SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 22, 2000
MICROTEL INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 1-10346 77-0226211
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File (IRS Employer)
incorporation or organization) Number) Identification No.)
9485 HAVEN AVENUE, SUITE 100, CALIFORNIA 91730
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (909) 987-9220
NOT APPLICABLE
-------------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
MicroTel International, Inc. (the "Company") has acquired substantially
all of the assets of T-Com, LLC, a Delaware limited liability company, and
assumed certain liabilities of T-Com, LLC. The primary assets acquired include
accounts receivable, inventory and fixed assets. The liabilities assumed consist
mostly of accounts payable, accrued payroll expenses and accrued commissions.
The assets purchased are valued at approximately $1,496,000, and the liabilities
assumed are valued at approximately $496,000.
T-Com, LLC was 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, LLC.
The acquisition of the assets closed on September 22, 2000 and has an
effective date of August 1, 2000. The Company paid to T-Com, LLC for the net
assets consideration valued at $1,000,000, as itemized below:
- 150,000 shares of Series B Preferred Stock of the Company ("Series B
Shares").
The Series B Shares become convertible into shares of common
stock of the Company in three equal lots of 50,000 shares each on
March 20, 2001, September 20, 2001 and March 20, 2002. Each Series B
Share will be convertible into ten shares of common stock. 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 to the extent the Series B Shares
are subject to a lock-up, to the extent the Company receives a
conversion notice covering the Series B Shares prior to the
redemption date, or if there is an insufficient number of authorized
and reserved shares of common stock to permit conversion of the
Series B Shares during the 20-day notice period. 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.
The certificate of designations, preferences and rights relating
to the Series B Shares provides that in the event the authorized
number of shares of the Company's common stock is not sufficient as
of March 20, 2001 to permit the conversion of the Series B Shares
into shares of common stock as provided for in such certificate,
then each Series B Share then outstanding would become entitled to
such number of votes as would provide the aggregate number of Series
B Shares then outstanding with voting rights equal to ten percent of
the then outstanding shares of common stock for any matter upon
which stockholders are entitled to vote. In January 2001, the
Company obtained stockholder approval for a proposal that increased
the number of shares of the Company's authorized common stock from
25,000,000 to 50,000,000. Consequently, as of March 20, 2001, the
Company had authorized a sufficient number of shares of common stock
to allow for conversion or redemption of the Series B Shares, and
the potential voting rights of the holders of Series B Shares did
not become effective.
2
- Warrants to purchase up to 250,000 shares of the Company's common
stock at an exercise price of $1.25 per share, which warrants 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 preferred shares based on a value of $0.6253 per common share (which was
the closing market price of the Company's common stock on the date of the
original letter of intent, July 27, 2000) multiplied by the 1,500,000 common
shares into which the preferred shares can be converted. The warrants have been
valued at approximately $62,000 based on a calculation using the Black-Scholes
valuation formula.
The acquisition is being accounted for using the purchase method of
accounting, with the assets acquired and the liabilities assumed recorded at
their fair values as of the date of acquisition.
In determining the purchase price for the acquisition, the tangible net
worth and anticipated earnings potential as consolidated under one roof with our
CXR Telcom operation in Fremont, California and the addition of central office
test equipment to our field test equipment product range were major factors.
Also, the Company took into account the value of companies of similar industry
and size to T-Com, LLC, the proprietary technology of T-Com, LLC, comparable
transactions and the market for such companies generally.
The closing of the acquisition was reported under "Item 5 - Other
Events" on a Form 8-K filed with the Securities and Exchange Commission on
October 5, 2000. After filing the Form 8-K, the Company determined that its
acquisition of T-Com, LLC was a significant acquisition that should have been
reported under "Item 2 - Acquisition or Disposition of Assets." Consequently,
Amendment No. 1 to Form 8-K was filed with the Securities and Exchange
Commission on December 6, 2000 to discuss the T-Com, LLC acquisition under Item
2 and contained financial statements under Item 7. This Amendment No. 2 to Form
8-K is being filed to include additional financial statements under Item 7.
3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired:
(i) Unaudited financial statements of T-COM, LLC at June 30, 2000
and for the six months ended June 30, 2000 and 1999 are set
forth at pages F-1 to F-17 attached to this Current Report.
(ii) Audited financial statements of T-COM, LLC at and for the
year ended December 31, 1999 are set forth at pages F-1 to
F-17 attached to this Current Report.
(iii) Audited financial statements of T-COM, LLC as of and for the
period from June 1, 1998 (date of inception) to December 31,
1998 are set forth at pages F-18 to F-29 attached to this
Current Report.
(b) Unaudited Pro Forma Condensed Combined Financial Information:
Unaudited pro forma condensed combined financial information
giving effect to MicroTel's acquisition of substantially all
of the assets and certain liabilities of T-COM, LLC are set
forth at pages F-30 to F-32 attached to this Current
Report.
(c) Exhibits
Exhibit
Number Description
------- -----------
2.1 Asset Purchase Agreement effective September 1, 2000 by and among the
Registrant, CXR Telcom Corporation and T-Com, LLC*
2.2 Letter agreement dated October 2, 2000 among the Registrant, CXR
Telcom Corporation and T-Com, LLC relating to Asset Purchase Agreement
by and among the same parties*
2.3 Bill of Sale and Assignment and Assumption Agreement dated as of
September 22, 2000 between T-Com, LLC and CXR Telcom Corporation*
4.1 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock of the Registrant*
23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants
23.2 Consent of Ireland San Fillipo, LLP, Independent Certified Public
Accountants
- ------------
* Filed with the Securities and Exchange Commission on November 20, 2000 as an
exhibit to Registrant's Form 10-Q for the quarter ended September 30, 2000
and incorporated herein by reference.
4
T-COM, LLC
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
Financial Statements Of And For The Year Ended December 31, 1999
And Related Unaudited Pro Forma Information
- -----------------------------------------------------------------
Report of Independent Certified Public Accountants.....................F-2
Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)...F-3
Statements of Operations for the year ended December 31, 1999 and
the six months ended June 30, 2000 (unaudited) and 1999
(unaudited).........................................................F-4
Statements of Members' Deficit for the years ended December 31, 1999
and June 30, 2000 (unaudited).......................................F-5
Statements of Cash Flows for the year ended December 31, 1999 and
the six months ended June 30, 2000 (unaudited) and 1999
(unaudited).........................................................F-6
Notes to Financial Statements..........................................F-7
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-18
Balance Sheet as of December 31, 1998..................................F-19
Statement of Income and Expense for the period from June 1, 1998
(Date of Inception) to December 31, 1998............................F-21
Statement of Members' Equity for the period from June 1, 1998
(Date of Inception) to December 31, 1998............................F-22
Statement of Cash Flows for the period from June 1, 1998
(Date of Inception) to December 31, 1998............................F-23
Notes to Financial Statements..........................................F-25
Schedule of Cost of Goods Sold for the period from June 1, 1998
(Date of Inception) to December 31, 1998............................F-28
Schedule of General and Administrative Expense for the period
from June 1, 1998 (Date of Inception) to December 31, 1998..........F-29
Unaudited Pro Forma Condensed Combined Financial Information...........F-30
- ------------------------------------------------------------
F-1
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-2
T-COM, LLC
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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
Note payable (Notes 5 and 9) 2,053,333 2,053,333
------------ ------------
Total liabilities 3,089,865 3,326,748
------------ ------------
Commitment and contingencies (Notes 7 and 10)
Subsequent events (Notes 6 and 9)
Members' deficit (Notes 6 and 9):
Members' capital 3,079,230 3,553,813
Accumulated deficit (4,925,029) (5,394,655)
------------ ------------
Total members' deficit (1,845,799) (1,840,842)
============ ============
$ 1,244,066 $ 1,485,906
============ ============
See accompanying notes to financial statements.
F-3
T-COM, LLC
----------
STATEMENTS OF OPERATIONS
Year Ended Six Months Ended
December 31, June 30,
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 accompanying notes to financial statements.
F-4
T-COM, LLC
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STATEMENTS OF MEMBERS' EQUITY
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 (Note 6)
(unaudited) 24,583 - 24,583
Net loss (unaudited) - (469,626) (469,626)
-------------- --------------- --------------
Balance at June 30, 2000 (unaudited) $ 3,553,813 $ (5,394,655) $ (1,840,842)
============== =============== ==============
See accompanying notes to financial statements.
F-5
T-COM, LLC
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STATEMENTS OF CASH FLOWS
Year Ended Six Months Ended
December 31, June 30,
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 accompanying notes to financial statements.
F-6
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
T-COM, LLC (the "Company") was organized in Delaware in April 1998. The Company
designs, develops, manufactures and markets telecommunications test equipment.
The Company has sales throughout the United States, with sales offices in four
states. According to the Company's Limited Liability Company Agreement (the "LLC
Agreement"), the term of the Company has been set at approximately 20 years and
will continue until December 31, 2018.
As further defined in the LLC, the Company was originally capitalized with
contributions in cash to the Company as follows:
(a) Five Members contributed a total of $25,479 in exchange for 3,925,000
units. These Members are hereinafter referred to as Non-Investor
Members.
(b) Fourteen Members contributed a total of $2,500,000 in exchange for
5,000,000 units. These Members are hereinafter referred to as Investor
Members.
PROFIT AND LOSS ALLOCATIONS
As further defined in the LLC Agreement, net losses of the Company, as defined,
shall be allocated as follows:
(a) First, until losses allocated to Investor Members equal the Investor
Member's aggregate capital contributions (i) 1% to Non-Investor Members
pro rata based upon their percentage interests and (ii) 99% to Investor
Members, pro rata based upon their percentage interests.
(b) Next, on a pro rata basis to all Members based upon their percentage
interest.
As further defined in the LLC Agreement, net profits of the Company, as defined,
shall be allocated as follows:
(a) First, until the cumulative amounts of profits are equal to the
cumulative allocations of previous losses, pro rata to all Members based
on such previous allocations
(b) Next, on a pro rata basis to all Members based upon their percentage
interest.
MEMBER DISTRIBUTIONS
As further defined in the LLC Agreement, all distributions of cash of the
Company shall be distributed among the Members, as follows:
(a) First, until the capital contributions of the Investor Members have been
returned, the Company will distribute 47% of the estimated annual
profits, as defined, to each Non-Investor Member, on a pro rata basis
based upon their percentage interest.
F-7
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) Next, until capital contributions of the Investor Members have been
returned, on a pro rata basis based upon their percentage interest until
the amount of all distributions in (a) and (b) results in all
distributions being in accordance with the percentage interests of the
Non-Investor and Investor Members.
(c) Next, to all Members on a pro rata basis based upon the aggregate of
their unreturned capital contributions, until such amount has been
returned to zero.
(d) Next, to all Members on a pro rata basis based upon their percentage
interest.
In connection with the December 1998 investment (Note 6) by Investor Members
(the "1998 Investor Members"), the 1998 Investor Members will receive a
preferred return of $500,000 prior to (b) above.
In connection with the January 2000 investment (Note 6) by Investor Members (the
"2000 Investor Members"), the 2000 Investor Members will receive a preferred
return of $1,350,000 prior to all of the distributions noted above.
The LLC agreement was amended in September 2000 (Note 9).
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market (net
realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed principally using the
straight-line method over the useful lives of the assets ranging from 3 to 5
years. Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
LONG-LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. See Note 8.
F-8
T-COM, LLC
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NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are recorded when products are shipped. All sales are made under the
terms of FOB shipping point.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods of
generally one or two years. Estimated warranty expense is recognized at the time
of the sale.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
approximately $43,000, $30,000 (unaudited) and $22,000 (unaudited) for the year
ended December 31, 1999 and the six months ended June 30, 2000 and 1999,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company has been organized as a Limited Liability Company ("LLC").
Accordingly, the Company has not provided for Federal income taxes since the
liability is that of the individual members. The Company is subject to a nominal
amount of state income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires all entities to disclose the fair value
of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. This statement defines fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. As of December 31, 1999 and June 30, 2000, the fair value of
all financial instruments approximated carrying value.
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are reasonable estimates of their fair value
because of the short maturity of these items. The Company believes the carrying
amounts of its line of credit and note payable approximate fair value because
the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
F-9
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to concentration of
credit risk, consist primarily of cash and accounts receivable. The Company
places its cash with financial institutions. At times, cash balances may be in
excess of the amounts insured by the Federal Deposit Insurance Corporation.
The Company's accounts receivable results from sales to a broad customer base.
The Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not require
collateral. The Company has not experienced significant write-offs or bad debt
and actual credit losses are provided for in the financial statements and
consistently have been within management's expectations.
The Company had sales to one customer which represented approximately 10% of net
sales for the year ended December 31, 1999. The accounts receivable balance from
this and one other customer was approximately 22% and 12%, respectively of the
Company's accounts receivable at December 31, 1999.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company had no comprehensive income items to report for all
periods presented.
SEGMENT INFORMATION
The Company follows the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No.131 requires that companies report
selected segment information in annual financial statements and requires
companies to report selected segment information in interim financial
statements. The Company operates solely in one operating segment; the design,
development, manufacture and sale of telecommunications test equipment.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial position as of June 30,
2000, and the results of operations and cash flows for the six months ended June
30, 2000 and 1999. The results of operations for the six months ended June 30,
2000 and 1999, are not necessarily indicative of the results to be expected for
the full year.
F-10
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS No. 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collective referred to as derivatives), and for
hedging activities. SFAS No 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
currently does not engage in, nor does it expect to engage in, derivative or
hedging activities and, accordingly, the Company anticipates there will be no
impact to its financial statements.
In April 1998, the American Institute of Certified Public Accountants issued SOP
No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5
requires that all start-up costs related to new operations must be expensed as
incurred. In addition, all start-up costs that were capitalized in the past must
be written off when SOP 98-5 is adopted. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB
101 summarizes certain areas of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company believes that its current revenue recognition policies comply with SAB
101.
(2) INVENTORIES
Inventories are summarized as follows:
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
============== =============
F-11
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(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
the Company and is payable in monthly principal installments of approximately
$37,000, plus interest through maturity in June 2002. As a result of the
Company's non-compliance with certain financial covenants and as the Company was
unable to make the required monthly payments in 1999 and 2000, the note is due
on demand. In September 2000, the obligation under the note and line of credit
(Note 4) was forgiven by the bank in exchange for a 33% interest in the Company
(Note 9). Due to the transaction described in Note 9, the entire balance under
the note payable has been classified as a long-term liability on the
accompanying balance sheets.
F-12
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT
CONTRIBUTIONS
In December 1998, a contribution of $500,000 was made by Investor Members in
exchange for 4,651,515 units.
As of December 31, 2000, a total of 13,576,515 units were outstanding.
In January 2000, a contribution of $450,000 was made by Investor Members in
exchange for $1,350,000 preferred return.
VOTING RIGHTS
Investor Members shall have the right to vote only upon certain significant
matters, including any amendments to the original LLC Agreement, admission of a
new Member or dissolution of the Company.
OPTIONS
The Company's LLC Agreement includes a provision to issue an additional
1,000,000 units to key employees. The Company has chosen to issue options
underlying these units instead of issuing the units outright. A summary of the
option activity is as follows:
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
============== ===============
F-13
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(6) MEMBERS' DEFICIT (CONTINUED)
Information relating to options at December 31, 1999 summarized by exercise
price is as follows:
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
-------- ------------- ------------- ------------- ----------------- --------------
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.
F-14
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(7) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The future minimum rental payments required under the two operating leases are
as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------- ------
2000 $ 49,725
2001 2,939
2002 2,939
2003 1,714
2004 -
-----------
$ 57,317
===========
EMPLOYMENT AGREEMENT
The Limited Liability Company Agreement includes a commitment to pay a
Non-Investor Member $150,000 per year as compensation for services as an
employee of the Company. As of December 31, 1999 and June 30, 2000, the Company
has approximately $174,000 and $255,000 (unaudited), respectively, accrued
related to this commitment. Such amount has been included in accrued payroll and
commissions on the accompanying balance sheets.
LITIGATION
The Company is, from time to time, involved in legal proceedings, claims and
litigation arising in the ordinary course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse affect on the Company's financial
position, results of operations or cash flows.
EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution plan ("401(k) Plan") covering the
majority of its employees. Participants may make voluntary pretax contributions
to such plans up to the limit as permitted by law. Annual contributions to the
plan by the Company, if any, is discretionary. The Company made no contributions
to the 401(k) Plan during the year ended December 31, 1999 or the six months
ended June 30, 2000 (unaudited) and 1999 (unaudited), respectively.
F-15
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(8) NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL
The Company assesses the recoverability of its goodwill whenever adverse events
or changes in circumstances or business climate indicate that expected future
cash flows (undiscounted and without interest charges) may not be sufficient to
support recorded goodwill. During 1999, due to a significant decrease in sales,
declines in profit margins and continuing operating losses, the Company
wrote-off the carrying value of goodwill originating with a June 1998
acquisition. This write-down totaled $3,424,569 and was charged to operations.
The Company was previously amortizing the goodwill over 15 years using the
straight-line basis. The statement of operations for the year ended December 31,
1999 and the six months ended June 30, 1999 (unaudited) each includes
approximately $123,000 of goodwill amortization prior to the write-off.
(9) SUBSEQUENT EVENTS
In September 2000, the Company amended its LLC Agreement (the "Amendment") and
concurrently completed the sale of substantially all of its assets and certain
of its liabilities to MicroTel International, Inc. ("MicroTel"), effective
August 1, 2000.
In accordance with the terms of the sales agreement with MicroTel, the Company
received 150,000 Series B Convertible Shares (the "Series B") of MicroTel.
Series B have a liquidation preference of $6.40, are convertible into common
stock of MicroTel at a rate of 10 common shares per Series B and are convertible
in 3 equal lots of 50,000 at six, twelve and eighteen months after the closing
of the sale. The Series B have no dividend rights. In addition, the Company
received warrants to purchase 250,000 common shares of MicroTel for $1.25 per
share, which are exercisable for twenty-four months. The sale excluded any
obligations under the line of credit (Note 4), note payable (Note 5) and
Non-Investor Member payroll accrual (Note 7).
The Company has determined the fair value of the proceeds received and net
assets sold to be approximately equal in value. As such, no significant gain or
loss is expected to be recorded in connection with this sale. The warrants were
valued using a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 95%; risk-free interest rate of 6%; and
an expected life of two years.
In accordance with the Amendment, the percentage interest of the Company was
amended to:
- 33% allocated to the Non-Investor Members as a group,
- 33% allocated to the Investor Members as a group,
- 33% to a bank.
The 33% interest and $25,000 was allocated to a bank in exchange for the
forgiveness of the line of credit (Note 4) and note payable (Note 5).
Outstanding principal and interest under the line of credit and note payable
totaled $2,620,025 as of the date of exchange. As the only remaining significant
assets of the Company will be the proceeds received on the sale to MicroTel, the
Company will record debt forgiveness of approximately $2.2 million (unaudited)
for the difference between the balance of the debt of $2,620,025 and the bank's
interest in the proceeds received in September 2000.
F-16
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
(9) SUBSEQUENT EVENTS (CONTINUED)
The Amendment includes a provision that a Non-Investor Member will forgive his
rights to the accrued payroll liability ($207,907 as of the date of the
Amendment). The Amendment also redefines the purpose of the Company from
designing, developing and selling telecommunications test equipment to holding
the MicroTel Series B and warrants for investment.
(10) GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company incurred significant operating
losses and negative cash flows from operations during the year ended December
31, 1999. As discussed in Notes 9, the Company sold substantially all of its
assets and certain liabilities and essentially remains as a holding company for
certain equity investments. The Company does not expect to generate any future
operating revenues subsequent to September 2000 but will continue to incur
certain administrative expenses. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company expects to be able to fund the limited administrative expenses
through the remaining cash not sold as part of the transaction detailed in Note
9 and possible additional member contributions. While the Company is unsure as
to the future distribution of any remaining assets, the MicroTel Series B
Preferred Shares and warrants cannot be fully distributed to the Members until
March 2002.
F-17
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-18
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-19
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-20
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-21
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-22
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-23
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-24
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:
- ----------------------------------------------------
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-25
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 3 - INVENTORIES:
- ---------------------
Inventories at December 31, 1998 consisted of the following:
Raw materials $ 194,038
Work in process 103,258
Finished goods 375,723
---------------
$ 673,019
===============
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)
--------------
$ 1,963,333
==============
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
-------------
$ 2,053,333
=============
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.
F-26
T-COM, LLC
----------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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
--------------- ----------------
1999 $ 204,309
2000 212,482
2001 220,981
2002 229,820
2003 177,485
----------------
$ 1,045,077
================
F-27
T-COM, LLC
----------
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
-----------
1,368,745
Less ending inventory 673,019
-----------
$ 695,726
===========
F-28
T-COM, LLC
----------
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
-----------
$1,560,987
===========
F-29
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The Unaudited Pro Forma Condensed Combined Financial information reflects
financial information which gives effect to MicroTel International, Inc.'s
("MicroTel" or the "Company") acquisition (the "Acquisition") of substantially
all of the assets and certain liabilities of T-COM, Inc. ("T-COM"), which
provided for the issuance of 150,000 shares of MicroTel Series B Preferred Stock
and 250,000 MicroTel warrants. The Acquisition closed on September 22, 2000. The
Pro Forma Financial Information included herein reflects the use of the purchase
method of accounting, after giving effect to the pro forma adjustments discussed
in the accompanying notes. The aggregate value of the consideration given was
approximately $1,000,000 which approximates the fair value of the net assets
acquired. Such financial information has been prepared from, and should be read
in conjunction with, the historical consolidated financial statements and notes
thereto of MicroTel and T-COM.
The Pro Forma Condensed Combined Statements of Operations gives effect to the
Acquisition as if it had occurred at the beginning of the earliest period
presented, combining the results of MicroTel for the year ended December 31,
1999 and for the six months ended June 30, 2000 with those of T-COM, for the
same periods.
The Pro Forma Condensed Combined Statements of Operations presented do not
include any potential cost savings. The Company believes that it may be able to
reduce salaries and related costs and office and general expenses as it
eliminates duplications of overhead. However, there can be no assurance that the
Company will be successful in effecting any such cost savings.
The Pro Forma Condensed Combined Financial Information is unaudited and is not
necessarily indicative of the consolidated results which actually would have
occurred if the above transactions had been consummated at the beginning of the
periods presented, nor does it purport to present the future financial position
and results of operations for future periods. A pro forma balance sheet has not
been provided herein as the Acquisition has been reflected in the Company's
September 30, 2000 balance sheet on Form 10-Q filed on November 20, 2000.
F-30
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro-Forma
Year Ended December 31, 1999 MicroTel T-COM Adjustments Combined
-------------- ------------ -------------- ---------------
(a)
Net sales $ 25,913 $ 3,239 $ -- $ 29,152
Cost of sales 17,066 1,442 -- 18,508
-------------- ------------ -------------- ---------------
Gross profit 8,847 1,797 -- 10,644
Operating expenses:
Selling, general and administrative 10,132 1,606 -- 11,738
Engineering and product development 1,841 1,001 -- 2,842
Write-down of goodwill - 3,425 3,425
-------------- ------------ -------------- ---------------
Loss from operations (3,126) (4,235) -- (7,361)
Other income (expense):
Interest expense (297) (280) -- (577)
Other, net 104 15 -- 119
-------------- ------------ -------------- ---------------
Loss from continuing operations before
income taxes (3,319) (4,500) -- (7,819)
Income taxes 128 4 (4)(b) 128
============== ============ ============== ===============
Loss from continuing operations $ (3,447) $ (4,504) $ 4 $ (7,947)
============== ============ ============== ===============
Basic and diluted earnings per share from
continuing operations $ (0.21) $ (0.48)
============== ===============
Basic and diluted weighted average shares
outstanding 16,638 16,638
============== ===============
See notes to pro forma condensed combined income statements on pages F-30 and F-32.
F-31
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro-Forma
Six Months Ended June 30, 2000 MicroTel T-COM Adjustments Combined
-------------- -------------- -------------- ---------------
(a)
Net sales $ 12,688 $ 1,430 $ -- $ 14,118
Cost of sales 7,565 627 -- 8,192
-------------- -------------- -------------- ---------------
Gross profit 5,123 803 -- 5,926
Operating expenses:
Selling, general and administrative 4,364 602 -- 4,966
Engineering and product development 496 525 -- 1,021
-------------- -------------- -------------- ---------------
Income (loss) from operations 263 (324) -- (61)
Other income (expense):
Interest expense (153) (149) -- (302)
Other, net 242 9 -- 251
-------------- -------------- -------------- ---------------
Income (loss) from continuing operations
before income taxes 352 (464) -- (112)
Income taxes 10 5 (5)(b) 10
============== ============== ============== ===============
Income (loss) from continuing operations $ 342 $ (469) $ 5 $ (122)
============== ============== ============== ===============
Earnings per share from continuing
operations:
Basic $ 0.02 $ 0.00
============== ===============
Diluted $ 0.01 $ 0.00
============== ===============
Weighted average shares outstanding:
Basic 18,443 18,443
============== ===============
Diluted 20,476 18,443
============== ===============
See notes to pro forma condensed combined income statements on page F-30.
(a) The operating results of MicroTel have been reclassified to reflect the
effect of MicroTel's decision, in October 2000, to discontinue its circuits
segment.
(b) To eliminate T-COM state income tax expense related to Limited Liability
Company tax status.
F-32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
MICROTEL INTERNATIONAL, INC.
By: /s/ Randolph D. Foote
-----------------------------
Randolph D. Foote
Chief Financial Officer
Date: April 2, 2001
F-33
EXHIBITS
Exhibit
Number Description
------- -----------
23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants
23.2 Consent of Ireland San Fillipo, LLP, Independent Certified Public
Accountants
F-34