judgment 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 XET and the Company. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.
In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement calls for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000
(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 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
Through 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 $21,000, $31,000 and $22,000 to the 401(k) Plans for the
calendar years ended December 31, 2000, 1999 and 1998, respectively.
EXECUTIVE MANAGEMENT
Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into a new employment agreement, providing for an
annual base salary of $250,000, with annual merit increases for an initial
period of five years with two renewal periods of two years and a severance
agreement of at least three years salary during the initial period.
F-37
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(15) SEGMENT AND MAJOR CUSTOMER INFORMATION
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
networking equipment. The Electronic Components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets digital
switches 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 and XCEL Circuits Division ("XCD"), a
division of XET Corporation, a wholly-owned subsidiary of the Company. XCEL
Etch-Tek was offered for sale (see Note 4). XCD is essentially a captive
supplier of printed circuit boards to the electronic components segment with
total sales to external customers of $173,000 and $167,000 for the years ended
December 31, 2000 and 1999, respectively. XCD has been retained and is now
included in the electronics components segment. 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, with the exception of XCD which has been included in the current and
prior financial information related to the electronics components segment in the
accompanying consolidated financial statements.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes
exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design and
manufacturing and marketing strategies. Selected financial data for each of the
Company's operating segments is shown below.
F-38
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
---- ---- ----
SALES TO EXTERNAL CUSTOMERS:
Telecommunications $ 15,658,000 $ 15,666,000 $ 17,532,000
Electronic Components 12,392,000 10,247,000 12,568,000
------------- ------------- -------------
$ 28,050,000 $ 25,913,000 $ 30,100,000
============= ============= =============
INTERSEGMENT SALES:
Telecommunications $ -- $ -- $ 17,000
Electronic Components -- 279,000 635,000
------------- ------------- -------------
$ -- $ 279,000 $ 652,000
============= ============= =============
INTEREST EXPENSE:
Telecommunications $ 131,000 $ 110,000 $ 79,000
Electronic Components 216,000 75,000 323,000
------------- ------------- -------------
$ 347,000 $ 185,000 $ 402,000
============= ============= =============
DEPRECIATION AND AMORTIZATION:
Telecommunications $ 528,000 $ 490,000 $ 265,000
Electronic Components 173,000 101,000 241,000
------------- ------------- -------------
$ 701,000 $ 591,000 $ 506,000
============= ============= =============
SEGMENT PROFITS (LOSSES):
Telecommunications $ 344,000 $ (1,739,000) $ 363,000
Electronic Components 3,365,000 1,168,000 2,498,000
------------- ------------- -------------
$ 3,709,000 $ (571,000) $ 2,861,000
============= ============= =============
SEGMENT ASSETS:
Telecommunications $ 9,901,000 $ 7,960,000 $ 10,234,000
Electronic Components 8,876,000 5,327,000 7,321,000
------------- ------------- -------------
$ 18,777,000 $ 13,287,000 $ 17,555,000
============= ============= =============
F-39
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.
2000 1999 1998
---- ---- ----
Net Sales
Total sales for reportable segments $ 28,050,000 $ 26,192,000 $ 30,752,000
Elimination of intersegment sales -- (279,000) (652,000)
------------- ------------- -------------
Total consolidated revenues $ 28,050,000 $ 25,913,000 $ 30,100,000
============= ============= =============
Profit (loss) from continuing operations
----------------------------------------
before income taxes
-------------------
Total profit (loss) for reportable segments $ 3,709,000 $ (571,000) $ 2,861,000
Unallocated amounts:
General corporate expenses (1,975,000) (3,499,000) (3,322,000)
------------- ------------- -------------
Consolidated loss from continuing operations before
income taxes $ 1,734,000 $ (4,070,000) $ (461,000)
============= ============= =============
Assets
------
Total assets for reportable segments $ 18,777,000 $ 13,287,000 $ 17,555,000
Other assets 707,000 3,202,000 2,797,000
------------- ------------- -------------
Total consolidated assets $ 19,484,000 $ 16,489,000 $ 20,352,000
============= ============= =============
Interest Expense
----------------
Interest expense for reportable segments $ 347,000 $ 185,000 $ 402,000
Other interest expense 77,000 226,000 273,000
------------- ------------- -------------
Total interest expense $ 424,000 $ 411,000 $ 675,000
============= ============= =============
Depreciation and Amortization
-----------------------------
Depreciation and amortization expense
for reportable segments $ 701,000 $ 591,000 $ 506,000
Other depreciation and amortization expense 82,000 190,000 190,000
------------- ------------- -------------
Total depreciation and amortization $ 783,000 $ 781,000 $ 696,000
============= ============= =============
F-40
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
A summary of the Company's net sales and identifiable assets by
geographical area follows:
2000 1999 1998
---- ---- ----
Net sales:
United States $13,246,000 $ 9,490,000 $12,804,000
Japan 941,000 658,000 706,000
France 9,118,000 10,958,000 11,118,000
United Kingdom 4,745,000 4,807,000 5,472,000
------------------------------------------------
$28,050,000 $25,913,000 $30,100,000
================================================
Long-lived assets:
United States $ 418,000 $ 371,000 $ 489,000
Japan 14,000 16,000 13,000
France 251,000 257,000 458,000
United Kingdom 237,000 190,000 133,000
------------------------------------------------
$ 920,000 $ 834,000 $ 1,093,000
================================================
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.
No one customer accounted for more than 10% of net sales during any of
the years presented.
(16) 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 and XCEL Circuits Division ("XCD"), a
division of XET Corporation, a wholly-owned subsidiary of the Company. 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). XCD is
essentially a captive supplier of printed circuit boards to the electronic
components segment with total sales to external customers of $173,000 and
$167,000 for the years ended December 31, 2000 and 1999, respectively. XCD has
been retained and is now included in the electronics components segment.
Accordingly, all current and prior financial information related to the circuits
segment operations (XCEL Etch Tek, HyComp and XCEL Arnold) has been presented as
discontinued operations in the accompanying consolidated financial statements.
F-41
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Summarized results of operations for the discontinued operations for
2000, 1999 and 1998 are as follows:
2000 1999 1998
---- ---- ----
Net sales $ 2,257,000 $ 2,388,000 $ 7,161,000
==================================================
Operating loss $ (212,000) $ (847,000) $(1,203,000)
==================================================
Gain (loss) on sale of discontinued operations $ (487,000) $ 449,000 $ 580,000
==================================================
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 sheets and are summarized as follows:
2000 1999
---- ----
Accounts receivable $ -- $ 351,000
Inventories -- 135,000
Other current assets -- 152,000
Property, plant and equipment -- 627,000
---------------------------
Total assets $ -- $1,265,000
===========================
Accounts payable and accrued expenses 15,000 75,000
Long-term debt -- 57,000
---------------------------
Total liabilities 15,000 132,000
===========================
Net assets (liabilities) of discontinued operations $ (15,000) $1,133,000
===========================
(17) NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 was previously amended by SFAS No. 137, "Accounting For Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which deferred the effective date of SFAS No. 133 to fiscal
years commencing 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 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. The Company believes that its current revenue recognition policies
comply with SAB 101.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44")
"Accounting for Certain Transactions Involving Stock Compensation", which
addresses certain accounting issues which arose under the previously established
accounting principles relating to stock-based compensation. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations, but may in the future due to repricing.
F-42
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly operations for the years
ended December 31, 2000 and 1999 (in thousands, except for per share data).
PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
2000 MAR. 31 MAR. 31 JUNE 30 JUNE 30 SEPT. 30 DEC. 31
---- ------- ------- ------- ------- -------- -------
Net Sales $ 6,486 $ 5,860 $ 7,512 $ 6,828 $ 6,871 $ 8,491
Gross Profit 2,373 2,326 2,814 2,796 3,791 3,608
Income (loss) from continuing operations (127) (71) 206 301 1,132 341
Income (loss) from discontinued
operations -- (56) -- (95) (702) 154
Net income (loss) (127) (127) 206 206 430 495
Income (loss) available to common
shareholder (150) (130) 183 183 407 544
Earnings (loss) per share:
Continuing Operations
Basic (0.01) (0.01) 0.01 0.02 0.06 0.02
Diluted (0.01) (0.01) 0.01 0.02 0.05 0.01
Discontinued Operations
Basic -- (0.00) -- (0.01) (0.04) 0.01
Diluted -- (0.00) -- (0.01) (0.03) 0.01
Net Income (loss)
Basic (0.01) (0.01) 0.01 0.01 0.02 0.03
Diluted (0.01) (0.01) 0.01 0.01 0.02 0.02
1999
----
Net Sales $ 7,510 $ 6,677 $ 6,801 $ 6,319 $ 6,448 $ 6,469
Gross Profit 2,606 2,550 2,390 2,381 2,245 1,671
Loss from continuing operations (975) (1,013) (914) (624) (761) (1,800)
Income (loss) from discontinued
operations -- 38 -- (290) (273) 127
Net loss (975) (975) (914) (914) (1,034) (1,673)
Loss available to common shareholder (1,031) (1,031) (903) (903) (1,058) (1,645)
Net income (loss) per share:
Continuing Operations
Basic (0.07) (0.07) (0.06) (0.04) (0.05) (0.10)
Diluted (0.07) (0.07) (0.06) (0.04) (0.05) (0.10)
Discontinued Operations
Basic -- (0.00) -- (0.02) (0.01) 0.01
Diluted -- (0.00) -- (0.02) (0.01) 0.01
Net loss
Basic (0.07) (0.07) (0.06) (0.06) (0.06) (0.09)
Diluted (0.07) (0.07) (0.06) (0.06) (0.06) (0.09)
The 2000 and 1999 quarterly results of operations for the periods
presented above have been restated to reflect discontinued operations resulting
from the Company's decision to discontinue its Circuits segment in October 2000.
(See Note 16.)
F-43
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additions
Balance at Charged to Transfers to Deductions
Beginning of Costs and Discontinued Write-offs of Balance at
Description Year Expenses Operations Accounts End of Year
----------- ---- -------- ---------- -------- -----------
Allowance for doubtful accounts:
Year ended December 31, 2000 $ 191,000 $ 47,000 $ -- $ (127,000) $ 111,000
Year ended December 31, 1999 258,000 36,000 6,000 (109,000) 191,000
Year ended December 31, 1998 241,000 97,000 (17,000) (63,000) 258,000
========== =========== ============ ============ ===========
Allowance for inventory obsolescence:
Year ended December 31, 2000 1,381,000 893,000 -- (1,105,000) 1,169,000
Year ended December 31, 1999 1,760,000 1,145,000 (1,000) (1,523,000) 1,381,000
Year ended December 31, 1998 1,856,000 885,000 (6,000) (975,000) 1,760,000
========== =========== ============ ============ ===========
F-44
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
ASSETS 2001 2000
--------- ---------
(Unaudited)
Cash and cash equivalents $ 368 $ 756
Accounts receivable - net 6,876 7,440
Notes receivable 97 130
Inventories 6,265 6,298
Other current assets 487 750
--------- ---------
Total current assets 14,093 15,374
Property, plant and equipment-net 735 809
Goodwill-net 2,679 2,737
Other assets 536 564
--------- ---------
$ 18,043 $ 19,484
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,435 $ 3,661
Current portion of long-term debt 559 614
Accounts payable 4,618 5,222
Accrued expenses 2,788 3,082
Net liability of discontinued operations 5 15
--------- ---------
Total current liabilities 11,405 12,594
Long-term debt, less current portion 225 282
Other liabilities 464 542
--------- ---------
Total liabilities 12,094 13,418
Convertible redeemable preferred stock, $10,000
unit value. Authorized 200 shares; issued and
outstanding 25 shares (aggregate liquidation
preference of $250) 261 259
Stockholders' equity:
Convertible Series B Preferred stock, $0.01 par
value. Authorized 10,000,000 shares; 150,000 shares
issued and outstanding 938 938
Common stock, $.0033 par value. Authorized
50,000,000 shares; 20,570,000 shares
issued and outstanding 68 68
Additional paid-in capital 24,307 24,307
Accumulated deficit (18,672) (18,775)
Accumulated other comprehensive loss (953) (731)
--------- ---------
Total stockholders' equity 5,688 5,807
--------- ---------
$ 18,043 $ 19,484
========= =========
See accompanying notes to consolidated condensed financial statements.
F-45
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended
March 31,
----------------------
2001 2000
-------- --------
(in thousands, except per
share amounts)
Net sales $ 7,465 $ 5,860
Cost of sales 4,350 3,534
-------- --------
Gross profit 3,115 2,326
Operating expenses:
Selling, general and administrative 2,581 2,147
Engineering and product development 359 243
-------- --------
Income (loss) from operations 175 (64)
Other income (expense):
Interest expense (93) (96)
Other income 28 96
-------- --------
Income (loss) from continuing operations
before income taxes 110 (64)
Income tax expense 3 7
-------- --------
Income (loss) from continuing operations 107 (71)
-------- --------
Discontinued operations:
Loss from operations of discontinued segment -- (56)
-------- --------
Net income (loss) 107 (127)
Other comprehensive income (loss):
Foreign currency translation adjustment (222) 296
-------- --------
Total comprehensive income (loss) $ (115) $ 169
======== ========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.01 $ (0.01)
======== ========
Diluted $ 0.00 $ (0.01)
======== ========
Discontinued operations:
Basic -- $ (0.00)
======== ========
Diluted -- $ (0.00)
======== ========
Net income (loss):
Basic $ 0.01 $ (0.01)
======== ========
Diluted $ 0.00 $ (0.01)
======== ========
See accompanying notes to consolidated condensed financial statements.
F-46
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
--------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 107 $ (127)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 84 32
Amortization of intangibles 95 66
Provision for doubtful account 24 --
Provision for obsolete/slow moving inventory 164 --
Gain on sale of fixed assets -- (43)
Other noncash items -- 122
Net change in operating assets of discontinued operations (10) (87)
Changes in operating assets and liabilities:
Accounts receivable 544 1,066
Inventories (89) 67
Other assets 291 (20)
Accounts payable and accrued expenses (1,068) (1,061)
-------- --------
Cash provided by operating activities 142 15
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (38) (6)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Cash collected on note receivable 33 --
-------- --------
Cash from investing activities (5) 557
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in notes payable and long-term debt (339) (260)
Proceeds from exercise of employee stock options -- 8
-------- --------
Cash (used in) financing activities (339) (252)
-------- --------
Effect Of Exchange Rate Changes On Cash (186) (165)
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents (388) 155
Cash and Cash Equivalents At Beginning Of Period 756 480
-------- --------
Cash and Cash Equivalents At End Of Period $ 368 $ 635
======== ========
See accompanying notes to consolidated condensed financial
statements.
F-47
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(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 XET
Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR,
S.A. (collectively "CXR") design, manufacture and market electronic
telecommunication test equipment and transmission and network access products.
XET and its subsidiaries design, manufacture and market digital switches and
power supplies. 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 Electronic Components.
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, and XCEL Circuits division ("XCD"), a division
of XET. XCEL Etch Tek was offered for sale and sold in November 2000. XCD, a
captive supplier of printed circuit boards to the electronic components segment,
has been retained and is now included in the electronic components segment.
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 March 31, 2001 and December 31, 2000 and the results of
operations and cash flows for the related interim periods ended March 31, 2001
and 2000. 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 2000 Annual Report
on Form 10-K.
F-48
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(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):
Three months ended
March 31,
---------
2001 2000
--------- ---------
(in thousands, except per
share amounts)
NUMERATOR:
Net income (loss) $ 107 $ (127)
Less: accretion of the excess of the redemption value over the
carrying value of redeemable preferred stock (3) (23)
--------- ---------
Income (loss) attributable to common stockholders $ 104 $ (150)
--------- ---------
DENOMINATOR:
Weighted average number of common shares outstanding during the
period 20,570 18,174
Incremental shares from assumed conversions of warrants, options
and preferred stock 3,246 --
--------- ---------
Adjusted weighted average shares 23,816 18,174
--------- ---------
Basic earnings (loss) per share $ 0.01 $ (0.01)
========= =========
Diluted earnings (loss) per share $ 0.00 $ (0.01)
========= =========
The computation of diluted loss per share for the three month period
ended March 31, 2000 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.
(3) INVENTORIES
Inventories consist of the following.
March 31, 2001 December 31, 2000
-------------- -----------------
Raw materials $ 2,575,000 $ 2,777,000
Work-in-process 1,926,000 1,914,000
Finished goods 1,764,000 1,607,000
------------------ ------------------
$ 6,265,000 $ 6,298,000
================== ==================
F-49
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
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
may not be predictable because of considerable uncertainties that may 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) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of one dollar or more and ranging as high as
$3.79 the opportunity to exchange their warrants with new warrants for one half
the number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of one dollar or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the Company's
stockholders.
The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. A $123,000 expense was
recorded in the first quarter of 2000 for the expense for the modification of
the warrants. Based on the nature and timing of the original grant of the
warrants, the expense was determined by various methods. For warrants issued to
employees and directors, compensation expense was determined by the intrinsic
value method and by treating the modified warrants as variable from the date of
modification in accordance with APB 25 and FIN 44. For warrants issued to
non-employees, compensation expense was determined in accordance with FAS 123 by
calculating the difference between the fair value of the new warrant and the old
warrant at the date of acceptance, with the exception of warrants initially
granted pre-FAS 123, in which case the entire fair value of the new warrant was
recorded as compensation expense. The estimated fair values of the old and new
warrants was calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield; expected volatility of 93%; a risk-free interest
rate of 6.2%; and expected lives ranging from 0.1 to 5 years.
(6) 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
networking equipment. The Electronic Components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
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-50
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in its 2000 Annual Report
on Form 10-K. Selected financial data for each of the Company's operating
segments is shown below:
Three months ended Three months ended
March 31, March 31,
2001 2000
---- ----
Sales to external customers:
Telecommunications $ 3,772,000 $ 3,553,000
Electronic Components 3,693,000 2,307,000
--------------- -----------------
$ 7,465,000 $ 5,860,000
=============== =================
Intersegment sales:
Telecommunications $ -- $ 73,000
Electronic Components -- --
--------------- -----------------
$ -- $ 73,000
=============== =================
Segment pretax profits (losses)
Telecommunications $ (255,000) $ (95,000)
Electronic Components 1,058,000 480,000
--------------- -----------------
$ 803,000 $ 385,000
=============== =================
March 31, December 31,
2001 2000
---- ----
Segment assets
Telecommunications $ 8,665,000 $ 9,901,000
Electronic Components 8,687,000 8,876,000
--------------- -----------------
$ 17,352,000 $ 18,777,000
=============== =================
F-51
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Three months ended Three months ended
March 31, 2001 March 31, 2000
-------------- --------------
Total income (loss) for reportable segments $ 803,000 $ 385,000
Unallocated amounts:
Unallocated general corporate expenses (696,000) (449,000)
------------------ ------------------
Consolidated income (loss) before
income taxes $ 107,000 $ (64,000)
================== ==================
March 31, December 31,
2000 2000
---- ----
Assets
------
Total assets for reportable segments $17,352,000 $18,777,000
Other assets 691,000 707,000
------------ ------------
Total consolidated assets $18,043,000 $19,484,000
============ ============
F-52
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.
/S/ BDO Seidman, LLP
Costa Mesa, California
December 4, 2000
F-53
T-COM, LLC
BALANCE SHEETS
December 31, June 30,
1999 2000
------------ ------------
(unaudited)
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
Notes 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
============ ============
See report of independent certified public accountants and
accompanying notes to financial statements.
F-54
T-COM, LLC
STATEMENTS OF OPERATIONS
Year Ended Six Months Ended
December June 30,
31, ---------------------------
1999 2000 1999
------------ ------------ ------------
(unaudited)
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)
============ ============ ============
See report of independent certified public accountants and
accompanying notes to financial statements.
F-55
T-COM, LLC
STATEMENT OF MEMBERS' DEFICIT
Members' Accumulated
Capital Deficit Total
------------ ------------ ------------
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 24,583 -- 24,583
(Note 6) (unaudited)
Net loss (unaudited) -- (469,626) (469,626)
------------ ------------ ------------
Balance at June 30, 2000 (unaudited) $ 3,553,813 $(5,394,655) $(1,840,842)
============ ============ ============
See report of independent certified public accountants and
accompanying notes to financial statements.
F-56
T-COM, LLC
STATEMENTS OF CASH FLOWS
Year Ended Six Months Ended
December June 30,
31, ---------------------------
1999 2000 1999
------------ ------------ ------------
(unaudited)
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
============ ============ ============
See report of independent certified public accountants
and accompanying notes to financial statements.
F-57
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.
F-58
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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.
F-59
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-60
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value
because of the short maturity of these items. The Company believes the carrying
amounts of its 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.
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.
F-61
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
F-62
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(2) INVENTORIES
Inventories are summarized as follows:
December 31, June 30,
1999 2000
------------ ------------
(unaudited)
Raw materials $ 115,767 $ 194,035
Work-in-process 176,164 255,731
Finished goods 361,800 346,255
------------ ------------
$ 653,731 $ 796,021
============ ============
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, June 30,
1999 2000
------------ ------------
(unaudited)
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
============ ============
(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
F-63
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
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.
(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 a $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.
F-64
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT (CONTINUED)
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:
December 31, 1999 June 30, 2000
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Units Price Units Price
---------- ---------- ---------- ----------
(unaudited)
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
========== ==========
Information relating to options at December 31, 1999 summarized by exercise
price is as follows:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Average Average
Exercise Price Exercise Exercise
Per 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
============== ======== ==== =========== ======== =========
F-65
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT (CONTINUED)
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:
As reported $(4,503,725)
Pro forma $(4,503,801)
(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.
The future minimum rental payments required under the two operating leases are
as follows:
Year Ending December 31, Amount
------------------------ -----------
2000 $ 49,725
2001 2,939
2002 2,939
2003 1,714
2004 --
-----------
$ 57,317
===========
F-66
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
(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.
F-67
(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:
o 33% allocated to the Non-Investor Members as a group,
o 33% allocated to the Investor Members as a group,
o 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.
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.
F-68
T-COM, LLC
NOTES TO FINANCIAL STATEMENTS
(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 can not be fully distributed to the Members until
March 2002.
F-69
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. The fair value of the net assets acquired was
approximately $635,000, resulting in goodwill of approximately $365,000. 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,
2000 with those of T-COM for the seven months ended July 31, 2000 as the
acquisition was effective August 1, 2000.
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
December 31, 2000 balance sheet on Form 10-K filed on April 2, 2001.
F-70
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro Forma
Year Ended December 31, 2000 MicroTel T-COM Adjustments Combined
----------- -------- ----------- ---------
(a) (b)
Net sales $ 28,050 $ 1,630 $ -- $ 29,680
Cost of sales 15,529 700 -- 16,229
----------- -------- ----------- ---------
Gross profit 12,521 930 -- 13,451
Operating expenses:
Selling, general and administrative 9,827 664 27(c) 10,518
Engineering and product development 1,167 547 -- 1,714
----------- -------- ----------- ---------
Income (loss) from operations 1,527 (281) (27) 1,219
Other income (expense):
Interest expense (424) (149) -- (573)
Other, net 631 9 -- 640
----------- -------- ----------- ---------
Income (loss) from continuing operations
before income taxes 1,734 (421) (27) 1,286
Income taxes 31 6 (6)(d) 31
----------- -------- ----------- ---------
Income (loss) from continuing operations $ 1,703 $ (427) $ (21) $ 1,255
=========== ======== =========== =========
Earnings per share from continuing operations:
Basic $ 0.09 $ 0.06
=========== =========
Diluted $ 0.07 $ 0.05
=========== =========
Weighted average shares outstanding:
Basic 19,504 19,504
=========== =========
Diluted 23,904 23,904
=========== =========
--------------
(a) The operating results of MicroTel have been reclassified to reflect the
effect of MicroTel's decision, in October 2000, to discontinue their
circuits segment.
(b) The acquisition of T-Com was effective August 1, 2000. Accordingly, the
T-Com activity presented is from January 1, 2000 through July 31, 2000
only.
(c) To record full year of goodwill amortization related to acquisition of
T-Com.
(d) To eliminate T-COM state income tax expense related to Limited Liability
Company tax status.
F-71
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Members
T-COM, LLC
Mountain View, California
We have audited the accompanying balance sheet of T-COM, LLC (A Delaware Limited
Liability Company) as of December 31, 1998, and the related statements of income
and expense, members' equity, and cash flows for the period from June 1, 1998
(date of inception) to December 31, 1998. 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 aspects, the financial position of T-COM, LLC as of December 31,
1998, and the results of its operations and its cash flows for the initial
period then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The schedules of cost of goods sold and general and
administrative expense are presented for the purpose of additional analysis and
are not a required part of the basic financial statements. Such information has
been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
/S/ Ireland San Filippo, LLP
February 4, 1999
F-72
T-COM, LLC
----------
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
------
Current assets:
Cash and cash equivalents $ 520,609
Accounts receivable 553,631
Inventories 673,019
Prepaid expenses 6,210
-----------
Total current assets 1,753,469
-----------
Fixed assets:
Computers 154,913
Software 7,664
Equipment 36,443
Furniture and fixtures 62,927
-----------
261,947
Less accumulated depreciation 54,028
-----------
207,919
-----------
Other assets:
Deposits 26,031
Goodwill, net of amortization of $143,545 3,547,606
-----------
3,573,637
-----------
$5,535,025
===========
The accompanying footnotes are an integral part of these financial statements.
F-73
T-COM, LLC
----------
BALANCE SHEET
DECEMBER 31, 1998
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Current liabilities:
Note payable $ 90,000
Line of credit 493,595
Accounts payable 158,638
Accrued expenses:
Salaries and commissions 103,099
Payroll and sales taxes 24,030
Other 44,355
Warranty reserve 50,000
Income taxes 3,800
-----------
Total current liabilities 967,517
Long-term liability:
Note payable 1,963,333
-----------
Total liabilities 2,930,850
-----------
Commitment
Members' equity 2,604,175
-----------
$5,535,025
===========
The accompanying footnotes are an integral part of these financial statements.
F-74
T-COM, LLC
----------
STATEMENT OF INCOME AND EXPENSE FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Sales $ 1,978,534
Costs of goods sold 695,726
------------
Gross profit 1,282,808
General and administrative expense 1,560,987
------------
Loss from operations (278,179)
------------
Other income and (expense):
Interest expense (139,865)
Interest income 540
------------
(139,325)
------------
Loss before provision for income taxes (417,504)
Provision for income taxes, all current 3,800
------------
Net loss $ (421,304)
============
The accompanying footnotes are an integral part of these financial statements.
F-75
T-COM, LLC
----------
STATEMENT OF MEMBERS' EQUITY FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Balance, beginning of period $ --
Member contributions 3,025,479
Net loss (421,304)
------------
Balance, end of period $ 2,604,175
============
The accompanying footnotes are an integral part of these financial statements.
F-76
T-COM, LLC
----------
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Cash flows from operating activities:
Net loss $ (421,304)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 197,573
Decrease (increase) in operating assets:
Accounts receivable (18,486)
Inventories 172,599
Prepaid expenses (6,210)
Increase (decrease) in operating liabilities:
Accounts payable 102,277
Accrued expenses (53,979)
Income taxes payable 3,800
------------
Net cash used by operating activities (23,731)
------------
Cash flows from investing activities:
Payment for acquisition of business (5,000,000)
Deposits (26,031)
Acquisition of fixed assets (2,036)
------------
Net cash used by investing activities (5,028,067)
------------
The accompanying footnotes are an integral part of these financial statements.
F-77
T-COM, LLC
----------
STATEMENT OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Cash flows from financing activities:
Proceeds from note payable $ 2,200,000
Proceeds from line of credit, net 493,595
Principal payments on note payable (146,667)
Proceeds from members' capital 3,025,479
------------
Net cash provided by financing activities 5,572,407
------------
Increase in cash and cash equivalents 520,609
Cash and cash equivalents, beginning of period --
------------
Cash and cash equivalents, end of period $ 520,609
============
Supplemental disclosure of cash flow information
------------------------------------------------
Cash paid during the period for:
Interest $ 137,743
Income taxes --
The accompanying footnotes are an integral part of these financial statements.
F-78
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - ORGANIZATION AND OPERATIONS:
-------------------------------------
T-Com, LLC (the "Company"), a Delaware corporation formed on June 1, 1998,
designs, develops, manufactures, and markets telecommunications test equipment
for telephony applications. The Company has sales nationwide with locations in
four states, and manufacturer's representatives in other states. The term of the
Company has been set at approximately 20 years and will continue until December
31, 2018.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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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 reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK - The Company has cash on deposit with a federally
insured bank in excess of the $100,000 maximum amount insured by the Federal
Deposit Insurance Corporation.
ACCOUNTS RECEIVABLE - The Company extends credit to its customers in the normal
course of business and performs ongoing credit evaluations of its customers,
maintaining allowances for potential credit losses which, when realized, have
been within management's expectations. The Company considers accounts receivable
to be fully collectible; accordingly, no allowance for doubtful accounts is
required.
INVENTORIES - Inventories are stated at the lower of cost or market with cost
being determined on the first-in, first out (FIFO) method.
FIXED ASSETS - Fixed assets are stated at cost and depreciated over their
estimated useful lives using accelerated methods for both financial and income
tax reporting purposes.
INTANGIBLE ASSETS - On June 1, 1998, the Company purchased substantially all of
the assets of T-COM Corporation for $5,000,000. The company recorded $3,691,151
of goodwill as part of the acquisition. Goodwill is being amortized over 15
years using the straight-line method.
INCOME TAXES - The Company has been organized as a Limited Liability Company
("LLC"). As such, the Company pays no federal income taxes but is taxed at the
state level using the statutory rates in effect for an LLC. Additionally, the
members are individually taxed on their proportionate share of the Company's
taxable income.
ADVERTISING - Advertising costs are charged to operations as they are incurred.
Advertising expense for the period ended December 31, 1998 was approximately
$93,000.
F-79
T-COM, LLC
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - INVENTORIES:
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Inventories at December 31, 1998 consisted of the following:
Raw materials $ 194,038
Work in process 103,258
Finished goods 375,723
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$ 673,019
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NOTE 4 - LINE OF CREDIT:
------------------------
The Company has a line of credit agreement, expiring in June 1999, with Imperial
Bank. Borrowings under the agreement are secured by substantially all assets of
the Company, bear interest at the bank's index rate plus 2.0% (9.75% at December
31, 1998), and are limited to the lesser of $800,000 or 80% of eligible accounts
receivable and 40% of net inventory.
The agreement requires the Company to comply with various financial covenants.
At December 31, 1998, the Company was not in compliance with the cash flow
coverage ratio. Subsequent to year-end, the Company has obtained a forbearance
agreement from the bank which provides that the bank will not require immediate
payment in full.
NOTE 5 - NOTE PAYABLE:
----------------------
At December 31, 1998, note payable consisted of the following:
Imperial Bank; secured by substantially all assets $2,053,333
Less current portion (90,000)
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$1,963,333
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At December 31, 1998, future principal payments are due as follows:
Year Ending
December 31, Amount
------------ -----------
1999 $ 90,000
2000 440,000
2001 440,000
2002 1,083,333
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$2,053,333
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F-80
T-COM, LLC
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 5 - NOTE PAYABLE (CONTINUED):
----------------------------------
The note payable requires the Company to comply with various financial
covenants. At December 31, 1998, the Company was not in compliance with the cash
flow coverage ratio. Subsequent to year-end the Company obtained a forbearance
agreement from the bank, expiring on January 5, 2000, which provides that the
bank will not require immediate payment in full. The forbearance agreement
requires that the Company make future monthly interest payments at the bank's
index rate plus 2.5% (10.25% at December 31, 1998) and principal payments based
on quarterly net earnings. Subsequent to January 5, 2000, the note calls for
monthly principal installments of $36,667, plus annual interest at the bank's
index rate plus 2.5% per annum through June 2002.
NOTE 6 - EMPLOYEE BENEFIT PLANS:
--------------------------------
401(k) PROFIT SHARING PLAN - The Company has a 401(k) Profit Sharing Plan (the
"Plan") in which employees who have met certain service and eligibility
requirements may participate. Each eligible employee may elect to contribute to
the Plan, and the Company may make discretionary matching contributions. The
Company made matching contributions of approximately $6,000 during the period
ended December 31, 1998.
NOTE 7 - COMMITMENT:
--------------------
The Company has entered into a long-term, non-cancelable operating lease
agreement for its facility. The lease currently requires monthly payments of
approximately $16,900 and expires in September 2003. Rent expense paid under
this lease for the period ended December 31, 1998, was approximately $87,000.
Future minimum annual lease payments required under this agreement are as
follows:
Year Ending
December 31, Building
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1999 $ 204,309
2000 212,482
2001 220,981
2002 229,820
2003 177,485
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$ 1,045,077
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F-81
T-COM, LLC
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SCHEDULE OF COST OF GOODS SOLD FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Beginning inventory $ 845,618
Material 317,603
Labor 188,031
Payroll taxes 14,963
Supplies 721
Equipment rental 686
Travel 504
Education 420
Postage 199
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1,368,745
Less ending inventory 673,019
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$ 695,726
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F-82
T-COM, LLC
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SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSE FOR THE
PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
Salaries $ 676,884
Commissions 110,741
Payroll taxes 42,273
Amortization 143,545
Consultants 93,908
Advertising 92,965
Rent 87,434
Travel 63,032
Depreciation 54,028
Insurance 44,541
Recruiting 38,238
Telephone and utilities 28,898
Legal and accounting 21,164
Office expense 14,619
Meals and entertainment 10,742
Outside services 7,401
Education and training 6,408
Trade shows 6,117
Employee benefits 5,676
Taxes and licenses 4,749
Equipment rental 3,375
Postage and freight 3,075
Small tools and supplies 1,099
Repairs and maintenance 75
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$1,560,987
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