<PAGE>
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended March 31, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-16580
TELENETICS CORPORATION
(Name of small business issuer in its charter)
California 33-0061894
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26772 Vista Terrace Drive
Lake Forest, California 92630
- ------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (including area code): (949) 455-4000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value per share
------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes No X
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
The registrant's revenues for its most recent fiscal year were $2,899,929.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on July 10, 1998 was approximately $3,243,972.
The number of shares outstanding of the registrant's only class of Common
Stock, no par value per share, was 44,180,826 on July 10, 1998.
================================================================================
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Company Overview
Telenetics Corporation, a California corporation ("Telenetics" or the
"Company"), was incorporated in California in June 1984 and began introducing
innovative modem and data communications products for the personal computer
("PC") market in 1985. As an early pioneer in the modem market, the Company
introduced the first internal 2400 bits per second ("bps") modem for PCs,
followed by several other products, including a modem with innovative security
features. The Company's initial success with these and other innovative products
enabled it to establish viable business relationships at that time with major
Fortune 500 corporations, including J.C. Penney, Chrysler Corporation and
International Business Machines. In 1987, the Company offered shares of its
Common Stock to the public and listed its shares of Common Stock for trading on
the Nasdaq National Market System.
During the late 1980s, intense competition from other manufacturers, coupled
with what current management of the Company believes to be a series of
managerial, engineering and production problems, stunted the Company's growth.
By the fourth calendar quarter of 1990, the financial difficulties of the
Company had escalated, causing the Company to lose many key customer accounts as
well as many of its key engineering personnel and other employees. In 1991, the
Common Stock of the Company was de-listed from trading on the Nasdaq National
Market System. As a result of these events, the Company has not filed an annual
or quarterly report with the Securities and Exchange Commission pursuant to
Securities Exchange Act of 1934, as amended (the "Exchange Act"), since the Form
10-Q covering the quarterly period ended December 31, 1990.
On January 21, 1992, the Company's Board of Directors met to discuss the
current financial situation of the Company. At that meeting it became clear to
the Board of Directors that unless funding could be obtained immediately, the
Company would be forced to seek protection under the United States Bankruptcy
Code. The Board of Directors reviewed two financing proposals and selected the
proposal offered by SMC Group, a consulting and human resource firm based in
Southern California ("SMC"). Pursuant to the terms of the proposal, SMC agreed
to provide the Company with at least $250,000 in exchange for shares of the
Company's Common Stock representing 64.8% of the then outstanding shares of the
Company's Common Stock. At a later meeting of the Board of Directors on January
24, 1992, the Board of Directors concluded that because of a number of factors
including, among others, that SMC would also provide management consulting
services to the Company in connection with the issuance of Common Stock to SMC,
that the then current bid price of the Company's Common Stock was $0 and that
independent brokers had considered the Common Stock to be without value, the
Board of Directors ascribed a value of $.01 per share of Common Stock to be
issued to SMC.
At the time the Company selected the financing proposal by SMC, SMC was owned
and controlled by Michael A. Armani, now the Company's President, Chief
Executive Officer, Chief Financial Officer and one of its directors, and by
Shala Shashani, now the Secretary and a director of the Company. Due to the
limited number of authorized shares available at the time of the investment by
SMC, the Company was unable to issue to SMC the 29,290,311 shares that were
calculated by the Board of Directors to represent a 64.8% ownership interest in
the Company. The Company did, however, issue 8,574,764 shares to SMC in December
1992 in connection with SMC's initial investment in the Company. Between
September 1992 and September 1996, SMC's involvement with and investments in the
Company were substantially greater than anticipated. By September 1996, SMC had
invested a total of $609,899.33 in the Company, of which $549,190 plus accrued
interest was owing to SMC.
Due to its negative financial condition in the early 1990s, the Company
experienced serious difficulties in obtaining payment terms from its suppliers.
Consequently, in 1993 Ms. Shashani formed SMC Communications Group, Inc., a
California corporation, which corporation had the sole purpose of assisting the
Company in procuring parts and products. By September 1996, the Company was
indebted to SMC Communications Group, Inc. in the amount of $115,535 plus
accrued interest in connection with this arrangement.
In 1994, the Company was ordered to vacate the premises upon which the
Company's facilities are located as a result of a legal action between the
Company and its landlord. To avoid a potentially serious disruption of the
1
<PAGE>
Company's activities that could have resulted from an eviction, SMC acquired the
premises in July 1994 and leased them to the Company. By September 1996, the
Company was also indebted to SMC in the amount of $84,000 plus accrued interest
in back rent.
In September 1996, the Company, SMC and SMC Communications Group, Inc. entered
into a compromise agreement and mutual release that reduced the number of shares
of the Company's Common Stock that SMC was entitled to receive in connection
with SMC's investments in the Company. The compromise agreement was amended in
December 1997. Pursuant to the amended compromise agreement, 5,000,000 shares of
the Company's Common Stock were issued to SMC and its assignees in March 1998.
As of March 31, 1998, the long-term debts of the Company to SMC and SMC
Communications Group, Inc. were $391,500 and $115,535, respectively.
Between 1992 and 1998, the Company's new management redirected the Company's
strategic focus to its current line of products by increasing research and
development expenditures, accelerating introduction of enhancements to its
products and disposing of certain non-core products. The Company also
restructured its sales force and implemented new sales and marketing strategies
focused specifically on the sale of industrial automation and data
communications and data acquisition modem products for the utility and
industrial automation markets. The business of the revitalized Company now
consists primarily of the design and manufacture of high quality, industrial
grade modems, fiber optic drivers and radio modems within the industrial
automation industry. The Company has also become active in the design and
manufacture of customized modem products for manufacturers of utility meters,
remote terminal units ("RTUs"), electric relays, flow measurement devices,
traffic controllers and the oil and gas industry. In addition to the Company's
primary focus on the industrial automation market, the Company plans to expand
into several other markets that have similar requirements for the type of
specialized modems the Company designs, such as transportation, lottery and
gaming, vending machine automation, security, point of sales ("POS") and
automated teller machine, telemedicine and military applications.
Management of the Company believes that one of the Company's key strengths is
its ability to respond rapidly to evolving niche markets with innovative
solutions. Management also believes that the ability to envision and anticipate
the needs of the industrial automation industry has transformed the Company from
a struggling commercial and consumer modem manufacturer in a crowded market to a
leading provider of innovative and mission critical solutions to electric, water
and gas utilities, petroleum and pipeline companies, transportation authorities,
building automation and energy management firms and major manufacturers of
industrial equipment products.
The Company presently envisions a future in which a large number of
electronic, electrical and mechanical devices that are currently controlled,
managed and polled manually or visually, will be remotely polled, configured,
managed and controlled. The Company believes that this process of automation
will not only enhance our everyday lives, but will also contribute to financial
savings and environmental protection. In pursuing this vision of the future, the
Company aspires to become a pioneer and a leading provider of modems, fiber
optic products and wireless communication solutions for the thriving industrial
automation industry.
The Telenetics Solution
Demand for modem and data communications products and services has grown
significantly in recent years. The Company believes that this growth has been
driven by a variety of factors, including (i) a significant increase in the
mobility of corporate functions and the need for remote data communications
access, (ii) rapid automation of manufacturing and other industrial processes,
requiring automation of internal data communications, (iii) the popularity of
the Internet and on-line services such as America Online, the Microsoft Network
and Prodigy, and (iv) advances in technology, which have improved the
functionality of microprocessor-based devices, primarily PCs, as a means of
transferring, capturing and manipulating data-intensive information. These
trends have resulted in substantial growth of modem unit sales, both for
corporate customers providing or otherwise using the data communications
services and for individual PC users.
In an effort to address the diverse needs of the data communications market,
the Company has developed and offers a broad line of industrial automation and
data communications and data acquisition modem products. The following are the
key attributes of the Telenetics solution:
2
<PAGE>
. Broad Product Range. The Company has developed a broad range of innovative
industrial grade dial-up and leased line modems, fiber optic line drivers
and limited distance modems that are designed to operate in extended
temperatures and harsh environments. These products generally exceed the
surge protection standards of the industry and are adaptive to wide ranges
of AC or DC power inputs. The modular design of the Company's products
enables them to either interface or complement one another. The versatility
of this modular concept has enabled the Company to offer over 100 different
product combinations to its customer. These variations include customized
selection of data speeds, data interfaces, power inputs, operating
temperatures, data formats and power consumption. In addition, the
Company's product line serves both central site data communications needs
and remote access and transmission sites on both the enterprise-wide and
single location level.
. Remote Access and Data Acquisition. The Company's access and transmission
modem products provide comprehensive capabilities in order to effectively
control both operations and costs. These capabilities allow effective
communications management through customized configuration, diagnostics,
cost management and capacity planning.
. Comprehensive Connectivity. The Company has invested over fourteen years
of product research and engineering time in the development of the
Company's products. The Company's products are designed to connect to a
broad range of modem configurations and to connect over a wide range of
prevailing transmission conditions. The Company's products incorporate a
wide range of standard international connectivity protocols as well as
proprietary protocols.
. High Quality Products. The Company's products are subject to extensive
development and quality assurance testing before shipment to customers. The
Company has quality assurance personnel on-site on a full-time basis at the
Company's facilities in Lake Forest, California and also requires that the
manufacturing facilities of the Company's subcontractors follow the
Company's quality assurance policies and guidelines. This has resulted in
the Company's modem products attaining a reputation with customers for
quality and reliability.
. Ease of Installation and Use. Because many of the Company's customers lack
significant technological resources, the data communications products used
by these customers need to be easy to install and use. The Company has
designed its modem products to be installed with limited or no hands-on
technical support.
Business Strategy
As discussed above, in 1992 the Company's new management responded to a
significant downturn in the Company's business by undertaking a series of
strategic initiatives and revising its business strategy to reposition the
Company as a leading supplier of industrial automation and data communications
and data acquisition modem products. The Company's objective is to continue to
be a leading provider of industrial automation and data communications and data
acquisition products. The Company's strategy to achieve this objective is
comprised of the following elements:
. Continue to Focus on Industrial Automation and Data Acquisition Products
Market. The Company will continue to focus on the industrial automation and
data acquisition products market and to develop new products and
enhancements to meet or exceed the evolving requirements of both central
site and remote applications of the Company's technologies.
. Maintain Technology Leadership. The Company intends to continue to invest
in research and development of products to meet its customers' needs. The
Company believes that the expertise it has developed in creating its
existing products will permit it to enhance these products, develop new
products and respond to emerging technologies in a cost-effective and
timely manner.
. Leverage Existing Customer Base. The Company believes that many of its
existing customers will continue to purchase industrial automation and data
acquisition products. The Company intends to aggressively market new
products and enhancements to its existing customers. The Company also
believes that its existing customer base represents an important source of
references for new customers.
3
<PAGE>
. Develop and Expand Strategic Relationships. The Company plans to continue
to develop its strategic relationships with data communications component
and equipment providers and other vendors in order to enhance the Company's
product development activities and leverage shared technologies and
marketing efforts.
. Develop and Expand Specialty Modem and OEM Relationships. The Company is
making significant investments to develop products for special applications
that require custom designed communications devices for implementation in
large private and government projects.
Markets
The Company characterizes the multi-billion dollar data communications market
as having four distinct segments. Two of these segments, which the Company
refers to as the "Consumer Market" and the "Commercial Market," dominate the
data communications market and currently capture the vast majority of customer
dollars spent on data communications products. The Consumer Market consists of
individuals who purchase modem products primarily to access the Internet. The
Commercial Market consists of corporate and business customers and manufacturers
of computers who purchase modem and data communication products for installation
in a workplace environment, primarily for purposes of integrating data, voice
and other types of information into the corporate communications network.
In addition to the Consumer Market and the Commercial Market, the Company has
identified two emerging markets that use data communications as an integral part
of corporate business operations, which markets the Company refers to as the
"Industrial Automation Market" and the "OEM and Specialty Market." The
Industrial Automation Market consists of a myriad of organizations that utilize
data communications in an automated process application, such as electric
utilities, energy management companies and oil and gas companies. The OEM and
Specialty Market consists of original equipment manufacturers ("OEMs") that
incorporate a special application modem into other hardware equipment, such as
an automatic teller machine, commonly known as an ATM, a credit card
verification machine or POS equipment, or that incorporate a wireless
communications device for remote diagnostics, such as an ambulance-based or
stand-alone medical diagnostics machine used by paramedics. These two markets
are the current principal targets of the Company's marketing and sales efforts.
Industrial Automation Market
Electric Power, Gas and Water Utilities. The electric power industry in the
---------------------------------------
United States, which is the largest sector among the three utilities market
segments, is a $200 billion per year business built primarily on electro-
magnetic technology that has remained largely unchanged in the last few decades.
At peak operation, the electric power industry provides a staggering 600,000
Megawatts of electricity to approximately 94 million homes and approximately 12
million commercial sites. Responding to deregulation and other major changes
taking place within the industry, the electric power utility companies have
become leading advocates in promoting the implementation of automation and
technological advancement as a means of achieving cost savings. With the advent
of deregulation of the industry, electric utilities must reduce their operating
costs as they enter the competitive arena and, as stated in Gas Industries
magazine's December 1995 issue, "[f]or many utilities, downsizing means more
computerization." According to a report prepared by Newton Evans Research
Company of Baltimore, Maryland, in 1994 alone, utility companies spent
approximately $5 billion on information technology and automation. Based on
other published estimates, the Company believes that the electric power
utilities will spend over $500 million on data communications and data
acquisition automation between 1995 and 1999.
The Company believes that the requirement for data communications products
within the rapidly changing utility industry can be broken down into five
separate categories: (i) data acquisition ("DA") and demand side management
("DSM"); (ii) substation automation; (iii) automatic meter reading; (iv)
automation system integrators; and (v) measurement and instrumentation. The
technologies that provide for remote DA offer potentially large cost savings by
giving the system operator instantaneous information of the status of the
system, thus permitting more effective control. With many economic, political
and logistical obstacles to the building of new generating stations to meet
increasing demand for electric power, utility companies are increasingly
directing their attention to DSM technologies, whereby power loads (demand) can
be controlled to fit within the fixed generating capacity available. These two
areas
4
<PAGE>
of technology are often grouped together using the acronym "DA/DSM." In both of
these areas, industrial grade communications products such as modems, line-
sharing devices, fiber optic drivers and radio communications equipment are
being implemented to support the management of Supervisory Control and Data
Acquisition ("SCADA") systems, relays, meters and other equipment. SCADA systems
are applied to monitoring and measuring operating conditions and controlling
certain processes. They are typically used in, among others, electric power
generation, transmission and distribution stations; oil and gas pipeline pumping
and compressor stations; water and waste pumping and lift stations;
telecommunications network surveillance; and transportation networks. Unlike in-
plant control systems, a SCADA system normally includes a remote
telecommunications link. The realtime measurements and controls at a number of
remote stations are transmitted over the telecommunications link to a
centralized control center which is often located a great distance from the
remote stations. At the central locations, computers acquire the data
measurements from all of the stations and present a complete dynamic profile of
the entire process. The acquired readings are displayed and recorded in graphic
and text formats and control commands are transmitted back to the remote sites,
either automatically or by system operators, to effect changes in the process.
Typically, a SCADA system will include from ten to 200 remote stations with
each station having from 16 to 2,000 measurement points. In order to achieve an
effective operational profile of the overall process, the entire measurements
database must be updated every few seconds and the measured data must be very
accurate. Control actions must be executed quickly. Further, the reporting of
the data and the execution of the controls must be efficient, reliable and
secure, especially when a major disturbance takes place in the system, such as
when a storm impacts an electric power network. The equipment installed at the
remote sites are called RTUs, or "Remote Terminal Units." These units measure
voltages, current pressures, temperatures, device positions and equipment alarms
and compute flow rates and volumes. The measurements and calculations are
performed at very high speeds to high degrees of accuracy under all conditions
of the rugged environment in which they are installed. The RTUs are intelligent,
normally containing multiple microprocessors with sophisticated realtime
software programs. They are configured to fit the specific needs of each
individual station and flexibly designed to be applicable to a variety of
differing stations' requirements.
The computer-based systems at the control center(s) are referred to as MTUs,
or Master Terminal Units. An MTU may be a single computer with display and
logging peripherals or, for more demanding requirements, an MTU may be comprised
of multiple computers networked together. The multiple computer systems provide
both added workstations and redundancy protection against computer failure.
Small to medium-sized MTU requirements are met with the application of high
performance PC-type computers running SCADA software under a realtime operation
system. For the very large SCADA system MTU cases, with measurement databases
exceeding 50,000 points, mainframe computers are needed, again with SCADA
specific software. PennWell Research Data, a leading utilities industry research
firm, recently stated that "since 1970, U.S. electric, water and gas/pipeline
utilities installed SCADA systems worth a total of $2.06 billion."
Substation automation is also a fast-growing segment of the utility automation
market. Investment in substation automation within the United States alone is
expected to exceed $300 million over the next four to five years. The Company
expects that a major portion of such expenditures will be for industrial
communication devices, such as the Company's products. To address the needs of
this segment of the market, the Company has formed relationships with many
established companies in the SCADA system and protection and control system
manufacturing business, such as GE/Harris, ABB, Bassler Electric, Beckwith,
Cooper Power Systems, GE Protection, GEC Alsthom, Mutilin, Schwitzer and
Siemens. Manufacturers of relays and other protection equipment are among the
largest suppliers to the utility industry. The Company believes that most of
these companies are in the process of adding remote communications capabilities
to their relay and control products and represent a significant group of
potential customers for the Company's dial-up, dedicated line and fiber optics
products.
Another market segment within the industrial automation market is automatic
meter reading, or AMR, wherein modem or wireless technologies can virtually
eliminate the expense and inefficiencies of human meter readers. According to
Investment Daily in a May 1995 published article, there are more than 234
million utility meters in North America alone, which translates to a potential
market of $11.7 billion. The Company has pursued and continues to pursue this
market segment primarily through meter manufacturers, such as Schlumberger, ABB,
PSI, Landis & Gyr, Scientific Atlanta, Power Measurement and General Electric.
Recently, the Company has entered into a letter of intent with Duquesne Light
Company to supply Duquesne Light Company with $8,000,000 of the Company's
Omega(TM) AMR Communication Interface Cabinets throughout the remainder of
fiscal year 1999. See "--Strategic Relationships."
5
<PAGE>
Comprising yet another market segment for industrial and controls automation
data communication products are automation system integrators who provide
turnkey solutions for power companies. Some of the Company's larger customers in
this market segment include GE/Harris, ABB, Power T&D, CAE and Siemens Power
Systems, which are among the largest automation system integrators in the world.
The fifth and final market segment is the measurement and instrumentation
industry. As automation increases, there is an increasing requirement for
innovative, complex, technology-driven solutions to address the demand for
remotely monitored measurement and control systems. The primary industries in
which this increase is taking place are the water metering, water treatment,
waste water management and gas flow measurement businesses. Many companies have
expressed interest in using the Company's products, and one company, H. W.
Harley, an electric flow management product manufacturer, has standardized its
data communications products based on the Company's special modem modules.
Plant and Manufacturing Automation. Industrial manufacturing at the end of the
----------------------------------
20th Century differs dramatically from industrial manufacturing of prior
years. The use of robots in assembly, material handling and warehousing are no
longer just scenes from science fiction movies, but have now become standard in
nearly all segments of plant and manufacturing facilities. "Process controls,"
"information-on-demand" and "total integrated automation" have become the
buzzwords of plant managers and operations directors. The quest for cost savings
and efficiency has moved the focus from wage control to automation, energy
efficiency and information management during the last decade of the 20th
Century. As the need for implementation of industrial automation solutions
increases worldwide, so does the need for communication devices for monitoring,
control, protection and alarm reporting and information management applications.
Some of the leading manufacturing and warehousing automation companies, such as
Siemens Energy & Automation, Cutler Hammer and Allen Bradley, are either using
or currently evaluating the use of the Company's products in their manufacturing
automation solutions.
Building Automation and Energy Management. Building automation, often referred
-----------------------------------------
to as BAS, is the process of integrating systems such as environmental control,
closed circuit television, building access control, elevator and parking
supervision and general control and monitoring of all mechanical and electrical
services equipment within a building. An isolated example of BAS is the
monitoring of energy consumption at an automobile manufacturing plant on an
hourly, daily and monthly basis. In the last decade, there has been an
unprecedented surge in the building automation and energy management industry.
Large commercial and residential buildings, restaurants, retail malls and other
large facilities are requiring more efficient energy management and control.
Honeywell, GE and Landis & Gyr are using or evaluating the Company's products
for use with their energy management systems. One of the leaders in this field,
Group Shnider/Square D Company, a pioneer and standard-setter in BAS, is also a
customer of the Company.
Oil and Gas and Mining Industries. There has also been a trend toward
---------------------------------
automation in the oil and gas (petroleum) and mining industries that has
accelerated over the last several years. This trend has resulted in gas stations
becoming increasingly more automated, in remote flow measurement and leak
detection devices being installed in pumping stations and refineries and in
petroleum distributors implementing remote monitoring and other industrial
automation solutions to increase the safety of their workers. The Company has
not to date expended significant marketing and sales efforts in this market
segment. However, the Company has established contacts with several major firms
in these industries and has generated some initial interest by such firms in
several of its specialized modem products.
Forestry and Forest Products. Through one of its customers having a
----------------------------
significant involvement in this industry, the Company has become aware of an
increasing potential for industrial automation in this area. However, to date
the Company has not expended any significant marketing or sales efforts in this
market segment and is currently evaluating this additional market opportunity.
Several industry analysts and research groups, including PennWell Research
Data and Advanced Manufacturing Research, have estimated that the data
communications and data acquisition product requirements of the aforementioned
markets will be in excess of $500 million per year by the year 2001.
6
<PAGE>
OEM and Specialty Market
The following market segments represent a fairly new focus of the Company's
marketing and sales efforts:
Transportation. An increasing number of transportation projects being
--------------
implemented through North America require special applications and industrial
modem and fiber optic products. In June 1998, President Clinton signed into law
the Transportation Act for the 21st Century (also known as the Transportation
Equity Act of 1998, or H.R. 2400), which authorizes up to $203 billion of
expenditures for refurbishment and new construction of federal and state
highways, roads and bridges. Special technology applications to be implemented
in these projects include ice detection, traffic counters, alarms, traffic
controllers and road monitoring. In most cases, these projects will require the
coordinated involvement of federal and state Departments of Transportation and
other transportation agencies, as well as equipment manufacturers and
integrators who specialize in the transportation industry. In anticipation of an
increase in transportation projects, the Company has established relationships
with state transportation authorities and several such manufacturers and
integrators, including Peek Traffic (weight and metering), Diamond Traffic
(traffic counting), IRD (vehicle detection) and Econolite (traffic control). The
Company is currently involved with a number of projects in California (in
cooperation with CALTRANS), South Dakota, North Dakota, Nevada, Pennsylvania,
Nebraska and Wyoming, which have deployed or will deploy the Company's products.
The Company also anticipates the use of its products in the railroad
transportation industry and has begun marketing efforts in that area.
Electronic Access Control, Home Monitoring and Alarm Systems. The Company
------------------------------------------------------------
estimates that the combined sales of products in the electronic access control
("EAC"), home monitoring and alarm system industries surpassed $4 billion in
1996. A leading industry research firm, Stat Industries, reported that in 1995
the EAC market alone reached over $1.8 billion in product sales and had an
annual growth rate of 28%. This potential market also includes home alarm and
monitoring systems and electronic access products for commercial and
manufacturing sites. Many applications in these industries require dial-up and
leased line modems, fiber optic modems and radio modems. The Company has
established initial contacts with several leading firms in these industries and
has begun marketing efforts in this market segment.
Lottery and Gaming. The Company believes that its modem products can also be
------------------
utilized for monitoring, downloading and access control in the lottery and
gaming industries and has established initial contacts with several state
lottery operators, as well as equipment manufacturers and system integrators in
this field. AWI, the largest manufacturer of lottery terminals in the U.S. and a
wholly-owned subsidiary of Power House (NASDAQ:PWRH), is currently evaluating
the Company's products.
Vending Machine Automation, ATM and POS Equipment Manufacturers. The Company
---------------------------------------------------------------
also believes that consumers will soon see the advent of more advanced,
"intelligent" vending machines, ATM machines and POS equipment that are remotely
configured, polled, programmed and monitored, and that this industry represents
another potential market for the Company's modem products.
Test Equipment and PBX Manufacturers. The Company has established a
------------------------------------
relationship with two leading companies in the equipment and PBX manufacturing
industries, Harris Digital and Hekimian Laboratories, and is expanding its
marketing and sales efforts to other PBX and test equipment manufacturers and
other manufacturers of devices that require remote diagnostics and polling.
Remote Medical Diagnostics. There is a worldwide movement toward improving
--------------------------
access to medical care for populations with substandard access to health care
facilities and professionals. In addition, use of electronic signaling to
transfer medical data from one site to another is increasing. The advent of
"telemedicine" is a fairly recent high-tech solution to this universal problem
of access to health care. Another growing segment of this unique market is the
remote monitoring of elderly and home-constrained patients. This emerging market
has a growing need for data communications products, including modems for remote
monitoring of medical data and diagnostics. The Company has one such customer,
Marquette Electronics, a manufacturer of medical equipment that incorporates the
Company's modem products into its products. The Company is actively engaged in
marketing and sales efforts in this industry.
7
<PAGE>
Sales and Marketing
The Company sells its products primarily through a direct sales force that
contacts firms that are known to be active in each of the aforementioned market
segments. The Company also markets its products through a limited network of
dealers and distributors and regional sales representatives. As of March 31,
1998, the Company's sales force consisted of seven persons, including three in
the Industrial Automation marketing group, one in the OEM and Specialty Markets
Group, and one in the Asia Pacific Sales group, with two applications engineers
supporting their efforts.
The Company generates interest in its products primarily through direct sales
efforts of its sales staff. In addition, the Company promotes its products
through sales literature and participation in national industry trade shows.
From January 1997 through March 1998, the Company exhibited its products at four
national trade shows. For the fiscal year ended March 31, 1998, the sales and
marketing budget for advertising, travel, trade shows and sales literature was
less than 2.5% of total revenues. Sales and marketing salaries, bonuses,
commissions and other compensation expense was approximately 7.5% of total
revenues. Accordingly, management anticipates that approximately 10% of total
revenues will be spent on sales and marketing expenses and compensation of sales
and marketing personnel during the fiscal year ending March 31, 1999. In
addition, the Company expects to increase the number of its sales personnel
during the fiscal year ending March 31, 1999, which would result in additional
personnel-related expenses. The Company is currently increasing its sales
through value added resellers and dealers who service and sell data
communications products to the OEM and Specialty Market. By developing this
channel fully, the Company believes that it can realize additional market
penetration. The Company is also working to augment this channel of distribution
through the addition of nationwide distribution chains such as Graybar
Electronic. The Company believes that building and working through this
distribution channel will enable the Company to leverage its marketing and
sales activities without the additional expense of a large direct sales force.
Due to the growth in sales during the past twelve months, the Company has
begun to gradually implement a plan to enhance its international presence. To
date, international sales of the Company's products have not been significant.
For the fiscal year ended March 31, 1998, direct international sales comprised
less than 2% of the Company's net sales. However, management of the Company
believes that international sales could in the future represent a substantial
portion of the Company's net sales after implementation of its plan to expand
into international markets. An important aspect of this expansion is the recent
entrance of the Company's products into the Chinese marketplace. In March 1998,
the Company reached an agreement in principal relating to a proposed five-year
master purchase contract with GE/Harris pursuant to which the Company would
provide its specially-designed digital fast pole modem product to China Light &
Power, a Hong Kong-based electric utility company ("CLP"). CLP is a joint
venture owned by British and Chinese firms and is considered to be one of the
most influential utility companies in China. Due primarily to this recent
development and assuming the Company and CLP are successful in reaching a
definitive agreement, management of the Company anticipates a substantial
increase in international sales over the next several years and expects as much
as $1,000,000 in revenue to be generated pursuant to this business relationship
during the fiscal year ending March 31, 1999. If the Company is able to expand
its sales and marketing efforts in China and other international markets,
management of the Company believes that international sales will represent a
substantial portion of net sales in the future.
In addition to China, the Company is also directing its international sales
and marketing efforts in Latin America, primarily in Mexico, Argentina, Brazil
and Chile, and in Europe and the former Soviet Republics as well. According to a
recent market survey published by PennWell Research Data, as much as $442
million of new control system projects and 174 new energy management systems and
SCADA system projects are planned in Europe for the next three to five years. In
addition, the survey indicates that an additional $19 million of related
communications projects and $8 million of RTU add-on projects are anticipated in
Europe during that period. However, international sales are subject to risks,
including various regulatory requirements, political and economic changes and
disruptions, tariffs or other barriers, difficulties in staffing and managing
foreign sales operations, and potentially adverse tax consequences. In addition,
fluctuations in exchange rates may render the Company's products less
competitive to local product offerings or expose the Company to foreign currency
exchange losses. In 1997 and 1998, the United States dollar generally has been
strong against major Asian and European currencies such as the German mark, the
Japanese yen and the Thai bhat, which could cause an increase in the price of
the Company's products in those markets and require the Company to reduce prices
and accept lower gross profit margins.
8
<PAGE>
Products
The Company offers a broad range of innovative industrial grade dial-up and
leased line modems, fiber optic line drivers and limited distance modems that
are designed to operate in extended temperature ranges and harsh environments.
These products generally exceed the surge protection standards of the industry
and are adaptive to wide ranges of AC or DC power inputs. The modular design of
the Company's products enables them to interface with or otherwise complement
one another. Product variations include customized selection of data speeds,
data interfaces, power inputs, data formats and power consumption. In addition,
the Company has developed and manufactures unique custom products for several
major OEMs. The Company has also recently introduced its Zodiac Series(TM)
ZDR/MultiPort Modem, a multi-port modem which the Company believes is the first
of its kind in the industrial automation industry. The Company's primary
products, and their average selling prices, are set forth below:
<TABLE>
<CAPTION>
Product Name Product Description Average Selling Price
- ------------ ------------------- ---------------------
<S> <C> <C>
Omega(TM) AMR Communication The Omega(TM) Series is a simple $1,250-$1,500
Interface Cabinet modem for connection to several
power revenue meters at commercial
and industrial sites. The Omega(TM)
Series integrates a cellular trans-
ceiver, a V.32bis modem module, an
8-part modem sharing unit and an
isolated power supply with battery
backup. A line-sharing module is
available for meter reading over
customer-shared lines. The
Omega(TM) Series is able to detect a
power outage at any of the
connected meters and initiate a call
to report the outage.
MIU202T, 0-1800 bps The MIU202T is a Bell Standard $450
Leased Line Modem 202T modem designed for
asynchronous operation at 0 to 1800
bps with C2 line conditioning, or 0
to 1200 bps on unconditioned lines.
The MIU202 is intended for use on
leased lines and private lines and
provides half-duplex communica-
tions on 2 line wires or full duplex
communications on 4 wires.
MIU9.6FPD and MIU/ The MIU9.6FPD modems are $535
PowerPort9.6FPD Digital sophisticated digital modems that
Fast Poll Modems are designed for multi-dropping
applications in substation and
industrial environments, are suitable
for 2-wire half-duplex and 4-wire
full duplex configurations, and will
drive data at speeds up to 57.6 Kbps
down several miles of unconditioned
twisted pair cable.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Product Name Product Description Average Selling Price
- --------------- ------------------- ---------------------
<S> <C> <C>
MIU9.6FP (Fast Poll) Modem The MIU9.6FP (Fast Poll) Modem is $535
a high speed modem with a fast
train time for multi-point polling
applications over dedicated, leased
lines.
Zodiac(TM) Series ZDR/MultiPort The Zodiac(TM) Series ZDR/MultiPort $1,800
Modem Modem is an industrial grade
modem with multiple data ports,
allowing the user to communicate
with several intelligent electronic
devices (IEDs) from a single
originating call. The ZDR/MultiPort
modem is a low profile rack-
mounted chassis with an internal
14400 bps modem module and is
equipped with 12 or 24 x RJ46 data
(RS232) ports.
Pony Express(TM) Series Modem Pony Express(TM) Series Modem $300
Modules Modules are available for both dial-
up and leased line applications,
including all standards from
Bell202T (1200 bps) to V.34 (28.8
Kbps). Pony Express(TM) modules are
at the heart of every Company
standalone and rack-mounted end-
user product and are also available
to OEMs for integration into meters,
controllers, RTUs, etc.
Hideaway(TM) Series Model The HA2400LP is designed for $150
HA2400LP Dial Modem those applications where no external
source of power is available and
derives its power from two isolated
sources. Power from the RS232
interface (TXD, RTS & DTR)
activates the HA2400LP's RS232
driver, the AT command set
controller and the optical relay that
picks up the telephone line, and the
telephone line then activates the
data pump and ancillary telephone
line components.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Product Name Product Description Average Selling Price
- --------------- ------------------- ---------------------
<S> <C> <C>
Hideaway(TM) Series Model The HA-LDM is a limited distance $99
HA-LDM Limited Distance (short haul) modem for applications
Modem where no external source of power is
available. Like the HA2400LP, the
HA-LDM derives its power from the
RS232 interface (TXD, RTS &
DTR). The HA-LDM is suitable for
2-wire half-duplex and 4-wire full
duplex configurations, point-to-
point and multi-point applications,
and will drive data at speeds up to
57.6 Kbps down several miles of
twisted pair cable.
Myriad(TM) Series Rack Mount The Myriad(TM) Rack Mount Modem $5,500
Modem Banks Bank is an industrial grade chassis
with slots for 18 modem cards and 2
power supply cards. Each modem
card can be installed with any of the
Telenetics Pony Express(TM) modem
modules.
MIU/PowerPort The MIU/PowerPort is an industrial $400
grade modem designed to be
powered directly through the RS232
(DB25) data interface port. An
external jack allows the
MIU/PowerPort to also be powered
from a wall transformer or other low
voltage AC or DC power source.
MIU/PowerPack The MIU/PowerPack is an industrial $450
grade modem powered from internal
9V rechargeable NiCad batteries
that draw their charging current
from the DTE's RS232 interface
(DTR and/or RTS). The batteries
will provide up to 3 years of life
with one data session per day.
MIU Modem Interface Units The MIU2.4, 9.6, 14.4 and 28.8 are $450
highly sophisticated full duplex,
V.22bis, V.32bis or V.34 data/fax
modems that are designed to
interface with RS232, RS485, 5V
logic (TTL) or simply send and
receive signals and operate at full or
half-duplex on dial-up or 2-wire and
4-wire leased line systems.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Product Name Product Description Average Selling Price
- --------------- ------------------- ---------------------
<S> <C> <C>
LDMIU Limited Distance Modem The LDMIU is a limited distance $325
modem, or line driver/repeater, with
57.6 Kbps data transfer capability.
- -----------------------------------------------------------------------------------------
FOIU and FO/MIU For fiber optic systems, the FOIU $700
can operate as a line driver or
repeater and the FO/MIU sends or
receives data via fiber at one end
and the telephone line at the other
end.
</TABLE>
The average price of a customer order for the Company's products depends on
the type of modem and the number and type of modules selected. The Company
customarily discounts from the list price of its products.
Product Development
The Company's product development efforts are directed toward enhancing
existing products and developing new products in order to meet changing end-user
needs and to support an increasing number of applications. The Company believes
its existing expertise in modem assembly, modular design and international
standards-compliant interfaces and protocols provide the Company with a strong
technology base to pursue this objective. The Company's product development
efforts focus on the following principles:
. Develop New Products and Technology. The Company continually assesses
market trends, both domestic and international, with the focus of
developing new products designed to meet emerging market demands. In
developing new products, the Company attempts to combine its existing
technology base with new technologies to provide a broader range of
automation and data communications and data acquisition solutions to the
end-user.
. Emphasize Modular Technology. The Company's modem products are designed so
that they can easily be expanded or upgraded and can easily be integrated
into a customer's existing hardware infrastructure. A modular architecture
also enables the Company to develop data communications hardware modules
that address new market needs or comply with changes in data communication
standards without re-engineering an entire hardware product.
. Improve Existing Technology. The Company seeks to expand the features and
functionality of its existing product lines through technology
modifications and enhancements to meet the changing needs of its customers.
The Company continuously reviews the design and manufacturing process of
its products to determine areas of product cost savings or enhanced product
quality.
As of June 30, 1998, the Company employed eight persons in engineering, five
of whom were engaged primarily in product development.
The Company believes its future success will depend, in part, upon its ability
to expand and enhance the features of its existing products and to develop and
introduce new products designed to meet changing customer needs on a cost-
effective and timely basis. Failure by the Company to respond on a timely basis
to technological developments, changes in industry standards or customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect on the Company's business and results of
operations. There can be no assurance that the Company will respond effectively
to technological changes or new product announcements by others or that the
Company will be able to successfully develop and market new products or product
enhancements.
12
<PAGE>
Technical Support and Customer Service
The Company is committed to providing quality technical support and
customer service. The Company believes that its technical support and customer
service programs have been a key factor in the Company's successful growth over
the past twelve months and distinguish the Company from many other vendors of
similar products. The Company offers extensive user documentation and a
technical support hotline to its customers. The Company's technical analysts
answer technical support calls directly and generally provide same-day or next-
day response to questions that cannot be resolved in the initial phone call. The
Company also provides a support forum through its home page on the Internet
World Wide Web, with technical information to answer hardware and software
compatibility questions and pursuant to which customers can contact the
Company's technical support and customer service personnel via electronic mail.
All products sold by the Company include a one-year limited warranty that
permits customers to return any product for repair or replacement if the product
does not perform as warranted. To date, the Company has not encountered material
warranty claims or liabilities. There can be no assurance, however, that
warranty claims will not have a material adverse effect on future operating
results. See "Warranties."
Manufacturing
The Company's manufacturing operations consist primarily of quality
control, functional testing, final assembly, burn-in and shipping. The Company
uses third party contract manufacturers for certain component and circuit board
assembly and testing and has developed strategic relationships with several
qualified and reliable local assembly houses. For example, the Company uses
Astronic, an ISO 9002 certified subcontractor, to provide contract manufacturing
to the Company. This approach minimizes both inventory and capital expenditures
while providing flexibility in production scheduling and capacity. Accordingly,
management of the Company currently intends to maintain this approach to
manufacturing and production for the foreseeable future. The Company performs
extensive testing and inspection of all of its products prior to shipment. Due
to the Company's expanding business, the Company has increased the size of its
quality control staff and implemented a number of policy and procedural changes.
The Company's serialization and revision control policy has been modified such
that all units will be labeled with both a serial number and part
number/revision identification. Furthermore, all units are being stamped with
both a test verification and inspection stamp to demonstrate and permanently
mark the product. The Company plans to enhance test procedure comprehensiveness
to include testing of custom requirements as well as standard and default tests.
Certificates of Compliance will be issued with each shipment that can be traced
back to the final test technician and inspector. Failure analysis reports will
be issued as a general practice rather than on a request basis. Finally the
Company plans to continue to add quality control staff to assure continuous
improvements in the quality of its products.
The Company's products include a large number of components and parts, most
of which are available from multiple sources with varying lead times. The
Company currently procures all of its components from outside suppliers. The
Company has generally been able to obtain adequate supplies of all components in
a timely manner from existing sources. Although the Company believes similar
products can be purchased from other sources, the process of qualifying
replacement suppliers, generating the supporting documentation, performing
system-level integration, obtaining standards-compliant approval for its
products, and retraining sales and marketing personnel would take a significant
amount of time and expense. The Company's inability to source these components
at satisfactory quality and quantity levels and with the appropriate lead time
would adversely affect the Company's business and operations.
Certain components used in the Company's products are and may in the future
become available only from single or limited sources, such as the modem chipsets
that the Company purchases from Rockwell International. In certain
circumstances, despite the availability of multiple sources, the Company may
select a single source in order to maintain quality control and develop a
strategic relationship with the supplier. Although the Company generally buys
components under purchase orders and does not have long-term agreements with its
suppliers, it expects its suppliers, most of whom are large companies, to be
able to continue to satisfy its requirements. Although the Company believes that
alternative sources are available, if the Company's ability to obtain these
components were impaired or interrupted for any reason, there could be a
substantial disruption in the supply of the Company's products, which could
adversely affect the Company's business and financial condition and results of
operations.
13
<PAGE>
Although the Company is not currently certified as an ISO 9000 supplier, it
has established policies and procedures consistent and compliant with the
requirements established by the Industry Standards Organization (ISO). The
Company intends to seek ISO 9000 certification in the future. There are no
assurances that the Company will obtain such certification.
To date, the Company has not experienced significant manufacturing defects
or customer returns of products. As of June 30, 1998, the Company had ten
employees in the area of product testing and quality assurance.
Strategic Relationships
Recently, the Company entered into a letter of intent with Duquesne Light
Company ("Duquesne") to supply Duquesne with approximately $8,000,000 of the
Company's Omega(TM) AMR Communication Interface Cabinets during fiscal 1999.
The initial order for $1,000,000 of products was placed by Duquesne's
subcontractor, Sargent Electric Company ("Sargent"), on June 10, 1998. The
Company commenced shipments under this initial purchase order in July 1998 and
expects to complete these shipments in August 1998. The Company anticipates the
remaining $7,000,000 of orders will be placed directly by Duquesne. However,
there can be no assurances that Duquesne will in fact place the additional
purchase order with the Company.
On July 13, 1998, the Company and Duquesne entered into a ten-year
Marketing and Technology Agreement ("Strategic Agreement") to achieve the
following objectives:
. To jointly pursue the deployment of new technology developed by the
Company for Duquesne to provide reliable wireless and landline
communication interfaces between Duquesne's advanced meter devices and
its central data management systems.
. To validate the Company's new technology developments by implementing
Duquesne's advanced metering capabilities through an initial field beta
test program and then a full deployment of the Company's Omega(TM) AMR
Communication Interface Cabinets.
. To take mutual advantage of the resulting technology advancements
through joint efforts to market the Company's Omega(TM) AMR
Communication Interface Cabinets and other automated metering solutions.
The Strategic Agreement provides, among other things, that Duquesne will
consider the Company as its primary supplier of products for automated meter
reading, substation automation and other similar uses and Duquesne, along with
the Company, will promote these products to other utility companies throughout
the United States and abroad. The Company will pay Duquesne a royalty in
connection with sales generated through Duquesne's efforts under the Strategic
Agreement.
In March 1998, the Company reached an agreement in principal relating to a
proposed five-year master purchase contract with GE/Harris pursuant to which the
Company would provide its specially-designed digital fast pole modem product to
CLP. CLP is a joint venture owned by British and Chinese firms and is considered
to be one of the most influential utility companies in China. Due primarily to
this recent development and assuming the Company and CLP are successful in
reaching a definitive agreement, management of the Company anticipates a
substantial increase in international sales over the next several years and
expects as much as $1,000,000 in revenue to be generated pursuant to this
business relationship during the fiscal year ending March 31, 1999. If the
Company is able to expand its sales and marketing efforts in China and other
international markets, management of the Company believes that international
sales will represent a substantial portion of net sales in the future.
Competition
The modem and data communications products industry is intensely
competitive and is characterized by rapid technological advances and changes in
industry standards, resulting in constant pricing pressures. The changes in
industry standards result in frequent introductions of new products with added
capabilities and features and continuous improvements in the relative
functionality and price of modems and other data communications products. The
failure
14
<PAGE>
of the Company to keep pace with technological advances would adversely affect
the Company's competitive position and results of operations.
Although management of the Company believes the Company markets and sells
its products primarily within a relatively narrow scope of market segments and
has only a handful of known direct competitors, such as CellNet, Itron, eT
Communication, Dataforth (Europe), Teltone, Dymec and Cermeteck, competitors of
the Company in the general modem and data communications products industry
include many large, well-known companies such as Boca Research, Zoom
Telephonics, Inc., Diamond Multimedia, GVC, Global Village, Hayes Microcomputer
Products, Motorola, Newcom and 3Com Corp. These companies and other existing and
potential competitors of the Company have significantly more financial,
engineering, product development, manufacturing and marketing resources than the
Company. Although the Company is not aware of any announcements or published
plans of any of those companies to enter into the industrial automation modem
markets, any of those companies could enter one or more of the Company's markets
at any time. The entry into the industrial automation modem markets by one or
more of those companies would likely have a material adverse effect on the
Company's competitive position and results of operations. In addition, the
difficult modem environment during the past several years may bring on a period
of consolidation that has possible benefits but also has risks.
The Company's products compete on the basis of product features, price,
quality, reliability, brand name recognition, product breadth, developed sales
channels, product documentation, product warranties and technical support and
service. The Company believes that it is competitive in each of these areas.
However, there can be no assurance that competitors will not introduce
comparable or superior products incorporating more advanced technology at lower
prices, or that other changes in market conditions or technology will not
adversely affect the Company's ability to compete successfully in the future.
Customers
The Company markets its products to a broad range of domestic and foreign
organizations. End users of the Company's products include electric power
utility companies, gas and oil companies, water utility companies, building
automation companies, energy management companies and various manufacturing
organizations. Several major OEMs and system integrators consider the Company as
the sole source supplier of specialized modems. The Company believes that this
is a result of the advanced designs and features contained in the Company's
industrial application modems, fiber optic drivers and wireless products. A
representative list of customers currently using the Company's products is set
forth below:
Duquesne Light Company GE/Harris (formerly Harris Controls)
H. W. Harley ABB Power T&D
Cooper Power Systems Ortel
Group Shnider/Square D Company CAE Electronics
Landis & Gyr Siemens Power Systems
Diamond Traffic Rochester Instrument Systems
Honeywell Toshiba
General Electric Automated Control Concepts
Siemens Energy and Automation Bristol Babcock
Intellectual Property
The Company does not hold any patents and currently relies on a combination
of contractual rights, copyrights, trademarks and trade secrets to protect its
proprietary rights. The Company believes that, because of the rapid pace of
technological change in the modem and data communications industry, the legal
intellectual property protection for its products is a less significant factor
in the Company's success than the knowledge, abilities and experience of the
Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. Although the Company relies to a great extent on trade secret
protection for much of its technology, there can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop comparable or superior
technologies or obtain unauthorized access to the Company's proprietary
technology.
15
<PAGE>
The Company owns, licenses or has otherwise obtained the right to use
certain technologies incorporated in its products. In addition, the Company
purchases modem chipsets that incorporate sophisticated modem technology.
Although the Company has not to date received any infringement claims, the
Company may in the future receive infringement claims from third parties
relating to the Company's products and technologies. In that event, the Company
intends to investigate the validity of any such claims and, if its believes the
claims have merit, to respond through licensing or other appropriate actions.
Certain of these claims may relate to technology included in modem chipsets or
other components purchased by the Company from third party vendors for
incorporation into the Company's products. In that event, the Company would
forward those claims to the appropriate vendor. If the Company or its component
manufacturers were unable to license or otherwise provide any such necessary
technology on a cost-effective basis, the Company could be prohibited from
marketing products containing that technology, incur substantial costs in
redesigning products incorporating that technology, or incur substantial costs
defending any legal action taken against the Company.
Governmental Regulation
All of the Company's products are required to meet United States and
Canadian government regulations, including regulations of the United States
Federal Communication Commission ("FCC") and Industry Canada, which regulates
certain communications equipment, such as modems. The FCC also regulates
electromagnetic radiation emissions. The Company currently intends to seek and
receive approvals for its existing and new products in other countries as well.
The regulatory process in the United States, Canada and other foreign countries
can be time-consuming and can require the expenditure of substantial resources.
In many foreign countries, obtaining required regulatory approvals may take
significantly longer than in the United States. There can be no assurance that
the FCC or foreign regulatory agencies will grant the requisite approvals for
any of the Company's products on a timely basis, if at all. United States and
foreign regulations regarding the manufacture and sale of modems and other data
communications devices are subject to future change. The Company cannot predict
what impact, if any, such changes may have upon its business.
Backlog
As of June 30, 1998, the Company had approximately $1.8 million in backlog
orders for its products. The amount of such backlog orders represents revenue
anticipated to be recognized in the future, as evidenced by purchase orders and
other commitments to purchase received from customers, but on which work has not
yet been initiated or with respect to which work is currently in progress. The
typical duration from receipt of a purchase order or other commitment to
purchase to shipment of the products ordered to the customer ranges from six to
eight weeks depending upon the size of the order. However, there can be no
assurance that the Company will be successful in fulfilling such orders and
commitments in a timely manner or that the Company will recognize as revenue the
amounts reflected as backlog.
Warranties
The Company typically provides a one-year material and workmanship
warranty, in addition to the pass-through warranties provided by component
suppliers and other vendors, which permits customers to return any product for
repair or replacement if the product does not perform as warranted.
Historically, warranty expenses have not had a material impact on the Company's
operations or its financial condition. However, there can be no assurance that
this will continue to be the case or that disputes over components or other
materials or workmanship will not arise in the future.
Employees
As of June 30, 1998, the Company employed approximately 25 people, of whom
approximately eight were hourly employees and approximately 17 were salaried.
The Company considers its relations with its employees to be good. None of the
Company's employees are represented by a labor union.
16
<PAGE>
Item 2. Description of Property.
The Company's executive offices occupy approximately 8,500 square feet of
leased space at 26772 Vista Terrace Drive, Lake Forest, California 92630. The
Company leases this space from SMC under a lease agreement with an initial lease
term that expires on July 31, 1999 and an option to extend for an additional
year. The annual rental presently is $54,000, but will be increased to $78,000
on August 1, 1998 under the terms of the lease and will be increased to $90,000
on August 1, 1999 if the Company exercises its one-year extension option. The
Company believes that its existing facilities are adequate for its current needs
and that additional facilities in the area are available to meet future needs.
Item 3. Legal Proceedings.
The Company does not believe that it is or has been involved in any
litigation or proceeding, including the following matters described below, that
will, individually or in the aggregate, have a material adverse effect on its
financial condition, results of operations or cash flow. Although current
management of the Company inherited a number of legal and collection matters
from the former management of the Company, all such matters were related to non-
payment, delinquency or other financial matters involving the Company's vendors
and creditors. As of January 1, 1998, all of such legal and collection matters
against the Company had either been fully satisfied or otherwise settled. There
is currently no material claim or litigation pending or, to the Company's
knowledge, threatened against the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters.
The Common Stock of the Company is not quoted on the Nasdaq National Market
System, the Nasdaq SmallCap Market or the National Association of Securities
Dealers, Inc. ("NASD") OTC Electronic Bulletin Board and is not listed for
trading on any exchange. After being de-listed from the Nasdaq National Market
System in 1991, the Common Stock of the Company has been quoted only
sporadically from time to time in the over-the-counter "pink sheets," an ad hoc
forum for quotations of securities prices intended to match potential buyers and
sellers, which forum is not monitored or supervised by any regulatory authority
or agency. Between October 1, 1996 and June 30, 1998, the Company's Common Stock
was traded on the over-the-counter market under the symbol "TLNT" for a total of
31 days, with a closing bid price per share ranging from $.01 to $.15. At June
30, 1998, the closing bid price of the Company's Common Stock was $.15 per
share.
At June 30, 1998, there were approximately 490 shareholders of record of
the Company's Common Stock. Within the holders of record of the Company's Common
Stock are depositories such as Cede & Co. that hold shares of stock for
brokerage firms which, in turn, hold shares of stock for beneficial owners.
The Company currently anticipates that it will retain all of its earnings
for use in the development of its business. The Company has never paid cash
dividends on its Common Stock and does not currently intend to pay cash
dividends in the foreseeable future.
In December 1997, the Company issued an aggregate of 635,000 shares of
Common Stock, at a price of $.01 per share, as a bonus to ten employees. In
March 1998, the Company issued 3,000,000 shares of Common Stock, at a price of
$.10 per share, to Michael A. Armani in partial satisfaction of $300,000 of
deferred salary, bonuses and unpaid approved expenses as of July 31, 1996. In
March 1998, the Company issued 5,000,000 shares of Common Stock, at a price of
$.075 per share, to SMC in partial satisfaction of the Company's obligations
under an amended compromise agreement. In July 1997, the Company issued an
aggregate of 1,320,000 shares of Common Stock in consideration of the
cancellation of promissory notes in the aggregate amount of $167,525. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The issuances of the Company's Common Stock in the above referenced
transactions were effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
17
<PAGE>
Act"), as transactions not involving a public offering. Exemption from the
registration provisions of the Securities Act is claimed on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated and had access to the kind of information registration would
provide.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Annual Report on Form 10-KSB. Except for the historical
information contained herein, the following discussion contains certain forward-
looking statements that involve risks and uncertainties, such as statements of
the Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Annual Report on Form 10-KSB. See "Forward-Looking Statements; Cautionary
Statement." The Company's actual results may differ materially from the results
discussed in the forward-looking statements as a result of certain factors
including, but not limited to, those discussed in "Risk Factors" and elsewhere
in this Annual Report on Form 10-KSB.
Overview
The Company was incorporated in California in June 1984 and began
introducing innovative modem and data communications products for the PC market
in 1985. As an early pioneer in the modem market, the Company introduced the
first internal 2400 bps modem for PCs, followed by several other products,
including a modem with innovative security features. The Company's initial
success with these and other innovative products enabled it to establish viable
business relationships at that time with major Fortune 500 corporations,
including J. C. Penney, Chrysler Corporation and International Business
Machines. In 1987, the Company offered shares of its Common Stock to the public
and listed its shares of Common Stock for trading on the Nasdaq National Market
System.
During the late 1980s, intense competition from other manufacturers,
coupled with what current management of the Company believes to be a series of
managerial, engineering and production problems stunted the Company's growth. By
the fourth calendar quarter of 1990, the financial difficulties of the Company
had escalated causing the Company to lose many key customer accounts as well as
many of its key engineering personnel and other employees. In 1991, the Common
Stock of the Company was de-listed from trading on the Nasdaq National Market
System.
On January 21, 1992, the Company's Board of Directors met to discuss the
current financial situation of the Company. At that meeting it became clear to
the Board of Directors that unless funding could be obtained immediately, the
Company would be forced to seek protection under the United States Bankruptcy
Code. The Board of Directors reviewed two financing proposals and selected the
proposal offered by SMC. Pursuant to the terms of the proposal, SMC agreed to
provide the Company with at least $250,000 in exchange for shares of the
Company's Common Stock representing 64.8% of then outstanding shares of Common
Stock. At a later meeting of the Board of Directors on January 24, 1992, the
Board of Directors concluded that because of a number of factors including,
among others, that SMC would also provide management consulting services to the
Company in connection with the issuance of Common Stock to SMC, that the then
current bid price of the Company's Common Stock was $0 and that independent
brokers had considered the Common Stock to be without value, the Board of
Directors ascribed a value of $.01 per share of Common Stock to be issued to
SMC.
At the time the Company selected the financing proposal by SMC, SMC was
owned and controlled by Michael A. Armani, now the Company's President, Chief
Executive Officer, Chief Financial Officer and one of its directors, and by
Shala Shashani, now the Secretary and a director of the Company. Due to the
limited number of authorized shares available at the time of the investment by
SMC, the Company was unable to issue to SMC the 29,290,311 shares that were
calculated by the Board of Directors to represent a 64.8% ownership interest in
the Company. The Company did, however, issue 8,574,764 shares to SMC in December
1992 in connection with SMC's initial investment in the Company. Between
September 1992 and September 1996, SMC's involvement with and investments in the
Company were substantially greater than anticipated. By September 1996, SMC had
invested a total of $609,899.33 in the Company, of which $549,190 plus accrued
interest was owing to SMC.
18
<PAGE>
Due to its negative financial condition in the early 1990s, the Company
experienced serious difficulties in obtaining payment terms from its suppliers.
Consequently, in 1993 Ms. Shashani formed SMC Communications Group, Inc., which
corporation had the sole purpose of assisting the Company in procuring parts and
products. By September 1996, the Company was indebted to SMC Communications
Group, Inc. in the amount of $115,535 plus accrued interest in connection with
this arrangement.
In 1994, the Company was ordered to vacate the premises upon which the
Company's facilities are located as a result of a legal action between the
Company and its landlord. To avoid a potentially serious disruption of the
Company's activities that could have resulted from an eviction, SMC acquired the
premises in July 1994 and leased them to the Company. By September 1996, the
Company was also indebted to SMC in the amount of $84,000 plus accrued interest
in back rent.
In September 1996, the Company, SMC and SMC Communications Group, Inc.
entered into a compromise agreement and mutual release that reduced the number
of shares of the Company's Common Stock that SMC was entitled to receive in
connection with SMC's investments in the Company. The compromise agreement was
amended in December 1998. Pursuant to the amended compromise agreement,
5,000,000 shares of the Company's Common Stock were issued to SMC and its
assignees in March 1998. As of March 31, 1998, the long-term debts of the
Company to SMC and SMC Communications Group, Inc. were $391,500 and $115,535,
respectively.
Between 1992 and 1998, the Company's new management redirected the
Company's strategic focus to its current line of products by increasing research
and development expenditures, accelerating introduction of enhancements to its
products and disposing of certain non-core products. The Company also
restructured its sales force and implemented new sales and marketing strategies
focused specifically on the sale of industrial automation and data
communications and data acquisition modem products for the utility and
industrial automation markets. The business of the revitalized Company now
consists primarily of the design and manufacture of high quality, industrial
grade modems, fiber optic drivers and radio modems within the industrial
automation industry. The Company has also become active in the design and
manufacture of customized modem products for manufacturers of utility meters,
remote terminal units ("RTUs"), electric relays, flow measurement devices,
traffic controllers and the oil and gas industry. In addition to the Company's
primary focus on the industrial automation market, the Company plans to expand
into several other markets that have similar requirements for the type of
specialized modems the Company designs, such as transportation, lottery and
gaming, vending machine automation, security, point of sales ("POS") and
automated teller machine, telemedicine and military applications.
Recently, the Company entered into a letter of intent with Duquesne to
supply Duquesne with approximately $8,000,000 of the Company's Omega(TM) AMR
Communication Interface Cabinets during fiscal 1999. The initial order for
$1,000,000 of products was placed by Sargent on June 10, 1998. The Company
anticipates the remaining $7,000,000 of orders will be placed directly by
Duquesne. However, there can be no assurances that Duquesne will in fact place
the additional purchase order with the Company. On July 13, 1998, the Company
and Duquesne entered into the Strategic Agreement to jointly promote the
Company's automated metering solutions. In addition, the Company reached an
agreement in principal relating to a proposed five-year purchase contract with
GE/Harris to provide the Company's digital fast pole modem to CLP. See
"Description of Business--Strategic Relationships."
The Company's results of operations have been and may continue to be
subject to significant fluctuations. The results for a particular period may
vary due to a number of factors, many of which are beyond the Company's control,
including the timing and nature of revenues from product sales that are
recognized during any particular quarter, the impact of price competition upon
the Company's average selling prices, the availability and pricing of components
for the Company's products, market acceptance of new product introductions by
the Company and its competitors, the timing of expenditures in anticipation of
future sales, product returns, the financial health of the Company's customers,
the overall state of the modem and data communications industry and economic
conditions generally. In addition, the volume and timing of orders received
during a quarter are difficult to forecast. The Company expects that its
quarterly operating results will continue to fluctuate in the future as a result
of these and other factors.
The Company continually seeks to improve its product designs and
manufacturing and assembly approach in order to reduce its costs. The Company
pursues a strategy of outsourcing rather than internally developing its modem
chipsets, which are application-specific integrated circuits that form the
technology base for its modems. By
19
<PAGE>
outsourcing the chipset technology, the Company is able to concentrate its
research and development capabilities on modem system design, leverage the
extensive research and development capabilities of its chipset suppliers, and
reduce its development time and associated costs and risks. This approach
enables the Company to quickly develop new and innovative products while
maintaining a relatively low level of research and development efforts and
expenses. The Company also outsources aspects of its manufacturing to contract
assemblers as a means of reducing its fixed labor costs and capital expenditures
and providing the Company with greater flexibility in its capacity planning.
Results of Operations
The following table sets forth, for the years indicated, certain financial
data as a percentage of net revenues:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net revenues.......................... 100.0% 100.0%
Costs of goods sold................... 54.0 57.8
----- -----
Gross profit.......................... 45.8 42.2
Salaries and related costs............ 26.6 26.7
Rents................................. 2.1 3.2
Shareholder costs..................... 0.8 0.5
Selling, general and administrative... 9.6 10.6
----- -----
Operating income...................... 6.8 1.2
Benefit from relief of indebtedness... 3.2 6.4
Restructuring costs................... (1.1) (9.4)
Interest expense (net)................ (5.7) (4.2)
----- -----
Net income (loss)..................... 3.2% (6.1)%
===== =====
</TABLE>
Revenues. Gross revenues for the fiscal year ended March 31, 1998 ("fiscal
1998") increased by $664,323 to $3,030,263 from $2,365,939 for the fiscal year
ended March 31, 1997 ("fiscal 1997"). Net revenues, representing gross revenues
net of discounts and returns and allowances, for fiscal 1998 were $2,899,929 as
compared to $2,302,813 for fiscal 1997, an increase of $597,116 or approximately
25.9%. This increase in revenues was primarily a result of the Company's
increased volume of sales, primarily due to purchases by ABB, GE/Harris and
Bristol Babcock, which began in the second half of fiscal 1998.
Returns and allowances for fiscal 1998 were $110,403, compared to $57,920
for fiscal 1997, an increase of $52,483 or 90%. The increase in returns and
allowances related primarily to an increase in sales activity, which resulted in
a significant increase in number of samples shipped for evaluation. In addition,
two customers returned ordered items after realizing that the products shipped
were not compatible with their applications. This represents approximately
$47,000 of returns. The larger order was later replaced by another product type
resulting in an increase over the original purchase order. Such returns and
allowances may vary substantially from quarter to quarter depending on the
customer base and general market conditions.
Cost of Goods Sold. Cost of goods sold increased by $240,373, or
approximately 18.1%, to $1,571,136 in fiscal 1998 from $1,330,763 in fiscal
1997, but decreased as a percentage of net revenue from approximately 57.8% in
fiscal 1997 to approximately 54.0% in fiscal 1998. The increase in dollar terms
of cost of goods sold resulted from an increase in the volume of sales during
fiscal 1998. The decrease in percentage cost of goods sold resulted primarily
from increased efficiency in procurement and manufacturing processes and the
Company's ability to obtain greater discounts from its major vendors.
Operating expenses. Salaries and related costs increased by $156,086, or
approximately 25.4%, to $771,464 in fiscal 1998 from $615,378 in fiscal 1997,
but decreased as a percentage of net revenue from approximately 26.7% in
20
<PAGE>
fiscal 1997 to approximately 26.6% in fiscal 1998. The increase in dollar terms
of salaries and related costs resulted from the hiring of additional sales,
marketing, engineering and customer support personnel during fiscal 1998. The
decrease in percentage salaries and related costs resulted primarily from the
increase in revenues during fiscal 1998 outpacing the increase in salaries and
related costs associated with current personnel and newly-hired additional
personnel.
Rents, consisting primarily of rental and tenant improvement expenses
incurred pursuant to the Company's lease of its office and related operating
facilities located in Lake Forest, California, decreased by $12,763, or
approximately 17.1%, to $61,780, or 2.1% of net revenue, for fiscal 1998 from
$74,543, or 3.2% of net revenue, for fiscal 1997. This decrease resulted
primarily from a decrease in tenant improvements in fiscal 1998.
Shareholder costs, consisting primarily of payments to consultants and
investor relations expenses, increased by $12,588, or approximately 110.8%, to
$23,954, or 0.8% of net revenue, for fiscal 1998 from $11,366, or 0.5% of net
revenue, for fiscal 1997. This increase resulted primarily from increased travel
expenses related to meetings with potential investors and investment banking
firms as well as management's decision to hire a New York-based investor
relations firm.
Selling, general and administrative expenses increased by $32,539, or
approximately 13.4%, to $275,327 in fiscal 1998 from $242,788 in fiscal 1997,
but decreased as a percentage of net revenue from approximately 10.6% in fiscal
1997 to approximately 9.6% in fiscal 1998. The increase in dollar terms of
selling, general and administrative expenses resulted primarily from an increase
in sales and marketing expenses. The decrease in percentage of selling, general
and administrative expenses was due primarily to the fact that expenses required
to establish the infrastructure necessary to achieve higher revenues had been
incurred in prior periods.
Benefit from relief of indebtedness. In fiscal 1998, the Company recorded a
benefit from the relief of indebtedness of $96,240, or 3.2% of net revenue, as
compared to $146,857, or 6.4% of net revenue, for fiscal 1997, a decrease of
$50,617, or approximately 34.5%. The benefit from relief of indebtedness
recorded in fiscal 1997 was attributable to a settlement of outstanding debt
with six of the Company's creditors. The benefit from relief of indebtedness
recorded in fiscal 1998 was attributable to a settlement with the estate of one
of the Company's largest creditors and similar settlements with five smaller
creditors.
Other expenses. Restructuring costs decreased by $184,451, or 85.0%, from
$216,918, or 9.4% of net revenue, in fiscal 1997 to $32,467, or 1.1% of net
revenue, in fiscal 1998. Restructuring costs incurred in both fiscal 1997 and
fiscal 1998 were attributable to a continuation of litigation activities,
reconciliation and reconstruction of missing records and clean-up of the
Company's corporate affairs.
Interest expense (net). Interest expense in fiscal 1998 increased by
$69,254 or approximately 71.9%, to $165,587, or 5.7% of net revenue, from
$96,333, or 4.2% of net revenue, in fiscal 1997. The increase is a result of
higher levels of borrowing in fiscal 1998 attributable to borrowings under the
Company's factoring arrangement. While the Company intends to repay some or all
of the amounts of such indebtedness out of future cash flow from operations,
management's internal cash projections estimate that such borrowings may remain
outstanding for the foreseeable future.
Income Taxes. The Company incurred a provision for income taxes in the
amount of $800 for each of fiscal 1998 and fiscal 1997, which amount reflects
the payment of the minimum tax of $800 imposed by the California Franchise Tax
Board on domestic corporations and no federal income tax payment. Management of
the Company anticipates that the provision for income taxes will increase
significantly in the future as net revenue increases and the Company's net
operating loss carry forward is fully utilized.
Net income (loss). Net income for fiscal 1998 was $93,654, or 3.2% of net
revenue, as compared to a net loss for fiscal 1997 of $139,220.
21
<PAGE>
Liquidity and Capital Resources
As of March 31, 1998, the Company had a negative working capital of
$290,546 and an accumulated deficit of $11,361,332. As of that date, the Company
had $11,338 in cash and cash equivalents and $629,830 in receivables. The
Company also had convertible promissory notes outstanding in the aggregate
amount of approximately $156,000 as of March 31, 1998. While the Company intends
to repay some or all of the amounts of such indebtedness out of future cash flow
from operations, management's internal cash projections estimate that such
borrowings may remain outstanding for the foreseeable future.
In fiscal 1998, the Company's net cash used in operating activities was
$114,540 as compared to $545,202 for fiscal 1997, net cash used in investing
activities was $32,957 as compared to $17,478 for fiscal 1997 and net cash
provided by financing activities was $140,236 as compared to $581,356 for fiscal
1997. The decrease in net cash used in operating activities was primarily
attributable to increases in trade receivables of $259,731 and inventories of
$19,500 and an advance from factor (net) of $680,739 offset by decreases in
accounts payable and accrued expenses of $530,267 and cash and cash equivalents
of $7,261. The increase in net cash used in investing activities resulted from
an increase in acquisitions of property and equipment in fiscal 1998. The
decrease in net cash provided by financing activities was attributable primarily
to the receipt of only $18,772 of proceeds of capital leases and $161,464 of
loans from shareholders in fiscal 1998, as compared to the receipt of proceeds
of approximately $659,000 from the sale of convertible promissory notes in
fiscal 1997. Accounts receivable as at March 31, 1998 increased by $259,731 over
accounts receivable at March 31, 1997, primarily resulting from an increase in
the volume of sales during fiscal 1998.
The Company's capital expenditures in fiscal 1998 of approximately $18,300
consisted primarily of leased computers and test equipment.
The Company believes that current and future available capital resources,
cash flow from operations, and other existing sources of liquidity will be
adequate to fund its operations for the remainder of the current fiscal year.
However, there can be no assurance that sufficient funds will be available or
that future events will not cause the Company to seek additional capital sooner,
including, but not limited to, the failure by the Company to timely collect
outstanding accounts receivable. To the extent the Company is in need of any
additional financing, there can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. The inability
to obtain such financing could have a material adverse effect on the Company's
business, financial condition and results of operation. If additional funds are
raised by issuing equity or convertible debt securities, options or warrants,
further dilution to the existing shareholders of the Company may result.
If adequate funds are not available, the Company may also be required to
delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of such circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
Year 2000 Compliance
Management of the Company believes that its software packages currently in
use and expected to be in use prior to the year 2000 are Year 2000 compliant.
Management does not expect that the financial impact of required modifications
to such software, if any, will be material to the Company's financial position,
cash flows or results of operations in any given year.
Effect of Inflation
The Company believes that inflation has not had a material effect on its
net sales or profitability in recent years.
22
<PAGE>
Impact of New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement No. 130
(Reporting Comprehensive Income), Statement No. 131 (Disclosure about Segment of
an Enterprise and Related Information), and Statement No. 132 (Employers'
Disclosures about Pensions and other Post Retirement Benefits). These statements
are effective for fiscal years beginning after December 15, 1997. Management has
determined that the disclosure requirements from these statements will not
impact the financial statements of the Company.
Looking Ahead
Set forth below are major highlights of the Company's business plan for
fiscal 1999. Management believes that the significant upward trend in increased
sales and bookings as well as cost reductions that began in the last quarter of
fiscal 1998 will continue through fiscal 1999.
During the fourth quarter of fiscal 1998 the Company experienced a dramatic
increase in sales and gross margins. Revenues for this quarter increased to
$1,012,099 with $102,765 in net income and $1.2 million in new bookings. Gross
margins increased from 43.6% for the first nine months, to 50.3% for the
quarter. Increased sales also reduced the ratio of salary expenses to revenue
from 33% for the first nine months, to 23.5% for the quarter.
During fiscal 1999 a significant portion of revenues will be realized from
opportunities that were uncovered and developed during fiscal 1998. Some of
these developments are as follows:
. Strategic Relationship with Duquesne. The Company anticipates receiving
orders in the approximate value of $8 million from Duquesne during
fiscal 1999. The Company expects that all units under this purchase
order are to be shipped before December 1998. The Company has already
received the first portion of this order for approximately $1 million
in June 1998 and has commenced shipment of products.
. Increase in Automated Meter Reading Market. The Company anticipates
that a significant portion of its business in fiscal 1999 will be
derived from an international trend in increased meter reading
automation. By pursuing major utilities with similar requirements as
Duquesne, and promotion of system solutions such as the Company's
Omega(TM) AMR Communication Interface Cabinets, the Company anticipates
a significant increase in revenues from this market.
. CLP Agreement in Principal. The Company anticipates shipping during
fiscal 1999 approximately $1 million in specially designed products to
CLP through a blanket purchase order it has received from GE/Harris.
The Company commenced shipments in March 1998 based upon an agreement
in principal reached between the Company and CLP. A definitive
agreement is currently under negotiation.
. Existing Major Customers. The Company anticipates that its general
business with its major customers will continue to grow in fiscal 1999.
In fiscal 1998, the Company's top ten customers were responsible for
approximately $2,331,331 in revenues. This trend increased by 40% in
the last quarter over the previous nine months. The Company anticipates
this trend will continue in the future.
. Transportation Industry. The Company anticipates that its significant
activities within the transportation industry and close work with
several departments of transportation such as CALTRANS, Wyoming
Department of Transportation, Pennsylvania Department of Transportation
and several other departments of transportation that are currently
customers of the Company, will result in a significant increase in the
Company's business during fiscal 1999.
. Distribution. The Company believes that its aggressive plan in
identifying and hiring distributors, value added resellers and system
integrators in fiscal 1998 will result in additional revenues in this
sector in fiscal 1999 and beyond.
. International Business. The Company anticipates a significant increase
in international business. Current opportunities in China, Mexico,
India, Spain and several other countries that the Company has been
involved with may result in approximately $1 million of additional
revenues during the next 18 months.
23
<PAGE>
Forward-Looking Statements; Cautionary Statement
Certain of the statements contained in this report, including those under
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and especially those contained under
"Liquidity and Capital Resources" and "Looking Ahead," are "forward-looking
statements" that involve risks and uncertainties. The actual future results of
the Company could differ materially from those statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this Annual Report on Form 10-KSB, risks associated with managing
the Company's growth, as well as those factors discussed in "Risk Factors"
described below in this Item 6 of this Annual Report on Form 10-KSB. While the
Company believes that these statements are accurate, the Company's business is
dependent upon general economic conditions and various conditions specific to
the modem and data communications industry, and future trends and results cannot
be predicted with certainty. In particular:
. Although the Company has received an initial $1 million purchase order
from Duquesne (through its subcontractor, Sargent) and anticipates
additional purchase orders in the aggregate amount of $7 million,
there can be no assurance that such anticipated additional purchase
orders will be placed as expected. Furthermore, the Company's
Omega(TM) AMR Communication Interface Cabinets, which are the subject
of this purchase order, are new products of the Company. Accordingly,
there can be no assurance that the Company will not incur significant
technical problems or application issues that may delay the shipments.
. The Company has no prior experience in shipping large quantities of
its Omega(TM) AMR Communication Interface Cabinets. The Duquesne
business is anticipated to exceed 10,000 units for fiscal 1999. There
can be no assurance that there will be no delays in procuring,
manufacturing, testing and shipping such a large volume of products.
. The Company continues to experience problems associated with under-
capitalization. This may adversely affect the ability of the Company
to ship its products in a timely manner, causing customers such as
Duquesne and others to cancel a portion or all of their orders.
. Although the Company has received and shipped the first portion of
products for CLP pursuant to the terms of an agreement in principal,
new unforeseen technical and application field problems may adversely
affect future shipments. Further, there can be no assurance that the
Company will successfully negotiate a definitive agreement on terms
favorable to the Company.
. As of June 1998, there are no national standards approved for data
communication and data acquisition within the transportation industry.
Although the Company believes that its products will adapt to any new
standards, lack of such procedures may delay orders or adversely
affect shipments.
. The Company has limited experience in marketing and selling its
products in international markets. International customs, standards,
approvals and political and economical uncertainties may adversely
affect the Company's ability to ship its products internationally in a
timely and profitable manner.
The Company has not experienced a material adverse impact of such risks and
uncertainties and does not anticipate such an impact. However, no assurance can
be given that such risks and uncertainties will not affect the Company's future
results of operations or its financial position.
Risk Factors
History of Losses, Accumulated Deficit and Negative Net Worth
The Company has incurred net losses in each year since inception, with the
exception of its most recent fiscal year ended March 31, 1998, in which the
Company realized nominal net income of $93,654. For the fiscal year ended March
31, 1997, the Company reported a net loss of $165,587. The Company's accumulated
deficit through March 31,
24
<PAGE>
1998 was $11,361,332 and as of that date the Company had a total shareholders'
deficit of $782,930 and a negative working capital of $290,546. Although the
Company expects to report net income for the three months ending June 30, 1998,
there can be no assurance the Company will maintain profitable operations in the
future.
Potential Fluctuations in Future Operating Results
The Company's quarterly 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 the Company's control, including the timing and nature of
revenues from product sales that are recognized during any particular quarter,
the impact of price competition on the Company's average selling prices, the
availability and pricing of components for the Company's products, market
acceptance of new product introductions by the Company and its competitors, the
timing of expenditures in anticipation of future sales, product returns, the
financial health of the Company's customers, the overall state of the modem and
data communications industry and economic conditions generally. The volume and
timing of orders received during a quarter are difficult to forecast. Such
fluctuations may also contribute to volatility in the market price for the
Common Stock of the Company. In particular, over the last eight years, the
Company has had only one profitable quarter. If the Company has one or more
unprofitable quarters in the future, the market price for its Common Stock could
be adversely affected.
Product Concentration
For the fiscal year ended March 31, 1998, revenues from the sale of modems
accounted for approximately 92% of the Company's total revenues. Although the
Company's customers typically standardize the unique or special components that
are manufactured for them by or through the Company to be incorporated in the
customers' end product, the Company does not have long-term contracts with its
customers. Accordingly, the Company is highly dependent on the successful sales
by the Company of this one type of product. A significant reduction in sales of
modems resulting from changes in the industry, including the entry of new
competitors into the market, from the introduction of new or improved technology
or an unanticipated shift in the needs of the Company's customers, or for other
reasons, would have a material adverse effect on the Company's business,
operating results and financial condition.
Customer Concentration
For the fiscal year ended March 31, 1998, the Company's five largest
customers, which include GE/Harris, ABB and Bristol Babcock, in the aggregate
accounted for approximately $1.9 million, or approximately 60%, of the Company's
total net revenues. The Company anticipates that its recent contract with
Duquesne may account for as much as 70% of the Company's anticipated revenues in
fiscal 1999. The Company has historically relied on a limited number of
customers for a significant portion of its revenues and anticipates that its
five or six largest customers will continue to account for the majority of its
revenues for the foreseeable future. The loss of any one or more of these major
customers or the failure of Duquesne to place the additional purchase order for
the remaining $7 million of the Company's products would likely have a material
adverse effect on the Company's business, operating results and financial
condition.
Future Capital Requirements; Uncertainty of Additional Funding
The Company's future capital requirements will depend upon many factors,
including the development of new products, possible future strategic partnering
and acquisitions, the expansion of the Company's sales and marketing efforts and
the status of competitive products. Although the Company achieved profitability
on an annual basis for the fiscal year ended March 31, 1998 and anticipates a
profitable quarter during the fiscal quarter ending June 30, 1998, there can be
no assurance that revenue growth or profitability will continue on a quarterly
or annual basis in the future. The Company believes that current and future
available capital resources, cash flow from operations, and other existing
sources of liquidity will be adequate to fund its operations for the remainder
of the current fiscal year. However, there can be no assurance that sufficient
funds will be available or that future events will not cause the Company to seek
additional capital sooner, including, but not limited to, the failure by the
Company to timely collect outstanding accounts receivable. To the extent the
Company is in need of any additional financing, there can be no assurance that
any additional financing will be available to the Company on acceptable terms,
or at all. The inability to obtain such
25
<PAGE>
financing could have a material adverse effect on the Company's business,
financial condition and results of operation. If additional funds are raised by
issuing equity or convertible debt securities, options or warrants, further
dilution to the existing shareholders of the Company may result.
If adequate funds are not available, the Company may also be required to
delay, scale back or eliminate its product development efforts or to obtain
funds through arrangements with strategic partners or others that may require
the Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain such financing
could result in a significant loss of ownership and/or control of its
proprietary technology and other important Company assets and could also
adversely affect the Company's ability to continue its product development
efforts, which the Company believes contributes significantly to its competitive
advantage. If any of those circumstances were to arise, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
Component Shortages; Dependence on Outside Suppliers
The major components of the Company's products include circuit boards,
microprocessors, chipsets and memory components. Most of the components used in
the Company's products are available from multiple sources. However, certain
components used in the Company's products are currently obtained from single or
limited sources. Certain modem chipsets used in the Company's data
communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. Similar to others in the modem
industry, the Company has, from time to time, experienced difficulty in
obtaining certain components. In particular, during 1996, the Company and many
others in the modem industry experienced substantial constraints in the
availability of modem chipsets from Rockwell International, its primary
supplier, which sharply impacted the Company's production and sale of its
communication products. Although the Company has since increased its efforts to
obtain required supplies of components, including working closely with component
manufacturers and vendors and qualifying alternative components for
incorporation into the Company's products, component shortages may again become
acute and there can be no assurances that the Company can continue to obtain
adequate supplies or obtain such supplies at their historical cost levels. The
Company has no guaranteed supply arrangements with any of its suppliers, and
there can be no assurance that these suppliers will continue to meet the
Company's requirements. Shortages of components could not only limit the
Company's production capacity but also could result in higher costs due to the
higher costs of components in short supply or the need to utilize higher cost
substitute components. An extended interruption in the supply of any of these
components or a reduction in their quality or reliability would have a material
adverse effect on the Company's financial condition and operating results. While
the Company believes that with respect to its single source components it could
obtain similar components from other sources, it could be required to alter
product designs to use alternative components. There can be no assurance that
severe shortages of components will not occur in the future that could increase
the cost or delay the shipment of the Company's products and have a material
adverse effect on the Company's financial condition and operating results.
Significant increases in the prices of these components could also have a
material adverse effect on the Company's operating results since the Company may
not be able to adjust product pricing to reflect the increases in component
costs.
Dependence Upon Management
The Company is dependent upon the continued services of key members of
management, including its Chairman of the Board, President and Chief Executive
Officer, Michael A. Armani. The loss of Mr. Armani or one or more other key
members of management could have a material adverse effect on the Company. The
Company does not maintain key-man life insurance policies on any member of
management.
Competition
The modem and data communications products industry is intensely
competitive and characterized by rapid technological advances and changes in
industry standards, resulting in constant pricing pressures. These changes
result in frequent introductions of new products with added capabilities and
features, and continuous improvements in the relative functionality and price of
modems and other data communications products. The failure of the Company to
keep pace with technological advances would adversely affect the Company's
competitive position and results of operations.
26
<PAGE>
Although management of the Company believes it markets and sells its
products primarily within a relatively narrow scope of market segments and has
only a handful of known direct competitors, such as CellNet, Itron, eT
Communication, Dataforth (Europe), Teltone, Dymec and Cermeteck, competitors of
the Company in the general modem and data communications products industry
include many large, well-known companies such as Boca Research, Zoom
Telephonics, Inc., Diamond Multimedia, GVC, Global Village, Hayes Microcomputer
Products, Motorola, Newcom and 3Com Corp. These companies and other existing and
potential competitors of the Company have significantly more financial,
engineering, product development, manufacturing and marketing resources than the
Company. Although the Company is not aware of any announcements or published
plans of any of such companies to enter into the industrial automation modem
markets, any of such companies could enter one or more of the Company's markets
at any time. The entry into the industrial automation modem market markets by
one or more of these companies would likely have a material adverse effect on
the Company's competitive position and results of operations. In addition, the
difficult modem environment during the past several years may bring on a period
of consolidation that has possible benefits, but also has risks.
The Company's products compete on the basis of product features, price,
quality, reliability, brand name recognition, product breadth, developed sales
channels, product documentation, product warranties and technical support and
service. The Company believes that it is competitive in each of these areas.
However, there can be no assurance that competitors will not introduce
comparable or superior products incorporating more advanced technology at lower
prices, or that other changes in market conditions or technology will not
adversely affect the Company's ability to compete successfully in the future.
Proprietary Rights
The Company does not hold any patents and currently relies on a combination
of contractual rights, copyrights, trademarks and trade secrets to protect its
proprietary rights. The Company believes that, because of the rapid pace of
technological change in the modem and data communications industry, the legal
intellectual property protection for its products is a less significant factor
in the Company's success than the knowledge, abilities and experience of the
Company's employees, the frequency of its product enhancements, the
effectiveness of its marketing activities and the timeliness and quality of its
support services. Although the Company relies to a great extent on trade secret
protection for much of its technology, there can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop comparable or superior
technologies or obtain unauthorized access to the Company's proprietary
technology.
The Company owns, licenses or has otherwise obtained the right to use
certain technologies incorporated in its products. In addition, the Company
purchases modem chipsets that incorporate sophisticated modem technology.
Although the Company has not to date received any infringement claims, the
Company may in the future receive infringement claims from third parties
relating to the Company's products and technologies. In such event, the Company
intends to investigate the validity of any such claims and, if its believes the
claims have merit, to respond through licensing or other appropriate actions.
Certain of these claims may relate to technology included in modem chipsets or
other components purchased by the Company from third party vendors for
incorporation into the Company's products. In such event, the Company would
forward these claims to the appropriate vendor. If the Company or its component
manufacturers were unable to license or otherwise provide any such necessary
technology on a cost-effective basis, the Company could be prohibited from
marketing products containing that technology, incur substantial costs in
redesigning products incorporating that technology, or incur substantial costs
defending any legal action taken against the Company.
Product Return Risks
The Company is exposed to the risk of product returns from its customers as
a result of returns due to defective products or product components. Returned
unused products are generally tested by the Company and, if undamaged, are
repackaged and put back into inventory to be resold. Returned used products are
tested, repaired and used as warranty replacements. Products returned to the
Company due to faulty work by Company subcontractors are returned to the
subcontractors for credit against future purchase orders. Historically, product
returns have not had a material impact on the Company's operations or its
financial condition. While the Company believes that product returns should not
be material in future periods, it is expected that a relatively modest number of
returns will continue. However, there
27
<PAGE>
can be no assurance that significant levels of product returns will not occur in
the future, which may have a material adverse effect on the Company's
operations.
Concentration of Ownership
Of the 44,180,826 shares of Common Stock outstanding as of July 10, 1998,
the current directors of the Company beneficially own and control 20,989,597
shares, or approximately 47.5% of the Company's outstanding Common Stock. As a
result, those persons will have sufficient voting power to control the outcome
of all corporate matters submitted to the vote of the shareholders. Those
matters could include the election of directors, changes in the size and
composition of the Board of Directors (and, thereby, the qualification and
appointment of officers of the Company), and mergers and other business
combinations involving the Company. In addition, through their control of the
Board of Directors and beneficial ownership of Common Stock of the Company, they
will be able to control certain decisions, including decisions with respect to
the Company's dividend policy, the Company's access to capital (including
borrowing from third-party lenders and the issuance of additional equity
securities), and the acquisition or disposition of assets by the Company. In
addition, the concentration of ownership in Messrs. Armani and Shaifer and Ms.
Shashani could have the effect of delaying or preventing a change in control of
the Company and may affect the market price of the Common Stock of the Company.
Risks Associated with Growth Strategy
The Company's strategy envisions a period of rapid growth that may put a
strain on its administrative and operational resources. The Company's recent
contract with Duquesne will require that the Company increase substantially its
personnel. While the Company believes that it has established a significant
infrastructure to support growth, its ability to effectively manage growth will
require it to continue to expand the capabilities of its operational and
management systems and to attract, train, manage and retain qualified engineers,
technicians, salesperson and other personnel. There can be no assurance that it
will be able to do so. If the Company is unable to successfully manage its
growth, the Company's business, operating results and financial condition could
be adversely affected.
Limited Prior Public Market; Volatility of Stock Price
There is currently an extremely limited trading market for the Company's
Common Stock. Between October 1, 1996 and June 30, 1998, the closing bid prices
for the Company's Common Stock have ranged from $.01 to $.15 per share, as
quoted sporadically from time to time in the over-the-counter market in the
"pink sheets," an ad hoc forum for quotations of securities prices intended to
match potential buyers and sellers, which forum is not monitored or supervised
by any regulatory authority or agency. Such prices, however, represent inter-
dealer quotations and not actual transactions and may not be considered valid
indications of market value because of the extremely limited amount of trading
in the Company's Common Stock. There can be no assurance given that any regular
trading market for the securities of the Company will develop or, if developed,
will be sustained. The trading prices of the Company's Common Stock could be
subject to wide fluctuations in response to quarter-to-quarter variations in the
Company's operating results, material announcements of technological
innovations, price reductions, significant customer orders or establishment of
strategic partnerships by the Company or its competitors or providers of
alternative products, general conditions in the modem and data communications
industry, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market as a whole and individual stocks have
experienced extreme price and volume fluctuations, which have often been
unrelated to the performance of the related corporations. The Company's
operating results in future quarters may be below the expectations of market
makers, securities analysts and investors. In any such event, the price of the
Company's Common Stock will likely decline, perhaps substantially. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has occurred against the issuing company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to substantial liabilities.
28
<PAGE>
No Dividends
The Company has never paid cash dividends on its Common Stock and does not
currently intend to pay cash dividends. It is not likely that any cash dividends
will be paid in the foreseeable future.
Dilution Due to Future Issuances of Stock Without Shareholder Approval
The Articles of Incorporation of the Company, as amended, currently
authorize the issuance of a maximum of 100,000,000 shares of Common Stock,
without par value. Accordingly, the Board of Directors may authorize the
issuance of up to an additional 57,159,174 shares of Common Stock without any
approval of such issuance by the shareholders of the Company. Existing holders
of the Company's Common Stock may be diluted in their percentage ownership of
the Company if any such additional shares are issued by the Company in the
future.
Possible Adverse Effects Due to Shares Eligible for Future Sale
Future sales of shares by existing security holders of the Company could
have an adverse effect on the market price of the Company's Common Stock or
otherwise impair the Company's ability to raise additional capital. Of the
42,840,826 shares of Common Stock of the Company outstanding as of July 10,
1998, approximately 20,876,229 shares are generally freely tradeable without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"), approximately 305,000 shares will be freely tradeable within
one year pursuant to the provisions of Rule 144(k) promulgated under the
Securities Act, approximately 670,000 shares will be freely tradeable within two
years pursuant to the provisions of Rule 144(k) promulgated under the Securities
Act and the remaining 20,989,597 shares will be tradeable subject to the
limitations of Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned such shares for at least one year will be entitled to sell in any three-
month period a number of shares that does not exceed the greater of (i) one
percent (1%) of the then outstanding shares of the Company's Common Stock or
(ii) the average weekly trading volume of the Company's Common Stock during the
four calendar weeks immediately preceding the date on which notice of sale is
filed with the Securities and Exchange Commission (the "Commission"). Sales
pursuant to Rule 144 are subject to certain requirements relating to manner of
sale, notice and the availability of current public information about the
Company, and the requirement that the Company has been subject to the reporting
requirements of Section 15(d) of the Exchange Act for a period of at least 90
days immediately preceding the sale of the securities and has filed all reports
required to be filed thereunder during the twelve months preceding such sale. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned such shares for at least two years is
entitled to sell such shares under Rule 144(k) without regard to the limitations
described above. Due to the failure of the Company to file any reports required
to be filed under the Exchange Act since the Company's Form 10-Q covering the
quarterly period ended December 31, 1990 and until and unless the Company has
filed all reports required to be filed thereunder during the next twelve months,
only holders of shares of Common Stock of the Company who are not affiliates of
the Company and who have beneficially owned such shares for at least two years
will be able to sell such shares pursuant to the provisions of Rule 144.
Exercise of Outstanding Options
The Company has reserved 1,500,000 shares of Common Stock for issuance upon
exercise of outstanding options to SMC Communications Group, Inc. During the
term of such option, SMC Communications Group, Inc. may have the opportunity to
benefit from an increase in the market price of the Common Stock of the Company,
with resulting dilution in the interest of existing holders of the Company's
Common Stock. The existence of the option may adversely affect the terms on
which the Company can obtain additional financing, and SMC Communications Group,
Inc. can be expected to exercise such option at a time when the Company, in all
likelihood, would be able to obtain additional capital by offering shares of its
Common Stock on terms more favorable to the Company than those provided by the
exercise of such options.
29
<PAGE>
Item 7. Financial Statements.
The consolidated financial statements of the Company and its subsidiaries
are submitted as a separate section of this Annual Report on Form 10-KSB on
pages F-1 through F-15.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Directors, Executive Officers and Key Employees
The directors, executive officers, and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael A. Armani(1) 47 Chairman of the Board, President,
Chief Executive Officer and Director
Shala Shashani(1) 48 Director
Carl Shaifer 66 Director
David Bray(2) 46 Director of Sales and Marketing,
Industrial and Utility Automation
Markets
Steve Michelle(2) 40 Director of Operations
William Kosoff(2) 56 Director of Business Development
Nelson Ngai(2) 48 Director of Engineering
</TABLE>
_______________
(1) Member of the Audit Committee.
(2) Not an executive officer position.
Michael Armani has served as President and as a member of the Board of
Directors of the Company since July 1993. He assumed the positions of Chief
Executive Officer, and Chief Financial Officer and became Chairman of the Board
in September 1996. Prior to joining the Company as the representative of
investors of SMC in 1992, Mr. Armani was Vice President of SMC. Mr. Armani
founded and managed an independent publishing company from 1984 to 1990 and has
been engaged in entrepreneurial business and manufacturing concerns for over 20
years.
Shala Shashani has served as Secretary and as a member of the Board of
Directors of the Company since September 1996. Ms. Shashani has been founder and
owner of SMC, a consulting and human resource firm, since 1987. Ms. Shashani has
over 16 years of managerial and consulting experience in the data communications
industry.
Carl Shaifer has served as a member of the Board of Directors since September
1996. Mr. Shaifer is also Chairman of the Board of Cornell Graphics, Inc., a
creative printing and packaging company. In addition, Mr. Shaifer is a member of
the Board of Directors of MicroLeague Multimedia, Inc. ("MMI"), a reporting
company that manufactures educational and computer game software products. Mr.
Shaifer has been a director of MMI since 1989. Mr. Shaifer has been involved in
financial and managerial positions in the printing industry since 1960.
30
<PAGE>
David Bray has served as Director of Sales for Industrial Automation Markets
since June 1995. Prior to joining the Company, Mr. Bray was Manager of Western
Region Operation of GEC/Alsthom. He joined GEC/Alsthom in 1968.
Steve Mitchell has served as Director of Operations since February 1998. He
joined the Company in October 1996 as Director of Manufacturing. Prior to
joining the Company, Mr. Mitchell served as Director of Manufacturing of Kofax,
which he joined in 1987.
William Kosoff has served as Director of Business Development since February
1998. Mr. Kosoff was one of the original founders of the Company in 1984 and has
served in various positions, including President and Chairman of the Board. Mr.
Kosoff rejoined the Company after working for five years as founder and
President of Blue Line Communications.
Nelson Ngai has served as Director of Engineering since April 1998. Prior to
joining the Company, he was Director of Engineering at CPI since 1995. Prior to
that Mr. Ngai served as Manager of Engineering at Calcomp for three years. Mr.
Ngai has over 20 years of experience in design and management in the modem
industry.
Currently, non-employee directors receive $500 per month for service on the
Board of Directors or any committee thereof. Directors are reimbursed for their
expenses for each meeting attended. Directors are eligible to participate in any
and all employee benefit plans of the Company, including any stock option or
stock purchase plans.
Each officer of the Company serves at the discretion of the Board of
Directors. Mr. Armani and Ms. Shashani were formerly husband and wife. There are
no other family relationships between or among any other directors, officers or
key employees of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities (the "10% Shareholders"), to file reports of
ownership and changes of ownership with the Commission. Officers, directors and
10% Shareholders of the Company are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms so filed.
Due to the financial difficulties the Company experienced in prior fiscal
years, each of the Company's present Section 16 reporting persons failed to file
a Form 3 upon become reporting persons and also failed to file a Form 4 with
respect to their respective transactions in the Company's securities since
becoming reporting persons. Each of Michael A. Armani, Shala Shashani and Carl
Shaifer have prepared and executed a Form 3. Also, each of Michael A. Armani,
Shala Shashani and Carl Shaifer have prepared and executed a late Form 4 with
respect to three, five and two transactions, respectively. These Form 3s and
Form 4s are scheduled to be filed with the Commission on or about July 16,
1998.
31
<PAGE>
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth certain information with respect to
compensation earned by the Company's Chief Executive Officer during the fiscal
year ended March 31, 1998 and the fiscal year ended March 31, 1997. There are no
other executive officers whose annual salary and bonus compensation exceeded
$100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- ------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation(1) Options Compensation
Principal Position Year ($) ($) ($) (#) ($)
- --------------------------- ---- ------- ------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Armani 1998 117,500 400 -- -- --
President, Chief 1997 120,000 -- -- 3,000,000 --
Executive Officer, Chief
Financial Officer and
Chairman of the Board
</TABLE>
_______________
(1) The costs of certain benefits are not included because they did not exceed
the lesser of $50,000 or 10% of the total annual salary and bonus as
reported above.
Option Exercises and Fiscal Year-End Values
Shown below is information with respect to the number of shares of the
Company's Common Stock acquired upon exercise of options, the value realized
therefor, the number of unexercised options at March 31, 1998 and the value of
unexercised in-the-money options at March 31, 1998 for the Company's Chief
Executive Officer in the Summary Compensation Table above. The Company's Chief
Executive Officer did not hold any stock appreciation rights during fiscal year
1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Value of Unexercised
Shares Options at Fiscal In-the-Money Options
Acquired on Value Year-End (#) at Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Michael A. Armani - - 3,000,000/0 $450,000/0
</TABLE>
Employment Agreements
The Company has not entered into any employment agreements with any of its
employees. The Company's Board of Directors has approved an annual salary of
$150,000 for Michael A. Armani, the Company's President, Chief Executive Officer
and Chief Financial Officer, commencing January 1, 1998.
32
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial
ownership of the Common Stock of the Company as of July 10, 1998, by (i) each
person known by the Company to own beneficially 5% or more of the outstanding
Common Stock of the Company; (ii) each of the Company's directors; (iii) the
executive officer named in the Summary Compensation Table; and (iv) all
directors and executive officers of the Company as a group. The address of each
person listed below is 26772 Vista Terrace Drive, Lake Forest, California 92630.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Beneficial Percent of Class
of Beneficial Owner Ownership of Common Stock(1) of Common Stock
------------------- ---------------------------- ----------------
<S> <C> <C>
Michael A. Armani(2)(3) 11,287,382 25.6%
Shala Shashani(3)(4) 9,787,382 21.4%
Carl Shaifer(3)(5) 1,414,833 3.2%
All Directors and
Executive Officers of the
Company as a Group 22,489,597 49.2%
(3 persons) (6)
</TABLE>
_______________
(1) 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 by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Shares of Common Stock subject to options currently exercisable, or
exercisable within 60 days after July 10, 1998, are deemed to be
outstanding in calculating the percentage ownership of a person or group
but are not deemed to be outstanding as to any other person or group.
(2) Named executive officer of the Company.
(3) Director of the Company.
(4) Includes 1,500,000 shares of Common Stock underlying options which are
exercisable as of July 10, 1998 or within 60 days after such date and which
options were issued to SMC Communications Group, Inc., a California
corporation of which Ms. Shashani is sole director and sole shareholder.
Also includes 2,000,000 shares held of record by Ms. Shashani's two
children, Nima and Roxana Amini, the voting and investment power with
respect to which shares is held by Ms. Shashani.
(5) Includes 1,089,833 shares held of record by Mr. Shaifer's wife, Kathryn G.
Shaifer.
(6) Includes 1,500,000 shares of Common Stock underlying options which are
exercisable as of July 10, 1998 or within 60 days after such date.
Item 12. Certain Relationships and Related Transactions.
On January 21, 1992, the Company's Board of Directors met to discuss the
current financial situation of the Company. At that meeting it became clear to
the Board of Directors that unless funding could be obtained immediately, the
Company would be forced to seek protection under the United States Bankruptcy
Code. The Board of Directors reviewed two financing proposals and selected the
proposal offered by SMC. Pursuant to the terms of the proposal, SMC agreed to
provide the Company with at least $250,000 in exchange for shares of the
Company's Common Stock representing 64.8% of the then outstanding shares of the
Company's Common Stock. At a later meeting of the Board of Directors on January
24, 1992, the Board of Directors concluded that because of a number of factors
including, among others, that SMC would also provide management consulting
services to the Company in connection with the issuance of Common Stock to SMC,
that the then current bid price of the Company's Common Stock was $0 and that
independent brokers had considered the Common Stock to be without value, the
Board of Directors ascribed a value of $.01 per share of Common Stock to be
issued to SMC.
33
<PAGE>
At the time the Company selected the financing proposal by SMC, SMC was
owned and controlled by Michael A. Armani, now the Company's President, Chief
Executive Officer, Chief Financial Officer and one of its directors, and by
Shala Shashani, now the Secretary and a director of the Company. Due to the
limited number of authorized shares available at the time of the investment by
SMC, the Company was unable to issue to SMC the 29,290,311 shares that were
calculated by the Board of Directors to represent a 64.8% ownership interest in
the Company. The Company did, however, issue 8,574,764 shares to SMC in December
1992 in connection with SMC's initial investment in the Company. Between
September 1992 and September 1996, SMC's involvement with and investments in the
Company were substantially greater than anticipated. By September 1996, SMC had
invested a total of $609,899.33 in the Company, of which $549,190 plus accrued
interest was owing to SMC.
Due to its negative financial condition in the early 1990s, the Company
experienced serious difficulties in obtaining payment terms from its suppliers.
Consequently, in 1993 Ms. Shashani formed SMC Communications Group, Inc., which
corporation had the sole purpose of assisting the Company in procuring parts and
products. Early in 1994, one of the Company's vendors ceased supplying products
that the Company marketed under the trade/model name of Hideaway. In March 1994,
a license to manufacture the Hideaway products was acquired by SMC
Communications Group, Inc. SMC Communications Group, Inc. expended substantial
amounts to redesign the Hideaway products and tooling. Thereafter, the Company
acquired its Hideaway products from SMC Communications Group, Inc. at prices
approximating those that the Company would have otherwise had to expend with its
previous vendor. The Company realizes an average gross profit of approximately
$45 on the resale of each Hideaway. In addition, SMC Communications Group, Inc.
from time to time acquired other goods and materials for the benefit of the
Company, which were then incorporated into the Company's products. On most of
these transactions, SMC Communications Group, Inc. charged a handling fee of
10%. The aggregate obligations for Hideaway and other goods and materials
incurred to SMC Communications Group, Inc. through March 31, 1998 amounted to
$787,370, of which the Company has paid $671,835. As of March 31, 1998, the
amount of unpaid invoices for Hideaway and other products equaled $115,535. As
part of an amended compromise agreement, the Company had agreed to pay this
obligation in full in December 1999, and SMC further agreed to enter into a
Technology Transfer Agreement whereby SMC transferred all right title and
interest in and to the Hideaway products to the Company in exchange for an
option to acquire 1,500,000 shares of the Company's Common Stock for $.10 per
share.
On September 15, 1993, the Company's Board of Directors approved a
compensation package for Michael Armani which included a bonus of $60,000 for
his services from January 1, 1992 to that date; a salary of $72,000 per annum
effective April 1, 1993, with authority for increases to $120,000 per annum at
unspecified later date(s); and future bonuses equal to 2% of the Company's
annual gross profits. Amounts due under the package were deferred based on the
financial condition of the Company, and an option good through December 31, 1996
to convert all or any portion of deferred salary, bonuses and any approved
expenses to shares of Common Stock at the rate of $.01 per share was granted.
Through December 31, 1995, Mr. Armani received certain advances against
reimbursement of expenses as well as against the above compensation package.
Since January 1, 1996, he has received a regular salary at the rate of $120,000
per annum. From April 1, 1993 through July 31, 1996, the total amount of
payments to Mr. Armani other than salary amounted to $75,900. The Company and
Mr. Armani have agreed that the total amount of deferred salary, bonuses and
unpaid approved expenses as of July 31, 1996 amounted to $300,000, which Mr.
Armani has agreed to convert to 3,000,000 shares of Common Stock and an option
to acquire an additional 3,000,000 shares at $.01 per share. Mr. Armani
exercised in July 1998. In addition, there have been advances between the
Company and Mr. Armani during the year ended March 31, 1998 in the aggregate
amount of $150,163 of which $53,126 has been credited to the amount due to Mr.
Armani. As of March 31, 1998, Mr. Armani is indebted to the Company in the net
amount of $97,037. Effective January 1, 1998, Mr. Armani's salary increased to
$150,000 per annum.
In 1994, the Company was ordered to vacate the premises upon which the
Company's facilities are located as a result of a legal action between the
Company and its landlord. To avoid a potentially serious disruption of the
Company's activities that could have resulted from an eviction, SMC acquired the
premises in July 1994 and leased them to the Company. As of March 31, 1998, the
amount of unpaid rents due under this arrangement equaled $141,500. As part of
the amended compromise agreement, the Company agreed to pay this obligation in
full in December 1999.
In May 1995, SMC established a credit card merchant account for the
exclusive benefit of the Company. Through March 31, 1998, the Company has
deposited into this account $10,901 in revenue received in the form of credit
card
34
<PAGE>
charges. Funds deposited in that account are either transferred to the Company's
other bank accounts or otherwise expended for its benefit. The results of the
transactions through such account are included in the Company's financial
statements.
In September 1996, the Company, SMC and SMC Communications Group, Inc.
entered into a compromise agreement and mutual release that reduced the number
of shares of the Company's Common Stock that SMC was entitled to receive in
connection with SMC's investments in the Company. The compromise agreement was
amended in December 1997. Pursuant to the amended compromise agreement,
5,000,000 shares of the Company's Common Stock were issued to SMC and its
assignees in March 1998 at a price of $.075 per share. As of March 31, 1998, the
long-term debts of the Company to SMC and SMC Communications Group, Inc. were
$391,500 and $115,535, respectively. Loans and obligations from SMC that remain
unpaid after the amended compromise agreement are secured by the receivables,
inventories and other assets of the Company pursuant to a security agreement
with SMC that provides that, in addition to obligations then outstanding,
subsequent advances are also secured.
In November 1997, the Company loaned $30,000 to the Company's President and
Chief Executive Officer, Michael A. Armani, pursuant to a promissory note which
is due and payable on November 29, 1998, together with accrued interest at a
rate of 7% per annum.
The Company's executive offices occupy approximately 8,500 square feet of
leased space at 26772 Vista Terrace Drive, Lake Forest, California 92630. The
Company leases this space from SMC under a lease agreement with an initial lease
term that expires on July 31, 1999 and an option to extend for an additional
year. The annual rental presently is $54,000, but will be increased to $78,000
on August 1, 1998 under the terms of the lease and will be increased to $90,000
on August 1, 1999 if the Company exercises its one-year extension option.
35
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
3.1 Restated Articles of Incorporation of the Company
3.2 Restated and Amended By-Laws of the Company
4.1 Telenetics Corporation Stock Purchase Warrant between the
Company and SMC Communications Group, Inc.
10.1 Letter of Intent dated May 28, 1998 by and between Duquesne
Light Company and the Company
10.2 Subcontract dated June 10, 1998 between Sargent Electric
Company and the Company
10.3 Marketing and Technology Agreement dated July 13, 1998 by and
between the Company and Duquesne Light Company
10.4 Factoring Agreement made by and between Access Capital, Inc.
and the Company as of November 26, 1997
10.5 Interparty Agreement dated November 26, 1997 by and between
SMC Communications Group, Inc., Shala Shashani doing business
as SMC Group and Access Capital, Inc.
10.6 Amendment to Factoring Agreement made by and between Access
Capital, Inc. and the Company as of January 31, 1998
10.7 Amendment to Compromise Agreement and Mutual Release dated
December 30, 1997 by and between the Company, SMC
Communications Group, Inc. and Shala Shashani doing business
as SMC Group
10.8 Security Agreement dated December 31, 1997 by and between the
Company and SMC Communications Group, Inc.
10.9 Amendment to Security Agreement dated March 30, 1998 by and
between the Company and SMC Group
10.10 Technology Transfer Agreement dated October 29, 1997 by and
between the Company and SMC Communications Group, Inc.
10.11 Commercial Lease dated July 30, 1994 between SMC Group and the
Company
27.1 Financial Data Schedule*
_____________
* To be filed by amendment.
(b) Reports on Form 8-K.
None.
36
<PAGE>
TELENETICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditor.......................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1998.................... F-3
Consolidated Statements of Income for the years
ended March 31, 1998 and 1997....................................... F-4
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997....................................... F-5
Consolidated Statements of Shareholders' Deficiency for the years
ended March 31, 1998 and 1997....................................... F-6
Notes to Consolidated Financial Statements.......................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors
and Shareholders of
Telenetics Corporation
I have audited the accompanying balance sheets of Telenetics Corporation, a
California corporation, as of March 31, 1998, and the statements of income, cash
flows and shareholders' equity deficiency for the two years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position and results of operations of
Telenetics Corporation as of March 31, 1998, and the two years then ended in
conformity with generally accepted accounting principles.
/S/GEORGE F. ROMBACH
Newport Beach, California
July 13, 1998
F-2
<PAGE>
TELENETICS CORPORATION
a California corporation
Consolidated Balance Sheets
__________
March 31, 1998
ASSETS
------
<TABLE>
<S> <C>
Current Assets:
Cash $ 11,338
Receivables (Note 3) 629,830
Inventories (Note 4) 592,675
----------
Total current assets 1,233,843
Property and Equipment, Net (Note 5) 46,835
Other Assets (Note 6) 6,742
----------
$1,287,420
==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
<TABLE>
<S> <C>
Current Liabilities:
Customer deposits $ 4,891
Amounts due to factor (Note 9) 680,739
Accounts payable and accrued expenses 519,750
Convertible notes payable (Note 8) 156,051
Current portion of long term debt (Notes 10 and 12) 162,958
------------
Total current liabilities 1,524,389
Due to shareholders (Note 10) 527,189
Capital leases (Note 12) 18,772
------------
Total Liabilities 2,070,350
------------
Shareholders' deficiency:
Common Stock, no par value; 100,000,000 shares
authorized; 41,180,826 shares issued and
outstanding (Note 13) 10,578,402
Accumulated deficit (11,361,332)
------------
Total shareholders' deficit (782,930)
------------
Total liabilities and shareholders' deficiency $ 1,287,420
============
</TABLE>
The accompanying Notes are an integral part of this statement.
F-3
<PAGE>
TELENETICS CORPORATION
a California corporation
Consolidated Statements of Income
__________
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net Revenue $2,899,929 $2,302,812
Cost of Goods Sold 1,571,136 1,330,763
---------- ----------
Gross Profit 1,328,793 972,049
---------- ----------
Operating Expenses:
Salaries and related costs 771,464 615,378
Rents (Note 18) 61,780 74,543
Shareholder costs 23,954 11,366
Selling, general and administrative 275,327 242,788
---------- ----------
Total Operating Expenses 1,132,525 944,075
---------- ----------
Operating Income 196,268 27,974
Benefit from Relief of Indebtedness 96,240 146,857
Restructuring Costs (32,467) (216,918)
Interest Expense (Net) (165,587) (96,333)
---------- ----------
Income Before Taxes 94,454 (138,420)
Provision for Taxes on Income at statutory rates 800 800
---------- ----------
Net Income (Loss) $ 93,654 $ (139,220)
========== ==========
Net Income (Loss) per Common Share:
Basic $ 0.0026 $ (0.0047)
========== ==========
Diluted $ 0.0023 $ (0.0043)
========== ==========
</TABLE>
Common Shares Used in Computing Net Income (Loss)
Per Common Share:
Basic 35,807,566 29,396,730
========== ==========
Diluted 40,307,566 32,396,730
========== ==========
The accompanying Notes are an integral part of this statement.
F-4
<PAGE>
TELENETICS CORPORATION
a California corporation
Consolidated Statements of Cash Flows
__________
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 93,654 $(139,220)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,782 4,771
Benefits from debt relief (92,533) (146,857)
Bonuses paid in stock 3,300 6,350
(Increase) decrease in operating assets:
Receivables (259,731) (310,318)
Inventories (19,500) (131,175)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (530,267) 198,136
Advances from factor, net 680,739 53,111
Customer deposits 16 (80,000)
--------- ---------
Net cash provided by (used in) operating activities (114,540) (545,202)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (32,957) (10,419)
Acquisition of other assets -- (7,059)
--------- ---------
Net cash provided by (used in) investing activities (32,957) (17,478)
--------- ---------
Cash flows from financing activities:
Proceeds of convertible notes -- 659,000
Judgment levy by Fredco Productions, Inc. -- (72,644)
Proceeds of capital leases 18,772 --
Loans from shareholders 161,464 5,000
Reduction in notes payable (40,000) (10,000)
--------- ---------
Net cash provided by (used in) financing activities 140,236 581,356
--------- ---------
Net increase (decrease) in cash and equivalents (7,261) 18,676
Cash and equivalents at beginning of period 18,599 (77)
--------- ---------
Cash and equivalents at end of period $ 11,338 $ 18,599
========= =========
</TABLE>
The accompanying Notes are an integral part of this statement.
F-5
<PAGE>
TELENETICS CORPORATION
a California corporation
Consolidated Statements of Shareholders' Deficiency
__________
Years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
----------------------- Retained
Number Earnings
of Shares Amount (Deficit) Total
---------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Beginning Balances as of
March 31, 1996 24,890,826 $ 9,267,794 $(11,315,766) $(2,047,972)
Common Stock issued for:
Employee bonuses 330,000 3,300 3,300
Conversion of notes payable and 5,975,000 516,026 516,026
related costs, net
(Notes 7 and 8)
Acquisition of test equipment 10,000 6,025 6,025
Settlement of accounts payable 3,020,000 323,000 323,000
(Note 18)
Net Income (loss) for the fiscal (139,220) (139,220)
year ended March 31, 1997
Beginning Balances as of
March 31, 1997 34,225,826 $10,116,145 $(11,454,986) $(1,338,841)
Common Stock issued for:
Employee bonuses 635,000 6,350 6,350
Conversion of notes payable and 1,320,000 167,525 167,525
related costs, net (Notes 7 & 8)
Settlement of accounts payable 5,000,000 288,382 288,382
(Note 18)
Net Income (loss) for the fiscal
year ended March 31, 1998 93,654 93,654
Balances, as of March 31, 1998 41,180,826 $10,578,402 $(11,361,332) $ (782,930)
========== =========== ============ ===========
</TABLE>
The accompanying Notes are an integral part of this statement.
F-6
<PAGE>
TELENETICS CORPORATION
a California corporation
Notes to Consolidated Financial Statements
Note 1. Organization and presentation
-----------------------------
Organization - The Company is a corporation organized on June 8, 1984
------------
under the laws of the State of California, and as of March 31, 1998 is in
good standing thereunder.
General nature of business activities - The Company's principal
-------------------------------------
business is the design, development, manufacture and marketing of modem and
fiber optic equipment for industrial and utility automation applications
where reliability of transmission results and the ability to operate under
adverse environmental conditions is of primary concern. This market focus is
a change from the Company's original concentration on general commercial
applications, and is part of an overall program of restructuring the
Company.
Prior to the quarter ended December 31, 1996 the Company had not been able
to realize any significant income from its operations. However, the
Company's new market focus has realized strong gross profit margins and
increased market acceptance, and management believes that profitable
operations can be sustained in the future with the Company's present
resources. Additional capital is required in order for the Company to
provide adequate working capital for its operations in order to realize the
full benefit of the present market focus and contract opportunities.
During the year ended March 31, 1997, the Company successfully completed the
reconstruction of records related to its financial position (balance sheet),
and the implementation of computerized accounting and inventory control
systems. The Company also continued its efforts to reconstruct the records
of its operations and cash flows for the period from April 1, 1993 to July
31, 1996.
Basis of presentation - The accompanying financial statements of the Company
---------------------
have been prepared on a going-concern basis. That basis of accounting
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of conducting business operations. If the Company were
unable to continue operations, the ability to realize its assets could be
adversely impacted.
Note 2. Summary of significant accounting policies
------------------------------------------
The significant accounting policies followed by the Company are summarized
below:
Recognition of income - Revenue is recognized in the period in which the
---------------------
Company delivers the merchandise which it has agreed to sell and the
responsibility therefor has passed to the customer, provided that the
customer has accepted same.
Receivables - Receivables are stated at their net realizable value. Net
-----------
realizable value is equal to the gross amount of receivables less a
provision for estimated amounts that may become uncollectible.
Inventories - Inventories consisting principally of electronic component
-----------
parts for the Company's modem products and related items are valued at the
lower of cost or market. The Company uses the first-in, first-out (FIFO)
method for determining the cost of inventories.
Property and Equipment - Property and equipment are carried at cost, net
----------------------
of accumulated depreciation. Maintenance, repairs and minor renewals thereof
are expensed as incurred. Technological upgrades that extend the life of an
existing asset are capitalized. When properties or equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and any gain or loss on disposition
is charged to earnings.
F-7
<PAGE>
Note 2. Summary of significant accounting policies (Cont'd)
------------------------------------------
Depreciation of property and equipment is computed by the straight-line
method over their estimated useful lives.
Intangible assets - Intangible assets are carried at costs incurred by
-----------------
the Company and have been amortized over their estimated useful lives on the
straight-line method.
Warranty - The Company passes through the warranties granted by
-------
manufacturers of the components of its products, which comprise the most
significant component of the Company's potential exposure. An estimate of
the amount required to cover the expense of supporting its products is
charged against income at the time of sale.
Foreign currency transactions - The Company records foreign currency
-----------------------------
transactional gains or losses resulting from differences in exchange rates
between the date an invoice is recorded and the date of payment in the
period that such gain or loss occurs. Such amounts have not been
significant.
Research and development - Costs incurred in connection with the
------------------------
planned efforts of the Company to discover new information that will help
create a new product, service, process or technique, or vastly improve one
currently in use (research and development activities) are expensed and
charged against operations in the period incurred.
Troubled debt restructuring - A troubled debt restructuring is one in
---------------------------
which a creditor allows a debtor concessions that would not normally be
considered. In that regard, the Company has negotiated the restructure of
substantial amounts of its obligations in exchange for the issuance, and
promise of issuance, of its Common Stock and rights to acquire its Common
Stock, as well as for discounted cash payments. When liabilities are
satisfied in exchange for the issuance of the Company's corporate securities
the effected liability accounts are relieved for the full carrying amount of
the outstanding obligation and the appropriate capital accounts are credited
for the fair value of the interest issued if such value is determinable. Any
difference in the value of securities issued and the carrying amount of the
debt is recognized as a gain in the period the restructuring is finalized.
If the fair value of the securities cannot be reasonably determined
separately, the value is deemed to be equal to the outstanding obligation.
When liabilities are satisfied for cash on a discounted basis, the liability
accounts are relieved for the carrying amount and the "discount" is
recognized as a gain in the period(s) that best reflect the overall nature
of the transaction and the circumstances surrounding the settlement. Legal
fees and other costs resulting from restructuring troubled debt are expensed
when incurred.
Time barred claims - When obligations incurred by the Company are no
------------------
longer legally enforceable as a consequence of any applicable statutes of
limitations and management has determined that it is in the best interest of
the Company not to pay such obligations, the respective liability accounts
are relieved for the full carrying amount of the outstanding obligations and
a gain recognized in the period in which such relief occurred.
Federal income tax and California franchise tax - Provision for Federal
-----------------------------------------------
income tax and California franchise tax is made against income reported for
financial statements purposes at the then prevailing rates. Such provision
is made regardless of when the respective items are reported for tax
purposes. Any timing differences between financial statement and income tax
reporting are reflected as deferred income taxes. The impact on deferred
income taxes resulting from any changes in tax rates is reported in the
period of the rate change.
F-8
<PAGE>
Note 3. Receivables
-----------
Receivables as of March 31, 1998 are stated as follows:
<TABLE>
<S> <C>
Gross trade accounts receivables $553,793
Less: allowance for doubtful accounts 21,000
--------
532,793
Employee receivables (Note 18) 97,037
--------
$629,830
========
</TABLE>
As of March 31, 1998, trade accounts receivable are subject to the
terms and conditions of the factoring agreement discussed in Note 9.
and are pledged to secure that indebtedness. Receivables are also
pledged to secure amounts due to SMC Group ("SMC") (Note 10).
Note 4. Inventories
-----------
Inventories as of March 31, 1998 consist principally of parts and
components of products currently in the process of production or held
for the future production of products. There are no significant
inventories of finished goods. Inventories are stated as follows:
<TABLE>
<S> <C>
Gross inventories $627,675
Less: allowance for obsolescence 35,000
--------
$592,675
========
</TABLE>
Policies followed by the Company relating to inventories are set forth
in Note 2. Inventories are pledged to secured amount due under the
factoring agreement (Note 9) and SMC (Note 10).
Note 5. Property and equipment
----------------------
Property and equipment as of March 31, 1998 consisted principally of
office furniture, fixtures and equipment, and electronic test
equipment that was acquired prior to March 31, 1996, and for the most
part was fully depreciated. However, the Company has not maintained
complete records of the cost of the assets that remain, the effect of
which is not material. The following summarizes property and equipment
based on reconstructed information of earlier periods plus recent
acquisitions:
<TABLE>
<CAPTION>
Cost:
<S> <C>
Furniture and fixtures $102,470
Equipment 66,694
Assets held under capital leases 32,957
--------
202,121
Less: accumulated depreciation 155,286
--------
$ 46,835
========
</TABLE>
Depreciation and other policies the Company applies as to property and
equipment are set forth in Note 2. Depreciation expense for the years
ended March 31, 1998 and 1997 amounted to $7,429 and $4,771,
respectively. Property and equipment are pledged to secure amounts due
under the factoring agreement (Note 9) and SMC (Note 10).
F-9
<PAGE>
Note 6. Other assets
------------
Other assets as of March 31, 1998 consist of the following:
<TABLE>
<S> <C>
Organizational costs $12,270
Less: accumulated amortization 12,270
-------
0
-------
Computer software costs 7,060
Less: accumulated amortization 2,353
-------
4,707
-------
Deposits 2,035
-------
$ 6,742
=======
</TABLE>
Amortization expense for the years ended March 31, 1998 and 1997
amounted to $2,353 and $0 respectively.
The Company previously carried intangible costs arising from the
acquisition of assets of Tri-Data Systems, Inc. and Infotron Systems
Corporation in the aggregate amount of $276,274, which have been fully
amortized.
Note 7. Notes Payable
-------------
Between July and October 1990 the Company issued, at par, $667,000 in
notes which were due and payable one year from the date of issue and
bore interest at the rate of 11% per annum. Holders of these notes
also held warrants to acquire shares of the Company's common stock at
the price of $1.00 per share, all of which have expired. During the
fiscal year ended March 31, 1993, holders of $185,000 of those notes
exchanged all of their rights thereunder for an aggregate of 1,742,752
shares of the Company's common stock; and a holder of a $100,000 note
agreed to re-write his note extending the due date and reducing the
rate of interest to 7 1/2% (see Note 10). The holders of $332,000 of
those notes have allowed their rights to enforce the Company's
obligations under these notes to expire. The relief of this obligation
has been recorded as a reduction in the Company's accumulated losses
from operations. The holder of the remaining $50,000 note filed an
action against the Company in which a default judgment was entered.
The Company settled the obligation under this remaining note,
including any and all interest thereon, for the aggregate cash sum of
$55,000 and the issuance of 400,000 shares of the Company's common
stock. As of March 31, 1997, the Company's remaining obligation
thereunder amounted to $40,000. As of March 31, 1998, this settlement
has been fully satisfied.
F-10
<PAGE>
Note 8. Convertible Notes Payable
-------------------------
Between December 1995 and August 1996, the Company issued at par
$890,000 in convertible notes. The notes bear interest at the rate of
7% per annum and are due and payable six months from the date of
issuance. The holders of the notes had the right to convert their
rights thereunder into shares of the Company's common stock at the
rates of $0.10 to $0.25 per share of the original principal balance of
the notes. As of March 31, 1998, the rights to these notes have
expired. Holders of $730,000 of the notes converted or otherwise
exchanged their notes at rates of $0.10 to $0.12 1/2 per share. The
holders of the remaining $160,000 have not been converted. The holders
of shares issued on the conversion of the notes have the right to
"piggyback" the registration of their shares if, subsequent to such
conversion, the Company registers any of its Common Stock. As of March
31, 1998, the rights to these notes have expired. The following
summarizes the Company's transactions relating to, and obligations
under, the convertible notes.
<TABLE>
<S> <C>
Notes issued $890,000
Less: Notes converted 730,000
Principal reductions 9,617
--------
150,383
Accrued interest 5,668
--------
$156,051
========
</TABLE>
Note 9. Amounts due to factor
---------------------
As of November 26, 1997, the Company entered into an agreement to
factor its trade accounts receivable. The term of the agreement has
been extended through August 31, 1998. Amounts due under the agreement
are secured accounts receivable, inventory and a general assignment of
assets. The agreement provides that the company may enter into a long
term factoring arrangement, and that if it declines to do so, a
terminating charge of approximately $35,000 will be payable by the
Company. The termination fee has not been reflected as of March 31,
1998.
Note 10. Shareholders' Loans
-------------------
As of March 31, 1998, the amounts owed by the Company on loans from
shareholders are summarized as follows:
<TABLE>
<CAPTION>
SMC (Note 18)
<S> <C>
Principal $531,617
Accrued interest 5,278
--------
Fred Curzio and Fredco Productions, Inc. $536,895
Stipulated judgment payable (Note 11) 144,504
--------
681,399
Less: Current portion 154,210
--------
$527,189
========
</TABLE>
A revised stipulated judgment provides for the payment of the
aggregate sum of $175,000 payable in installments, without interest,
in the amount of $25,000 upon signing; $25,000 on April 1, 1998;
twelve monthly installments of $10,000 commencing May 15, 1998; and a
final installment of $5,000 on May 15, 1999. The settlement payments
have been recorded at their present value at 7 1/2%.
In September 1996, SMC Communications Group, Inc. and Shala Shashani
doing business as SMC agreed to accept 5,000,000 shares of the
Company's Common Stock and the cash sum of $200,000, payable in
October 1996, in full satisfaction of the unpaid balance of advances
and accrued interest thereon in the aggregate amount of $498,167 as
well as the Company's obligations under an agreement to sell SMC
21,593,388 shares for the sum of $152,881. The agreement also provided
for the payment of unpaid balances
F-11
<PAGE>
of rents and merchandise invoices (Note 18). However, in that this
agreement was entered into based on the Company's representation of
the settlement with Fred Curzio and Fredco Productions, Inc., this
agreement was rescinded as a consequence of the repudiation by Fred
Curzio and Fredco Productions, Inc. of their settlement. In December
1997, after the settlement of the Fredco/Curzio litigation (Note 11),
the settlement with SMC et. al. was reinstated with the modification
that the cash portion would be increased to $250,000 to compensate for
the time delay, and all obligations due in cash are due and payable in
December 1999.
Loans and obligations from SMC that remain unpaid after the settlement
are secured by the receivables, inventories and other assets of the
Company, notice of which was duly recorded on February 20, 1992 by a
UCC-1 financing statement, which was renewed on July 15, 1997. The
Security Agreement with SMC provides that, in addition to obligations
then outstanding, subsequent advances are also secured. This security
interest is subordinated to the security interest under the factoring
agreement (Note 9).
Note 11. Fredco/Curzio litigation
------------------------
In September 1996, Fred Curzio and Fredco Productions, Inc. agreed to
accept 1,000,000 shares of Common Stock and the sum of $100,000 in
full satisfaction of the unpaid balance of notes and loans payable.
In December 1996, when the Company was on the verge of completing its
restructuring and after Fred Curzio repudiated the settlement
agreement. Thereafter Mr. Curzio and Fredco Productions commenced
legal proceedings designed for them to take over control of the
Company. Procedures included a levy on the Company's bank account when
the Company was in the final stages of implementing an accounts
receivable financing arrangement with its bank. As a result of the
levy, $72,644 of Company's cash was taken, and its accounts receivable
financing line was lost. The cash levied upon included funds that had
not yet "cleared," and Fredco Productions, Inc. did not release or
return the funds when they did not clear, which caused the Company's
accounts to be overdrawn by $40,367, of which $21,377 remained
outstanding as March 31, 1998. The receivable line would have provided
capital for the Company's restructuring: the loss of the cash
adversely affected the Company's short term working capital and
operations, and the overdraft condition caused the Company to seek new
banking relationships.
The litigation activities of Fred Curzio and Fredco Productions, Inc.
caused significant inconvenience and cost, and the Company's
restructuring activities operations were impeded. The litigation
matters were pending when Mr. Curzio died in August 1997. His estate
stipulated to the settlement of all matters on terms consistent with
the positions maintained by the Company's management. (See Note 10).
Note 12. Capital leases
--------------
During the year ended March 31, 1998, the Company acquired under two
capital leases certain computer and testing equipment having an
aggregate cost of $32,957. The leases are due in monthly installment
of $1,459 through July 1999. As of March 31, 1998, the outstanding
balances aggregated $27,520, the current portion of which is $8,748.
Note 13. Common Stock
------------
The Common Stock has no par value and there are 100,000,000 shares
authorized. At March 31, 1998, there were 39,840,826 shares issued and
outstanding, and 1,340,000 shares were in the process of being issued
and are for purposes of this financial statement deemed to be
outstanding. The holders of the Company's Common Stock have full
voting rights entitling them to one vote for each share on all matters
voted upon by share holders, and to vote cumulatively in the election
of directors. The shares are not subject to redemption or liability
for further calls. Outstanding shares are validly issued, fully paid
and non-assessable. Holders of the Common Stock do not have any rights
to acquire additional shares of the Company's Common Stock or to
convert any shares to other securities of the Company. They are
entitled to receive, out of funds legally available, such dividends as
may be declared by the Board of Directors. In the event of any
liquidation or dissolution of the Company, the holders of Common Stock
are entitled to share proportionately in the assets, if any, remaining
after payment of all debts and liabilities.
F-12
<PAGE>
Note 14. Subsequent events
-----------------
Subsequent to March 31, 1998, the Company entered into a letter of
intent to sell certain of its products to Duquesne Light Company
("Duquesne") in the approximate aggregate amount of $8,000,000, of
which the Company has received a purchase order of approximately
$1,000,000. The Company commenced shipments under this initial
purchase order in July 1998 and expects to complete such shipments in
August 1998. Duquesne has agreed to make advance payments aggregating
$1,000,000. The advance payment is due in installments in the amount
of $300,000 on June 10, 1998; $300,000 on or before July 17, 1998
subject to delivery of the first 530 units of product; and $400,000 on
July 31, 1998 subject to the delivery of approximately an additional
900 units. The advance payments will be ratably credited against
invoices for delivered products.
On July 7, 1998, Michael Armani, the Company's Chief Executive
Officer, exercised an option to purchase 3,000,000 shares of the
Company's Common Stock at a price of $0.01 per share (Note 15).
Note 15. Rights to Purchase Common Stock
-------------------------------
In connection with a settlement with Michael Armani, the Company's
Chief Executive Officer, the Company issued an option to acquire
3,000,000 shares of common stock at the price of $0.01 per share which
was to expire on December 31, 1999. This option was exercised on July
7, 1998.
Note 16. Employee compensation and benefits
----------------------------------
The Company has not adopted policies or plans covering employees'
compensation for termination benefits, pension or profit sharing, or
other such benefits. Payment of such benefits is determined on a case
by case basis and is expensed in the period paid or incurred. No
liability for future payments that may be incurred has been recorded.
The Company has had two non-qualified Incentive Stock Option Plans.
The first was adopted in 1984 and discontinued in 1987. The second was
adopted in 1987 and was, by its terms, to expire in 1997, except that
it was discontinued in March 1996. All unexercised options granted
under these plans have expired.
From time to time the Company has granted bonuses to employees in the
form of its Common Stock (see Note 19).
Note 17. Commitments and Contingencies
------------------------------
As of March 31, 1998, the Company is obligated under two capital
leases (see Note 12). The Company is not obligated under any other
noncancellable leases. The facilities utilized by the Company are
rented on a month-to-month basis from a related party (see Note 18).
The Company is a defendant in various litigation matters arising from
trade accounts payable and contractual commitments, the liability for
which is included in accounts payable and accrued expenses (see also
Note 11).
In March 1998, the Company entered into a contract [agreement in
principal] with General Electric to provide certain of the Company's
products to GE in support of its contract with China Light & Power.
The revenue under this contract is expected to aggregate $1,800,000.
Shipments under the contract commenced in March 1998.
Note 18. Related Party Transactions
--------------------------
In 1992, a controlling interest in the Company's common stock was
acquired by SMC, an entity which is owned and controlled by Shala
Shashani, a director of the Company, and in which Michael Armani, the
Chief Executive Officer and a director of the Company, has an interest
to the extent SMC holds or acquires shares
F-13
<PAGE>
of the Company's Common Stock. The transaction occurred after the
Company failed to conclude various merger and sales transactions, and
at a time that the Company was insolvent, had a negative net worth and
was financially unable to continue operations. The terms of the
transaction approximated those of the last failed merger transaction,
but also included an issuance of 2,169,653 shares of Common Stock in
satisfaction of services valued at $15,361, which were rendered in
connection with the unsuccessful merger and sales transactions.
SMC has advanced funds to the Company in the total amount of $856,272,
of which $45,348 has been applied to the acquisition of 6,405,111
shares of Common Stock pursuant to the above referenced transaction,
and $386,700 has been repaid. Interest has been accrued at the rate of
7% per annum (see Note 10). The advances are secured by the Company's
receivables, inventories and other tangible assets. Pursuant to the
terms of the above-referenced acquisition agreement with SMC, there
are an additional 21,593,388 shares of Common Stock which were to have
been issued in consideration of $152,881 of these advances. In
September 1996, SMC agreed to accept 5,000,000 shares of Common Stock
and the sum of $250,000 in full satisfaction of the unpaid balance of
advances and the Company's obligations under the acquisition
agreement. This settlement agreement was rescinded when Fred Curzio
repudiated his settlement agreement, which had been entered into
concurrently with the SMC agreement (see Notes 10 and 11).
In July 1994, SMC acquired the real property that the Company utilizes
as its principal facilities. At that time, the Company's obligation
for monthly rental was $4,133, and the Company was seven months in
arrears in rental payments. Between August 1994 and July 1996, the
Company secured the use of the facilities from SMC for the promise to
pay a monthly rental of $3,500, of which one month has been paid,
certain improvements to the property in the approximate amount of
$37,500, and the use by SMC of two offices with certain receptionist
services. As of September 1996, the monthly rental payment increased
to $4,500. As of March 31, 1998, the amount of unpaid rents due under
this arrangement equaled $141,500. As part of the reinstated
settlement agreement, the Company had agreed to pay this obligation in
full in December 1999.
In May 1995, SMC established a credit card merchant account for the
exclusive benefit of the Company. Through March 31, 1998, the Company
has deposited into this account $10,901 in revenue received in the
form of credit card charges. Funds deposited in that account are
either transferred to the Company's other bank accounts or otherwise
expended for its benefit. The results of the transactions through such
account are included in the Company's financial statements.
Early in 1994, one of the Company's vendors ceased supplying products
that the Company marketed under the trade/model name of Hideaway. In
March 1994, a license to manufacture the Hideaway products was
acquired by SMC Communications Group, Inc., a California corporation
formed by Shala Shashani for that purpose. (SMC Communications Group,
Inc. is an entity separate and distinct from SMC discussed above). At
that time, the Company had no ability to acquire those rights. SMC
Communications Group, Inc. expended substantial amounts to redesign
the Hideaway products and tooling. Thereafter, the Company acquired
its Hideaway products from SMC Communications Group, Inc. at prices
approximating those that the Company would have otherwise had to
expend with its previous vendor. The Company realizes an average gross
profit of approximately $45 on the resale of each Hideaway. In
addition, SMC Communications Group, Inc. from time to time acquired
other goods and materials for the benefit of the Company, which were
then incorporated into the Company's products. On most of these
transactions, SMC Communications Group, Inc. charged a handling fee of
10%. The aggregate obligations for Hideaway and other goods and
materials incurred to SMC Communications Group, Inc. through March 31,
1998 amounted to $787,370, of which the Company has paid $671,835. As
of March 31, 1998, the amount of unpaid invoices for Hideaway and
other products equaled $115,535. As part of the reinstated settlement
agreement, the Company had agreed to pay this obligation in full in
December 1999, and SMC further agreed to enter into a Technology
Transfer Agreement whereby SMC transferred all right title and
interest in and to the Hideaway products to the Company in exchange
for an option to acquire 1,500,000 shares of the Company's Common
Stock for $0.25 per share.
On September 15, 1993, the Company's Board of Directors approved a
compensation package for Michael Armani which included a bonus of
$60,000 for his services from January 1, 1992 to that date; a salary
of
F-14
<PAGE>
$72,000 per annum effective April 1, 1993, with authority for
increases to $120,000 per annum at unspecified later date(s); and
future bonuses equal to 2% of the Company's annual gross profits.
Amounts due under the package were deferred based on the financial
condition of the Company, and an option good through December 31, 1996
to convert all or any portion of deferred salary, bonuses and any
approved expenses to shares of Common Stock at the rate of $0.01 per
share was granted. Through December 31, 1995, Mr. Armani received
certain advances against reimbursement of expenses as well as against
the above compensation package. Since January 1, 1996, he has received
a regular salary at the rate of $120,000 per annum. From April 1, 1993
through July 31, 1996, the total amount of payments to Mr. Armani
other than salary amounted to $75,900. The Company and Mr. Armani have
agreed that the total amount of deferred salary, bonuses and unpaid
approved expenses as of July 31, 1996 amounted to $300,000, which Mr.
Armani has agreed to convert to 3,000,000 shares of Common Stock and
an option to acquire an additional 3,000,000 shares at $0.01 per
share. Mr. Armani exercised in July 1998. In addition there have been
advances between the Company and Mr. Armani during the year ended
March 31, 1998 in the aggregate amount of $150,163 of which $53,126
has been credited to the amount due to Mr. Armani. As of March 31,
1998, Mr. Armani is indebted to the Company in the net amount of
$97,037.
Note 19. Non-Cash Transactions
---------------------
In December 1997, the Company approved the issuance of 635,000 shares
of Common Stock as a bonus to ten employees. For financial statement
purposes these transactions are valued at $0.01 per share.
Note 20. Income tax carryforwards and credits
------------------------------------
For income tax purposes, the Company has substantial Federal and
California net operating loss carryforwards. Due to changes in the
ownership of the Company's Common Stock in the fiscal years ended
March 31, 1988 and 1993, certain limitations and restrictions on the
utilization of these loss carryforwards will apply. The utilization of
net operating loss carryforwards will be presented as a reduction of
the provision for income taxes. In addition, the Company has research
and development and investment tax credit carryforwards.
F-15
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELENETICS CORPORATION
Dated: July 13, 1998 By: /s/ MICHAEL A. ARMANI
-------------------------------------
Michael A. Armani
Chairman of the Board, President,
Chief Executive Officer and Chief
Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ MICHAEL A. ARMANI Chairman of the Board, President, July 13, 1998
- ------------------------ Chief Executive Officer, Chief
Michael A. Armani Financial Officer and Director
(principal executive officer and
principal accounting officer)
/s/ SHALA SHASHANI Secretary and Director July 13, 1998
- ------------------------
Shala Shashani
/s/ CARL SHAIFER Director July 13, 1998
- ------------------------
Carl Shaifer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation of the Company
3.2 Restated and Amended By-Laws of the Company
4.1 Telenetics Corporation Stock Purchase Warrant between the
Company and SMC Communications Group, Inc.
10.1 Letter of Intent dated May 28, 1998 by and between Duquesne
Light Company and the Company
10.2 Subcontract dated June 10, 1998 between Sargent Electric
Company and the Company
10.3 Marketing and Technology Agreement dated July 13, 1998 by
and between the Company and Duquesne Light Company
10.4 Factoring Agreement made by and between Access Capital, Inc.
and the Company as of November 26, 1997
10.5 Interparty Agreement dated November 26, 1997 by and between SMC
Communications Group, Inc., Shala Shashani doing business as SMC
Group and Access Capital, Inc.
10.6 Amendment to Factoring Agreement made by and between Access
Capital, Inc. and the Company as of January 31, 1998
10.7 Amendment to Compromise Agreement and Mutual Release dated
December 30, 1997 by and between the Company, SMC Communications
Group, Inc. and Shala Shashani doing business as SMC Group
10.8 Security Agreement dated December 31, 1997 by and between
the Company and SMC Communications Group, Inc.
10.9 Amendment to Security Agreement dated March 30, 1998 by and
between the Company and SMC Group
10.10 Technology Transfer Agreement dated October 29, 1997 by and
between the Company and SMC Communications Group, Inc.
10.11 Commercial Lease dated July 30, 1994 between SMC Group and the
Company
27.1 Financial Data Schedule*
____________
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
ENDORSED
FILED
In the office of the Secretary of State
of the State of California
NOV 12 1996
/s/ BILL JONES
BILL JONES, Secretary of State
RESTATED ARTICLES OF INCORPORATION
OF
TELENETICS CORPORATION,
a California corporation
Michael A. Armani and Shala Shashani certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of the corporation named above.
2. The Articles of Incorporation of the corporation shall be amended and
restated to read in full as follows.
FIRST: The name of the corporation is TELENETICS CORPORATION.
SECOND: The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
THIRD: The total number of shares which this corporation shall have
authority to issue is One Hundred Million (100,000,000) shares, all of one
class.
3. The restated articles and this certificate have been approved by the
Board of Directors of the corporation.
4. The foregoing amendment was approved by the required vote of the
shareholders of the corporation in accordance with Section 902 of the
Corporations Code, the total number of outstanding shares of each class entitled
to vote with respect to the foregoing amendment was 24,685,550 Common shares and
the number of shares voting in favor of the foregoing amendment equaled or
exceeded the vote required, such required vote being a majority of the
outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: October 1, 1996
/s/ MICHAEL A. ARMANI
-------------------------
MICHAEL A. ARMANI
/s/ SHALA SHASHANI
-------------------------
SHALA SHASHANI
<PAGE>
EXHIBIT 3.2
RESTATED AND AMENDED BY-LAWS
OF
TELENETICS CORPORATION
TABLE OF CONTENTS
ARTICLE I
OFFICES........................................................... 1
-------
Section 1. PRINCIPAL OFFICE...................................... 1
Section 2. OTHER OFFICES......................................... 1
ARTICLE II
SHAREHOLDERS...................................................... 1
------------
Section 1. PLACE OF MEETINGS..................................... 1
Section 2. ANNUAL MEETINGS....................................... 1
Section 3. SPECIAL MEETINGS...................................... 2
Section 4. NOTICE OF MEETINGS.................................... 2
Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS.... 2
Section 6. QUORUM................................................ 3
Section 7. ADJOURNMENTS.......................................... 3
Section 8. ORGANIZATION.......................................... 4
Section 9. VOTING................................................ 4
Section 10. PROXIES............................................... 4
Section 11. FIXING DATE FOR DETERMINATION OF
SHAREHOLDERS OF RECORD...................................... 5
Section 12. LIST OF SHAREHOLDERS ENTITLED TO VOTE................. 6
Section 13. INSPECTORS OF ELECTION................................ 6
Section 14. SHAREHOLDERS ACTING WITHOUT A MEETING - DIRECTORS..... 6
Section 15. OTHER ACTIONS WITHOUT A MEETING....................... 7
ARTICLE III
DIRECTORS......................................................... 7
---------
Section 1. RESPONSIBILITY AND POWERS OF THE BOARD OF DIRECTORS... 7
Section 2. STANDARD OF CARE...................................... 7
Section 3. NUMBER AND QUALIFICATION OF DIRECTORS................. 8
i
<PAGE>
Section 4. ELECTION AND TERM OF OFFICE OF DIRECTORS.............. 8
Section 5. ELECTION OF A CHAIRMAN OF THE BOARD................... 8
Section 6. RESIGNATIONS.......................................... 8
Section 7. REMOVAL OF DIRECTORS.................................. 8
Section 8. VACANCIES............................................. 9
Section 9. NOTICE, PLACE AND MANNER OF MEETINGS.................. 9
Section 10. REGULAR MEETINGS...................................... 10
Section 11. SPECIAL MEETINGS...................................... 10
Section 12. QUORUM................................................ 10
Section 13. NOTICE OF ADJOURNMENT................................. 11
Section 14. ORGANIZATION.......................................... 11
Section 15. SOLE DIRECTOR PROVIDED BY ARTICLES OF INCORPORATION OR
BY-LAWS..................................................... 11
Section 16. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT......... 11
Section 17. COMMITTEES............................................ 11
Section 18. ADVISORY DIRECTORS.................................... 12
Section 19. COMPENSATION OF DIRECTORS............................. 12
Section 20. CONTRACTS............................................. 12
ARTICLE IV
OFFICERS.......................................................... 13
--------
Section 1. RESPONSIBILITY AND DUTIES OF OFFICERS................. 13
Section 2. STANDARD OF CARE...................................... 13
Section 3. OFFICERS.............................................. 13
Section 4. SUBORDINATE OFFICERS, ETC. ........................... 14
Section 5. ELECTION.............................................. 14
Section 6. REMOVAL AND RESIGNATION OF OFFICERS................... 14
Section 7. VACANCIES............................................. 14
Section 8. CHAIRMAN OF THE BOARD................................. 14
Section 9. PRESIDENT............................................. 15
Section 10. VICE PRESIDENT........................................ 15
Section 11. SECRETARY............................................. 15
Section 12. CHIEF FINANCIAL OFFICER (Treasurer)................... 16
Section 13. CONTRACTS............................................. 16
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS,
---------------------------------------
EMPLOYEES AND OTHER CORPORATE AGENTS.............................. 17
------------------------------------
Section 1. ACTIONS, SUITS, OR PROCEEDINGS OTHER THAN
THOSE BY OR IN THE RIGHT OF THE CORPORATION................. 17
ii
<PAGE>
Section 2. ACTIONS, SUITS, OR PROCEEDINGS BY OR IN
THE RIGHT OF THE CORPORATION................................ 17
Section 3. EXPENSES INCURRED..................................... 18
Section 4. DETERMINATION OF INDEMNIFICATION...................... 18
Section 5. ADVANCE OF EXPENSES................................... 18
Section 6. NON-EXCLUSIVITY....................................... 18
Section 7. INSURANCE............................................. 18
Section 8. INCLUSION OF CONSTITUENT CORPORATION.................. 19
Section 9. INCLUSION OF OTHER TERMS.............................. 19
Section 10. CONTINUATION OF INDEMNIFICATION....................... 19
ARTICLE VI
CERTIFICATES AND TRANSFER OF SHARES............................... 20
-----------------------------------
Section 1. CERTIFICATES FOR SHARES............................... 20
Section 2. TRANSFER ON THE BOOKS................................. 20
Section 3. LOST OR DESTROYED CERTIFICATES........................ 20
Section 4. TRANSFER AGENTS AND REGISTRARS........................ 20
Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE............ 21
Section 6. LEGEND CONDITION...................................... 21
ARTICLE VII
RECORDS - REPORTS - INSPECTION.................................... 21
------------------------------
Section 1. FORM OF RECORDS....................................... 21
Section 2. CORPORATE RECORDS..................................... 22
Section 3. FINANCIAL RECORDS..................................... 22
Section 4. REPORTS............................................... 22
Section 5. INSPECTION OF BOOKS AND RECORDS....................... 22
Section 6. CERTIFICATION AND INSPECTION OF BY-LAWS............... 22
ARTICLE VIII
ANNUAL REPORTS.................................................... 22
--------------
Section 1. REPORT TO SHAREHOLDERS, DUE DATE...................... 22
Section 2. WAIVER................................................ 23
ARTICLE IX
AMENDMENTS TO BY-LAWS............................................. 23
---------------------
Section 1. AMENDMENT BY SHAREHOLDERS............................. 23
Section 2. POWERS OF DIRECTORS................................... 23
Section 3. RECORD OF AMENDMENTS.................................. 23
iii
<PAGE>
ARTICLE X
CORPORATE SEAL.................................................... 24
--------------
ARTICLE XI
MISCELLANEOUS..................................................... 24
-------------
Section 1. REPRESENTATION OF SHARES IN OTHER CORPORATIONS........ 24
Section 2. SUBSIDIARY CORPORATIONS............................... 24
Section 3. CHECKS, DRAFTS, ETC. ................................. 24
Section 4. CONTRACTS, ETC. --- HOW EXECUTED...................... 24
Section 5. WAIVER OF NOTICE OF MEETING OF SHAREHOLDERS........... 25
Section 6. ACCOUNTING YEAR....................................... 25
Section 7. GENDER................................................ 25
CERTIFICATE BY SECRETARY OF ADOPTION BY SHAREHOLDERS' VOTE............. 25
iv
<PAGE>
RESTATED AND AMENDED BY-LAWS
OF
TELENETICS CORPORATION
A California Corporation
ARTICLE I
OFFICES
-------
Section 1. PRINCIPAL OFFICE. The registered principal office for the
transaction of business of the corporation is hereby fixed and located at 26772
Vista Terrace Drive, Lake Forest, California . The location may be changed by
approval of a majority of the authorized members of the Board of Directors of
the Corporation (the "Board of Directors"), and additional offices may be
established and maintained at such other place or places, either within or
without California, as the Board of Directors may from time to time designate.
Section 2. OTHER OFFICES. Branch or subordinate offices may at any time
be established by the Board of Directors at any place or places where the
corporation is qualified to do business, or as the business of the corporation
may otherwise require.
ARTICLE II
SHAREHOLDERS
------------
Section 1. PLACE OF MEETINGS. All meetings of the Shareholders shall be
held on such date, and at such time and appropriate and convenient location,
either within or without of the State of California as the Board of Directors
may from time to time designate. In the absence of any such designation, meeting
of shareholders shall be at the principal office of the corporation.
Section 2. ANNUAL MEETINGS. The annual meetings of the Shareholders shall
be held, each year, within five months after the close of the fiscal year of the
corporation. At the annual meeting, the Shareholders shall elect a Board of
Directors, consider reports of the affairs of the corporation and transact such
other business as may be properly brought before the meeting.
1
<PAGE>
Section 3. SPECIAL MEETINGS. Special meetings of the Shareholders may be
called at any time by the Board of Directors, the Chairman of the Board, the
President, a Vice President, the Secretary, or by one or more Shareholders
holding not less than one-tenth (1/10; 10%) of the voting power of the
corporation. Except as may required by law, special meetings may not be called
by any other person or persons. Except as next provided, notice shall be given
as for the annual meeting.
Upon receipt of a written request addressed to the Chairman of the Board or
the President mailed or delivered personally to such Officer by any person
(other than the Board) entitled to call a special meeting of Shareholders, such
Officer shall cause notice to be given, to the Shareholders entitled to vote,
that a meeting will be held at a time requested by the person or persons calling
the meeting, not less than twenty-five (25) nor more than sixty (60) days after
the receipt of such request. If such notice is not given within twenty (20)
days after receipt of such request, the persons calling the meeting may give
notice thereof in the manner provided by these By-Laws.
Section 4. NOTICE OF MEETINGS. Whenever shareholders are required or
permitted to take any action at a meeting, notice of such meeting, annual or
special, shall be given in writing not less than ten (10) nor more than sixty
(60) days before the date of the meeting to all Shareholders entitled to vote at
such meeting. Such notice shall be given by the Secretary or the Assistant
Secretary, or if there be no such Officer, or in the case of his or her neglect
or refusal, by any Director or Shareholder.
Such notices or any reports shall be given personally or by mail and shall
be sent to the Shareholder's address appearing on the books of the corporation,
or supplied by him or her to the corporation for the purpose of notice. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail, postage prepaid.
Notice of any meeting of Shareholders shall specify the place, the day and
the hour of meeting, and (1) in case of a special meeting, the purpose for which
the meeting is called and the general nature of the business to be transacted
and no other business may be transacted, or (2) in the case of an annual
meeting, those matters which the Board at date of mailing, intends to present
for action by the Shareholders. At any meetings where Directors are to be
elected, notice shall include the names of the nominees, if any, intended at
date of notice to be presented by management for election.
Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of Shareholders, however called and noticed, shall
be valid as though had at a meeting duly held after regular call and notice, if
a quorum be present either in person or by proxy, and if, either before or after
2
<PAGE>
the meeting, each of the Shareholders entitled to vote, not present in person or
by proxy, sign a written waiver of notice, or a consent to the holding of such
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting. Attendance shall constitute a waiver of notice.
Section 6. QUORUM. The holders of a majority of the outstanding shares of
each class of stock entitled to vote at a meeting of the shareholders, present
in person, or represented by proxy, shall constitute a quorum at all meetings of
the Shareholders for the transaction of business except as otherwise provided by
law, by the Certificate of Incorporation, or by these By-Laws. For the purposes
of the foregoing, two or more classes or series of stock shall be considered a
single class if the holders thereof are entitled to vote together as a single
class at the meeting. If, however, such majority shall not be present or
represented at any meeting of the Shareholders, the Shareholders entitled to
vote at such meeting, present in person, or by proxy, shall have the power to
adjourn the meeting from time to time, until the requisite amount of voting
shares shall be present. At such adjourned meeting at which the requisite amount
of voting shares shall be represented, any business may be transacted which
might have been transacted at a meeting as originally notified.
Shares of the capital stock of the Corporation belonging, on the record
date for the meeting, to the Corporation or to another corporation, if a
majority of the shares entitled to vote in the election of directors of such
other corporation are held, directly or indirectly, by the Corporation, shall
neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
any stock held by it in a fiduciary capacity.
If a quorum be initially present, the Shareholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
Shareholders to leave less than a quorum, if any action taken is approved by a
majority of the Shareholders required to initially constitute a quorum.
Section 7. ADJOURNMENTS. Any meeting of shareholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. Except, however, when a meeting is
adjourned for forty-five (45) days or more, or if after the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting
shall be given as in case of an original meeting.
3
<PAGE>
Section 8. ORGANIZATION. Meetings of shareholders shall called to order
by the President, or other person appointed by the President, Chairman of the
Board or by the Board of Directors. Thereafter the meeting shall be presided
over by the Chairman of the Board, if any, or in his absence by the President;
or by a chairman chosen at the meeting. The Secretary shall act as secretary of
the meeting, but in the absence of the Secretary, the chairman of the meeting
may appoint any person to act as secretary of the meeting.
Section 9. VOTING. Only persons in whose names shares entitled to vote
stand on the stock records of the Corporation on the day of any meeting of
Shareholders, unless some other day be fixed by the Board of Directors for the
determination of Shareholders of record, and then on such other day, shall be
entitled to vote at such meeting.
Unless otherwise provided in the Articles of Incorporation or by the laws
of the State of California, each shareholder entitled to vote at any meeting of
the shareholders shall be entitled to one vote for each share of stock held by
him, which has voting power, upon each matter in question, except that, for the
purpose of election of directors, only, provided that at least one candidate's
name has been placed in nomination prior to the voting and one or more
Shareholder has given notice at the meeting of the Shareholder's intent to
cumulate the Shareholder's votes, every Shareholder entitled to vote at any
election for Directors of any corporation for profit may cumulate their votes
and give one candidate a number of votes equal to the number of Directors to be
elected multipled by the number of votes to which his or her shares are
entitled, or distribute his or her votes on the same principle among as many
candidates as he or she thinks fit. The candidates receiving the highest number
of votes up to the number of Directors to be elected are elected.
Voting at meetings of shareholders need not be by written ballot and need
not be conducted by inspectors unless the holders of a majority of the
outstanding shares of all classes of stock entitled to vote thereon present in
person or by proxy at such meeting shall so determine. At all meetings of
shareholders all elections and questions shall, unless otherwise provided by
law, the Articles of Incorporation or these By-Laws, be decided by the vote of
the holders of a majority of the outstanding shares of all classes of stock
entitled to vote thereon present in person or by proxy at such meeting, except
that the election of Directors, if cumulative voting is in effect, shall be
conducted in the manner stated above in this Section.
Section 10. PROXIES. Every Shareholder entitled to vote, or to execute
consents, may do so, either in person or by written proxy filed with the
Secretary of the corporation. The proxy, which shall include writings sent by
telex, telegraph, cable or other facsimile transmission, may be executed by
either the shareholder or the shareholder's duly authorized attorney-in-fact. No
such proxy shall
4
<PAGE>
be voted or acted upon after three years from its date unless the proxy provides
for a longer period. A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A shareholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or another duly
executed proxy bearing a later date with the Secretary of the Corporation.
Section 11. FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. The
Board of Directors may fix a time in the future not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date fixed for the
payment of any dividend or distribution, or for the allotment of rights, or when
any change or conversion or exchange of shares shall go into effect, or other
lawful action as to shareholders to take place, as a record date for the
determination of the Shareholders entitled to notice of and to vote at any such
meeting or adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any such dividend
or distribution, or entitled to receive any allotment of rights, or entitled to
exercise the rights in respect to any such change, conversion or exchange of
shares, or entitled to receive the benefit of or exercise the right of any other
lawful action in relation to shareholders. In such case only Shareholders of
record on the date so fixed shall be entitled to notice of and to vote at such
meeting, or to receive such dividends, distribution or allotment of rights, or
to exercise such rights, as the case may be, notwithstanding any transfer of any
share on the books of the corporation after any record date fixed as aforesaid.
The Board of Directors may close the books of the corporation against transfers
of shares during the whole or any part of such period.
If no record date is fixed by the Board of Directors the record date: (1)
for determining shareholders entitled to notice of, or to vote at a meeting of
shareholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) for
determining shareholders entitled to express consent to corporate action in
writing without a meeting, to the extent permitted by these By-Laws, shall be
the day on which the written consent is expressed; and (3) for determining
shareholders of record for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
A determination by the Board of Directors or otherwise of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
5
<PAGE>
Section 12. LIST OF SHAREHOLDERS ENTITLED TO VOTE. If a record date has
been set by the Board of Directors, the Secretary shall prepare and make, at
least 10 days before every meeting of shareholders, a complete list of the
shareholders entitled to vote at the meeting, arranged in alphabetical order and
showing the address of each shareholder and the number of shares registered in
the name of each shareholder. Such list shall, during normal business hours, be
open to the examination of any shareholder, or any shareholder's duly authorized
representative, for any purpose germane to the meeting either at the principal
office of the Corporation and/or such other place as may be specified in the
notice of the meeting. If no record date is fixed by the Board of Directors, the
Secretary shall prepare and make such list as of the alternative record date
provided for in the By-Laws. The list shall be produced and kept at the time and
place of the meeting during the whole time thereof and may be inspected by any
shareholder present.
Section 13. INSPECTORS OF ELECTION. In advance of any meeting of
Shareholders the Board of Directors may, if they so elect, appoint inspectors of
election to act at such meeting or any adjournment thereof. If inspectors of
election be not so appointed, or if any persons so appointed fail to appear or
refuse to act, the chairman of any such meeting may, and, if any Shareholder, or
his or her proxy, requests and said request is approved by a majority of the
outstanding shares of all classes of stock entitled to vote present at such
meeting in person or by proxy the chairman shall, make such appointment at the
meeting in which case the number of inspectors shall be either one (1) or three
(3) as determined by a majority of the Shareholders represented at the meeting.
The duties of these inspectors shall be to (1) determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, and the authenticity, validity and effect of
proxies; (2) receive votes, ballots or consents; (3) determine all challenges
and questions arising in connection with the right to vote; (4) count and
tabulate all votes and consents; (5) determine the election result; and (6) do
any other acts that may be proper to conduct the election or vote with fairness
to all shareholders.
Section 14. SHAREHOLDERS ACTING WITHOUT A MEETING - DIRECTORS. Any action
which is required or may be taken at any meeting of the Shareholders, may be
taken without a meeting, without prior notice and without a vote if consent in
writing, setting forth the action so taken, shall be signed by all of the
Shareholders entitled to vote at a meeting held for such purpose, and filed with
the Secretary of the corporation. Except that, if the Directors fail to fill a
vacancy, then a Director to fill that vacancy may be elected by the written
consent of persons holding a majority of shares entitled to vote for the
election of Directors.
6
<PAGE>
Section 15. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise provided by
statute or the Articles of Incorporation, any action which is required or may be
taken at any meeting of Shareholders may be taken without a meeting, without
prior notice and without a vote if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Unless the consents of all Shareholders entitled to vote have been
solicited in writing, (1) Notice of any Shareholders approval without a meeting
by less than unanimous written consent shall be given at least ten (10) days
before the consummation of the action authorized by such approval, and (2)
Prompt notice shall be given of the taking of any other corporate action
approved by Shareholders without a meeting by less than unanimous written
consent, to each of those Shareholders entitled to vote who have not consented
in writing.
Any Shareholder giving a written consent, or the Shareholder's proxy
holders, or a transferee of the shares of a personal representative of the
Shareholder or their respective proxy holders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
ARTICLE III
DIRECTORS
---------
Section 1. RESPONSIBILITY AND POWERS OF THE BOARD OF DIRECTORS. Except as
otherwise provided by law or in the Articles of Incorporation, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board of Directors. The Board may
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other person, provided that the business
and affairs of the corporation shall be managed and all corporate powers shall
be exercised under the ultimate direction of the Board.
Section 2. STANDARD OF CARE. Each Director shall perform the duties of a
Director, including the duties as a member of any committee of the Board upon
which the Director may serve, in good faith, in a manner such Director believes
to be in the best interests of the corporation, and with such care, including
reasonable
7
<PAGE>
inquiry, as an ordinary prudent person in a like position would use under
similar circumstances.
Section 3. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of Directors shall be equal to the number of holders of shares of the
corporations common stock but not less than three (3) nor more than seven (7)
until changed by a duly adopted amendment to the Articles of Incorporation or by
an amendment to this by-law adopted by the vote or written consent of holders of
a majority of the outstanding shares entitled to vote. Directors need not be
stockholders.
Section 4. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of the Shareholders to hold office until the next
annual meeting. Each Director, including a Director elected to fill a vacancy,
shall hold office until the expiration of said term for which elected and until
a successor has been elected and qualified. No decrease in the authorized number
of directors shall shorten the term of any incumbent directors.
Section 5. ELECTION OF A CHAIRMAN OF THE BOARD. At the regular meeting of
the Board of Directors following a meeting of shareholders which has elected
directors, the Directors may elect a Chairman of the Board from among the
directors. The Chairman of the Board shall hold office until the corresponding
meeting of the Board of Directors in the next year, or otherwise after the
shareholders have elected directors, and until a successor shall have been
elected and qualified, or until earlier resignation or removal. The Chairman of
the Board, if such be elected, shall be the Chief Executive Officer of the
Corporation and, if present, preside at meetings of the Board of Directors and
exercise and perform such other powers and duties as may be from time to time
assigned by the Board of Directors or prescribed by the By-Laws. Any vacancy in
such office may be filled for the unexpired portion of the term in the Board of
the Directors at any regular or special meeting.
Section 6. RESIGNATIONS. Any Director may resign effective upon giving
written notice to the Chairman of the Board, the President, the Secretary or the
Board of Directors of the corporation, unless the notice specifies a later time
for the effectiveness of such resignation. If the resignation is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
Section 7. REMOVAL OF DIRECTORS. Subject to the provisions of the
Articles of Incorporation, any Director may be removed with or without cause at
any time by the affirmative vote of shareholders holding of record in the
aggregate at least a majority of the outstanding shares of the classes of shares
of the Corporation entitled to vote thereon at a special meeting of the
shareholders called for that purpose, and may be removed for cause by action of
the Board.
8
<PAGE>
Section 8. VACANCIES. Newly created directorships resulting from any
increase in the number of directors any vacancies in the Board of Directors may
be filled by a majority of the remaining Directors, though less than a quorum,
or by a sole remaining Director, except that a vacancy created by the removal of
a Director by the vote or written consent of the Shareholders or by court order
may be filled only by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or by the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each Director so elected shall hold office until the next annual meeting
of the Shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board of Directors shall be deemed to exist
in the event of the death, resignation, or removal of any Director, or if the
Board of Directors by resolution declares vacant the office of a Director who
has been declared of unsound mind by an order of court or convicted of a felony,
or if the authorized number of Directors is increased, or if the Shareholders
fail, at any meeting of Shareholders at which any Director or Directors are
elected, to elect the number of Directors to be voted for at that meeting.
The Shareholders may elect a Director or Directors at any time to fill any
vacancy or vacancies not filled by the Directors, but any such election by
written consent shall require the consent of a majority of the outstanding
shares entitled to vote.
No reduction of the authorized number of Directors shall have the effect of
removing any Director before that Director's term of office expires.
Section 9. NOTICE, PLACE AND MANNER OF MEETINGS. Meetings of the
board of Directors may be called by the Chairman of the Board, or the President,
or any Vice President, or the Secretary, or any two (2) Directors and shall be
held at the principal executive office of the corporation, unless some other
place is designated in the notice of the meeting. Members of the Board, or any
committee thereof, may participate in a meeting through use of a conference
telephone or similar communications equipment so long as all members
participating in such a meeting can hear one another. Telephonic participation
in a meeting shall constitute presence in person at such meeting.
If notice of a meeting of the Board of Directors, or any committee thereof,
is sent to a Director by letter, it shall be addressed to him or her at his or
her address as it is shown upon the records of the corporation, or if it is not
so shown on such records or is not readily ascertainable, at the place in which
the meetings of the Directors are regularly held. Such notice shall be
deposited in the United States mail, postage prepaid, in the place in which the
principal executive office of the corporation is located at least four (4) days
prior to the time of the holding of the meeting. Notice of
9
<PAGE>
a meeting may also be given to Directors by personally delivering the notice to
them, or by a corporate Officer personally communicating it to them by
telephone, telegraph, telex, cable or other facsimile transmission. Such
personal notice shall be given at least forty-eight (48) hours prior to the time
of the meeting. Such mailing, or personal notice by telecommunication or
delivery as above provided shall be due, legal and personal notice to such
Director.
When all of the Directors are present at any Directors' meeting, however
called or noticed, and either (i) sign a written consent thereto on the records
of such meeting, or, (ii) if a majority of the Directors are present and if
those not present sign a waiver of notice of such meeting or a consent to
holding the meeting or an approval of the minutes thereof, whether prior to or
after the holding of such meeting, which said waiver, consent or approval shall
be filed with the Secretary of the corporation, or, (iii) if a Director attends
a meeting without notice but without protesting, prior thereto or at its
commencement, the lack of notice, then the transactions thereof are as valid as
if had at a meeting regularly called and noticed.
Accurate minutes of any meeting of the Board or any committee thereof,
shall be maintained by the Secretary or other Officer designated for that
purpose.
Section 10. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held immediately following a meeting of shareholders which
has elected directors, and at such other times and dates as the Board of
Directors may determine. Such meetings shall be held at the corporate offices,
or such other place as may be designated by the Board of Directors. If the day
designated for said meeting shall fall upon a holiday, such meetings shall be
held on the next succeeding business day thereafter. No notice need to be given
of such regular meetings.
Section 11. SPECIAL MEETINGS. Special meetings of the Board may be
held at any time and place within or without, and may be called at any time by
the Chairman of the Board, or the President, or any Vice President, or the
Secretary, or any two (2) Directors by giving proper notice as set forth
hereinbefore.
Section 12. QUORUM. A majority of the number of Directors as fixed
by the Articles of Incorporation or By-Laws shall be necessary to constitute a
quorum for the transaction of business, and the action of a majority of the
Directors present at any meeting at which there is a quorum, when duly
assembled, is valid as a corporate act provided that the Articles of
Incorporation or these By-Laws do not require a vote of a greater number for
that action. Except, however, that, in the absence of a quorum, a minority of
the Directors present may adjourn from time to time until a quorum shall attend,
but may not transact any other business. A meeting at which a quorum is
initially present may continue to transact business, notwithstanding the
withdrawal of Directors, if any action taken is approved by a majority of the
required
10
<PAGE>
quorum for such meeting.
Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given to absent Directors if the time
and place be fixed at the meeting adjourned and held within twenty-four (24)
hours, but if adjourned more than twenty-four (24) hours, notice shall be given
to all Directors not present at the time of the adjournment.
Section 14. ORGANIZATION. Meetings of the Board of Directors shall
be presided over by the Chairman of the Board, if any, or in his absence by the
President, or in their absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in the absence of the
Secretary, the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 15. SOLE DIRECTOR PROVIDED BY Articles OF INCORPORATION OR
BY-LAWS. In the event only one (1) Director is required by the By-Laws or
Articles of Incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the Directors
shall be deemed to refer to such notice, waiver, etc., by such sole Director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to a Board of Directors.
Section 16. DIRECTORS ACTION BY UNANIMOUS WRITTEN CONSENT. Any
action required or permitted to be taken by the Board of Directors may be taken
without a meeting and with the same force and effect as if taken by a unanimous
vote of Directors, if authorized by a writing signed individually or
collectively by all members of the Board. Such consent shall be filed with the
minutes of the Board of Directors.
Section 17. COMMITTEES. Committees of the Board may be appointed by
resolution passed by a majority of the whole Board of Directors. Committees
shall be composed of one (1) or more members of the Board, and one (1) or more
Officers of the Corporation and any other such persons determined to be
appropriate to the purpose of the committees appointed, and shall have and may
exercise such powers of the Board as may be expressly delegated to it by
resolution of the Board of Directors, except that no such committee shall have
the power or authority to amend the Articles of Incorporation or By-Laws,
authorize the issuance of stock, adopt an agreement of merger or consolidation,
recommend to shareholders the sale, lease or exchange of all or substantially
all of the Corporation's property or assets, recommend to shareholders a
dissolution of the Corporation or a revocation thereof, or exercise any other
powers expressly made non-delegable by statute. The Board of Directors may
designate one or more directors as alternate members of any
11
<PAGE>
committee who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
and any alternate if one has been appointed by the Board, the member or members
there present at any meeting, and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in place of any such absent or
disqualified member.
Unless the Board of Directors otherwise provides, each committee designated
by the Board of Directors may adopt, amend and repeal rules for the conduct of
its business provided that any such rules do not violate, and is not
inconsistent with, the laws of the State of California, the Articles of
Incorporation, or these By-Laws. In the absence of a provision by the Board of
Directors or a provision in the rules of such committee to the contrary, a
majority of the entire authorized number of the members of such committee,
excluding any alternate members appointed or authorized, shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board of Directors conducts its business
pursuant to these By-Laws.
Section 18. ADVISORY DIRECTORS. The Board of Directors from time to
time may elect one or more persons to be Advisory Directors who shall not by
such appointment be members of the Board of Directors. Advisory Directors shall
be available from time to time to perform special assignments specified by the
President, to attend meetings of the board of directors upon invitation and to
furnish consultation to the Board. The period during which the title shall be
held may be prescribed by the Board of Directors. If no period is prescribed,
the title shall be held at the pleasure of the Board.
Section 19. COMPENSATION OF DIRECTORS. Directors, as such, shall not
receive any stated salary for their services, but by resolution of the Board a
fixed sum and expense of attendance, if any, may be allowed for attendance at
each regular and special meeting of the Board; provided that nothing herein
contained shall be construed to preclude any Director from serving the
corporation in any other capacity and receiving compensation therefor.
Section 20. CONTRACTS. No contract or other transaction between this
corporation and any other corporation shall be impaired, affected or
invalidated, nor shall any Director be liable in any way by reason of the fact
that any one or more of the Directors of this corporation is or are interested
in, or is a director or officer, or are directors or officers of such other
corporation, provided that such facts are disclosed or made known to the Board
of Directors.
12
<PAGE>
Any Director, personally and individually, may be a party to or may be
interested in any contract or transaction of this corporation, and no Director
shall be liable in any way by reason of such interest, provided that the fact of
such interest be disclosed or made known to the Board of Directors, and provided
that the Board of Directors shall authorize, approve or ratify such contract or
transaction by the vote (not counting the vote of any such Director) of a
majority of a quorum, notwithstanding the presence of any such Director at the
meeting at which such action is taken. Such Director or Directors may be
counted in determining the presence of a quorum at such meeting. This section
shall not be construed to impair or invalidate or in any way affect any contract
or other transaction which would otherwise be valid under the law (common,
statutory or otherwise) applicable thereto.
ARTICLE IV
OFFICERS
--------
Section 1. RESPONSIBILITY AND DUTIES OF OFFICERS. Except as
otherwise provided by law or in the Articles of Incorporation, the Officers of
the Corporation shall have such responsibility, power and duties in the
management of the Corporation as shall be stated in these By-Laws or in a
resolution of the Board of Directors which is not inconsistent with these By-
Laws and, to the extent not so stated, as generally pertain to their respective
offices, subject to the control of the Board of Directors.
Section 2. STANDARD OF CARE. Each Officer shall perform the duties
of his office, including the duties as a member of any committee of the Board
upon which the Officer may serve, in good faith, in a manner such Officer
believes to be in the best interests of the corporation, and with such care,
including reasonable inquiry, as an ordinary prudent person in a like position
would use under similar circumstances. However, the Board of Directors may
require any officer, agent or employee to give security for the faithful
performance of his or her duties.
Section 3. OFFICERS. The Officers of the corporation shall be a
President, a Secretary, and a Chief Financial Officer or Treasurer . The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board, one or more Vice Presidents, one or more Assistant
Secretaries, one or more Assistant Treasurers or Assistant Chief Financial
Officers, and such other Officers as may be appointed in accordance with the
provisions of Section 4 of this Article. Any number of offices may be held by
the same person, except that, if there are two (2) or more persons holding
office, a person holding either the office of Chairman of the Board or President
may not also hold the office Secretary.
13
<PAGE>
Section 4. SUBORDINATE OFFICERS, ETC. The Board of Directors may
appoint such other Officers as the business of the corporation may require, each
of whom shall hold office for such period, have such authority and perform such
duties as are provided in the By-Laws or as the Board of Directors may from time
to time determine.
Section 5. ELECTION. The Officers of the Corporation shall be chosen
by the Board of Directors at the first meeting of the Board of Directors after a
meeting of shareholders which elected directors. Except as otherwise provided in
a resolution of the Board of Directors electing the officer, each officer of the
corporation shall hold office until the first meeting of the Board of Directors
after the next meeting of shareholders which elected directors, and a successor
shall be elected and qualified, or until his earlier death, resignation, removal
or other disqualification. The election of an officer shall not of itself create
any contractual right as to the person so elected.
Section 6. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an Officer under any contract of employment, any Officer may
be removed at any time, either with or without cause, by action of the Board of
Directors taken with or without a meeting, or by any Officer upon whom such
power of removal may be conferred by the Board of Directors.
Any Officer may resign at any time by giving written notice to the
Corporation or its Board of Directors. Any resignation shall take effect at the
date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the Officer is a party.
Section 7. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the By-Laws for regular appointments to that office.
Section 8. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
an officer be elected, shall be the Chief Executive Officer of the Corporation,
have general supervision, direction and control of the business and Officers of
the corporation, and, if present, preside at meetings of the Board of Directors,
be an ex officio a member of all the standing committees, if any, and shall
exercise and perform such other powers and duties as may be from time to time
assigned by the Board of Directors or prescribed by the By-Laws. If there is no
President, the Chairman of the Board shall in addition have all of the powers
and duties prescribed in Section 9 of this Article.
14
<PAGE>
Section 9. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there be
such an Officer, the President shall be the Chief Operating Officer of the
corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and Officers of the
corporation. He or she shall preside at all meetings of the Shareholders and in
the absence of the Chairman of the Board, or if there be none, at all meetings
of the Board of Directors. If there is no Chairman of the Board, the President
shall be the Chief Executive Officer and shall in addition have all of the
powers and duties prescribed in Section 8 of this Article. The President shall
be ex officio a member of the Executive Committee appointed by the Board, if
any, and shall have the general powers and duties of management usually vested
in the office of President of a corporation, and shall have such other powers
and duties as may be prescribed by the Board of Directors or the By-Laws.
Section 10. VICE PRESIDENT. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to, all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the By-Laws.
Section 11. SECRETARY. The Secretary shall keep, or cause to be kept,
a book of minutes at the principal office or such other place as the Board of
Directors may order, of all meetings of Directors, including any committees
thereof, and Shareholders, with the time and place of holding, whether regular
or special, and if special, how authorized the notice thereof given, the names
of those present at Directors' meetings, the number of shares present or
represented at Shareholders' meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office or
at the office of the corporation's transfer agent, a share register, or
duplicate share register, showing the names of the Shareholders and their
addresses; the number and classes of shares held by each; the number and date of
certificates issued for the same; and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the Shareholders and of the Board of Directors required by the By-Laws or by
law to be given. He or she shall keep the seal of the corporation in safe
custody with the authority to affix such seal to any instrument requiring it,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or by the By-Laws.
15
<PAGE>
Section 12. CHIEF FINANCIAL OFFICER (Treasurer). The Chief Financial
Officer or Treasurer shall keep and maintain, or cause to be kept and maintained
in accordance with generally accepted accounting principles, adequate and
correct accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, earnings (or surplus) and shares. The books of account shall at
all reasonable times be open to inspection by any Director.
This Officer shall deposit all moneys and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the Board of Directors. He or she shall disburse the funds of the corporation
as may be ordered by the Board of Directors, shall render to the President and
Directors, whenever they request it, an account of all of his or her
transactions and of the financial condition of the corporation, and shall have
such other powers and perform such other duties as may be prescribed by the
Board of Directors or the By-Laws.
Section 13. CONTRACTS. No contract or other transaction between this
corporation and any other corporation shall be impaired, affected or
invalidated, nor shall any Officer be liable in any way by reason of the fact
that any one or more of the Officers and Directors of this corporation is or are
interested in, or is a director or officer, or are directors or officers, of
such other corporation, provided that such facts are disclosed or made known to
the Board of Directors.
Any Officer, personally and individually, may be a party to or may be
interested in any contract or transaction of this corporation, and no Officer
shall be liable in any way by reason of such interest, provided that the fact of
such interest be disclosed or made known to the Board of Directors, and provided
that the Board of Directors shall authorize, approve or ratify such contract or
transaction by the vote (not counting the vote of any such interested Officer if
he is also Director) of a majority of a quorum, notwithstanding the presence of
any such Officer/Director at the meeting at which such action is taken. This
section shall not be construed to impair or invalidate or in any way affect any
contract or other transaction which would otherwise be valid under the law
(common, statutory or otherwise) applicable thereto.
16
<PAGE>
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS,
---------------------------------------
EMPLOYEES AND OTHER CORPORATE AGENTS
------------------------------------
Section 1. ACTIONS, SUITS, OR PROCEEDINGS OTHER THAN THOSE BY OR IN
THE RIGHT OF THE CORPORATION. The Corporation may indemnify, in the manner and
to the full extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
Section 2. ACTIONS, SUITS, OR PROCEEDINGS BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee, or agent
of the Corporation, or is or was serving or has agreed to serve at the request
of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise or by reason
of any action alleged to have been taken or omitted in such capacity against
costs, charges and expenses (including attorneys' fees) actually and reasonably
incurred by him or in his behalf in connection with the defense or settlement of
such action or suit and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and except that no indemnification shall be made in respect of
any claim, issue, or matter as to which such person shall have been adjudged to
be liable to the Corporation unless and only to the extent that the Court in
which such action or suit was brought, shall determine upon application that,
despite adjudication of liability but in view of all the
17
<PAGE>
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such Court shall deem proper.
Section 3. EXPENSES INCURRED. To the extent that a director,
officer, employee, or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit, or proceeding referred to in
Sections 1. and 2., above, or in defense of any claim, issue, or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
Section 4. DETERMINATION OF INDEMNIFICATION. Any indemnification
provided under Section 1. and 2., above, (unless ordered by a Court) shall be
made by the Corporation upon a determination that indemnification of the
director, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct in Sections 1. and 2., above. The
determination of the amount of indemnity shall reasonably be made (1) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding, or (2) if such a quorum is
not obtainable, and if a majority of disinterested directors so directs, by
arbitration pursuant to the then existing rules of the American Arbitration
Association; or (3) by the stockholders of the Corporation.
Section 5. ADVANCE OF EXPENSES. Costs and expenses (including
attorneys' fees) incurred by or on behalf of a director, officer, employee, or
agent in defending or investigating a civil or criminal action, suit,
proceeding, or investigation may be paid by the Corporation in advance of the
final disposition of such matter, if such director, officer, employee, or agent
shall undertake, in writing, to repay any such advances in the event that it is
ultimately determined that he is not entitled to indemnification.
Section 6. NON-EXCLUSIVITY. The right of indemnity and advancement
of expenses provided herein shall not be deemed exclusive of any other rights to
which any person seeking indemnification or advancement of expenses from the
Corporation may be entitled under any agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office. Any
agreement for indemnification of or advancement of expenses to any director,
officer, employee, agent, or other person may provide rights of indemnification
or advancement of expenses which are broader or otherwise different from those
set forth herein.
Section 7. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director,
18
<PAGE>
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, or as a member of any committee or similar body
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article or applicable law.
Section 8. INCLUSION OF CONSTITUENT CORPORATION. For purposes of
this Article, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger, which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees, or agents, so that any person who is or was a
director, officer, employee, or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, shall stand in the same position under the
provisions of this Article with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
Section 9. INCLUSION OF OTHER TERMS. For purposes of this Article,
reference to "other enterprises" shall include, but not be limited to, employee
benefit plans; references to "fines" shall include, but not be limited to, any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include, but not
be limited to, any services as a director, officer, employee, or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation," as referred to in
this Article.
Section 10. CONTINUATION OF INDEMNIFICATION. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article may,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee, or agent and may inure to
the benefit of the heirs, executors, and administrators of such a person.
19
<PAGE>
ARTICLE VI
CERTIFICATES AND TRANSFER OF SHARES
-----------------------------------
Section 1. CERTIFICATES FOR SHARES. Certificates for shares shall be
of such form and device as the Board of Directors may designate and shall state
the name of the record holder of the shares represented thereby; its number;
date of issuance; the number of shares for which it is issued; a statement of
the rights, privileges, preferences and restrictions, if any; a statement as to
the redemption or conversion, if any; a statement of liens or restrictions upon
transfer or voting, if any; if shares be assessable or, if assessments are
collectible by personal action, a plain statement of such facts.
All Certificates shall be signed in the name of the corporation by the
Chairman of the Board or Vice Chairman of the Board or the President or Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the Shareholder.
Any or all of the signatures on the certificate may be facsimile. In case
any Officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed on a certificate shall have ceased to be that Officer,
transfer agent, or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an Officer,
transfer agent, or registrar at the date of issue.
Section 2. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming a
certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of the fact and shall, if the Directors in their discretion so
require, give the corporation a bond of indemnity, in form and with one or more
sureties satisfactory to the Board, in at least double the value of the stock
represented by said certificate, whereupon a new certificate may be issued in
the same tenor and for the same number of shares as the one alleged to be lost
or destroyed.
Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors
may appoint one or more transfer agents or transfer clerks, and one or more
registrars, which shall be an incorporated bank or trust company, either
domestic or
20
<PAGE>
foreign, who shall be appointed at such times and places as the requirements of
the corporation may necessitate and the Board of Directors may designate.
Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE. In order that
the corporation may determine the Shareholders entitled to notice of any meeting
or to vote or entitled to receive payment of any dividend or other distribution
or allotment of any rights or entitled to exercise any rights in respect of any
other lawful action, the Board may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days prior to the date of
such meeting nor more than sixty (60) days prior to any other action.
If no record date is fixed; the record date for determining Shareholders
entitled to notice of or to vote at a meeting of Shareholders shall be at the
close of business on the business day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the business day
next preceding the day on which the meeting is held. The record date for
determining Shareholders entitled to give consent to corporate action in writing
without a meeting, when no prior action by the Board is necessary, shall be the
day on which the first written consent is given.
The record date for determining Shareholders for any other purpose shall be
at the close of business on the day on which the Board adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such other
action, whichever is later.
Section 6. LEGEND CONDITION. In the event any shares of this
corporation are issued pursuant to a permit or exemption therefrom requiring the
imposition of a legend condition, the person or persons issuing or transferring
said shares shall make sure said legend appears on the certificate and shall not
be required to transfer any shares free of such legend unless an amendment to
such permit or a new permit be first issued so authorizing such a deletion.
ARTICLE VII
RECORDS - REPORTS - INSPECTION
------------------------------
Section 1. FORM OF RECORDS. Any records maintained by the
Corporation in the regular course of its business, including, but not limited
to, minute books, stock ledger and books of account, may be kept on, or be in
the form of, computer disks or diskettes, magnetic tape, photographs,
microphotographs or any other information storage device, provided that the
records so kept can be converted into clearly legible form within a reasonable
time. The Corporation shall so convert
21
<PAGE>
any records so kept upon the request of any person entitled to inspect the same.
All of such books, records and accounts shall be kept at its principal executive
office as fixed by the Board of Directors from time to time.
Section 2. CORPORATE RECORDS. The Corporation shall maintain
accurate and adequate records containing the Articles of Incorporation and
amendments thereto; By-Laws and amendments thereto; issuances, transfers and
holdings of shares of the Corporations stock; minutes of the meetings and
actions of shareholders, and directors and any committee thereof; and other
corporate activities.
Section 3. FINANCIAL RECORDS. The corporation shall maintain, in
accordance with generally accepted accounting principles, adequate and correct
accounts, books and records of its business and properties.
Section 4. REPORTS. The Directors and Officers of the Corporation
shall make such reports of the corporate and business affairs of the Corporation
as may be required by the statutes of all competent governmental authorities
having jurisdiction over the Corporation; those required by action of the
shareholders and directors; and those required for the competent management of
its affairs.
Section 5. INSPECTION OF BOOKS AND RECORDS. All books and records
shall be open to inspection of the Directors and Shareholders from time to time
during normal business hours upon reasonable notice.
Section 6. CERTIFICATION AND INSPECTION OF BY-LAWS. The original or
a copy of these By-Laws, as amended or otherwise altered to date, certified by
the Secretary, shall be kept at the corporation's principal executive office and
shall be open to inspection by the Shareholders of the corporation at all
reasonable times during office hours.
ARTICLE VIII
ANNUAL REPORTS
--------------
Section 1. REPORT TO SHAREHOLDERS, DUE DATE. The Board of Directors
shall cause an annual report to be sent to the Shareholders not later than one
hundred twenty (120) days after the close of the fiscal or calendar year adopted
by the corporation. This report shall be sent at least fifteen (15) days before
the annual meeting of Shareholders to be held during the next fiscal year and in
the manner specified in these By-Laws for giving notice to the Shareholders of
the
22
<PAGE>
corporation. The annual report shall contain a balance sheet as of the end of
the fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report of independent
accountants or, if there is no such report, the certificate of an authorized
Officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
Section 2. WAIVER. The annual report to Shareholders referred to in
Section 1501 of the California General Corporation Law is expressly dispensed
with so long as this corporation shall have less than one hundred (100)
Shareholders. However, nothing herein shall be interpreted as prohibiting the
Board of Directors from issuing annual or other periodic reports to the
Shareholders of the corporation as they consider appropriate.
ARTICLE IX
AMENDMENTS TO BY-LAWS
---------------------
Section 1. AMENDMENT BY SHAREHOLDERS. New By-Laws may be adopted or
these By-Laws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote; provided,
however, that if the Articles of Incorporation of the corporation set forth the
number of authorized Directors of the corporation, the authorized number of
Directors may be changed only by an amendment of the Articles of Incorporation.
Section 2. POWERS OF DIRECTORS. Subject to the right of the
Shareholders to adopt, amend or repeal By-Laws, as provided in Section 1 of this
Article, the Board of Directors may adopt, amend or repeal any of these By-Laws
other than a By-Law or amendment thereof changing the authorized number of
Directors.
Section 3. RECORD OF AMENDMENTS. Whenever an amendment or new By-Law
is adopted, it shall be copied in the corporate book with the original By-Laws,
in the appropriate place. If any By-law is repealed, the fact of repeal with the
date of the meeting at which the repeal was enacted or written assent was filed
shall be stated in said book.
23
<PAGE>
ARTICLE X
CORPORATE SEAL
--------------
The Corporation may have a corporate seal. Such corporate seal shall
be circular in form, and shall have inscribed thereon the name of the
corporation, the year or date of its incorporation, and the word "California",
or otherwise in such form as may be approved from time to time by the Board of
Directors. The corporate seal may be used by causing it, or a facsimile thereof,
to be impressed or affixed or in any other manner reproduced.
ARTICLE XI
MISCELLANEOUS
-------------
Section 1. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of
other corporations standing in the name of this corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
corporation by the Chairman of the Board, the President or any Vice President
and the Secretary or an Assistant Secretary.
Section 2. SUBSIDIARY CORPORATIONS. Shares of this corporation owned
by a subsidiary shall not be entitled to vote on any matter. A subsidiary for
these purposes is defined as a corporation, the shares of which possessing more
than 25% of the total combined voting power of all classes of shares entitled to
vote, are owned directly or indirectly through one (1) or more subsidiaries.
Section 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders
for payment of money, notes or other evidences of indebtedness, issued in the
name of or payable to the corporation, shall be signed or endorsed by such
person or persons and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
Section 4. CONTRACTS, ETC. --- HOW EXECUTED. The Board of Directors,
except as in the By-Laws otherwise provided, may authorize any Officer or
Officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the corporation. Such authority may be general
or confined to specific instances. Unless so authorized by the Board of
Directors, no Officer, agent or employee shall have any power or authority to
bind the corporation by any contract or agreement, or to pledge its credit, or
to render it liable for any purpose or to any amount, except as provided by
statute.
24
<PAGE>
Section 5. WAIVER OF NOTICE OF MEETING OF SHAREHOLDERS. Whenever
notice is required to be given by law or under any provision of the Articles on
Incorporation or these By-Laws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the shareholders, directors, or members of a
committee of directors need be specified in any written waiver of notice unless
so required by the Articles of Incorporation or these By-Laws. Unless either
proper notice of a meeting of shareholders or the Board of Directors, or any
committee thereof, has been given, or else the persons entitled thereto have
waived such notice (either in writing or by attendance as set forth above), any
business transacted at such meeting shall null and void.
Section 6. ACCOUNTING YEAR. The accounting year of the corporation
shall be fixed by resolution of the Board of Directors.
Section 7. GENDER. Any references to the masculine gender in these
By-Laws shall be construed to mean the feminine gender, as the situation may
demand.
CERTIFICATE BY SECRETARY OF ADOPTION BY SHAREHOLDERS' VOTE
----------------------------------------------------------
THIS IS TO CERTIFY:
That I am the duly elected, qualified, and acting Secretary of the
above-named corporation and that the above and foregoing Code of By-Laws was
submitted to the Shareholders at their meeting convened on September 16, 1996,
and recorded in the Minutes thereof, and was ratified by the vote of
Shareholders entitled to exercise the majority of the voting power of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand this ____ day of
September, 1996.
/s/ SHALA SHASHANI
_______________________
Secretary
25
<PAGE>
EXHIBIT 4.1
TELENETICS CORPORATION
STOCK PURCHASE WARRANT
THIS WARRANT entitles SMC COMMUNICATIONS GROUP, INC., a California
corporation, or its assign, to purchase, on or before October 31, 2002, One
Million Five Hundred Thousand (1,500,000) shares of fully paid, nonassessable
common stock of this corporation at $0.10 per share, upon exercise of this
Warrant together with presentation of the full exercise price, subject to the
conditions set forth herein.
This warrant may be exercised in whole or in part at any time prior to its
expiration. Upon a partial exercise of this warrant Telenetics Corporation
shall issue to SMC Communications Group, Inc. a new warrant on the terms and
conditions set forth herein for any remaining number of shares not purchased.
TELENETICS CORPORATION
/s/ MICHAEL A. ARMANI
By:___________________________________
Michael A. Armani, President
<PAGE>
TERMS AND CONDITIONS
1. While warrants are exercisable, this corporation shall reserve a
sufficient number of shares to provide for the delivery of stock pursuant to
this and other warrants.
2. Any change in the structure of this corporation or in its outstanding
stock that affect the rights and participation to which the holder hereof would
be entitled as of the date of exercising this warrant shall result in the
proportionate adjustment of the shares that may be purchased pursuant to this
warrant.
3. Until the valid exercise of this warrant, the holder shall not be
entitled to any stockholder rights.
4. To exercise this warrant, the exercise form below must be completed and
delivered to the warrant agent, together with the exercise price.
5. This warrant is transferable with the same effect as a negotiable
instrument. To transfer rights, the transfer form below must be completed.
EXERCISE OF WARRANT
I hereby irrevocably elect to exercise the purchase rights represented by
this warrant for the following shares of common stock, upon the terms and
subject to the conditions specified herein:
Shares subscribed for: _______________
Subscription price: $0.10/share
Total cost: $________________
Dated:
SMC COMMUNICATIONS GROUP, INC.
By:______________________________
Shala Shashani, President
TRANSFER OF WARRANT
For value received, I hereby assign this warrant to ________________________,
whose address is __________________________________________________.
Dated:
SMC COMMUNICATIONS GROUP, INC.
By:______________________________
Shala Shashani, President
<PAGE>
EXHIBIT 10.1
Letter of Intent
This Letter of Intent is made by and between Duquesne Light Company of
Pennsylvania and Telenetics Corporation of California, in order to set forth the
general conditions for delivery of interface cabinet equipment to Duquesne
Light, and to authorize Telenetics to begin incurring the costs necessary to
proceed.
Duquesne Light is currently engaged in an automated meter reading and outage
reporting project. Telenetics is the manufacturer of an AlphaMeter Interface
Cabinet (AMIC) to be used for wired and wireless communications between multiple
and single metering sites connected through a central host processing unit to
provide automated reading of ABB Alpha meters in Duquesne's service area.
Duquesne Light hereby agrees to purchase 12,000 to 16,000 units of AMIC's in
three different configurations, conditioned on the performance of 30 units (10
of each configuration) to be delivered for testing on or about June 15, 1998.
The price per unit, price basis and conditions of sale are set forth in
Telenetics letters dated May 22 and May 27, 1998 (copies attached hereto).
Duquesne Light will assign a purchase order number by May 29, 1998, and the
parties agree to work out details of the master purchase agreement by June 12,
1998, including the following issues:
Shipment Schedule
Progress Payment Plan
Acceptable Payment Terms
Flexible Number of Each Configuration
Duquesne Light and Telenetics also agree to discuss a long term strategic
marketing alliance to promote this product and other products they may choose,
in Pennsylvania and the six states contiguous states. Details of such Agreement
are to be worked out by June 12, 1998.
Provided that all other terms and conditions are defined in a timely manner,
Telenetics will make its best effort to meet the following delivery schedule:
1,000 units of Model AMIC-I, by July 3, 1998.
400 units of Model AMIC-III, by July 10, 1998.
400 units of Model AMIC-II, by July 17.
An agreed mix of Models 1, 11 & III per week thereafter at a rate
necessary to complete all deliveries by November 15, 1998.
Based on the foregoing, Duquesne Light authorizes Telenetics to proceed with
purchasing the parts and materials needed to begin the manufacturing and
delivery of AMIC units.
Signed on this 28th day of May, 1998 by:
/s/ MICHAEL ARMANI /s/ KENNETH M. SHAFFER
- -------------------- ---------------------------
Michael Armani Kenneth M. Shaffer
President General Manager
Telenetics Corporation Duquesne Light
<PAGE>
EXHIBIT 10.2
(Certain portions have been omitted pursuant to a request for confidentiality
and have been separately filed with the Securities and Exchange Commission)
SUBCONTRACT
DATE: ___June 10, 1998_____
SECTION 1.
CONTRACTOR: Sargent Electric Company
ADDRESS: 28th and Liberty Avenue
Pittsburgh, PA 15230
--------------------------------------------------------
SUBCONTRACTOR Telenetics
--------------------------------------------------------
ADDRESS: 26772 Vista Terrace Drive, Lake Forest, CA 92630
--------------------------------------------------------
DESCRIPTION: JOB NO: U5079-0161
-------------------------- ---------------------
OWNER: Duquesne Light Company
--------------------------------------------------------
Owner:
--------------------------------------------------------
ADDRESS: 411 7th Avenue, Pittsburgh, PA 15230
--------------------------------------------------------
PLANS & SPECIFICATIONS
ENTITLED:
--------------------------------------------------------
PREPARED BY: Bruce Sisson DATED: June 10, 1998
-------------------------- ----------------------
SECTION 2. ________ Telenetics__________________(hereinafter "Subcontractor")
and Sargent Electric (hereinafter "Sargent") agree that the equipment to be
furnished and the work to be done by the Subcontractor are as follows:
Deliver the first 1,830 Omega 1, 2, & 3 Interface Cabinets per the attached
Duquesne Light Company-Telenetics shipping schedule (Attachment A)
and riders Telenetics General Conditions of Purchase (Attachment B) attached
hereto, ALL IN ACCORDANCE WITH DUQUESNE LIGHT COMPANY/ TELENETICS SPECIFICATIONS
(ATTACHMENT C), THEREFOR AS DEFINED IN SECTIONS 1, 2 AND 3 OF THE ATTACHED
ADDITIONAL PROVISIONS OF SUBCONTRACT (HEREINAFTER "GENERAL CONTRACT").
SECTION 3. This contract shall be subject to all of the "ADDITIONAL PROVISIONS
OF SUBCONTRACT" which are hereby expressly incorporated herein and made a part
hereof.
SECTION 4. The Subcontractor agrees: (1) to keep himself thoroughly informed as
to the progress of the job; (2) to begin work upon notification by Sargent; (3)
to prosecute the work as and when directed by Sargent; (4) to perform the work
in accordance with the highest professional standards applicable to the
performance of like work; (5) and to perform the full extent of the work covered
by this Subcontract so as to assume all the obligations of Sargent therefor.
Subcontractor further acknowledges that time is of the essence in performance of
the work and failure to perform the work within the time specified shall be
grounds for termination by Sargent. Subcontractor specifically agrees to provide
all necessary coordination required to fully complete the work in accordance
with the scheduling requirements of the project set forth in the Duquesne Light
Company Schedule.
An Equal Opportunity Employer
06/10/98 Page 1 of 6
<PAGE>
SECTION 5. IN CONSIDERATION WHEREOF, Sargent agrees to pay the Subcontractor for
the full and faithful performance of its work the sum of [Confidential portion
omitted and filed separately with the Securities and Exchange Commission] in
current funds, subject to additions and deductions for changes as may be agreed
upon, provided that no payments are to be made unless the Subcontractor's rate
of progress, work done and material furnished are satisfactory to Sargent and
the Owner, and as herein agreed upon. Payments shall be made as follows:
. A payment of $ [Confidential portion omitted and filed separately with
the Securities and Exchange Commission] to cover start-up costs shall be
paid upon acceptance of this subcontract.
. Delivery of 10 each of Omega 1, 2, & 3 Communication Interface Cabinets.
. Functional Acceptance Testing and Acceptance by Duquesne Light Company.*
. A progress payment of $ [Confidential portion omitted and filed
separately with the Securities and Exchange Commission] shall be paid
upon receipt of the next 1,000 units (on or about July 17).
. A second progress payment of $ [Confidential portion omitted and filed
separately with the Securities and Exchange Commission] shall be paid
upon receipt of the next 800 units (partial shipment on of about July
24, balance on or about July 31).
. Should the value of the products contemplated by this Agreement be less
than the sum of the above start-up and progress payments, said amount
shall be credited to future invoicing.
*Note: No equipment delivery will be accepted, nor progress payment due
until Duquesne Light Company acceptance of the initial 30 units.
NOTE: Subcontractor must file a Certificate of Insurance with Sargent prior to
starting work, (naming Sargent and Duquesne Light Company as an additional
insured). All invoices must be submitted in duplicate and signed "APPROVED" by
the Sargent and Duquesne Light Company project managers prior to processing for
payment.
Subcontractor represents that it has examined this Subcontract and the
referenced contract documents and understands the Owner's expected functionality
for the subcontracted Equipment, and that it enters this Subcontract on the
basis of its own examination and evaluation and not any representations of
Sargent.
IN WITNESS WHEREOF, The parties hereto have executed this agreement for
themselves, their heirs, executors, successors, administrators and assigns, on
the day and year first above written.
CONTRACTOR: Sargent Electric Company Telenetics Corporation
--------------------------------
SUBCONTRACTOR
BY /s/ ILLEGIBLE SIGNATURE /s/ MICHAEL A. ARMANI
- ------------------------------------------ --------------------------------
General Manager/utility President
- ------------------------------------------ --------------------------------
TITLE TITLE
/s/ ILLEGIBLE SIGNATURE /s/ ILLEGIBLE SIGNATURE
- ------------------------------------------ --------------------------------
WITNESS WITNESS
An Equal Opportunity Employer
06/10/98 Page 2 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
ADDITIONAL PROVISIONS OF SUBCONTRACT
1. The phrase "General Contract" shall be deemed to mean the contract
between Sargent and the Owner with reference to the work described in Section 1
of this Subcontract, together with Attachments A, B, and C therein, all of which
are made a part of this Subcontract and fully incorporated herein by reference.
Whenever the requirements of the General Contract are more inclusive
or more restrictive than the terms of this Subcontract, the provisions of the
General Contract shall apply and the foregoing shall include but are not limited
to quantities, dates, tests, insurance, warranties, etc.
2. The Subcontractor agrees to furnish the Equipment required by this
Subcontract strictly in accordance with all plans and specifications of the
General Contract.
3. The Subcontractor agrees that he will so perform this agreement as not
to violate any term, covenant or condition of said General Contract. The
relationship of the Subcontractor hereunder towards Sargent shall be the same as
that of Sargent towards the Owner under said General Contract and the
relationship of Sargent hereunder to the Subcontractor shall be the same as that
of the Owner towards Sargent under said General Contract.
4. The Subcontractor shall submit to Sargent's Office, requisitions for
payment, covering the value of the work completed to the satisfaction of the
Owner during that month. Such invoice shall be submitted in time for processing
and submission to the Owner.
5. The Subcontractor shall furnish Sargent with such partial releases and
waivers of lien from Subcontractor's materialmen and creditors as Sargent may
request from time to time on labor and/or material and/or other claims, and
final releases and waivers of lien at the time of final payment on this
Subcontract.
6. The Subcontractor shall furnish, if requested by Sargent, sworn
affidavits from time to time, in accordance with the form provided by Sargent,
which shall state amounts due or to become due, amounts paid, and any other
information clearly to indicate the financial condition of the Subcontractor,
insofar as it relates to labor and material furnished, under this Subcontract,
and Sargent may take such steps as he may deem necessary to protect itself
against any claims including the withholding of payment and the right to issue
joint checks, until satisfactory evidence is received indicating all claims have
been satisfied. If at any time Sargent shall determine that the Subcontractor's
financial condition has become, in his opinion, unsatisfactory the Subcontractor
shall furnish satisfactory security to Sargent within three days after written
notice to his last known address and in default of furnishing said security,
Sargent shall have the option to cancel this contract. In case of such
cancellation the rights of Sargent shall be the same as if the Subcontractor had
failed to perform this contract in whole or in part.
An Equal Opportunity Employer
Page 3 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
7. The Subcontractor agrees that monies received for the performance of
this contract shall be held in trust for payment for labor and material entering
into this work and said monies shall not be diverted to satisfy obligations of
the Subcontractor on other contracts.
8. The right is reserved by Sargent to require changes in, deviations
from, additions to, and omissions from, the work herein contracted, and the
subcontract price shall be adjusted accordingly. Before proceeding with any
change, deviation, addition or omission, the Subcontractor will first obtain
written authorization from Sargent, which authorization will state the amount by
which the Subcontract will be adjusted, if any.
9. Subcontractor shall comply with all federal, state and municipal laws,
codes, regulations and ordinances effective where the work under this contract
is to be performed, and same shall govern where more restrictive than as set out
in plans or specifications.
10. This Subcontract shall supersede and take precedence over any and all
proposals, correspondence, and oral agreements made prior to the date hereof.
11. This Subcontract shall not be altered, modified or amended except by
further written agreement signed by both parties hereto.
12. The Subcontractor shall not sublet any portion of this subcontract
without the written consent of Sargent first had and obtained.
13. Subcontractor shall not assign, or attempt to assign in any manner at
any time any funds accrued or to accrue under this subcontract without prior
written consent of Sargent, and no such assignment shall be binding on Sargent
unless and until accepted in writing by Sargent.
14. The Subcontractor agrees to prosecute his work, and the several parts
thereof at such times and in such order as defined in Attachment to avoid any
delay in the completion of the project as a whole. The Subcontractor shall
reimburse Sargent for any loss, damage or extra expense paid or incurred by
Sargent, subject to the terms set forth in Attachment B. In case Sargent or the
Owner deems this procedure necessary for proper conduct of the work, all monies
expended therefor shall be deducted from the contract price herein stated, and
if such expenditures exceed the amount otherwise due to the Subcontractor
hereunder the Subcontractor agrees to pay to Sargent on demand the full amount
of such excess, together with interest thereon at the rate of__18_________
percent (_18__%) per annum, until paid.
15. The Subcontractor shall promptly amend and make good any defective
equipment to the entire approval and acceptance of the Owner. Telenetic's
obligation and liability shall be as set forth in Attachment B.
16. The Subcontractor shall furnish all guarantees, warranties and
operating instructions, etc., as required by the Attachment B.
17. To the fullest extent permitted by law, Subcontractor shall indemnify,
defend and save Sargent and Owner harmless from and against all suits, claims,
damages or expenses
An Equal Opportunity Employer
Page 4 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
(including attorneys fees), arising from any act, omission or negligence of
Subcontractor, its agents, employees, suppliers or subcontractors in connection
with Equipment supplied under this Subcontract, for or on account of any claim
arising out of: (1) any personal injury or death, including claims by any of
Subcontractor's employees for which Subcontractor would otherwise be immune by
virtue of any state workers' compensation law; (2) any damage to property; (3)
anything to be supplied hereunder infringing or being covered by a patent not
owned by Subcontractor; (4) the filing of any claims or liens by anyone
furnishing labor and/or materials to the Project; or (5) the breach of any
federal, state or local statute, ordinance or regulation.
18. Anti-Discrimination (a) The Subcontractor, in performing the work
required by this contract, shall not discriminate against any employees or
applicants for employment because of race, religion, creed, sex, national
origin, age, veteran status, and non-job related disability. The Subcontractor
is required to pursue actively a policy of non-discrimination in accordance with
directives of the Owner and a failure to do so may result in a cancellation of
this Subcontract.
(b) The Subcontractor agrees that the provisions of paragraph (a)
above and any other provisions required by the General Contract to be included
will be inserted in all of its subcontracts or in its purchase orders or
contracts if so required by the General Contract.
(c) Sargent shall not be liable to Subcontractor for any delay to
Subcontractor's work resulting from the act, negligence or default of the Owner,
or on account of any acts of God or any other cause beyond Sargent's control; or
on account of any circumstances caused or contributed to by Subcontractor.
(d) Should the Owner delay Subcontractor's work, then and in such
event Sargent shall owe Subcontractor therefor only an extension of time for
completion equal to the delay caused, and then only if written claim is made to
Sargent within forty-eight (48) hours from the beginning of the delay and only
to the extent Sargent receives an extension of time from the Owner.
19. Subcontractor agrees to guarantee its work against all defects in
materials or workmanship, as called for in Attachment B.
20. Notwithstanding any other provision herein to the contrary, and in
addition to any other provision herein provided for cancellation, it is
expressly agreed by Subcontractor that if at any time prior to final completion
of the work Subcontractor is in default in any respect in performance or in
compliance with any requirement of this Subcontract, Sargent may give written
notice to Subcontractor stating the nature of the default, and if such default
has not been remedied within twenty-four (24) hours from the time of delivery of
such notice to Subcontractor. Sargent may thereafter at any time, so long as
such default continues, cancel this Subcontract forthwith, without further
notice to Subcontractor. And it is expressly agreed that no prior failure to
exercise this right of cancellation shall ever be construed as a waiver of this
right of cancellation. In the event of such cancellation, terms set forth in
Attachment B shall apply.
21. Subcontractor agrees to exhaust the remedies available to Sargent under
the General Contract prior to commencing any separate arbitration against
Sargent for recovery. Subcontractor agrees to be bound to Contractor to the same
extent as Sargent is bound to Owner by the final
An Equal Opportunity Employer
Page 5 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
decision of any court or arbitration panel, whether or not Subcontractor is a
named party to any such proceeding.
Any claims asserted by Subcontractor for additional compensation or
damages for extra work directed by Owner or project delays caused by Owner will,
at Sargent's option, be passed through to Owner, in Sargent's name, and
Subcontractor will prosecute such claims at its cost.
At Sargent's option, Subcontractor agrees to a joint arbitration with
Owner, Sargent and Subcontractor in Pittsburgh, Pennsylvania with respect to any
claim, dispute or other matter substantially involving the rights, duties and
obligations of each such party if complete relief is to be obtained.
No arbitration or court proceeding may be commenced by Subcontractor
later than one year following delivery of last unit.
Any controversies arising between the parties to this contract and not
resolved in normal negotiations shall be settled under the principles
established by the arbitration clause of the General Contract, if any. In the
absence of such arbitration provision in the General Contract, disputes shall be
settled under the rules of the American Arbitration Association.
22. Subcontractor hereby waives and releases all liens or right of liens
now existing or that may hereafter arise for any and all work or labor performed
or material furnished under this Subcontract, upon said facility, or monies due
or to become due to Sargent and agrees to furnish a good and sufficient waiver
of lien in proper form for filing from every person or entity furnishing labor
or materials for this Project under Subcontractor.
23. It is further understood that Owner has the right to approve or
disapprove of all Subcontractors and in the event Owner does not approve of this
Subcontract it shall become null and void. If Owner subsequently terminates the
General Contract, Sargent may in turn terminate this Subcontract by giving
Subcontractor written notice. In such case, Sargent will pay Subcontractor
pursuant to the term of Attachment B.
An Equal Opportunity Employer
Page 6 of 6
<PAGE>
(Attachment A)
- --------------
DUQUESNE LIGHT COMPANY
Customer Advanced Reliability System
PROJECTED OMEGA CABINET DELIVERY SCHEDULE
THROUGH FIRST TWO PURCHASES
<TABLE>
<CAPTION>
June July August September October
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Omega 6/19 6/26 7/3 7/10 7/17 7/24 7/31 8/7 8/14 8/21 8/28 9/4 9/11 9/18 9/25 10/2 Total
Cabinet
- ------------------------------------------------------------------------------------------------------------------------------------
1 10 500 500 400 200 200 200 200 200 200 200 2,810
- ------------------------------------------------------------------------------------------------------------------------------------
11 10 400 400 200 400 400 400 400 400 400 400 3,810
- ------------------------------------------------------------------------------------------------------------------------------------
111 10 400 200 200 200 200 200 200 200 200 200 2,210
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10 20 500 500 400 400 600 800 800 800 800 800 800 800 800 8,830
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6/11/98
<PAGE>
Purchase Order No.___U5079-0161_______________________Dated:__June 10, 1998_____
(Attachment B)
- --------------
GENERAL CONDITIONS OF PURCHASE
1. PAYMENT
Start-up and progress payments shall be as detailed in the governing
subcontract.
Unit prices for quantities of interface cabinets shall be as follows for
quantities delivered through the end of 1998:
Omega 1 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission] Plus
Shipping
Omega 2 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission]Plus
Shipping
Omega 3 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission]Plus
Shipping
The above unit prices assume that the minimum delivered quantity of
Interface Cabinets shall not be less than 10,000 units for use on the
Duquesne Light Company Project in 1998.
Terms of payment against shipments are net fifteen (15) days after the date
of the Telenetic's invoice. Amounts not paid when due shall bear interest at
the lesser of one and one-half (1.5%) percent per month and the highest
legal rate, and may result in the imposition by Telenetics of modified
credit terms.
2. PRICES AND TAXES
Prices are exclusive of all federal, state, municipal or other government
excise, sales, use, occupational or like taxes or duties now in force or
enacted in the future. Any such tax, fee, or charge of any nature whatsoever
imposed by any governmental authority on or measured by the transaction
between Telenetics and Sargent Electric shall be paid by the Sargent
Electric in addition to the prices quoted or invoiced. In the event
Telenetics is required to pay any such tax, fee, or a charge, at the time of
sale or thereafter, Sargent Electric shall reimburse Telenetics thereof.
3. SHIPMENT AND DELIVERY
All shipments herein shall be F.O.B. Jobsite (Greater Pittsburgh, PA area)
via ground freight using a Common Carrier, unless otherwise requested by the
Sargent Electric. The time of delivery is the time the Product is delivered
to the first jobsite by the carrier. All shipping charges shall be paid by
Telenetics, and set forth as a separate item on the Telenetics invoice.
4. TITLE AND RISK OF LOSS
Title to the Product shall pass to Sargent Electric upon delivery thereof by
the carrier to the jobsite and upon delivery Sargent Electric shall be
responsible for and bear all future risk of loss or damage to the Products.
Telenetics shall be responsible for shipping damage,
1
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
and retain a security interest in the Products until payment in full.
5. PROPRIETARY INFORMATION
Products contain valuable proprietary programs and data. Telenetics retains
for itself all title and proprietary rights in and to all designs,
engineering details, software resident in Read-Only Memories (ROM's), and
other program data contained in any Product sold.
Sargent Electric shall treat any information disclosed to Sargent Electric
hereunder, which is identified as confidential or proprietary, in strict
confidence and shall not disclose such information to third parties or use
it for any purpose other than the purpose for which it was disclosed to
Sargent Electric.
6. LIMITED PRODUCT WARRANTY
Telenetics warrants that the Product sold will be free from defects in
material and workmanship and perform to Telenetics' applicable published
specifications for a period of 18 months from the date of delivery to
Sargent Electric or 12 months from placement into service, whichever occurs
first. The liability of Telenetics hereunder shall be limited to replacing
or repairing, at its option, any defective Products which are returned
F.O.B., Telenetics' facility, Lake Forest, California (or, at Telenetics'
option refunding the purchase price of such products). In no case are
Products to be returned without a Sargent Electric return order number from
Telenetics. Telenetics shall not be liable for any consequential or
incidental damages, except in the case of equipment failure in excess of 5%
(of the installed units), at which time Telenetics shall be liable for
shipping and in and out charges in addition to the above stated remedy (or
other mutually agreed upon method of remediation). In and out charges shall
be fixed at $50.00 per occurrence.
Products that have been subject to abuse, misuse, accident, alteration,
neglect, unauthorized repair or installation are not covered by the
warranty. Telenetics shall make the final determination as to the existence
and cause of any alleged defect. No liability is assumed for expendable
items such as lamps and fuses. No warranty is made with respect to custom
except as specifically stated in writing by Telenetics in the agreement for
such custom products. For the purposes of this Agreement, no products
delivered for the Duquesne Light Company Project shall be considered custom
products.
This warranty is the only warranty made by Telenetics with respect to the
goods delivered hereunder, and may be modified or amended only by a written
instrument signed by a duly authorized officer or Telenetics and accepted by
Sargent Electric.
This warranty and limitation extends to Sargent Electric, Duquesne Light
Company, and to users of the product and is in lieu of all warranties with
respect to the product whether express, implied, or statutory, including
without limitation the implied warranties of merchantability and fitness for
a particular purpose, provided, however, that all advertised functionality
is delivered. This advertised functionality includes, but is not necessarily
limited to, specific Alpha meter outage notification to Duquesne Light
Company's MV-90 system, and Alpha meter serial number recognition and
automated modem port assignment/reporting.
2
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
7. PATENT AND COPYRIGHT INDEMNITY
Telenetics warrants that the use of the Products and documentation furnished
to Sargent Electric shall be free and clear of infringement of and United
States patent or registered copyright covering the structure of such
articles or documentation. In the event of a claim, suit or action against
Sargent Electric alleging such infringement, Telenetics shall defend and
save Sargent Electric harmless from liability, as finally determined by a
court of competent jurisdiction, for such infringement, provided that
Sargent Electric shall have made timely payment of all amounts due for the
article involved in the claim, suit or action, that Sargent Electric shall
have notified Telenetics promptly in writing of such claim, suit or action,
that Sargent Electric shall have given Telenetics all proper information and
assistance requested by Telenetics and full and exclusive control of the
defense thereof, and that Telenetics shall have the sole right to settle or
compromise such claim, suit or action. In the event that a final injunction
is obtained in such action against the use of the Products or any part
thereof by reason of infringement of a United States patent or otherwise
within the scope of this Paragraph, Telenetics will, at its option either:
(a) Procure for Sargent Electric, at Telenetics' expense, the right to
continue using the Products;
(b) Replace or modify the same so that it shall be non-infringing; or
(c) Direct Sargent Electric to return such Products to Telenetics, and
refund to Sargent Electric the purchase price originally paid less a
use credit equal to the depreciation of the installed units based on a
10-year straight lined depreciation method. in addition to the above
purchase price rebate, less use fee, Telenetics shall be liable for all
in and out and shipping fees arising out of above said injunction.
Telenetics shall only resort to option (c) after having exerted reasonable
effort to remedy the situation by first utilizing option (a) or (b).
Telenetics has no liability for any claim, suit or action pursuant to this
Paragraph based upon or arising out of the combination, operation or use of
the Products with Products or items not furnished by Telenetics. The
foregoing states Telenetics' entire liability and obligations and Sargent
Electric's exclusive remedy with respect to any claim, suit or action
alleging infringement of any intellectual property rights.
8. SOFTWARE AND PRODUCT LICENSE
Program and product will be licensed to Sargent Electric and Duquesne Light
Company pursuant to the terms and conditions of Telenetics' Software
Products License. These general terms and conditions shall not be valid
until a mutually acceptable software and product license is executed by all
parties.
9. LIMITATION OF LIABILITY
Telenetics shall not be liable for any loss, damages, or penalty resulting
from delay in delivery when such delay is due to causes beyond the
reasonable control of Telenetics,
3
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
including but not limited to supplier delay, force majeure, act of God,
labor unrest, fire, explosion, or earthquake. In any such event, the
delivery date shall be deemed extended for a period equal to the delay.
Telenetics' liability under, for breach of, or arising out of this Purchase
Order shall be limited to refund of the purchase price, except for in and
out and shipping costs listed in Sections 6. and 7. above. In no event
shall Telenetics be liable for costs of procurement of substitute goods by
the Sargent Electric. In no event shall Telenetics be liable for any
consequential, or incidental, damages (including without limitation loss of
profit) whether or not Telenetics has been advised of the possibility of
such loss. The essential purpose of this provision is to limit the
potential liability of Telenetics arising out of this Purchase Order.
10. ACCEPTANCE BY SARGENT ELECTRIC - ENTIRE AGREEMENT
The terms and conditions as set forth herein shall compliment the governing
Subcontract. This Agreement shall not be modified, supplemented, qualified,
or interpreted by any trade usage or prior course of dealing not made a
part of the Purchase Order Subcontract by its express terms.
The failure by Telenetics to enforce at any time any of the provisions of
this Agreement, or to exercise any election or portion provided herein,
shall in no way be construed as a waiver of such provisions or options, nor
in any way to affect the validity of this Purchase Order or any part
thereof, or the right of Telenetics thereafter to enforce each and every
such provision.
Sargent Electric hereby acknowledges that it has not entered into this
Agreement in reliance upon any warranty or representation by any person or
entity except for the warranties or representations specifically set forth
herein, or within the governing Subcontract.
11. CANCELLATION AFTER ACCEPTANCE
This Agreement may be cancelled by Sargent Electric only upon the payment
of reasonable cancellation charges. For the purposes of this agreement,
reasonable cancellation charges shall be fixed at 20% of the selling price
for all cancelled units. Upon cancellation Sargent Electric shall have no
rights to partially completed products.
12. TERMINATION
Sargent may terminate this agreement without cause upon written notice to
Telenetics. In the event of termination without cause, the above Section
11. cancellation fees shall apply. Sargent shall also have the right to
terminate this agreement immediately in the event contractor fails to
comply with the material provisions of this agreement and all reasonable
attempts to cure such breach within 30 days have failed. In the event of
termination with cause, the above cancellations fees shall not apply.
4
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
13. SUBSTITUTIONS AND MODIFICATIONS
Telenetics shall have the right to make substitutions and modifications in
the specifications of Products sold by Telenetics provided that such
substitutions or modifications will not materially affect overall Product
performance, and are acceptable to Duquesne Light Company Company.
14. ASSIGNMENT
Without consent of Telenetics in writing, Sargent Electric may not assign
any transactions associated herewith, except to an entity to which Sargent
Electric assigns, transfers, and conveys substantially all of its assets
into which it is merged or with which it is consolidated.
15. BANKRUPTCY
If Sargent Electric shall become bankrupt or insolvent or compounds with
his creditors or commences to be wound up or suffers a receiver to be
appointed, Telenetics shall be at liberty by notice in writing to cancel
this Purchase Order without judicial intervention or declaration of default
of Sargent Electric and without prejudice to any remedy which shall have
accrued or shall accrue thereafter to Telenetics, subject to applicable
federal and state law.
16. MISCELLANEOUS
Paragraph headings are provided for convenience of reference only and shall
not limit of modify any term hereof. Stenographic and clerical errors are
subject to corrections.
The Agreement between the parties is made, governed by, and shall be
construed in accordance with the laws of the State of PA.
The governing subcontract shall identify the terms by which to pursue
settlement of disputes.
5
<PAGE>
EXHIBIT 10.3
(Certain portions have been omitted pursuant to a request for confidentiality
and have been separately filed with the Securities and Exchange Commission)
Marketing and Technology Agreement
This Marketing and Technology Agreement (hereinafter
"Agreement") is made and entered into this 13th day of July 1998,
by and between:
Telenetics Corporation, a corporation of California
(hereinafter "Telenetics") and
Duquesne Light Company, a corporation of Pennsylvania,
(hereinafter "DLC");
WITNESSETH:
WHEREAS, DLC has expertise in electric power distribution,
metering and outage analysis which it has developed on its own and
in cooperation with its vendors;
WHEREAS, Telenetics has expertise in data communications
including various types of modems;
WHEREAS, with the encouragement, advice and technical
information supplied by DLC, Telenetics has developed new
technology embodied in a series of Communication Interface
Cabinets, more particularly described in specifications and
agreements between Telenetics and DLC or Sargent Electric Company,
for interfacing electric meters with certain central meter data
management systems;
WHEREAS, Telenetics and DLC mutually desire to set forth in
this Agreement certain terms for their future joint testing and
marketing of the Communications Interface Cabinets;
WHEREAS, the parties desire to pursue the deployment of the
new technology developed by Telenetics to provide reliable wireless
and land line communication interfaces between advanced meter
devices and central meter data management systems;
WHEREAS, the parties desire to validate the new Telenetics
technology developments by successfully implementing advanced
metering capabilities through an initial field Beta test program
and then a field deployment of Telenetics Communication Interface
Cabinets; and
WHEREAS, the parties desire to take mutual advantage of the
resulting technology advancements through joint efforts to market
the communications interface equipment and other automated metering
solutions;
NOW, THEREFORE, DLC and Telenetics, intending to be legally
bound, hereby agree as follows:
Section 1
DEFINITIONS
1.0 Definitions. In this Agreement, the following words and
expressions will have the following meanings:
"Products" mean Telenetics' Omega Interface Communication
Cabinets (as described more fully in the specification attached as
Exhibit B hereto) and variations and improvements thereof sold for
the purpose of automating utility, supplier and meter data
management agency meter reading functions.
"Affiliate" of a company shall mean a corporation or other
legal entity the majority of whose shares or other securities
entitled to vote for directors (or other managing authority) is now
or hereafter controlled by such company.
"Gross Sales" shall mean amounts billed by Telenetics (or any
Affiliate) to customers for Products, less customary trade
discounts and allowances, returns, and other deductions generally
<PAGE>
allowed by its customers.
Section 2
2.1 Purchases. Telenetics will deliver Products in accordance
with and as described more fully in Exhibit B and in the June 10,
1998 Subcontract between Sargent Electric Company and Telenetics
and the purchase orders and related attachments which are included
as Exhibit A hereto (the "Subcontract").
2.2 Primary Supplier. DLC will consider Telenetics as its
primary supplier of the Products and associated products for
automated meter reading, substation automation and other similar
uses and Telenetics will sell Products to DLC from time to time at
DLC's request at the most favorable price, terms and conditions
offered any other customer in the last six (6) months prior to such
request.
Section 3
JOINT TESTING AND DEVELOPMENT
3.1 Beta Testing. Telenetics will deliver to Sargent
Electric Company ten (10) each of the following Products sometimes
referred to as Omega 1, Omega 2 and Omega 3 (as more specifically
set forth in the Subcontract):
(a) single meter - cell phone communications interface
cabinet,
(b) multiple meter - land line communications interface
cabinet, and
(c) multiple meter - cell phone communications interface
cabinet.
Reasonably promptly thereafter, DLC or its contractor, Sargent
Electric Company or another designated installation subcontractor,
will install a sufficient number of each type Product for metering
electrical usage by commercial or industrial customers of DLC and
interface said Products to DLC's central meter data management
system (the ITRON/UTS MV-90 System) for the purpose of Beta
Testing, that is, testing in the actual environment of intended use
to establish that the Products comply with the specifications
(Exhibit B) and operate in a flawless manner to transfer data from
electric meters to the central meter data management system. DLC
will share all data concerning the operation of the prototype
Products (to the extent no agreement with another vendor or
customer would be violated) with Telenetics and will cooperate with
Telenetics to validate the successful operation of the Products.
3.2 Approval. Upon approval by DLC of the operation and
function of the Products, DLC, either directly or through Sargent
Electric Company or another designated installation subcontractor,
will proceed with the general installation of the Products as more
specifically provided for in the Subcontract. DLC will continue to
share data (to the extent no agreement with another vendor or
customer would be violated) concerning the operation of the
installed Products for the term of this Agreement.
Section 4
JOINT MARKETING
4.1 Joint Marketing Activities. DLC and Telenetics agree to
consult and cooperate with each other in the interest of promoting
the Products. It is envisioned that the primary marketing efforts
will be made by Telenetics. To that end, each party shall:
<PAGE>
(a) Become familiar with the technical and operational
functions and features of the Products;
(b) Host visits of potential customers for marketing presentations
upon reasonable request; and
(c) Conduct demonstrations and performance benchmarks of
the Products.
Additionally,
(d) DLC agrees to support Telenetics' efforts with
respect to trade show presentations, provided that the same
does not interfere with DLC's ability to fulfill its electric
service requirements;
(e) DLC agrees to notify Telenetics of the presentation
of papers by its employees that pertain to the system that
include the Products in advance of presentation so that
Telenetics can use the opportunity to prospect for customers;
(f) DLC will attempt to establish a preferred
arrangement with ITRON for use of the Products for ITRON
installations in the Pittsburgh area, through North America
and the world, however, Telenetics acknowledges that whether
or not ITRON becomes a party to such an agreement is
exclusively under ITRON's control, and DLC makes no warranty
or other promise that such an agreement will be executed,
delivered or performed by ITRON; and
(g) DLC will promote the Products outside of its service
areas for advanced metering solutions, and will provide the
necessary knowledge base with respect to utility operation and
regulation to sell the Products in a regulated utility
environment.
4.2 Marketing Materials. Telenetics shall submit all
marketing literature, arrangements and other materials regarding
the Products that contain the name of DLC to DLC for its review and
approval prior to use.
Section 5
ROYALTY PAYMENTS
5.1 Royalties. In consideration of DLC's assistance in
developing the Products, in continuing to provide information on
the operation of the Products and further in view of DLC's
participation in the joint marketing activities set forth in
Section 4 of this Agreement, Telenetics will pay DLC a royalty on
Products sold by Telenetics (except Products sold to DLC) as
follows:
CATEGORY ROYALTY PAYMENT
A. Category I. Products sold to [Confidential portion omitted and
any and all utility companies filed separately with the
located in Pennsylvania and Securities and Exchange Commission]
the six (6) contiguous states. % of gross sales
B. Category II. Products sold to [Confidential portion omitted and
owners of ITRON automatic filed separately with the
meter reading installations in Securities and Exchange Commission]
North America, outside of % of gross sales
Pennsylvania and the six (6)
contiguous states.
C. Category III. Products sold to [Confidential portion omitted and
utility, supplier or meter data filed separately with the
Securities and Exchange Commission]
% of gross sales
<PAGE>
management agencies (other than
owners of ITRON automatic meter
reading installations) located in
North America, outside of
Pennsylvania and the six (6)
contiguous states.
5.2 Reports and Payments. Payment of the royalties specified
by paragraph 5.1 shall be made by Telenetics to DLC within sixty
(60) days after March 31, June 30, September 30 and December 31 of
each year during the term of this Agreement covering the quantity
of Products sold by Telenetics and its Affiliates during the
preceding calendar quarter. Each quarterly payment shall be
accompanied by a written statement of gross sales of Products
during such quarter. Such written statements shall show the gross
sales of Products broken out according to Categories I, II and III,
the gross sales during the calendar quarter and the amount of
royalties payable.
<PAGE>
5.3 Records and Inspection. Telenetics shall maintain or
cause to be maintained a true and correct set of records pertaining
to the gross sales of Products by Telenetics or Affiliates under
this Agreement. During the term of this Agreement and for a period
of six (6) months thereafter, Telenetics agrees to permit a
certified public accountant paid by DLC to have access during
ordinary business hours to such records as are maintained by
Telenetics as shall be necessary in the opinion of such accountant
to determine the correctness of any report or payment made under
this Agreement. Such accountant shall maintain in confidence, and
shall not disclose to DLC, any information concerning Telenetics or
its operations or properties other than information directly
relating to the correctness of such reports and payments.
Section 6
PROPRIETARY PROTECTION
6.1 Confidentiality. All technical information of a
confidential nature associated with the Products or this Agreement
shall be protected by both parties. The financial terms of this
Agreement shall be kept confidential; provided, however, that
either party may disclose the financial terms of this Agreement if
required to be disclosed pursuant to applicable law (including,
without limitation, the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended) or court order.
<PAGE>
6.2 No Implied Rights. Except for the rights and licenses
expressly confirmed and granted by this Agreement, nothing in this
Agreement shall be deemed to create a license from either party to
the other of any trade secret, patent, copyright, trademark or
other intellectual property right.
6.3 Indemnification.
(a) Telenetics will hold DLC harmless against all
claims, liabilities, demands, damages, expenses or losses
including, but not limited to, claims based upon product
liability laws and trade secret, patent, copyright, trademark
and other intellectual property laws, which claims (1) arise
out of use by DLC or Telenetics' customers of the Products or
(2) arise out of warranties or representations made by
Telenetics for the Products; and
(b) DLC shall hold Telenetics, its officers and
employees, harmless against all claims, liabilities, demands,
damages, expenses (including reasonable attorneys' fees) and
losses as a result of errors, omissions, negligence,
misrepresentations or false or wrongful actions of any of DLC,
DLC's Affiliates or any of their respective agents or
employees in the performance of this Agreement.
Section 7
TERM
7.0 Term. This Agreement shall take effect upon the date set
forth above and, unless earlier terminated pursuant to Section 7.1
below, shall remain in effect for an initial period of ten (10)
years; this Agreement shall automatically extend for successive
two-year periods unless either party shall have provided written
notice of its intention to terminate at least six (6) months prior
to the end of the initial period or any renewal period.
7.1 Termination. A party may terminate this Agreement upon
thirty (30) days written notice if any of the following occurs:
(a) the other becomes insolvent, or any person seeks the
dissolution, winding-up, liquidation, reorganization or
similar arrangement with respect to such party under any law
relating to bankruptcy, insolvency or similar relief;
(b) the other party merges or combines with another
entity (except that DLC may merge or combine with any
Affiliate of DLC); and
(c) the other party fails to pay any amounts owed
hereunder when due, and such failure has not been cured within
thirty (30) days of such payment due date.
Section 8
MISCELLANEOUS
8.1 Compliance With Laws. The parties agree that they shall
comply with all applicable laws and regulations of governmental
bodies or agencies in their performance under this Agreement.
Without limiting the generality of the foregoing, neither party
shall knowingly export or re-export, directly or indirectly, any
technical data (as defined by the U.S. Export Administration
Regulations) produced or provided under this Agreement, or export
or re-export, directly or indirectly, any direct product of such
technical data, including software, to a destination to which such
export or re-export is restricted or prohibited by U.S. or non-U.S.
law, without obtaining prior authorization from the U.S. Department
<PAGE>
of Commerce and other competent government authorities to the
extent required by those laws.
8.2 No Agency. Nothing herein shall be construed to create
a partnership, joint venture, or agency relationship between the
parties hereto.
8.3 Counterparts. This Agreement may be executed in one or
more counterparts, all of which together shall constitute a single
Agreement.
8.4 Governing Law. The validity, construction and performance
of this Agreement shall be governed by the laws of the Commonwealth
of Pennsylvania, USA. Any litigation shall be filed and pursued in
either state or federal court in Pittsburgh, Pennsylvania.
8.5 Amendments; Waiver. This Agreement may be amended only
by an instrument in writing executed by both parties to this
Agreement. Waiver of any provision of this Agreement shall not be
deemed a waiver of any other provision, and any failure to act in
response to a breach or insist on strict performance of any
provision of this Agreement shall not be deemed a waiver of any
such breach or of any later breach or failure to perform any
provision of this Agreement.
8.6 Notices. All notices, requests, demands and other
communications required or permitted by this Agreement shall be in
writing and shall be deemed to have been duly given if sent by
personal delivery, by facsimile, by express courier service, or, if
mailed, postage prepaid, first-class, certified mail, return
receipt requested, on the third day after mailing, to the following
addresses or to such other address as a party may specify to the
other in writing:
To Telenetics: President
Telenetics Corporation
26772 Vista Terrace Drive
Lake Forest, California 92630
To DLC: Vice President Operations
Duquesne Light Company
2101 Beaver Avenue
Mail Drop M-GSU
Pittsburgh, Pennsylvania 15233
8.7 Severability. A decision by any arbitrator or court of
competent jurisdiction invalidating or holding unenforceable any
part of this Agreement shall not affect the validity and
enforceability of any other part of this Agreement.
8.8 Entire Agreement. This Agreement is the entire agreement
between the parties and supersedes all prior discussions and
agreements between the parties with respect to the matters it
addresses.
8.9 No Assignment. Without the prior written consent of the
other party (which consent may not be withheld without reason),
neither party may sell, assign or divide its rights under this
Agreement except DLC may assign this Agreement to an Affiliate of
DLC.
IN WITNESS WHEREOF, DLC and Telenetics have caused this
Agreement to be signed and delivered by their duly authorized
officers, all as of the date first hereinabove written.
DUQUESNE LIGHT COMPANY TELENETICS CORPORATION
<PAGE>
By: /s/ KENNETH M. SHAFFER By: /s/ MICHAEL A. ARMANI
---------------------- ---------------------
Kenneth M. Shaffer Michael A. Armani
Title: General Manager Title: President and
Customer Operations Unit Chief Executive Officer
Date: July 9, 1998 Date: July 13, 1998
<PAGE>
EXHIBIT A
TO
MARKETING AND TECHNOLOGY AGREEMENT
<PAGE>
SUBCONTRACT
DATE: ___June 10, 1998_____
SECTION 1.
CONTRACTOR: Sargent Electric Company
ADDRESS: 28th and Liberty Avenue
Pittsburgh, PA 15230
--------------------------------------------------------
SUBCONTRACTOR Telenetics
--------------------------------------------------------
ADDRESS: 26772 Vista Terrace Drive, Lake Forest, CA 92630
--------------------------------------------------------
DESCRIPTION: JOB NO: U5079-0161
-------------------------- ---------------------
OWNER: Duquesne Light Company
--------------------------------------------------------
Owner:
--------------------------------------------------------
ADDRESS: 411 7th Avenue, Pittsburgh, PA 15230
--------------------------------------------------------
PLANS & SPECIFICATIONS
ENTITLED:
--------------------------------------------------------
PREPARED BY: Bruce Sisson DATED: June 10, 1998
-------------------------- ----------------------
SECTION 2. ________ Telenetics__________________(hereinafter "Subcontractor")
and Sargent Electric (hereinafter "Sargent") agree that the equipment to be
furnished and the work to be done by the Subcontractor are as follows:
Deliver the first 1,830 Omega 1, 2, & 3 Interface Cabinets per the attached
Duquesne Light Company-Telenetics shipping schedule (Attachment A)
and riders Telenetics General Conditions of Purchase (Attachment B) attached
hereto, ALL IN ACCORDANCE WITH DUQUESNE LIGHT COMPANY/ TELENETICS SPECIFICATIONS
(ATTACHMENT C), THEREFOR AS DEFINED IN SECTIONS 1, 2 AND 3 OF THE ATTACHED
ADDITIONAL PROVISIONS OF SUBCONTRACT (HEREINAFTER "GENERAL CONTRACT").
SECTION 3. This contract shall be subject to all of the "ADDITIONAL PROVISIONS
OF SUBCONTRACT" which are hereby expressly incorporated herein and made a part
hereof.
SECTION 4. The Subcontractor agrees: (1) to keep himself thoroughly informed as
to the progress of the job; (2) to begin work upon notification by Sargent; (3)
to prosecute the work as and when directed by Sargent; (4) to perform the work
in accordance with the highest professional standards applicable to the
performance of like work; (5) and to perform the full extent of the work covered
by this Subcontract so as to assume all the obligations of Sargent therefor.
Subcontractor further acknowledges that time is of the essence in performance of
the work and failure to perform the work within the time specified shall be
grounds for termination by Sargent. Subcontractor specifically agrees to provide
all necessary coordination required to fully complete the work in accordance
with the scheduling requirements of the project set forth in the Duquesne Light
Company Schedule.
An Equal Opportunity Employer
06/10/98 Page 1 of 6
<PAGE>
SECTION 5. IN CONSIDERATION WHEREOF, Sargent agrees to pay the Subcontractor for
the full and faithful performance of its work the sum of [Confidential portion
omitted and filed separately with the Securities and Exchange Commission] in
current funds, subject to additions and deductions for changes as may be agreed
upon, provided that no payments are to be made unless the Subcontractor's rate
of progress, work done and material furnished are satisfactory to Sargent and
the Owner, and as herein agreed upon. Payments shall be made as follows:
. A payment of $ [Confidential portion omitted and filed separately with
the Securities and Exchange Commission] to cover start-up costs shall be
paid upon acceptance of this subcontract.
. Delivery of 10 each of Omega 1, 2, & 3 Communication Interface Cabinets.
. Functional Acceptance Testing and Acceptance by Duquesne Light Company.*
. A progress payment of $ [Confidential portion omitted and filed
separately with the Securities and Exchange Commission] shall be paid
upon receipt of the next 1,000 units (on or about July 17).
. A second progress payment of $ [Confidential portion omitted and filed
separately with the Securities and Exchange Commission] shall be paid
upon receipt of the next 800 units (partial shipment on of about July
24, balance on or about July 31).
. Should the value of the products contemplated by this Agreement be less
than the sum of the above start-up and progress payments, said amount
shall be credited to future invoicing.
*Note: No equipment delivery will be accepted, nor progress payment due
until Duquesne Light Company acceptance of the initial 30 units.
NOTE: Subcontractor must file a Certificate of Insurance with Sargent prior to
starting work, (naming Sargent and Duquesne Light Company as an additional
insured). All invoices must be submitted in duplicate and signed "APPROVED" by
the Sargent and Duquesne Light Company project managers prior to processing for
payment.
Subcontractor represents that it has examined this Subcontract and the
referenced contract documents and understands the Owner's expected functionality
for the subcontracted Equipment, and that it enters this Subcontract on the
basis of its own examination and evaluation and not any representations of
Sargent.
IN WITNESS WHEREOF, The parties hereto have executed this agreement for
themselves, their heirs, executors, successors, administrators and assigns, on
the day and year first above written.
CONTRACTOR: Sargent Electric Company Telenetics Corporation
--------------------------------
SUBCONTRACTOR
BY /s/ ILLEGIBLE SIGNATURE /s/ MICHAEL A. ARMANI
- ------------------------------------------ --------------------------------
General Manager/utility President
- ------------------------------------------ --------------------------------
TITLE TITLE
/s/ ILLEGIBLE SIGNATURE /s/ ILLEGIBLE SIGNATURE
- ------------------------------------------ --------------------------------
WITNESS WITNESS
An Equal Opportunity Employer
06/10/98 Page 2 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
ADDITIONAL PROVISIONS OF SUBCONTRACT
1. The phrase "General Contract" shall be deemed to mean the contract
between Sargent and the Owner with reference to the work described in Section 1
of this Subcontract, together with Attachments A, B, and C therein, all of which
are made a part of this Subcontract and fully incorporated herein by reference.
Whenever the requirements of the General Contract are more inclusive
or more restrictive than the terms of this Subcontract, the provisions of the
General Contract shall apply and the foregoing shall include but are not limited
to quantities, dates, tests, insurance, warranties, etc.
2. The Subcontractor agrees to furnish the Equipment required by this
Subcontract strictly in accordance with all plans and specifications of the
General Contract.
3. The Subcontractor agrees that he will so perform this agreement as not
to violate any term, covenant or condition of said General Contract. The
relationship of the Subcontractor hereunder towards Sargent shall be the same as
that of Sargent towards the Owner under said General Contract and the
relationship of Sargent hereunder to the Subcontractor shall be the same as that
of the Owner towards Sargent under said General Contract.
4. The Subcontractor shall submit to Sargent's Office, requisitions for
payment, covering the value of the work completed to the satisfaction of the
Owner during that month. Such invoice shall be submitted in time for processing
and submission to the Owner.
5. The Subcontractor shall furnish Sargent with such partial releases and
waivers of lien from Subcontractor's materialmen and creditors as Sargent may
request from time to time on labor and/or material and/or other claims, and
final releases and waivers of lien at the time of final payment on this
Subcontract.
6. The Subcontractor shall furnish, if requested by Sargent, sworn
affidavits from time to time, in accordance with the form provided by Sargent,
which shall state amounts due or to become due, amounts paid, and any other
information clearly to indicate the financial condition of the Subcontractor,
insofar as it relates to labor and material furnished, under this Subcontract,
and Sargent may take such steps as he may deem necessary to protect itself
against any claims including the withholding of payment and the right to issue
joint checks, until satisfactory evidence is received indicating all claims have
been satisfied. If at any time Sargent shall determine that the Subcontractor's
financial condition has become, in his opinion, unsatisfactory the Subcontractor
shall furnish satisfactory security to Sargent within three days after written
notice to his last known address and in default of furnishing said security,
Sargent shall have the option to cancel this contract. In case of such
cancellation the rights of Sargent shall be the same as if the Subcontractor had
failed to perform this contract in whole or in part.
An Equal Opportunity Employer
Page 3 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
7. The Subcontractor agrees that monies received for the performance of
this contract shall be held in trust for payment for labor and material entering
into this work and said monies shall not be diverted to satisfy obligations of
the Subcontractor on other contracts.
8. The right is reserved by Sargent to require changes in, deviations
from, additions to, and omissions from, the work herein contracted, and the
subcontract price shall be adjusted accordingly. Before proceeding with any
change, deviation, addition or omission, the Subcontractor will first obtain
written authorization from Sargent, which authorization will state the amount by
which the Subcontract will be adjusted, if any.
9. Subcontractor shall comply with all federal, state and municipal laws,
codes, regulations and ordinances effective where the work under this contract
is to be performed, and same shall govern where more restrictive than as set out
in plans or specifications.
10. This Subcontract shall supersede and take precedence over any and all
proposals, correspondence, and oral agreements made prior to the date hereof.
11. This Subcontract shall not be altered, modified or amended except by
further written agreement signed by both parties hereto.
12. The Subcontractor shall not sublet any portion of this subcontract
without the written consent of Sargent first had and obtained.
13. Subcontractor shall not assign, or attempt to assign in any manner at
any time any funds accrued or to accrue under this subcontract without prior
written consent of Sargent, and no such assignment shall be binding on Sargent
unless and until accepted in writing by Sargent.
14. The Subcontractor agrees to prosecute his work, and the several parts
thereof at such times and in such order as defined in Attachment to avoid any
delay in the completion of the project as a whole. The Subcontractor shall
reimburse Sargent for any loss, damage or extra expense paid or incurred by
Sargent, subject to the terms set forth in Attachment B. In case Sargent or the
Owner deems this procedure necessary for proper conduct of the work, all monies
expended therefor shall be deducted from the contract price herein stated, and
if such expenditures exceed the amount otherwise due to the Subcontractor
hereunder the Subcontractor agrees to pay to Sargent on demand the full amount
of such excess, together with interest thereon at the rate of__18_________
percent (_18__%) per annum, until paid.
15. The Subcontractor shall promptly amend and make good any defective
equipment to the entire approval and acceptance of the Owner. Telenetic's
obligation and liability shall be as set forth in Attachment B.
16. The Subcontractor shall furnish all guarantees, warranties and
operating instructions, etc., as required by the Attachment B.
17. To the fullest extent permitted by law, Subcontractor shall indemnify,
defend and save Sargent and Owner harmless from and against all suits, claims,
damages or expenses
An Equal Opportunity Employer
Page 4 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
(including attorneys fees), arising from any act, omission or negligence of
Subcontractor, its agents, employees, suppliers or subcontractors in connection
with Equipment supplied under this Subcontract, for or on account of any claim
arising out of: (1) any personal injury or death, including claims by any of
Subcontractor's employees for which Subcontractor would otherwise be immune by
virtue of any state workers' compensation law; (2) any damage to property; (3)
anything to be supplied hereunder infringing or being covered by a patent not
owned by Subcontractor; (4) the filing of any claims or liens by anyone
furnishing labor and/or materials to the Project; or (5) the breach of any
federal, state or local statute, ordinance or regulation.
18. Anti-Discrimination (a) The Subcontractor, in performing the work
required by this contract, shall not discriminate against any employees or
applicants for employment because of race, religion, creed, sex, national
origin, age, veteran status, and non-job related disability. The Subcontractor
is required to pursue actively a policy of non-discrimination in accordance with
directives of the Owner and a failure to do so may result in a cancellation of
this Subcontract.
(b) The Subcontractor agrees that the provisions of paragraph (a)
above and any other provisions required by the General Contract to be included
will be inserted in all of its subcontracts or in its purchase orders or
contracts if so required by the General Contract.
(c) Sargent shall not be liable to Subcontractor for any delay to
Subcontractor's work resulting from the act, negligence or default of the Owner,
or on account of any acts of God or any other cause beyond Sargent's control; or
on account of any circumstances caused or contributed to by Subcontractor.
(d) Should the Owner delay Subcontractor's work, then and in such
event Sargent shall owe Subcontractor therefor only an extension of time for
completion equal to the delay caused, and then only if written claim is made to
Sargent within forty-eight (48) hours from the beginning of the delay and only
to the extent Sargent receives an extension of time from the Owner.
19. Subcontractor agrees to guarantee its work against all defects in
materials or workmanship, as called for in Attachment B.
20. Notwithstanding any other provision herein to the contrary, and in
addition to any other provision herein provided for cancellation, it is
expressly agreed by Subcontractor that if at any time prior to final completion
of the work Subcontractor is in default in any respect in performance or in
compliance with any requirement of this Subcontract, Sargent may give written
notice to Subcontractor stating the nature of the default, and if such default
has not been remedied within twenty-four (24) hours from the time of delivery of
such notice to Subcontractor. Sargent may thereafter at any time, so long as
such default continues, cancel this Subcontract forthwith, without further
notice to Subcontractor. And it is expressly agreed that no prior failure to
exercise this right of cancellation shall ever be construed as a waiver of this
right of cancellation. In the event of such cancellation, terms set forth in
Attachment B shall apply.
21. Subcontractor agrees to exhaust the remedies available to Sargent under
the General Contract prior to commencing any separate arbitration against
Sargent for recovery. Subcontractor agrees to be bound to Contractor to the same
extent as Sargent is bound to Owner by the final
An Equal Opportunity Employer
Page 5 of 6
<PAGE>
SARGENT ELECTRIC COMPANY
Standard Subcontract Form
decision of any court or arbitration panel, whether or not Subcontractor is a
named party to any such proceeding.
Any claims asserted by Subcontractor for additional compensation or
damages for extra work directed by Owner or project delays caused by Owner will,
at Sargent's option, be passed through to Owner, in Sargent's name, and
Subcontractor will prosecute such claims at its cost.
At Sargent's option, Subcontractor agrees to a joint arbitration with
Owner, Sargent and Subcontractor in Pittsburgh, Pennsylvania with respect to any
claim, dispute or other matter substantially involving the rights, duties and
obligations of each such party if complete relief is to be obtained.
No arbitration or court proceeding may be commenced by Subcontractor
later than one year following delivery of last unit.
Any controversies arising between the parties to this contract and not
resolved in normal negotiations shall be settled under the principles
established by the arbitration clause of the General Contract, if any. In the
absence of such arbitration provision in the General Contract, disputes shall be
settled under the rules of the American Arbitration Association.
22. Subcontractor hereby waives and releases all liens or right of liens
now existing or that may hereafter arise for any and all work or labor performed
or material furnished under this Subcontract, upon said facility, or monies due
or to become due to Sargent and agrees to furnish a good and sufficient waiver
of lien in proper form for filing from every person or entity furnishing labor
or materials for this Project under Subcontractor.
23. It is further understood that Owner has the right to approve or
disapprove of all Subcontractors and in the event Owner does not approve of this
Subcontract it shall become null and void. If Owner subsequently terminates the
General Contract, Sargent may in turn terminate this Subcontract by giving
Subcontractor written notice. In such case, Sargent will pay Subcontractor
pursuant to the term of Attachment B.
An Equal Opportunity Employer
Page 6 of 6
<PAGE>
(Attachment A)
- --------------
DUQUESNE LIGHT COMPANY
Customer Advanced Reliability System
PROJECTED OMEGA CABINET DELIVERY SCHEDULE
THROUGH FIRST TWO PURCHASES
<TABLE>
<CAPTION>
June July August September October
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Omega 6/19 6/26 7/3 7/10 7/17 7/24 7/31 8/7 8/14 8/21 8/28 9/4 9/11 9/18 9/25 10/2 Total
Cabinet
- ------------------------------------------------------------------------------------------------------------------------------------
1 10 500 500 400 200 200 200 200 200 200 200 2,810
- ------------------------------------------------------------------------------------------------------------------------------------
11 10 400 400 200 400 400 400 400 400 400 400 3,810
- ------------------------------------------------------------------------------------------------------------------------------------
111 10 400 200 200 200 200 200 200 200 200 200 2,210
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10 20 500 500 400 400 600 800 800 800 800 800 800 800 800 8,830
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6/11/98
<PAGE>
Purchase Order No.___U5079-0161_______________________Dated:__June 10, 1998_____
(Attachment B)
- --------------
GENERAL CONDITIONS OF PURCHASE
1. PAYMENT
Start-up and progress payments shall be as detailed in the governing
subcontract.
Unit prices for quantities of interface cabinets shall be as follows for
quantities delivered through the end of 1998:
Omega 1 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission] Plus
Shipping
Omega 2 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission]Plus
Shipping
Omega 3 Communication Interface Cabinet - $ [Confidential portion omitted
and filed separately with the Securities and Exchange Commission]Plus
Shipping
The above unit prices assume that the minimum delivered quantity of
Interface Cabinets shall not be less than 10,000 units for use on the
Duquesne Light Company Project in 1998.
Terms of payment against shipments are net fifteen (15) days after the date
of the Telenetic's invoice. Amounts not paid when due shall bear interest at
the lesser of one and one-half (1.5%) percent per month and the highest
legal rate, and may result in the imposition by Telenetics of modified
credit terms.
2. PRICES AND TAXES
Prices are exclusive of all federal, state, municipal or other government
excise, sales, use, occupational or like taxes or duties now in force or
enacted in the future. Any such tax, fee, or charge of any nature whatsoever
imposed by any governmental authority on or measured by the transaction
between Telenetics and Sargent Electric shall be paid by the Sargent
Electric in addition to the prices quoted or invoiced. In the event
Telenetics is required to pay any such tax, fee, or a charge, at the time of
sale or thereafter, Sargent Electric shall reimburse Telenetics thereof.
3. SHIPMENT AND DELIVERY
All shipments herein shall be F.O.B. Jobsite (Greater Pittsburgh, PA area)
via ground freight using a Common Carrier, unless otherwise requested by the
Sargent Electric. The time of delivery is the time the Product is delivered
to the first jobsite by the carrier. All shipping charges shall be paid by
Telenetics, and set forth as a separate item on the Telenetics invoice.
4. TITLE AND RISK OF LOSS
Title to the Product shall pass to Sargent Electric upon delivery thereof by
the carrier to the jobsite and upon delivery Sargent Electric shall be
responsible for and bear all future risk of loss or damage to the Products.
Telenetics shall be responsible for shipping damage,
1
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
and retain a security interest in the Products until payment in full.
5. PROPRIETARY INFORMATION
Products contain valuable proprietary programs and data. Telenetics retains
for itself all title and proprietary rights in and to all designs,
engineering details, software resident in Read-Only Memories (ROM's), and
other program data contained in any Product sold.
Sargent Electric shall treat any information disclosed to Sargent Electric
hereunder, which is identified as confidential or proprietary, in strict
confidence and shall not disclose such information to third parties or use
it for any purpose other than the purpose for which it was disclosed to
Sargent Electric.
6. LIMITED PRODUCT WARRANTY
Telenetics warrants that the Product sold will be free from defects in
material and workmanship and perform to Telenetics' applicable published
specifications for a period of 18 months from the date of delivery to
Sargent Electric or 12 months from placement into service, whichever occurs
first. The liability of Telenetics hereunder shall be limited to replacing
or repairing, at its option, any defective Products which are returned
F.O.B., Telenetics' facility, Lake Forest, California (or, at Telenetics'
option refunding the purchase price of such products). In no case are
Products to be returned without a Sargent Electric return order number from
Telenetics. Telenetics shall not be liable for any consequential or
incidental damages, except in the case of equipment failure in excess of 5%
(of the installed units), at which time Telenetics shall be liable for
shipping and in and out charges in addition to the above stated remedy (or
other mutually agreed upon method of remediation). In and out charges shall
be fixed at $50.00 per occurrence.
Products that have been subject to abuse, misuse, accident, alteration,
neglect, unauthorized repair or installation are not covered by the
warranty. Telenetics shall make the final determination as to the existence
and cause of any alleged defect. No liability is assumed for expendable
items such as lamps and fuses. No warranty is made with respect to custom
except as specifically stated in writing by Telenetics in the agreement for
such custom products. For the purposes of this Agreement, no products
delivered for the Duquesne Light Company Project shall be considered custom
products.
This warranty is the only warranty made by Telenetics with respect to the
goods delivered hereunder, and may be modified or amended only by a written
instrument signed by a duly authorized officer or Telenetics and accepted by
Sargent Electric.
This warranty and limitation extends to Sargent Electric, Duquesne Light
Company, and to users of the product and is in lieu of all warranties with
respect to the product whether express, implied, or statutory, including
without limitation the implied warranties of merchantability and fitness for
a particular purpose, provided, however, that all advertised functionality
is delivered. This advertised functionality includes, but is not necessarily
limited to, specific Alpha meter outage notification to Duquesne Light
Company's MV-90 system, and Alpha meter serial number recognition and
automated modem port assignment/reporting.
2
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
7. PATENT AND COPYRIGHT INDEMNITY
Telenetics warrants that the use of the Products and documentation furnished
to Sargent Electric shall be free and clear of infringement of and United
States patent or registered copyright covering the structure of such
articles or documentation. In the event of a claim, suit or action against
Sargent Electric alleging such infringement, Telenetics shall defend and
save Sargent Electric harmless from liability, as finally determined by a
court of competent jurisdiction, for such infringement, provided that
Sargent Electric shall have made timely payment of all amounts due for the
article involved in the claim, suit or action, that Sargent Electric shall
have notified Telenetics promptly in writing of such claim, suit or action,
that Sargent Electric shall have given Telenetics all proper information and
assistance requested by Telenetics and full and exclusive control of the
defense thereof, and that Telenetics shall have the sole right to settle or
compromise such claim, suit or action. In the event that a final injunction
is obtained in such action against the use of the Products or any part
thereof by reason of infringement of a United States patent or otherwise
within the scope of this Paragraph, Telenetics will, at its option either:
(a) Procure for Sargent Electric, at Telenetics' expense, the right to
continue using the Products;
(b) Replace or modify the same so that it shall be non-infringing; or
(c) Direct Sargent Electric to return such Products to Telenetics, and
refund to Sargent Electric the purchase price originally paid less a
use credit equal to the depreciation of the installed units based on a
10-year straight lined depreciation method. in addition to the above
purchase price rebate, less use fee, Telenetics shall be liable for all
in and out and shipping fees arising out of above said injunction.
Telenetics shall only resort to option (c) after having exerted reasonable
effort to remedy the situation by first utilizing option (a) or (b).
Telenetics has no liability for any claim, suit or action pursuant to this
Paragraph based upon or arising out of the combination, operation or use of
the Products with Products or items not furnished by Telenetics. The
foregoing states Telenetics' entire liability and obligations and Sargent
Electric's exclusive remedy with respect to any claim, suit or action
alleging infringement of any intellectual property rights.
8. SOFTWARE AND PRODUCT LICENSE
Program and product will be licensed to Sargent Electric and Duquesne Light
Company pursuant to the terms and conditions of Telenetics' Software
Products License. These general terms and conditions shall not be valid
until a mutually acceptable software and product license is executed by all
parties.
9. LIMITATION OF LIABILITY
Telenetics shall not be liable for any loss, damages, or penalty resulting
from delay in delivery when such delay is due to causes beyond the
reasonable control of Telenetics,
3
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
including but not limited to supplier delay, force majeure, act of God,
labor unrest, fire, explosion, or earthquake. In any such event, the
delivery date shall be deemed extended for a period equal to the delay.
Telenetics' liability under, for breach of, or arising out of this Purchase
Order shall be limited to refund of the purchase price, except for in and
out and shipping costs listed in Sections 6. and 7. above. In no event
shall Telenetics be liable for costs of procurement of substitute goods by
the Sargent Electric. In no event shall Telenetics be liable for any
consequential, or incidental, damages (including without limitation loss of
profit) whether or not Telenetics has been advised of the possibility of
such loss. The essential purpose of this provision is to limit the
potential liability of Telenetics arising out of this Purchase Order.
10. ACCEPTANCE BY SARGENT ELECTRIC - ENTIRE AGREEMENT
The terms and conditions as set forth herein shall compliment the governing
Subcontract. This Agreement shall not be modified, supplemented, qualified,
or interpreted by any trade usage or prior course of dealing not made a
part of the Purchase Order Subcontract by its express terms.
The failure by Telenetics to enforce at any time any of the provisions of
this Agreement, or to exercise any election or portion provided herein,
shall in no way be construed as a waiver of such provisions or options, nor
in any way to affect the validity of this Purchase Order or any part
thereof, or the right of Telenetics thereafter to enforce each and every
such provision.
Sargent Electric hereby acknowledges that it has not entered into this
Agreement in reliance upon any warranty or representation by any person or
entity except for the warranties or representations specifically set forth
herein, or within the governing Subcontract.
11. CANCELLATION AFTER ACCEPTANCE
This Agreement may be cancelled by Sargent Electric only upon the payment
of reasonable cancellation charges. For the purposes of this agreement,
reasonable cancellation charges shall be fixed at 20% of the selling price
for all cancelled units. Upon cancellation Sargent Electric shall have no
rights to partially completed products.
12. TERMINATION
Sargent may terminate this agreement without cause upon written notice to
Telenetics. In the event of termination without cause, the above Section
11. cancellation fees shall apply. Sargent shall also have the right to
terminate this agreement immediately in the event contractor fails to
comply with the material provisions of this agreement and all reasonable
attempts to cure such breach within 30 days have failed. In the event of
termination with cause, the above cancellations fees shall not apply.
4
<PAGE>
General Conditions of Purchase
- --------------------------------------------------------------------------------
13. SUBSTITUTIONS AND MODIFICATIONS
Telenetics shall have the right to make substitutions and modifications in
the specifications of Products sold by Telenetics provided that such
substitutions or modifications will not materially affect overall Product
performance, and are acceptable to Duquesne Light Company Company.
14. ASSIGNMENT
Without consent of Telenetics in writing, Sargent Electric may not assign
any transactions associated herewith, except to an entity to which Sargent
Electric assigns, transfers, and conveys substantially all of its assets
into which it is merged or with which it is consolidated.
15. BANKRUPTCY
If Sargent Electric shall become bankrupt or insolvent or compounds with
his creditors or commences to be wound up or suffers a receiver to be
appointed, Telenetics shall be at liberty by notice in writing to cancel
this Purchase Order without judicial intervention or declaration of default
of Sargent Electric and without prejudice to any remedy which shall have
accrued or shall accrue thereafter to Telenetics, subject to applicable
federal and state law.
16. MISCELLANEOUS
Paragraph headings are provided for convenience of reference only and shall
not limit of modify any term hereof. Stenographic and clerical errors are
subject to corrections.
The Agreement between the parties is made, governed by, and shall be
construed in accordance with the laws of the State of PA.
The governing subcontract shall identify the terms by which to pursue
settlement of disputes.
5
<PAGE>
EXHIBIT B
TO
MARKETING AND TECHNOLOGY AGREEMENT
<PAGE>
________________________________________________________________________________
Telenetics
Communication Interface Cabinets for Duquesne Light
General Description
- -------------------
Telenetics Communication Interface Cabinets provide the dial-up communication
interface between the ABB Alpha Meters and the Public Switched Telephone Network
(PSTN). Three models are available (See Page 2)...
Type I: For use with a single Alpha Meter (Type M) with internal 2400bps
modem. Provides a cellular interface with the PSTN.
Type II: For use with multiple Alpha Meters (Type X) with no internal 2400bps
modem. Provides a direct connection with the PSTN.
Type III: For use with multiple Alpha Meters (Type X) with no internal 2400bps
modem. Provides a cellular interface with the PSTN.
Outage Reporting
- ----------------
Type II and Type III provide the Outage Reporting capability not available with
the ABB Alpha Meter Type X (without internal modem).
The Type II and Type III cabinets can be connected to up to 8 Alpha Meters.
Telenetics' Check Ports logic monitors each port's DTR control pin for power
loss. In the event of a power loss at one or more of the ports, the modem
will...
(a) Automatically dial out to a phone number stored in the modem;
(b) Transmit a message identifying the modem location;
(c) Append message (b) with a port number identifying the failed meter.
For Example;
Power Out at Carnegie for Meters: 378
Reports that meters 3, 7 and 8 have failed at the Carnegie site.
The phone number and message up to the colon-blank (: ) are stored in the
modem's directory #1. The port number(s) identifying the failed meter(s) are
generated by the Telenetics Check Ports routine.
The message can be sent as DTMF tones to a pager, or as ASCII characters for
hard copy displays.
If the primary power to the Communication Interface Cabinet fails, the unit
switches to battery back up and transmits the message "Power Out at Carnegie for
Meters: 0"
________________________________________________________________________________
May 5, 1998 Page 1
<PAGE>
________________________________________________________________________________
Telenetics
[Schematic diagram of Type III dial-up communication interface]
[Schematic diagram of Type II dial-up communication interface]
[Schematic diagram of Type I dial-up communication interface]
________________________________________________________________________________
May 5, 1998 Page 2
<PAGE>
________________________________________________________________________________
Telenetics
Product Specifications
Dial Modem [Type II & III]
- ---------- ---------------
Model: Telenetics PE14.4-D0
Modulation: V.32bis, V.32, V.22bis, V.22, Bell 212, Bell 103
Line Speed 14400, 9600, 4800, 2400, 1200, 300bps
DTE Rates: 57600, 38400, 19200, 9600, 4800, 2400, 1200, 300bps
EC/DC: MNP2, 3, 5 & 10; V.42, V.42bis
Configuration: Hayes(TM) Extended AT Command Set
Analog Connector: RJ11 Modular [to Internal Cellular Transceiver or
External Telco]
Digital Data Ports [Type II & III]
- ------------------ ---------------
Quantity: 8
Data Interface: RS232
Drive Capability: 300 feet
Control Signals: TxD, RxD, CD, RTS, CTS, DSR, DTR
Connector: RJ45 Modular, 8-Pin
Isolation: TBA
Analog Data Port [Type I]
- ---------------- --------
Quantity: 1
AC Line Impedance: 600 Ohms
Operating Current: 20mA min.
Ring/Tip DC Impedance: On-hook: 50M Ohms / RENS (Bell Spec.)
Off-hook: 120 - 410 Ohms with a 25mA loop
Connector: RJ11 Modular
________________________________________________________________________________
May 5, 1998 Page 3
<PAGE>
________________________________________________________________________________
Telenetics
Cellular Transceiver [Type I & II]
- -------------------- -------------
Model: Motorola S5690B (3 Watt) with S1936D Data Module
Frequency Range: 824.030 - 848.980 MHz Transmit
869.030 - 893.930 MHz Receive
Number of Channels: 832
Frequency Stability: +/- 2.5ppm
Operating Voltage: 10.9 - 16.3VDC
Current Drain: Transmit, @ max. power level: 2.0A
Idle: 100mA max.
RF Power Output: 3.0 Watt max.
Channel Spacing: 30kHz
Duplex Spacing: 45MHz, Modulation Type F3 +/- 12kHz for 100% @ 1kHz
Alternate Chnl Sel: -60dB +/- 60kHz AMPS
Audio Distortion: Less than 5% @ 1kHz, +/- 8kHz Deviation
Audio Response: 6dB/octave pre-emphasis Tx
6dB/octave de-emphasis Rx
Power Range: 6.77dBm nominal to 34.77dBm nominal in 8 power steps
with 4dB separation between adjacent steps
Audio Sensitivity: Greater than -116dBm (C-MSG weighted) @ 12dB SINAD SAT
Sensitivity.
Greater than -116dBm @ 12dB SINAD
Signaling Sensitivity: Greater than -110dBm
Input/Output Impedance: 50 ohms nominal
Emissions: Conducted/Radiated/Spurious: Less than -60dB below
carrier
Hum & Noise: 32dB below 8kHz deviation @ 1kHz
________________________________________________________________________________
May 5, 1998 Page 4
<PAGE>
________________________________________________________________________________
Telenetics
Data Connector: RJ11 Modular
To Internal Modem [Type III]
To External Modem [Type I]
Handset Compatibility: Compatible with bag phone type of handset (not
included). Typical Motorola Part S6038C
Antenna [Type I & III]
- ------- --------------
Type: Coil-based
Omni-Directional
50 Ohm
928 MHz
Power Supply [Type I, II & III]
- ------------ ------------------
Input: 90 - 264VAC
Fuses: 1.0 Amp
Replaceable 5 x 20mm
Output: 8.0VDC +/- 5% @ 250mA to Modem [Type II & III]
12.6VDC +/- 5% @ 2.1A to Cellular Xceiver [Type I & II]
Current Limited
Power Transformer: 4kV Breakdown Primary to Secondary
94V-O Flame Requirements
UL, CSA & IEC Safety Standards
Input Power Connector: 3-Screw Terminal Block [UL/CSA]
________________________________________________________________________________
May 5, 1998 Page 5
<PAGE>
________________________________________________________________________________
Telenetics
Surge Protection: Input: 1500 Watt pk @ 400V
Back Up Battery [Types I, II & III]
- --------------- -------------------
Type: Maintenance-Free, Rechargeable, Lead-Acid
Nominal OC Voltage: 12.7 VDC
Nominal Working Voltage: 11.9 VDC
Nominal Capacity: 2.6 Ampere-Hours (20 Hour Rate)
Recharging Method: Float Charging
General [Type I, II & III]
- ------- ------------------
Enclosure: Material: Polystyrene
Protection: NEMA 4X / IP66
Size: 10 x 7 x 4-3/8 inches
Operating Temperature: Type I: -30 to 60 C
Type II: -40 to 85 C
Type III: -30 to 60 C
Operating Humidity: 0 to 90% non-condensing
Weight: Type I: 4.5 lbs
Type II: 5.8 lbs
Type III: 7.0 lbs
________________________________________________________________________________
May 5, 1998 Page 6
<PAGE>
EXHIBIT 10.4
FACTORING AGREEMENT
-------------------
THIS FACTORING AGREEMENT made as of the 26th day of November 1997 by and
between ACCESS CAPITAL, INC., a New York corporation ("Access Capital") and
TELENETICS CORPORATION, a California corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has requested Access Capital to purchase from it, from
time to time, all of the right, title and interest of the Company in and to
certain accounts receivable due to the Company from its customers; and
WHEREAS, Access Capital is willing to consider purchasing certain of such
accounts receivable from the Company from time to time, upon the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, Access Capital and the Company have entered into a Letter of
Intent dated November 20, 1997 (the "Letter of Intent"), a copy of which is
attached hereto as Schedule A and the terms of which are incorporated herein,
whereby it is contemplated that Access Capital will provide capital to the
Company on the general terms set forth therein. Prior to the execution and
delivery of the definitive agreements contemplated by the Letter of Intent, the
Company has requested Access Capital to provide interim financial
accommodations, and Access Capital is willing to accommodate the short term
funding requirements of the Company on the terms, and subject to the conditions
contained herein;
NOW, THEREFORE, to induce Access Capital to purchase such accounts
receivable, and for other good valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, it is agreed as follows:
1. Tender of Accounts Receivable; Invoices.
----------------------------------------
(a) The Company will tender to Access Capital all of the accounts
receivable from its customers with respect to goods sold and delivered to, or
services performed for, such customers by the Company (individually, an "Account
Receivable," and, collectively, "Accounts Receivable") by delivering to Access
Capital all of the invoices to be rendered to such customers promptly after the
creation thereof. Access Capital will forward all such invoices delivered to the
Company's customers (without regard to whether such invoices are offered for
purchase by Access Capital), in accordance with Access Capital's standard
procedures, together with a notice by the Company to its customers, in the form
prescribed by Access Capital, of the assignment of payment of such invoices to
Access Capital.
(b) Access Capital will conduct such examination and verification of
the invoices delivered to it, and such credit investigation of the account
debtors, as it considers necessary or desirable, and will notify the Company as
to which of the individual Accounts Receivable tendered by the Company, if any,
Access Capital elects to purchase from the Company. Access Capital shall have
the absolute right, in its sole discretion, to reject any or all of the Accounts
Receivable tendered
<PAGE>
to it by the Company, irrespective of whether or not Access Capital has
previously purchased Accounts Receivable from the Company or has purchased
Accounts Receivable of any particular account debtor (individually, an "Account
Debtor," and, collectively, "Account Debtors").
2. Purchase and Sale of Accounts Receivable.
-----------------------------------------
(a) Those Accounts Receivable which Access Capital elects to purchase
from the Company shall be listed in an Invoice Delivery Schedule, substantially
in the form of Exhibit A (such form, together with any schedules and attachments
thereto is hereinafter referred to as an "Invoice Schedule"), executed by the
Company and accepted by Access Capital from time to time throughout the term of
this Agreement. Upon acceptance by Access Capital of an Invoice Schedule, the
Company shall be deemed to have sold, assigned, transferred, conveyed and
delivered to Access Capital, and Access Capital shall be deemed to have
purchased and received from the Company, all right, title and interest of the
Company in and to the Accounts Receivable listed in such Invoice Schedule.
Notwithstanding the foregoing, if either the Company or Access Capital fails to
include in any Invoice Schedule a particular Account Receivable tendered by the
Company to Access Capital, but Access Capital nonetheless makes an Initial
Payment (as hereinafter defined) to the Company for such Account Receivable,
then Access Capital shall be presumed conclusively to have purchased, and the
Company shall be presumed conclusively to have sold, such Account Receivable
pursuant to this Agreement, and such Account Receivable shall be governed by the
terms and conditions (including, without limitation, the Company's
representations and warranties to Access Capital) of this Agreement. The
Accounts Receivable which Access Capital has purchased, either by its acceptance
of an Invoice Schedule or by making an Initial Payment with respect thereto, are
sometimes referred to herein as "Purchased Receivables."
(b) Upon acceptance of an Invoice Schedule, Access Capital shall
deliver to the Company the amount of the Initial Payment specified in the Fee
Schedule, a copy of which is attached as Exhibit B hereto and made a part hereof
(the "Fee Schedule") with respect to the Accounts Receivable listed therein.
(c) By its execution of each Invoice Schedule with respect to
Accounts Receivable or acceptance of an Initial Payment with respect to an
Account Receivable, the Company shall be deemed to represent, warrant and
covenant to Access Capital with respect to each such Purchased Receivable that:
(i) The Company is the sole owner of such Purchased
Receivable and such Purchased Receivable has not previously been assigned
or encumbered in any manner; the Company has the full power and authority
to sell such Purchased Receivable and its sale to Access Capital has been
duly authorized by all necessary corporate action;
(ii) The goods or services listed or referred to in the
invoice related to such Purchased Receivable have been shipped or rendered
to the Account Debtor, and the prices and terms of shipment set forth
therein conform in all material respects to the terms of any related
purchase order or agreement with the Account Debtor;
2
<PAGE>
(iii) The invoice representing such Purchased Receivable
correctly sets forth the full purchase price of the goods or services
covered thereby, and such amount, less only the applicable trade discounts
and allowances stated therein, if any, is due and owing from the Account
Debtor, subject to no set-offs, deductions, disputes, contingencies or
counterclaims against the Company or the invoice, and payment thereof is
not contingent upon fulfillment of any obligation other than delivery of
the goods or services referred to in such invoice; and
(iv) Upon acceptance of the Invoice Schedule related
thereto and payment of the Initial Payment with respect thereto, Access
Capital shall be vested with all right, title and interest in and to such
Purchased Receivable, including all proceeds thereof, rights of stoppage in
transit and rights of return, contract rights and rights under policies of
insurance.
(d) If the amount of any Purchased Receivable is not paid by the
Account Debtor by reason of the financial inability of the Account Debtor to pay
when due, following acceptance by the Account Debtor of the goods sold or
services rendered, without dispute, the Company shall not be liable to reimburse
Access Capital the amount of the Initial Payment with respect thereto.
(e) If any Purchased Receivable is not paid by the Account Debtor
within 120 days after the date that such Purchased Receivable was invoiced and
such non-payment is not by reason of the insolvency of the Account Debtor or the
financial inability of the Account Debtor to pay the Purchased Receivable, or if
any Account Debtor asserts at any time any deduction, dispute, contingency, set-
off, or counterclaim with respect to any Purchased Receivable, the Company shall
reimburse Access Capital on demand for the amount of the Initial Payment with
respect to any Purchased Receivable. The Company shall be obligated to pay (and
Access Capital shall have the right to retain) the fee set forth on Exhibit B
with respect to such Purchased Receivable even if the Company is required to
reimburse Access Capital for such Purchased Receivable. For the purposes hereof,
(i) any failure of an Account Debtor to pay all or part of an invoice shall be
deemed to have been for a reason other than the insolvency or financial
inability of such Account Debtor unless the Company provides evidence to the
contrary acceptable to Access Capital, and (ii) even if the Company provides
such evidence under clause (i) above, any failure of an Account Debtor to pay
all or part of an invoice shall be deemed to have been for a reason other than
the insolvency or financial inability of such Account Debtor if such Account
Debtor has asserted any defense, dispute, contingency, deduction, or set-off,
regardless of the financial condition of such Account Debtor.
3. Conditions Precedent. Access Capital shall not be obligated to
--------------------
purchase any Accounts Receivable from the Company until each of the following
conditions shall have been satisfied:
(a) The Company shall have entered into a Security Agreement
substantially in the form attached hereto as Exhibit C (the "Security
Agreement") to secure the performance of the representations, warranties and
covenants of the Company in this Agreement (but not the payment of the Accounts
Receivable purchased thereby which are unpaid solely by reason of the financial
inability of the Account Debtor to pay at maturity, following acceptance by such
Account Debtor of the goods sold or services rendered without dispute) and the
payment and performance by the Company of its other obligations under this
Agreement;
3
<PAGE>
(b) The Company shall have executed and delivered to Access Capital
Uniform Commercial Code financing statements for filing with the appropriate
filing officer or officers in each jurisdiction where, in the opinion of Access
Capital, such filing is necessary or desirable to perfect the security interests
granted pursuant to the Security Agreement;
(c) Michael Armani shall have executed and delivered to Access
Capital Anti-Fraud and Performance Agreements substantially in the form attached
hereto as Exhibit D-1 (the "Anti-Fraud and Performance Agreement") with respect
to the performance of the representations, warranties and covenants of the
Company in this Agreement (but not the payment of the Accounts Receivable
purchased thereby) and the payment and performance by the Company of its other
obligations under this Agreement;
(d) SMC Communications Group Inc. and Shala Shashani doing business
as SMC Group shall have executed and delivered to Access Capital a Subordination
Agreement substantially in the form attached hereto as Exhibit E (the
"Subordination Agreement") with respect to certain obligations of the Company.
(e) The Company shall have executed and delivered to Access Capital
an Internal Revenue Service Form 8821 authorizing Access Capital to inspect
and/or receive all information regarding all of the Company's taxes for all
periods; and
(f) The Company shall have executed and/or delivered to Access
Capital all other documents, agreements, instruments, certificates and opinion
letters as shall be required by Access Capital in connection with the
transactions contemplated by this Agreement.
4. Collection of Accounts Receivable.
----------------------------------
(a) Commencing on the date of this Agreement, Access Capital shall
administer the collection of all Accounts Receivable originated by the Company.
Following identification of payments and application to the related invoices,
payments received with respect to Accounts Receivable, net of Access Capital's
administration fee as set forth in the Fee Schedule and any amounts due with
respect to Purchased Receivables, shall be remitted to the Company by Access
Capital at weekly intervals (or such other intervals to which the Company and
Access Capital may agree from time to time).
(b) Access Capital shall have the right of endorsement on all
payments received in connection with each Account Receivable and the Company
hereby appoints Access Capital the attorney-in-fact and agent of the Company for
this purpose, which appointment is coupled with an interest and is irrevocable
during the term of this Agreement.
(c) Access Capital shall have no liability to the Company for any
mistake in the application of any payment received by it with respect to any
Account Receivable, so long as it acts in good faith and without gross
negligence.
5. Administration of Purchased Receivables. For administrative
---------------------------------------
convenience, the Purchased Receivables delivered by the Company to Access
Capital during each week (or such other
4
<PAGE>
period as Access Capital may reasonably determine) may be aggregated and
administered as a single Account Receivable, or as several discreet Accounts
Receivable, in the discretion of Access Capital (each, an "Aggregate
Receivable"). As Access Capital collects the Purchased Receivables comprising an
Aggregate Receivable, it will pay to the Company an amount equal to the excess,
if any, of (i) the aggregate amount collected by Access Capital with respect to
such Aggregate Receivable, less (ii) the sum of (A) the aggregate Initial
Payments made by Access Capital with respect to such Aggregate Receivable, (B)
the fees earned by Access Capital with respect to such Aggregate Receivable, (C)
the aggregate amount theretofore paid by Access Capital (in excess of the
amounts specified in clauses (ii)(A) and (ii)(B)) with respect to such Aggregate
Receivable, if any, and (D) any amounts due pursuant to Sections 8 and 10 below
which have not theretofore been paid.
6. Cross-Collateralization. If a Default (as defined in Section 11 below)
-----------------------
shall have occurred and be continuing, Access Capital shall have the right,
which may be exercised in its sole and absolute discretion at any time and from
time to time during the continuance of such Default, to apply all amounts
collected with respect to Accounts Receivable as follows, before any payment
from such collections shall be made to the Company: (i) against the unreimbursed
balance of the Initial Payments made by Access Capital to the Company with
respect to Purchased Receivables; (ii) to the payment of all fees accrued with
respect to Accounts Receivable purchased by Access Capital from the Company,
whether or not such fees have become due and payable pursuant to the terms of
this Agreement; and (iii) to the payment of any and all other liabilities and
obligations of the Company to Access Capital pursuant to this Agreement, the
Security Agreement and any other agreement entered into between Access Capital
and the Company (the "Transaction Documents"). For purposes of this Section 6,
"Company" means and includes each person named as the Company in the preamble to
this Agreement and any parent, subsidiary, controlling person or other
affiliate.
7. Collection of Accounts Receivable.
----------------------------------
(a) The Company will instruct all Account Debtors obligated with
respect to its Accounts Receivable to mail or deliver payments on such Accounts
Receivable directly to Access Capital at its address set forth at the end of
this Agreement or to such other address that Access Capital may specify in a
written notice to the Company. Such instructions shall not be rescinded or
modified without Access Capital's prior written consent. If, despite such
instructions, the Company shall receive any payments with respect to any
Accounts Receivable purchased by Access Capital, it shall receive such payments
in trust for the benefit of Access Capital, shall segregate such payments from
its other funds, and shall deliver or cause to be delivered to Access Capital,
in the same form as so received with all necessary endorsements, all such
payments received as soon as practicable, but in no event later than two
business days after the receipt thereof by the Company.
(b) Access Capital shall have the full power and authority to collect
each Account Receivable, through legal action or otherwise, and may, in its sole
discretion, settle, compromise, or assign (in whole or in part) the claim for
any of the Accounts Receivable, or otherwise exercise any other right now
existing or hereafter arising with respect to any of the Accounts Receivable, if
such action will facilitate collection. The amount of any reduction resulting
from any such settlement, compromise, assignment or other collection action
shall reduce the balance otherwise due to the Company hereunder. The Company
acknowledges and agrees that Access Capital shall have the sole and exclusive
right to commence legal action to collect any Account Receivable.
5
<PAGE>
8. Payment of Expenses and Taxes; Indemnification. The Company will (a)
----------------------------------------------
pay or reimburse Access Capital for all of Access Capital's out-of-pocket costs
and expenses incurred in connection with the preparation and execution of, and
any amendment, supplement or modification to, the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby, including,
without limitation, the fees and disbursements of counsel to Access Capital
(whether or not such counsel is affiliated with Access Capital), (b) pay or
reimburse Access Capital for all its costs and expenses incurred in connection
with the enforcement or preservation of any rights under the Transaction
Documents, and the verification of the Accounts Receivable and the credit
worthiness of the account debtors, including, without limitation, fees and
disbursements of counsel to Access Capital (whether or not such counsel is
affiliated with Access Capital) and any collateral evaluation (e.g. field
examinations, collateral analysis or other business analysis) performed by
Access Capital or for its benefit as Access Capital deems necessary; (c) pay,
indemnify, and hold Access Capital harmless from, any and all recording and
filing fees and any and all liabilities with respect to, or resulting from, any
delay in paying, stamp, excise and other taxes, if any, which may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation of any of the transactions contemplated by, or any amendment,
supplement of modification of, or any waiver or consent under or in respect of,
the Transaction Documents; (d) pay, indemnify, and hold Access Capital harmless
from and against any and all claims, liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever, whether threatened, pending or determined (including
attorneys' fees and court costs now or hereafter arising from the enforcement of
this clause), (1) with respect to the execution, delivery, enforcement and
performance of the Transaction Documents, including, without limitation, the
custody, preservation, use or operation of, or the sale of, collection from, or
other realization upon, any collateral, or (2) arising directly or indirectly
from the activities of the Company or any subsidiary, its predecessors in
interest, or third parties with whom it has a contractual relationship, or
arising directly or indirectly from the violation of any environmental
protection, health, or safety law, whether such claims are asserted by any
governmental agency or any other person, or (3) arising by virtue of or in
connection with any representation or warranty by the Company being untrue as of
the date made or any agreement or covenant by the Company not being performed as
and when required hereunder (all of the foregoing, collectively, the
"indemnified liabilities"); provided, that the Company shall have no obligation
hereunder to Access Capital with respect to indemnified liabilities arising from
(i) the gross negligence or willful misconduct of Access Capital, (ii) salaries
and other amounts payable by Access Capital to its employees in the ordinary
course of business (other than for legal fees specifically billed with respect
to a particular matter to which the foregoing relates) or (iii) expenses
incurred by Access Capital (other than those specifically enumerated above) in
the ordinary course of business in connection with the performance of its
obligations hereunder. The agreements in this Section 8 shall survive the
termination of this Agreement.
9. Term; Fees.
-----------
(a) This Agreement shall be effective for a period commencing on the
date hereof and continuing until the close of business on January 31, 1998 (the
"Initial Term").
(b) The representations, warranties and covenants of the Company and
the remedies of Access Capital for a breach of such representations, warranties
and/or covenants, shall
6
<PAGE>
survive the termination of this Agreement, and such termination shall not affect
the rights of Access Capital to enforce its remedies under the Transaction
Documents against the Company or against any collateral after a default by the
Company.
(c) The Company shall pay to Access Capital simultaneous with the
execution of this Factoring Agreement, a commitment fee of $10,000.
(d) In the event that the Company terminates this agreement on or
before January 31, 1998 without entering into the agreement pursuant to the
Letter of Intent dated November 20, 1997 then the Company shall pay a
Termination fee of $35,000.
11. Defaults; Remedies. If any of the following events (each herein
------------------
referred to as a "Default") shall occur:
(a) Any representation, warranty or covenant made by the Company in
any of the Transaction Documents shall prove to have been incorrect, incomplete
or misleading on or as of the date made or deemed made; or
(b) The Company shall fail to perform or observe any term covenant or
agreement contained in any Transaction Document and such failure shall continue
for a period of five (5) days after written notice thereof from Access Capital
shall have been received by the Company; or
(c) Access Capital shall reasonably believe that the Company is
failing to tender all of its Accounts Receivable to Access Capital for purchase
pursuant to Section 1 of this Agreement;
(d) The Company shall instruct any Account Debtor to mail or deliver
payment on Accounts Receivable to the Company or to any person other than Access
Capital; or
(e) There shall be any change in the controlling ownership of the
Company; or
(f) The Company (i) shall generally not pay, or shall be unable to
pay, or shall admit in writing its inability to pay its debts as such debts
become due; or (ii) shall make an assignment for the benefit of creditors, or
petition or apply to any tribunal for the appointment of a custodian, receiver,
or trustee for it or a substantial part of its assets; or (iii) shall commence
any proceeding under any bankruptcy, reorganization, arrangement, readjustment
of debt, dissolution, or liquidation law or statute of any jurisdiction, whether
now or hereafter in effect; or (iv) shall have had any such petition or
application filed or any such proceeding commenced against it in which an order
for relief is entered or an adjudication or appointment is made, or (v) shall
take any corporate action indicating its consent to, approval of, or
acquiescence in any such petition, application, proceeding, or order for relief
or the appointment of a custodian, receiver, or trustee for all or any
substantial part of its properties; or (vi) shall suffer any such custodianship,
receivership, or trusteeship to continue undischarged.
then, and in any such event, Access Capital, without notice to the Company, may
exercise all of the rights provided in Section 6 and, by notice to the Company,
may: (i) declare the Facility Fee, Access
7
<PAGE>
Capital's accrued fees with respect to the Purchased Receivables (calculated as
provided in the Fee Schedule as if all Purchased Receivables had been paid in
full on the date of such declaration) and all other amounts payable under the
Transaction Documents to be forthwith due and payable, whereupon the Facility
Fee and all such other amounts shall become and be forthwith due and payable,
without demand, protest, or further notice of any kind, all of which are hereby
expressly waived by the Company; or (ii) declare that its obligation to purchase
and/or administer Accounts Receivable pursuant to this Agreement is terminated,
whereupon such obligation or obligations shall forthwith terminate; or (iii)
both. Access Capital may terminate its obligation to purchase additional
Accounts Receivable pursuant to this Agreement without terminating this
Agreement or its right to administer Accounts Receivable pursuant to the terms
hereof. In addition, the Company shall pay Access Capital a liquidation fee
("Liquidation Fee") in the amount of five percent (5%) of the face amount of
each receivable outstanding at any time during a "liquidation period" (as
defined below). For the purposes hereof, "liquidation period" means a period:
(i) beginning on the earliest date of (x) an event referred to in Section 11(f);
or (y) the cessation of business of the Company; and (ii) ending on the date on
which Access Capital has actually received fees, costs, expenses and other
amounts due and owing to it under the Transaction Documents. The Liquidation Fee
shall be paid on the earlier to occur of: (i) the date on which Access Capital
collects the applicable Account Receivable; and (ii) the 90th day from the
invoice of such Account Receivable by deduction from any amount otherwise due
from Access Capital to the Company directly, at the option of Access Capital.
The Company and Access Capital acknowledge that the actual damages that would be
incurred by Access Capital after the occurrence of a Default would be difficult
to quantify and that the Company and Access Capital have agreed that the fees
and obligations set forth in this paragraph and in this Agreement would
constitute fair and appropriate liquidated damages in the event of any such
termination.
12. Notices. All notices and other communications hereunder and under any
-------
other Transaction Document (unless otherwise specified in such Transaction
Document) shall be deemed given when delivered or deposited in the mails, first
class postage prepaid (provided, however, that notices given by telegram, telex
or telefax shall be deemed given when dispatched by telegram, telex or telefax,
as the case may be) and if to a party hereto addressed as set forth beneath its
name at the foot hereof unless a party shall give notice in writing of a
different address or telefax number in the manner provided herein.
13. Amendments. Etc. No amendment, modification, termination, or waiver of
---------------
any provision of any Transaction Document to which the Company is a party, nor
consent to any departure by the Company from any Transaction Document to which
it is a party, shall in any event be effective unless the same shall be in
writing and signed by Access Capital, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
14. No Waiver. No course of dealing between Access Capital and the
---------
Company, nor any failure or delay on the part of Access Capital in exercising
any right, power, or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right, power, or remedy
preclude any other or further exercise thereof or the exercise of any other
right, power, or remedy hereunder. The rights and remedies provided in the
Transaction Documents are cumulative, and are not exclusive of any other rights,
powers, privileges, or remedies, now or hereafter existing, at law or in equity
or otherwise.
8
<PAGE>
15. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the Company and Access Capital and their respective successors
and assigns, except that the Company may not assign or transfer any of its
rights under any Transaction Document to which it is a party without the prior
written consent of Access Capital.
16. Integration. This Agreement and the other Transaction Documents
-----------
contain the entire agreement between the parties relating to the subject matter
hereof and supersede all oral statements and prior writings with respect
thereto.
17. Severability of Provisions. Any provision of any Transaction Document
--------------------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such
Transaction Document or affecting the validity or enforceability of such
provision in any other jurisdiction.
18. Additional Reports. In the event that at any time after the expiration
------------------
of the term of this Agreement (as the same may be extended or modified, or
terminated following the occurrence of a default), the Company or any successor
or assignee of the Company, shall request additional information from Access
Capital including, without limitation, account reports, collections advice for
previously concluded transactions or information for the Company's accounting
records, such information shall be supplied by Access Capital to the Company if
available, and the Company shall pay Access Capital based on the time spent by
Access Capital personnel in the preparation of such information for the Company,
and for the disbursements incurred by Access Capital in connection therewith, at
the hourly rates established by Access Capital for the consulting services of
its personnel.
19. Headings. Section headings in the Transaction Documents are included
--------
in such Transaction Documents for the convenience of reference only and shall
not constitute a part of the applicable Transaction Documents for any other
purpose.
20. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
-----------------------
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN,
THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT A FINAL JUDGMENT
IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT, AFTER ALL
APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
21. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
-------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
9
<PAGE>
22. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL
-----------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT.
23. COUNTERPARTS. THIS AGREEMENT MAY BE EXECUTED IN ANY NUMBER OF
------------
COUNTERPARTS, ALL OF WHICH SHALL CONSTITUTE ONE AND THE SAME INSTRUMENT, AND ANY
PARTY HERETO MAY EXECUTE THIS AGREEMENT BY SIGNING ONE OR MORE COUNTERPARTS.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
ACCESS CAPITAL, INC.
By: /s/ PAUL MEHRING
-------------------------------------
Name: Paul Mehring
Title: Vice President
Address for Notices:
405 Park Avenue
New York, New York 10022
Attn: Client Services Department
Telephone Number: (212) 644-9300
Telefax Number: (212) 644-5488
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-------------------------------------
Michael Armani
President & Chief Executive Officer
Address for Notices:
26772 Vista Terrace Drive
Lake Forest, CA 92630
Telephone Number: (714) 455-4000
Telefax Number: (714) 455-4010
10
<PAGE>
EXHIBIT A
---------
INVOICE DELIVERY SCHEDULE
-------------------------
Bulk #: ________________
ACI Invoice #: _________
Aggregate Amount of Invoices: $ ________________
Initial Payment: $ ___________________________
Date:_________ 199___
Pursuant to the terms and conditions of the Factoring Agreement in effect
by and between the Company (as named below) and Access Capital, Inc. ("Access
Capital"), the Company hereby sells to Access Capital, and Access Capital hereby
purchases from the Company, the accounts receivable of the Company set forth on
Schedule A attached hereto and made a part hereof. Reference is made to the
Factoring Agreement between the parties, the terms and conditions of which are
incorporated herein by this reference.
Name of Company: Accepted:
TELENETICS CORPORATION ACCESS CAPITAL, INC.
By: /s/ MICHAEL ARMANI By: /s/ PAUL MEHRING
-------------------------------------- -----------------------------
Michael Armani Name: Paul Mehring
President & Chief Executive Officer Title: Vice President
11
<PAGE>
EXHIBIT B
---------
TELENETICS CORPORATION
FEE SCHEDULE
The fee earned by Access Capital, Inc. for purchasing Accounts
Receivable with an initial payment of 75% shall be 15% (fifteen percent) per
annum. Collected funds shall be available to the account of the Company five (5)
business clearance days after receipt of payment.
Access Capital, Inc. will earn a 2.5% (two and one half percent) administrative
fee for all Accounts Receivable purchased by the Company during the term of the
Account Agreements.
Agreed to and Accepted:
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-------------------------------
Michael Armani
President & Chief Executive Officer
<PAGE>
EXHIBIT C
---------
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT made as of the 26th day of November 1997 by and
between TELENETICS CORPORATION a California corporation, (the "Company") and
ACCESS CAPITAL, INC., a New York corporation ("Access Capital").
W I T N E S S E T H:
WHEREAS, the Company intends to enter into a Factoring Agreement with
Access Capital dated the date hereof (the "Factoring Agreement") pursuant to
which Access Capital will purchase certain accounts receivable represented by
invoices rendered to customers of the Company ("Accounts Receivable") on the
basis of, and in reliance upon the representations, warranties and covenants of
the Company contained in the Factoring Agreement; and
WHEREAS, it is a condition precedent to the obligation of Access Capital to
purchase Accounts Receivable pursuant to the Factoring Agreement that the
Company shall have entered into this Security Agreement for the purpose of
securing the performance of the representations, warranties and covenants of the
Company in the Factoring Agreement (but not the payment of the Accounts
Receivable purchased thereby which are unpaid solely by reason of the financial
inability of the account debtor to pay at maturity, following acceptance by such
account debtor of the goods sold or services rendered without dispute) and the
payment and performance by the Company of its other obligations under the
Factoring Agreement;
NOW, THEREFORE, to induce Access Capital to enter into the Factoring
Agreement and purchase Accounts Receivable pursuant thereto, and in
consideration thereof and for other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. Security Interest. The Company hereby grants Access Capital a security
-----------------
interest (the "Security Interest") in all of the following property now owned or
at any time hereafter acquired by it, or in which it now has or at any time in
the future may acquire any right, title or interest (the "Collateral"):
(a) all Accounts Receivable purchased by Access Capital pursuant to
the Factoring Agreement, all rights of the Company pursuant to the Factoring
Agreement, and all contract rights and other general intangibles related to the
Accounts Receivable purchased by Access Capital pursuant to the Factoring
Agreement and associated therewith and the proceeds and products thereof
(including without limitation proceeds of insurance) and all additions,
accessions and substitutions thereto or therefor; and
(b) all accounts not purchased by Access Capital, all other personal
property and fixtures of the Company, including, without limitation, inventory,
equipment, goods, documents, instruments, contract rights, general intangibles
and chattel paper in which the Company now has or hereafter may acquire any
right, title or interest and the proceeds and products thereof (including
<PAGE>
without limitation, proceeds of insurance) and all additions, accessions and
substitutions thereto or therefor.
Terms used in clauses (a) and (b) of this Section which are defined in the
Uniform Commercial Code as enacted and in effect in the State of New York (the
"Code") are used as so defined in the Code.
2. Obligations. This Agreement and the Security Interest shall secure the
-----------
following obligations (the "Obligations"):
(a) Any and all obligations of the Company under the Factoring
Agreement or under any other agreement or instrument executed and delivered
pursuant thereto, including without limitation all reimbursement and
indemnification obligations of the Company; and
(b) Any and all other liabilities and obligations of every kind and
nature whatsoever of the Company to Access Capital under the Factoring Agreement
or otherwise, whether such liabilities and obligations be direct or indirect,
absolute or contingent, secured or unsecured, now existing or hereafter arising
or acquired, due or to become due.
3. Financing Statements and Other Action. The Company will do all lawful
-------------------------------------
acts which Access Capital deems necessary or desirable to protect the Security
Interest or otherwise to carry out the provisions of this Agreement, including,
but not limited to, the execution of Uniform Commercial Code financing,
continuation, amendment and termination statements and similar instruments in
form satisfactory to Access Capital and the procurement of waivers and
disclaimers of interest in the Collateral by the owners of any real estate on
which the Collateral is located and will promptly pay on demand any filing fees
or other costs in connection with the filing or recordation of such statements
and instruments.
4. Places of Business. The Company warrants that its principal place of
-------------------
business, chief executive office and the place where the records concerning its
accounts and contract rights are located at the address for notices set forth in
the Factoring Agreement. None of the Accounts Receivable is evidenced by a
promissory note or other instrument. The Company will keep its principal place
of business and chief executive office and the office where it keeps its records
concerning its accounts and contract rights at the location therefor specified
in the previous sentence or, upon 30 days' prior written notice to Access
Capital, at any other locations in a jurisdiction where all actions required by
this Section 4 shall have been taken with respect to the Collateral. The Company
will hold and preserve its records concerning its accounts and contract rights
and will permit representatives of Access Capital at any time during normal
business hours to inspect and make abstracts from such records.
5. Encumbrances. The Company warrants that it has title to the Collateral
------------
purportedly owned by it and that there are no sums owed or claims, liens,
security interests or other encumbrance (collectively, "Liens") against the
Collateral other than as set forth on Schedule 1 hereto. The Company will notify
Access Capital of any Liens against the Collateral, will defend the Collateral
against any Liens adverse to Access Capital, except for liens having priority
listed on Schedule 1 hereto, and will not create, incur, assume, or suffer to
exist now or at any time throughout the
2
<PAGE>
duration of the term of this Security Agreement, any Liens against the
Collateral, whether now owned or hereafter acquired, except liens in favor of
Access Capital and liens listed on Schedule 1.
6. Maintenance of Collateral. The Company shall preserve the Collateral
--------------------------
for the benefit of Access Capital. Without limiting the generality of the
foregoing, the Company shall:
(a) make all such repairs, replacements, additions and improvements to
its equipment as in its judgment are necessary to permit such business to
be properly and advantageously conducted at all times;
(b) maintain and preserve its inventory except as sold in the ordinary
course of business;
(c) preserve all beneficial contract rights to the extent commercially
reasonable;
(d) in conjunction with, and at the direction of, Access Capital, take
commercially reasonable steps to collect all accounts; and
(e) pay all taxes, assessments or other charges on the Collateral when
due, unless the amount or validity of such taxes, assessments or charges
are being contested in good faith by appropriate proceedings and reserves
have been provided on its books with respect thereto in conformity with
generally accepted accounting principles.
Nothing contained herein shall be construed to prohibit the Company from
buying and selling equipment and inventory in the ordinary course of business.
7. Additional Provisions Concerning the Collateral.
------------------------------------------------
(a) The Company authorizes Access Capital to file, without the
signature of the Company, where permitted by law, one or more financing or
continuation statements, and amendments thereto, relating to the Collateral.
Access Capital may file a photographic or other reproduction of this Agreement
in lieu of a financing or continuation statement in any filing office where it
is permissible to do so.
(b) The Company irrevocably appoints Access Capital as its attorney-
in-fact (which power of attorney is coupled with an interest) and proxy, with
full authority in the place and stead of the Company and in its name or
otherwise, from time to time in Access Capital's discretion, including: (i) to
obtain and adjust insurance required to be paid to Access Capital pursuant to
Section 8 hereof; (ii) to ask, demand, collect, sue for, recover, compound,
receive, and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral; (iii) to receive, endorse, and
collect any checks, drafts or other instruments, documents, and chattel paper in
connection with clause (i) or clause (ii) above; (iv) to sign the Company's name
on any invoice or bill of lading relating to any account, on drafts against
customers, on schedules and assignments of accounts, on notices of assignment,
financing statements and other public records, on verification of accounts and
on notices to customers (including notices directing customers to make payment
directly to Access Capital); (v) if a Default (as defined in the Factoring
Agreement) has occurred and is
3
<PAGE>
continuing, to notify the postal authorities to change the address for delivery
of its mail to an address designated by Access Capital, to receive, open and
process all mail addressed to the Company, to send requests for verification of
accounts to customers; and (vi) to file any claims or take any action or
institute any proceedings which Access Capital may deem necessary or desirable
for the collection of any of the Collateral or otherwise to enforce the rights
of Access Capital with respect to any of the Collateral. The Company ratifies
and approves all acts of said attorney; and so long as the attorney acts in good
faith and without gross negligence it shall have no liability to the Company for
any act or omission as such attorney.
(c) If the Company fails to perform any agreement contained herein,
Access Capital may itself perform, or cause performance of, such agreement or
obligation, and the costs and expenses of Access Capital incurred in connection
therewith shall be payable by the Company and shall be fully secured hereby.
(d) The powers conferred on Access Capital hereunder are solely to
protect its interest in the Collateral and shall not impose any duty upon Access
Capital to exercise any such powers. Except for the safe custody of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, Access Capital shall have no duty as to any Collateral or as to
the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to any Collateral.
(e) Anything herein to the contrary notwithstanding, (i) the Company
shall remain liable under any contracts and agreements relating to the
Collateral, to the extent set forth therein, to perform all of its obligations
thereunder, to the same extent as if this Agreement had not been executed; (ii)
the exercise by Access Capital of any of its rights hereunder shall not release
the Company from any of its obligations under the contracts and agreements
relating to the Collateral; and (iii) Access Capital shall not have any
obligation or liability by reason of this Agreement under any contracts and
agreements relating to the Collateral, nor shall Access Capital be obligated to
perform any of the obligations or duties of the Company thereunder or to take
any action to collect or enforce any claim for payment assigned hereunder.
8. Insurance. The Company shall maintain insurance covering the
---------
Collateral with financially sound and reputable insurers satisfactory to Access
Capital against such risks as are customarily insured by a business in the same
or a similar industry and similarly situated for an amount not less than the
full replacement value of such Collateral. All such insurance policies covering
property on and after the date such property becomes subject to the Security
Interest shall be written so as to be payable in the event of loss to the
Company and Access Capital as their interests shall appear and shall provide for
at least thirty (30) days prior written notice to Access Capital prior to the
cancellation or modification of each such policy. At the request of Access
Capital, all insurance policies covering property subject to the Security
Interest shall be furnished to and held by Access Capital. If, while any
Obligations are outstanding, any proceeds with respect to any casualty loss are
paid to Access Capital under such policies on account of such casualty loss, and
no Default (as defined in the Factoring Agreement) has occurred and is
continuing, Access Capital will pay over such proceeds in whole or in part to
the Company, for the purpose of repairing or replacing the Collateral destroyed
or damaged, with any such repaired or replaced Collateral to be secured by this
Agreement. If a Default has occurred and is continuing, Access Capital may apply
the proceeds in its
4
<PAGE>
discretion to any of the Obligations. Access Capital is hereby appointed during
the term of this Agreement as irrevocable attorney-in-fact to collect the
proceeds of such insurance, to settle any claims with the insurers in the event
of loss or damage, to endorse settlement drafts and upon the occurrence and
during the continuance of a Default to cancel, assign or surrender any insurance
policies.
9. Remedies. If any Default (as defined in the Factoring Agreement) shall
---------
have occurred and be continuing:
(a) Access Capital may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies of a secured party on default under the Code
(whether or not the Code applies to the affected Collateral), and also may (i)
require the Company to, and the Company hereby agrees that it will at its
expense and upon request of Access Capital forthwith, assemble all or part of
the Collateral as directed by Access Capital and make it available to Access
Capital at a place to be designated by Access Capital which is reasonably
convenient to both parties and (ii) without notice except as specified below,
sell the Collateral or any part thereof in one or more parcels at public or
private sale, at any of Access Capital's offices or elsewhere, for cash, on
credit or for future delivery, and upon such other terms as Access Capital may
deem commercially reasonable. The Company agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to the Company of the
time and place of any public sale or the time after which any private sale is to
be made shall constitute reasonable notification. Access Capital shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given. Access Capital may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and any such sale
may, without further notice, be made at the time and place to which it was so
adjourned.
(b) Any cash held by Access Capital as Collateral and all cash
proceeds received by Access Capital in respect of any sale of, collection from,
or other realization upon all or any part of the Collateral may, in the
discretion of Access Capital, be held by Access Capital as Collateral for,
and/or then or any time thereafter be applied in whole or in part by Access
Capital against, all or any part of the Obligations in such order as Access
Capital shall elect. Any surplus of such cash or cash proceeds held by Access
Capital and remaining after payment in full of all the Obligations shall be paid
over to the Company or to whomsoever may be lawfully entitled to receive such
surplus.
(c) Access Capital may exercise any and all rights and remedies of the
Company under or in connection with the Collateral, including, without
limitation, any and all rights of the Company to demand or otherwise require
payment of any amount under, or performance of any provision of, any account,
contract or agreement.
(d) All payments received by the Company under or in connection with
the Collateral shall be received in trust for the benefit of Access Capital,
shall be segregated from other funds of the Company and shall be forthwith paid
over to Access Capital in the same form as so received (with any necessary
endorsement).
10. Payment of Taxes. Charges. Etc. Access Capital, at its option, after
-------------------------------
notice to the Company, may discharge any taxes, charges, assessments, security
interests, liens or other
5
<PAGE>
encumbrances upon the Collateral or otherwise protect the value thereof. All
such expenditures incurred by Access Capital shall become payable by the Company
to Access Capital upon demand, shall bear interest at an annual rate equal at
all times to the lesser of 15 percent per annum or the highest legal interest
rate from the date incurred to the date of payment, and shall be secured by the
Collateral.
11. Duties with Respect to Collateral. Access Capital shall have no duty
---------------------------------
to the Company with respect to the Collateral other than the duty to use
reasonable care in the safe custody of any of the Collateral in its possession.
Without limiting the generality of the foregoing, Access Capital, although it
may do so at its option, shall be under no obligation to the Company to take any
steps necessary to preserve rights in the Collateral against other parties.
12. Waivers. To the extent permitted by law, the Company hereby waives
-------
demand for payment, notice of dishonor or protest and all other notices of any
kind in connection with the Obligations except notices required herein, by law
or by any other agreement between the Company and Access Capital. Access Capital
may release, supersede, exchange or modify any collateral or security which it
may from time to time hold and may release, surrender or modify the liability of
any third party without giving notice hereunder to the Company. Such
modifications, changes, renewals, releases or other actions shall in no way
affect the Company's obligations hereunder.
13. Termination. This Agreement and the Security Interest shall terminate
-----------
upon the expiration, cancellation or other termination of the Factoring
Agreement, provided that all Obligations have been paid or discharged in full.
Upon termination of the Security Interest, Access Capital will deliver to the
Company appropriate termination statements with respect to Collateral so
released from the Security Interest for filing with each filing officer with
which financing statements have been filed by Access Capital to perfect the
Security Interest in such Collateral.
14. Successors and Assigns. This Agreement shall be binding upon and inure
----------------------
to the benefit of the Company and Access Capital and their respective successors
and assigns.
15. Severability of Provisions. Any provision of this Agreement which is
--------------------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
16. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
-----------------------
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN,
THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT A FINAL JUDGMENT
IN ANY SUCH SUIT ACTION OR PROCEEDING
6
<PAGE>
BROUGHT IN SUCH A COURT, AFTER ALL APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND
BINDING UPON IT.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
-------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
18. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL
-----------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the date first above written.
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-------------------------------------
Michael Armani
President & Chief Executive Officer
ACCESS CAPITAL, INC.
By: /s/ PAUL MEHRING
-------------------------------------
Name: Paul Mehring
Title: Vice President
7
<PAGE>
Schedule 1
to
Security Agreement
------------------
PERMITTED LIENS
---------------
8
<PAGE>
EXHIBIT D-1
-----------
ANTI-FRAUD and PERFORMANCE AGREEMENT
------------------------------------
THIS ANTI-FRAUD and PERFORMANCE AGREEMENT, made as of the 26th day of
November 1997, by and between MICHAEL ARMANI ("Michael Armani") and ACCESS
CAPITAL, INC., a New York corporation ("Access Capital").
W I T N E S S E T H:
WHEREAS, TELENETICS CORPORATION (the "Company") and Access Capital intend
to enter into a Factoring Agreement dated the date hereof (the "Factoring
Agreement") pursuant to which Access Capital will purchase certain accounts
receivable billed to customers of the Company ("Accounts Receivable") on the
basis of, and in reliance upon, the representations, warranties and covenants of
the Company contained in the Factoring Agreement; and
WHEREAS, Michael Armani is an officer and shareholder of the Company; and
WHEREAS, it is a condition precedent to the obligation of the Access
Capital to enter into the Factoring Agreement and to purchase Accounts
Receivable pursuant thereto that Michael Armani shall have entered into this
Anti-Fraud and Performance Agreement, guaranteeing the performance by the
Company of the representations, warranties and covenants of the Company in the
Factoring Agreement (but not the payment of the Accounts Receivable purchased
thereby which are unpaid solely by reason of the financial inability of the
account debtor to pay at maturity, following acceptance by such account debtor
of the goods sold or services rendered without dispute) and the payment and
performance by the Company of its other obligations under the Factoring
Agreement;
NOW, THEREFORE, in order to induce Access Capital to enter into the
Factoring Agreement and the Security Agreement and to purchase Accounts
Receivable pursuant thereto, and in consideration thereof and for other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged by
Michael Armani, it is agreed as follows:
1. Liabilities of Michael Armani. Michael Armani hereby absolutely and
-----------------------------
unconditionally guarantees the accuracy and completeness of the Company's
representations and warranties and the prompt and complete performance by the
Company of the Company's covenants and obligations in the Factoring Agreement,
the prompt and complete payment and performance of all other fees, expenses and
obligations of any nature that shall become due or owing to Access Capital by
the Company under the Factoring Agreement or pursuant to any modification or
amendment thereof, and the payment of any costs or expenses incurred by Access
Capital in enforcing the same (the "Obligations"). Except as provided in Section
7, this Anti-Fraud and Performance Agreement is a continuing guaranty of the
Obligations for the duration of the term of the Factoring Agreement and any
renewals or extensions thereof. Payments to be made by Michael Armani hereunder
may be required by Access Capital on any number of occasions. Payment by Michael
Armani shall be made to Access Capital at Access Capital's office on demand as
Obligations become due.
<PAGE>
2. Presumption of Default. In the event that Access Capital shall have
----------------------
purchased an Account Receivable from the Company which shall not have been paid
in full when due at a time when the customer to which such Account Receivable
was billed has not (i) ceased generally to pay its debts as they become due, or
(ii) made an assignment for the benefit of creditors, or petitioned or applied
to any tribunal for the appointment of a custodian, receiver, or trustee for it
or a substantial part of its assets, or (iii) commenced any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, or (iv) had a petition or
application filed or any such proceeding commenced against it, then the failure
of the customer to pay such Account Receivable shall be presumed to be the
result of the Company's breach of a representation, warranty, covenant or
obligation in the Factoring Agreement with respect to the Account Receivable to
which it relates.
3. Costs of Enforcement. Michael Armani shall pay to Access Capital
--------------------
forthwith upon demand, all reasonable costs and expenses (including court costs
and legal expenses) incurred or expended by Access Capital in enforcing its
rights under this Anti-Fraud and Performance Agreement.
4. Waiver of Right of Subrogation. Notwithstanding any payment or
------------------------------
payments made by Michael Armani hereunder, Michael Armani will not exercise any
rights of Access Capital against the Company by way of subrogation,
reimbursement or indemnity, and shall have no right of recourse to any assets or
property of the Company held for the payment and performance of its Obligations,
whether or not the Obligations of the Company shall be satisfied. If there is
more than one obligor, each obligor agrees not to seek contribution from any
other obligor until all the Obligations shall have been paid in full. If any
amount shall nevertheless be paid to Michael Armani, such amount shall be held
in trust for the benefit of Access Capital and shall forthwith be paid to Access
Capital to be credited and applied to the Obligations, whether matured or not
matured. The provisions of this Section 4 shall survive termination of this
Anti-Fraud and Performance Agreement.
5. Waiver. Michael Armani hereby assents, to the extent permitted by law,
------
to all the terms and conditions of the Obligations and waives: (a) notice of
acceptance of this Anti-Fraud and Performance Agreement and all notice of the
creation, extension or accrual of any Obligations; (b) presentment, demand for
payment, notice of dishonor and protest; (c) notice of any other nature
whatsoever; (d) any requirement of diligence or promptness on the part of Access
Capital in the enforcement of any of its rights under the provisions of the
Factoring Agreement or any Account Agreement; (e) any requirement that Access
Capital take any action whatsoever against the Company or any other party or
file any claim in the event of the bankruptcy of the Company; or (f) failure of
Access Capital to protect, preserve or resort to any collateral. The waivers set
forth in this section shall be effective notwithstanding the fact that the
Company ceases to exist by reason of its liquidation, merger, consolidation or
otherwise.
6. Consent. Michael Armani hereby consents that from time to time, and
-------
without further notice to or consent of Michael Armani, Access Capital may take
any or all of the following actions without affecting the liability of Michael
Armani: (a) extend, renew, modify, compromise, settle or release the
Obligations; (b) release or compromise any liability of any party or parties
with respect to the Obligations; (c) release its security interest in the
collateral or exchange, surrender or otherwise deal with the collateral as
Access Capital may determine; or (d) exercise or refrain from exercising any
right or remedy of Access Capital.
2
<PAGE>
7. Obligations of Michael Armani Unconditional; Termination. The
--------------------------------------------------------
obligations of Michael Armani under this Anti-Fraud and Performance Agreement
shall be absolute and unconditional, irrespective of the validity, regularity or
enforceability of any Obligation or any instrument or agreement evidencing the
same or relating thereto or any other circumstance that might otherwise
constitute a defense available to, or a discharge of, Michael Armani. The
obligations of Michael Armani hereunder shall be absolute and unconditional
under any and all circumstances and shall not be discharged except by complete
payment or performance of the Obligations and the liabilities of Michael Armani
hereunder.
8. Notices. All notices and other communications hereunder shall be
-------
deemed given when delivered or deposited in the mails, first class postage
prepaid (provided, however, that notices given by telegram, telex or telefax
shall be deemed given when dispatched) and if to a party hereto addressed as set
forth beneath its name at the foot hereof unless a party shall give notice of a
different address or telefax number in the manner provided herein.
9. Survival of Agreement. This Anti-Fraud and Performance Agreement shall
---------------------
inure to the benefit of and be binding upon Michael Armani and Access Capital
and their respective heirs, successors and assigns, including any subsequent
holder or holders of any Obligations, and the term "Access Capital" shall
include any such holder or holders whenever the context permits.
10. Independent Obligation. Access Capital may proceed against Michael
----------------------
Armani under this Anti-Fraud and Performance Agreement without first proceeding
against the Company, against any other surety or any other person or any
security held by Access Capital and without pursuing any other remedy.
11. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
-----------------------
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN,
THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT A FINAL JUDGMENT
IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT, AFTER ALL
APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
12. GOVERNING LAW. THIS ANTI-FRAUD AND PERFORMANCE AGREEMENT SHALL BE
-------------
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
13. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL
-----------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT.
3
<PAGE>
IN WITNESS WHEREOF, Michael Armani has executed this Agreement as a sealed
instrument as of the date first above written.
/s/ MICHAEL ARMANI
--------------------------
Michael Armani
Address for Notices:
26772 Vista Terrace Drive
Lake Forest, CA 92630
Telephone Number: (714) 455-4000
Telefax Number: (714) 455-4010
The foregoing Anti-Fraud and Performance Agreement is hereby confirmed and
accepted as of the date hereof:
ACCESS CAPITAL, INC.
By: /s/ PAUL MEHRING
------------------------
Name: Paul Mehring
Title: Vice President
Address for Notices:
405 Park Avenue
New York, New York 10022
Attn: Client Services Department
Telephone Number: (212) 644-9300
Telefax Number: (212) 644-5488
4
<PAGE>
EXHIBIT E
---------
SUBORDINATION AGREEMENT
-----------------------
THIS AGREEMENT made as of the 26th day of November 1997 by and between SMC
COMMUNICATIONS GROUP INC. and SHALA SHASHANI doing business as SMC GROUP (the
"Creditor") and ACCESS CAPITAL, INC., a New York corporation ("Access Capital").
W I T N E S S E T H:
WHEREAS, the Creditor has made certain loans and advances to TELENETICS
CORPORATION (the "Company") as detailed on Schedule 1 attached hereto and
incorporated herein by reference (collectively the "Loans"); and
WHEREAS, the Company and Access Capital intend to enter in a Factoring
Agreement dated the date hereof (the "Factoring Agreement"), pursuant to which
Access Capital will purchase certain accounts receivable billed to customers of
the Company (such accounts receivable, together with the proceeds thereof, are
hereinafter referred to as "Accounts Receivable"); and
WHEREAS, it is a condition precedent to the obligation of Access Capital to
enter into the Factoring Agreement and to purchase Accounts Receivable pursuant
thereto that the Creditor shall have entered into this Subordination Agreement
for the purpose of establishing, as between the Creditor and Access Capital, the
respective priorities of the Loans and the obligations of the Company to Access
Capital under the Factoring Agreement;
NOW, THEREFORE, to induce Access Capital to enter into the Factoring
Agreement and purchase Accounts Receivable pursuant thereto, and in
consideration thereof and for other good valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed as follows:
1. Definitions. For the purposes of this Agreement:
-----------
(a) the term "Senior Obligations" shall mean : (i) all fees, expenses
and other amounts due or hereafter becoming due to Access Capital under the
Factoring Agreement and any other agreements and instruments executed in
connection therewith; and (ii) any and all other amounts owed to Access Capital
by the Company, whether now existing or hereafter arising;
(b) the term "Junior Obligations" shall mean: (i) the Loans, together
with any and all interest accrued with respect thereto; (ii) all dividends and
other distributions with respect to the capital stock of any class of the
Company; and (iii) any and all amounts due or to become due, or accrued or to
accrue, from the Company to the Creditor pursuant to any present or future
agreement; and
<PAGE>
(c) the term "Subordinated Party" shall mean the Creditor, any
affiliate of the Creditor and any transferee from the Creditor of any Junior
Obligation.
2. Subordination of Junior Obligations.
------------------------------------
(a) SUBORDINATION. All indebtedness and obligations constituting
Junior Obligations shall be subordinate and junior in right of payment to the
Senior Obligations to the extent and in the manner hereinafter provided in this
Section 2.
(b) BANKRUPTCY, LIQUIDATION, ETC. In the event of any of the
following (collectively referred to as "Acts of Bankruptcy"): (i) any
insolvency or bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection therewith relative to
the Company or any subsidiary or to the property of the Company or any
subsidiary that has been instituted but has not been discharged, (ii) any
proceedings for voluntary liquidation, dissolution or other winding up of the
Company or any subsidiary, whether or not involving insolvency or bankruptcy
proceedings, or (iii) any distribution, division or application, partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
substantially all of the property, assets or business of the Company or any
subsidiary or the proceeds thereof to any creditor or creditors other than in
the ordinary course of business (including without limitation any marshalling of
assets), then, in the event of the occurrence of any of the foregoing Acts of
Bankruptcy the Senior Obligations shall be paid in full before the holder of any
Junior Obligation shall be entitled to receive any payment or distribution,
direct or indirect, whether in cash, securities, property or otherwise, on
account of Junior Obligations and to that end (but subject to the power of a
court of competent jurisdiction to make other equitable arrangements reflecting
the rights conferred in this Agreement upon the Senior Obligations with respect
to the indebtedness represented thereby by a lawful plan of reorganization under
applicable bankruptcy law), Access Capital shall be entitled to receive and to
apply in payment of the Senior Obligations any payment or distribution, direct
or indirect, whether in cash, securities, property or otherwise, which may be
payable or deliverable in any such proceedings in respect of the Junior
Obligations.
(c) NO PAYMENT IN RESPECT OF JUNIOR OBLIGATIONS. Unless and until the
Senior Obligations shall have been paid and satisfied in full, no payment or
distribution, direct or indirect, whether in cash, securities, property or
otherwise, on account of any principal or interest or other amount of any Junior
Obligation shall be made to any Subordinated Party.
(d) RECEIPT OF PAYMENTS IN TRUST. Any payments or other distributions
in cash, securities, property or otherwise received by any of the Subordinated
Parties in contravention of the provisions of this Section 2 shall be deemed to
be received in trust for the benefit of Access Capital and shall be remitted
forthwith to Access Capital in the exact form received with any necessary
endorsements for application to the payment of the Senior Obligations to the
extent necessary to pay the same in full.
(e) JUNIOR OBLIGATIONS NOT IMPAIRED. The provisions of this Section 2
are for the purpose of defining the relative rights of Access Capital, on the
one hand, and the Subordinated Parties, on the other hand, against the Company
and its property. Nothing contained in this Section is intended to or shall
impair, as among the Company and the Subordinated Parties, the obligations
2
<PAGE>
of the Company to the Subordinated Parties under the terms of the relevant
agreements. In addition, nothing contained in this Section 2 shall prevent any
Subordinated Party from exercising all rights and remedies otherwise permitted
by applicable law or under any Junior Obligation upon a default thereunder,
subject to (i) the rights of Access Capital under this Section to receive cash,
property or securities of the Company or any subsidiary received upon the
exercise of any such remedy or otherwise deliverable to such Subordinated Party,
and (ii) the limitations on the exercise of certain rights of the Subordinated
Parties set forth in subsection (f) below.
(f) LIMITATION ON EXERCISE OF CERTAIN RIGHTS. Each Subordinated Party
agrees that unless and until the Senior Obligations shall have been paid and
satisfied in full, it will not (i) make any request or demand for, accelerate or
bring any action with respect to, the payment of any Junior Obligation, (ii)
bring any action to or otherwise enforce any judgment or lien against the
Company or any subsidiary or its assets, (iii) seize any property of the Company
or any subsidiary, or (iv) institute, or join in any petition for, any
insolvency, bankruptcy, receivership or similar proceeding against the Company
or any subsidiary, except that in such instance that Access Capital institutes
such an action or proceeding against the Company or any subsidiary, then the
Subordinated Parties may immediately join in such action or proceeding.
(g) SUBROGATION. Subject to the payment in full of all Senior
Obligations, the Subordinated Parties shall be subrogated to the rights of
Access Capital to receive payments or distributions of assets of the Company or
any subsidiary made on the Senior Obligations. No payments or distributions,
direct or indirect, whether in cash, securities, property or otherwise, to
Access Capital shall, as between the Company and its creditors other than Access
Capital, be deemed to be a payment by the Company to any Subordinated Party or
on account of any Junior Obligation. The provisions of this subsection are
intended solely to define the relative rights of the Subordinated Parties, on
the one hand, and Access Capital, on the other hand, vis-a-vis the Company.
Notwithstanding the right of subrogation of the Subordinated Parties to the
rights of Access Capital, each of the Subordinated Parties agrees that Access
Capital may, prior to payment in full of all amounts due on the Senior
Obligations, make all determinations and take or omit to take all actions and
exercise or refrain from exercising all remedies that Access Capital may have at
any time with respect to the Senior Obligations without consultation with, or
participation or joinder by, or any consideration of the interests of, any
Subordinated Party and without any liability to any Subordinated Party.
(h) ADDITIONAL RIGHTS OF ACCESS CAPITAL. Without the consent of or
notice to any Subordinated Party, Access Capital at any time and from time to
time in its sole and absolute discretion may (i) amend or supplement the
Factoring Agreement and any other document or instrument executed by the Company
or any subsidiary in connection therewith; (ii) demand and receive a security
interest in or other lien upon any property or assets of the Company or any
subsidiary to secure the Senior Obligations and sell, exchange, release or
otherwise deal with any property pledged or mortgaged to secure, or howsoever
securing, Senior Obligations; (iii) exercise or refrain from exercising any
other of its rights in respect of the Senior Obligations against the Company,
any subsidiary or others (including any Subordinated Party) and (iv) apply any
sums by whomsoever or however realized to the Senior Obligations.
3
<PAGE>
(i) REINSTATEMENT. The provisions of this Section 2 shall continue to
be effective or be reinstated, as the case may be, if at any time any payment of
any of the Senior Obligations is rescinded or must otherwise be returned by
Access Capital to the Company or any subsidiary upon the insolvency, bankruptcy
or reorganization of the Company or such subsidiary or otherwise, all as though
such payment had not been made.
3. Relationship to Other Agreements. Notwithstanding any provisions to
--------------------------------
the contrary of any other agreement or document to which any Subordinated Party
is a party, whether with the Company or otherwise (collectively, the
"Subordinated Documents"), the parties hereto intend, and each of the
Subordinated Parties hereby expressly acknowledges and agrees, that with respect
to the subject matter of this Agreement, the terms of this Agreement shall
govern and control in the event of a conflict between the Subordinated Documents
and this Agreement.
4. Restriction on Transfer. Each Subordinated Party covenants and agrees
-----------------------
that until the Senior Obligations have been paid and discharged in full it will
not, without the prior written consent of Access Capital, transfer, sell,
endorse, assign, or grant a participation in all or any part of any Subordinated
Obligation and, as a condition to any such consent by Access Capital, any
transferee must agree to assume the obligations of this Agreement in a written
instrument satisfactory to Access Capital signed by such transferee.
5. Amendments. Any provision hereof may be modified or amended only by a
----------
written instrument expressly referring hereto signed by each Subordinated Party
and by Access Capital.
6. Notices. All notices and other communications hereunder shall be
-------
deemed given when delivered or deposited in the mails, first class postage
prepaid (provided, however, that notices given by telegram, telex or telefax
shall be deemed given when dispatched) and if to a party hereto addressed as set
forth beneath its name at the foot hereof unless a party shall give notice of a
different address or telefax number in the manner provided herein.
7. No Third Party Beneficiary. The subordinations and agreements of the
--------------------------
Subordinated Parties and Access Capital set forth herein are solely for the
benefit of said parties and neither the Company nor any other person not a party
to this agreement shall be a third party beneficiary hereof, including without
limitation a trustee-in-bankruptcy of the Company or any subsidiary, or entitled
to any rights hereunder or arising out of this Agreement.
8. References to Access Capital. All references herein to "Access
----------------------------
Capital" shall be deemed to include any future holder or holders of the Senior
Obligations without further amendment to this Agreement.
9. Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which, taken together, shall constitute one and the same
instrument, and any of the parties hereto may execute this agreement by signing
any such counterpart.
10. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the successors, assigns, heirs and legal representatives of the
parties hereto.
4
<PAGE>
11. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
-----------------------
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN,
THE CITY OF NEW YORK OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT A FINAL JUDGMENT
IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT, AFTER ALL
APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
--------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
5
<PAGE>
13. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL RIGHT
-----------------
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT.
IN WITNESS WHEREOF, this instrument has been signed as of the day and year
first above written.
ACCESS CAPITAL, INC.
By: /s/ PAUL MEHRING
___________________________
Name: Paul Mehring
Title: Vice President
Address for Notices:
405 Park Avenue
New York, New York 10022
Attn: Client Services Department
Telephone Number: (212) 644-9300
Telefax Number: (212) 644-5488
CREDITOR
/s/ SHALA SHASHANI
______________________________
Shala Shashani
Address for Notices:
SMC Group
26772 Vista Terrace
Lake Forest, CA 92630
Attn: Shala Shashani
Telephone Number: (714) 855 4545
Telefax Number: (714) 855 8988
The undersigned hereby accepts and acknowledges receipt of a copy of the
foregoing Agreement.
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
__________________________
Michael Armani
President & Chief Executive Officer
6
<PAGE>
SCHEDULE 1
----------
Loans from the Creditor
to the Company
Unpaid Principal Amount Date
----------------------- ----
$200,000 February 7, 1992 and
amended on September 6,
1996.
7
<PAGE>
EXHIBIT 10.5
INTERPARTY AGREEMENT
--------------------
THIS INTERPARTY AGREEMENT is made as of the 26th day of November 1997 by
and between SMC COMMUNICATIONS GROUP INC and SHALA SHASHANI doing business as
SMC GROUP (the "Creditor"), and ACCESS CAPITAL, INC., a New York corporation
("Access Capital").
WITNESSETH:
WHEREAS, the Creditor has extended certain loans and financial
accommodations to Telenetics Corporation (the "Company") pursuant to certain
loan agreements and instruments executed and to be executed in connection
therewith (collectively, the "Creditor Agreements"); and
WHEREAS, the Company is indebted to the Creditor, which indebtedness is
secured by a security interest in certain assets of the Company, including
accounts, inventory and equipment (the "Creditor Collateral") pursuant to the
Creditor Agreements; and
WHEREAS, pursuant to the terms of a Factoring Agreement of even date with
the Company (the "Factoring Agreement"), pursuant to which Access Capital will,
from time to time, purchase certain accounts receivable billed by the Company to
its customers (such accounts receivable, together with the proceeds thereof,
being referred to herein as the "Accounts Receivable");and
WHEREAS, pursuant to a Security Agreement of even date (the "Access
Security Agreement"), Access Capital desires to acquire, and the Creditor is
willing to permit Access Capital to obtain the following (collectively, the
'Access Collateral'): (1) a first priority security interest in all of the
Accounts Receivable of the Company (including, without limitation, the Accounts
Receivable purchased and not purchased by Access Capital), together with the
contract rights and other general intangibles related to its Accounts Receivable
and the proceeds thereof and (2) a second priority security interest,
subordinate and junior to the security interest of the Creditor in the other
assests of the Company;
WHEREAS, the Creditor and Access Capital wish to enter into certain
agreements with respect to the administration of their respective security
interests in the Creditor Collateral and the Access Collateral;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Creditor consents to the execution and delivery by the Company of
the Factoring Agreement and the Access Security Agreement and agrees that Access
Capital shall acquire title to such of the Accounts Receivable as it shall
purchase from the Company pursuant to the Factoring Agreement free and clear of
any security interest of the Creditor in the Accounts Receivable of the Company.
2. Notwithstanding any provisions to the contrary in the Creditor
Agreements or the Access Security Agreement, the respective orders or priorities
which would ordinarily result from the time of granting and the time and place
of perfection of the respective security interests of the Creditor and Access
Capital under the Uniform Commercial Code as in effect in any jurisdiction or
otherwise:
<PAGE>
(a) the security interest of Access Capital in all the assets of the
Company (including the Accounts Receivable purchased and not purchased by
Access Capital), together with the contract rights and other general
intangibles related to such Accounts Receivable and the proceeds thereof
shall be superior to and have priority over the security interest of the
Creditor in the Access Collateral; and
(b) the security interest of the Creditor in the Creditor Collateral
(other than the Access Collateral) shall be superior to and have priority
over the security interest of Access Capital.
3. Access Capital agrees to give the Creditor notice of any default,
acceleration or enforcement of its security interest under the Factoring
Agreement, and the Creditor agrees to give to Access Capital notice of any
default, acceleration or enforcement of its security interest under the Creditor
Agreements, in each case prior to or concurrently with the giving of such notice
to the Company.
4. At such time as the Company's obligations to the Creditor pursuant to
the Creditor Agreements shall have been paid and discharged in full, the
Creditor will assign its security interest in all of the Creditor Collateral to
Access Capital and deliver to Access Capital all instruments and documents
included in the Creditor Collateral and in the possession of the Creditor. The
Company consents and agrees to such transfer and agrees that any such
instruments and documents shall thereafter be held by Access Capital subject to
the provisions of the Access Security Agreement. The cost and expense of
effectuating such assignment shall be borne by the Company.
5. The Creditor shall not assign or transfer any claim against or interest
of any kind in the Creditor Collateral to any person while this Agreement
remains in effect unless such person shall execute an agreement reasonably
satisfactory to Access Capital to be bound by this Agreement.
6. Access Capital shall not assign or transfer any claim against or
interest of any kind in the Access Collateral to any person while this Agreement
remains in effect unless such person shall execute an agreement reasonably
satisfactory to SMC Group to be bound by this Agreement.
7. In the event of commencement of foreclosure or other exercise of
remedies under the Creditor Agreements and under the Factoring Agreement and
Security Agreement, the Creditor and Access Capital will cooperate in the
exercise of their respective remedies.
8. (a) All notices and reports required to be given hereunder shall be hand
delivered or sent by prepaid certified mail, return receipt requested (confirmed
by telefax if possible) and shall be deemed to have been given when received.
Notices and reports to the Creditor shall be addressed to the Creditor at:
SMC Group
26772 Vista Terrace
Lake Forest, CA 92630
Attn: Shala Shashani
Telephone No.: (714) 855 4545
Telefax No.: (714) 855 8988
<PAGE>
and notices and reports to Access Capital shall be addressed to Access Capital
at:
Access Capital, Inc.
405 Park Avenue
New York, NY 10022
Attention: Client Services Department
Telephone No.: (212) 644-9300
Telefax No.: (212) 644-5488
or such other person or at such other address as either the Creditor or Access
Capital may from time to time specify.
(b) Access Capital will give the Creditor prompt notice of any
amendment to or extension or termination of the Factoring Agreement or the
Security Agreement, and of any other agreement, document or instrument relating
to or affecting the Access Collateral or providing for the extension to the
Company of additional credit. The Creditor will give Access Capital prompt
notice of any amendment to or extension or termination of the Creditor
Agreements, and of any other agreement, document or instrument relating to or
affecting the Creditor Collateral or providing for the extension to the Company
of additional credit. In each case, the notifying party shall provide the other
party with a copy of any agreement, document or instrument referred to in its
notice.
9. If any dispute shall arise between the parties hereto with respect to
this Agreement or with respect to the rights or obligations hereunder of either
party, the parties agree to submit to arbitration in New York City in accordance
with the rules of the American Arbitration Association then obtaining.
10. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
11. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL RIGHT TO A TRIAL BY JURY
IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SMC COMMUNICATIONS GROUP INC and
SHALA SHASHANI doing business as
SMC GROUP
By: /s/ SHALA SHASHANI
------------------------
Shala Shashani
President/Proprietor
ACCESS CAPITAL, INC.
By: /s/ PAUL MEHRING
------------------------
Name: Paul Mehring
Title: Vice President
The undersigned acknowledge receipt of
a copy of the foregoing Agreement and
consent to the provisions thereof:
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-----------------------------------
Michael Armani
President & Chief Executive Officer
<PAGE>
EXHIBIT 10.6
AMENDMENT TO FACTORING AGREEMENT
This AMENDMENT TO FACTORING AGREEMENT, dated as of January 31,1998
(this "Amendment"), is entered into by and between ACCESS CAPITAL, INC., a New
---------
York corporation ("Access Capital"), and TELENETICS CORPORATION, a California
--------------
corporation ("Company"), with reference to the following facts:
-------
A. Access Capital and Company have previously entered into that
certain Factoring Agreement, dated as of November 26, 1997 (the "Agreement"),
---------
for an initial term expiring January 31, 1998.
B. The parties hereto desire to extend the initial term to August
31, 1998.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. All initially capitalized terms used but not
-------------
defined in this Amendment shall have the meanings ascribed to such terms in the
Agreement.
2. Extension of Initial Term. Section 9(a) of the Agreement is
-------------------------
hereby amended in its entirety as follows:
"(a) This Agreement shall be effective for a period commencing on
the date hereof and continuing until the close of business on August
31, 1998 (the 'Initial Term')."
3. Effectiveness of Amendment. This Amendment shall be effective
--------------------------
upon the occurrence of both of the following: (i) the execution and delivery of
this Amendment by each of the parties hereto, and (ii) the execution and
delivery by Michael Armani of the Consent attached hereto.
4. Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Amendment.
5. Affirmation of Agreement. The Agreement as amended hereby remains
------------------------
in full force and effect.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly
executed as of the date first above written.
ACCESS CAPITAL TELENETICS CORPORATION
By: /S/PAUL MEHRING By: /S/MICHAEL ARMANI
-------------------------- ---------------------------
Its: Vice President Its:
-------------------- --------------------
2
<PAGE>
EXHIBIT 10.7
Amendment to
"COMPROMISE AGREEMENT AND MUTUAL RELEASE"
This Amendment ("the Amendment") is hereby made to Compromise Agreement and
Mutual Release dated September 1, 1996 ("the Agreement"), attached herein as
Exhibit "A", signed by and between Telenetics Corporation ("Telenetics") on one
side, and SMC Communications Group, Inc. ("SMC Corp.") and Shala Shashani doing
business as SMC Group ("Shashani"), jointly on the other side.
Recitals
Whereas, the Agreement was signed on September 1, 1996 but never fulfilled
and Telenetics is in default on the Agreement;
Whereas, Telenetics is indebted to SMC Corp. and Shashani as indicated in
the paragraphs 2.a., 2.b. and 2.c. of the Agreement has increased in principal
and accrued interest since September 1, 1996;
Now therefore, the parties agree to amend the Agreement as follows:
1. Paragraphs 2.b.and 3.c. are hereby amended to reflect that as of the
date of this amendment, the total unpaid sum for Telenetics rental obligation is
$141,500 plus accrued interest and late charges as indicated in the accompanying
letter by Telenetics Controller (Exhibit "B").
2. Paragraph 3.c. is hereby amended to allow for issuance of a note for
the sum of $141,500 payable to Shashani to cover the indebtedness under
paragraph 2.b. of the Agreement and paragraph 1 of the Amendment. This note
shall mature by December 31, 1999 bearing 10% interest per annum commencing on
March 31, 1998. Telenetics may pay this note and accrued interest earlier than
said maturity date without any penalties. (Exhibit "C").
3. Paragraph 3.c is further amended to allow for issuance of a note for
the sum of $115,535 payable to SMC Corp. to cover the indebtedness under
paragraph 2.c. of the Agreement. This note shall mature by December 31, 1999
bearing 10% interest per annum commencing on March 31, 1998. Telenetics may pay
this note and accrued interest earlier than said maturity date without any
penalties. (Exhibit "D").
4. Paragraph 3.a. is amended as follows:
a. The sum of $200,000 payable to Shashani is increased to $250,000 to
include unpaid interest and to compensate for Telenetics inability to pay this
sum in cash as provided under terms of the Agreement. A note shall be issued to
cover this obligation. This note shall mature by April 30, 1999 bearing 7%
interest. (Exhibit "E")
b. Number of shares of common stock to be issued shall remain the same as
Five Million (5,000,000). Certificate shall be issued by March 31, 1998.
<PAGE>
All other terms and conditions and covenants of the Agreement shall remain
enforced.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on this
30th day of December 1997.
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-----------------------------
Michael Armani
President & Chief Executive Officer
SMC GROUP
By: /s/ SHALA SHASHANI
________________________________
Shala Shashani
SMC COMMUNICATIONS GROUP, Inc.
By: /s/ SHALA SHASHANI
________________________________
Shala Shashani
President
<PAGE>
Exhibit "A"
COMPROMISE AGREEMENT AND MUTUAL RELEASE
Telenetics Corporation, a California corporation, hereinafter referred to
as "Telenetics", on the one side, and SMC Communications Group, Inc., a
California corporation, and Shala Shashani, doing business as SMC Group,
hereinafter respectively referred to as "SMC Corp." and "Shashani," jointly on
the other side, in consideration of the promises made herein, agree as follows:
NATURE AND EFFECT OF AGREEMENT
1. This Agreement consists of a compromise and settlement by each party of
that party's claims against the other party, and a release given by each party
to the other relinquishing all claims against the other. By executing this
Agreement, each of the parties intends to and does hereby extinguish the
obligations heretofore existing between them. This Agreement is not, and shall
not be treated as, an admission of liability by either party for any purpose.
Nature and Status of Dispute
2. a. Between January 1, 1992 and the present Shashani lent to Telenetics
the sum of $389,642. The parties hereto agree that the outstanding balance of
principal and interest owed on this obligation as of July 31, 1996, was
$498,167, all of which is past due and immediately callable.
b. Between September 1, 1994 and August 31, 1996 Telenetics has incurred
a rental obligation to Shashani for the occupancy of 26772 Vista Terrace Drive,
Lake Forest, California in the amount of $87,500 plus accrued late charges and
interest which sums are unpaid. In that same time period Telenetics has made
improvements to the subject premises in the approximate amount of $30,000
which have not been reimbursed.
c. Between January 1, 1992 and the present SMC Corp. and/or Shashani
provided products and services to or on behalf of Telenetics in the invoice
amount of $115,535, none of which has been paid.
MUTUAL COMPROMISE AGREEMENT
1
<PAGE>
3. Each party, in consideration of the promises and concessions made by
the other, hereby compromises and settles any and all past, present, or future
claims, demands, obligations, or causes of action, whether based on tort,
contract, or other theories of recovery, which that party has or which may later
accrue to or be acquired by that party against the other party and the other
party's predecessors and successors in interest, heirs and assigns, as well as
past, present and future officers, directors, shareholders, agents, employees,
parent and subsidiary organizations, affiliates and partners, arising from the
subject matter of the action described in Paragraph 2 of this Agreement, on the
following terms and conditions:
a. Telenetics shall pay to Shashani the sum of $200,000 and
shall issue to her Five Million (5,000,000) shares of the common stock of
Telenetics in the manner hereinafter set forth in full satisfaction of the
dispute, and any and all claims arising therefrom, described in Paragraph 2a of
this Agreement. In this regard, the parties agree that the sum of $200,000,
bearing no interest, shall be paid in full within thirty days of the execution
hereof. The parties hereto acknowledge that Telenetics is presently without
corporate authority to issue an additional 5,000,000 shares of its Common Stock
and that its Board of Directors will call a Shareholders' Meting to convene
before September 30, 1996 to increase the authority to issue Telenetics' Common
Stock to a number more than adequate to meet its obligations hereunder.
Telenetics shall issue and deliver its stock certificate for 5,000,000 shares in
the name of Shashani, or her nominees, to Shashani on or before October 1, 1996.
b. Telenetics shall pay to Shashani the sum of $203,035 in the
manner hereinafter set forth in full satisfaction of the dispute, and any and
all claims arising therefrom, described in Paragraphs 2b and 2c of this
Agreement. In this regard, the parties agree that the sum of $203,035, bearing
no interest, shall be paid in six equal installments commencing thirty days
following the execution hereof and continuing each thirty days thereafter until
paid in full. Default shall be deemed to have occurred if any one payment is
not received within ten days of its due date and upon any one default the
remaining balance shall become immediately due and payable.
c. Telenetics, SMC Corp. and Shashani agree that this compromise
and settlement shall constitute a bar to all past, present, and future claims
arising out of the subject matter of the dispute described in Paragraph 2.
MUTUAL GENERAL RELEASE
2
<PAGE>
4. Each of the parties on behalf of itself, its descendants, ancestors,
dependents, heirs, executors, administrators, and assigns, parent and subsidiary
organizations, affiliates, partners, agents, servants, shareholders, employees,
representatives, assigns and successors, hereby fully releases and discharges
the other party and that party's descendants, ancestors, dependents, heirs,
executors, administrators, and assigns, parent and subsidiary organizations,
affiliates, partners, agents, servants, shareholders, employees,
representatives, assigns and successors from all rights, claims, and actions
which each party and the above-mentioned successors now have against the other
party and the above-mentioned successors, stemming from their differences
arising from the subjects of the dispute described in Paragraph 2.
UNKNOWN CLAIMS
5 a. Each party acknowledges and agrees that the release it gives to the
other party upon executing this Agreement applies to all claims for injuries,
damages, or losses to its own person and property, real or personal (whether
those injuries, damages, or losses are known or unknown, foreseen or unforeseen,
patent or latent) which she or it may have against the other party. Each party
certifies that she or it has read the following provisions of California Civil
Code Section 1542:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
and indicates that fact by signing its initials here:
/s/ M.A. Telenetics
---------
/s/ S.S. SMC Corp. and Shashani
---------
c. Each party understands and acknowledges that the significance and
consequence of this waiver of California Civil Code Section 1542 is that even if
she or it should eventually suffer additional damages arising out of the facts
referred to in Paragraph 2, she or it will not be able to make any claims for
those damages. Furthermore, each party acknowledges that she or it consciously
intends even as to claims for damages that may exist as of the date of this
release but which she or it does not know exists, and which, if known, would
materially affect her or its decision to execute this release, regardless of
whether her or its lack of knowledge is the result of ignorance, oversight,
error, negligence, or any other cause.
3
<PAGE>
ADVICE OF ATTORNEY
6. Each party warrants and represents that in executing this Agreement she
or it has relied upon legal advice from the attorney of her or its choice; that
the terms of this Agreement have been read (including risks, complications and
costs) have been completely explained to her or it by that attorney; and that
she or it fully understands the terms of this Agreement. Each party further
acknowledges and represents that in executing this release, she or it has not
relied on any inducements, promises, or representations made by Releasee or any
party representing or serving Releasee.
CONDITIONS OF EXECUTION
7. Each party acknowledges and warrants that her or its execution of this
release is free and voluntary.
EXECUTION OF OTHER DOCUMENTS
8. Each party to this Agreement shall cooperate fully in the execution of
any and all other documents and in the completion of any additional actions that
may be necessary or appropriate to give full force and effect to the terms and
intent of this Agreement.
ATTORNEYS' FEES
9. Each party to this Agreement shall bear all attorney's fees and costs
arising from that party's own counsel in connection with this Agreement and the
matters referred to herein, and all related matters. This paragraph shall be
applicable to this entire Agreement.
ENTIRE AGREEMENT
10. This Agreement contains the entire agreement between the parties.
EFFECTIVE DATE
11. This Agreement shall become effective immediately upon execution by
Telenetics, SMC Corp. and Shashani.
GOVERNING LAW
4
<PAGE>
12. This Agreement is entered into, and shall be construed and interpreted
in accordance with, the laws of the State of California.
Executed at Lake Forest, California, on September 1, 1996.
TELENETICS CORPORATION
BY: /s/ MICHAEL A. ARMANI
--------------------------------------
Michael A. Armani, President
SMC COMMUNICATIONS GROUP, INC.
BY: /s/ SHALA SHASHANI
--------------------------------------
Shala Shashani, President
SMC GROUP
BY: /s/ SHALA SHASHANI
--------------------------------------
Shala Shashani, Proprietor
5
<PAGE>
EXHIBIT "B"
INTEROFFICE MEMO
From: Rebecca Kolesar, Controller
To: Michael Armani
Re: Unpaid Accrued Rent
This memo is to confirm that as of March 31, 1998 the total amount of unpaid
accrued rent to SMC/Shashani is $141,500. We have been paying rent since
January 1, 1998 at the rate of $4,500 per month. The accrual is for the period
ending December 31, 1997.
/s/ REBECCA KOLESAR
<PAGE>
EXHIBIT "C"
SECURED
PROMISSORY NOTE
---------------
$141,500.00 Lake Forest, California
December 30, 1997
FOR VALUE RECEIVED, Telenetics Corporation, a California corporation
("Borrower"), hereby promises to pay to the order of Shala Shashani, d.b.a. SMC
Group ("Lender"), the principal sum of One Hundred Forty One Thousand Five
Hundred and No/100 Dollars ($141,500.00) with interest thereon at the rate of
ten percent (10%) per annum.
1. Payments.
--------
a) This Note may be prepaid, in part or in full, at any time and from
time to time without premium or penalty. Borrower waives demand,
presentment, notice of nonpayment or dishonor, diligence in
collecting, grace, notice and protest, and consent to all
extensions without notice for any period or periods of time and
partial payment, before or after maturity, without prejudice to the
holder.
b) Accrual of interest commences on April 1998. No interest is accrued
or due between the date of this note and April 1, 1998.
c) Interest is due and payable every quarter.
d) Principal and any unpaid accrued interest shall be paid in full by
December 31, 1999.
2. Security. This Note is secured by a Security Agreement between Lender
--------
and Borrower dated February 7, 1992 and any amendments thereafter.
3. Events of Default and Remedies. Upon the happening of an event of
------------------------------
default with respect to this Note, the whole sum of principal and interest still
outstanding pursuant to the terms of this Note shall become due and payable
immediately, at the option of the Lender, unless said default is cured within
thirty (30) business days. The following shall constitute events of default
hereunder: (1) the failure of the Borrower to pay principal when due and
payable; (2) a decree or order by a court having jurisdiction in the premises
being entered adjudging the Borrower a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, readjustment, arrangement,
composition or similar relief for the Borrower under the Federal bankruptcy
laws, or any other similar applicable Federal or state law, and such decree or
order shall have continued undischarged or unstayed for a period of sixty (60)
days; or (3) a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy
or insolvency of the Borrower, or a substantial part of its property or for the
winding-up or liquidation of its affairs, shall have been entered, and such
decree or order shall have remained in force discharged or unstayed for a
<PAGE>
period of sixty (60) days; or (4) any substantial part of the property of the
Borrower, on a consolidated basis, shall be sequestered or attached and shall
not be returned to the possession of the Borrower or released from such
attachment within sixty (60) days thereafter; or (5) the Borrower shall
institute proceedings to be adjudicated a voluntary bankrupt or shall consent to
the filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization, readjustment, arrangement, composition
or similar applicable Federal or state law, or shall consent to the filing of
any such petition, or shall consent to the appointment of a receiver,
liquidator, trustee or assignee in bankruptcy or insolvency of it or a
substantial part of its property, or shall make an assignment for the benefit of
creditors.
4. Miscellaneous. This Note shall be binding upon and inure to the
-------------
benefit of the heirs, executors, administrators, and successors of the parties
hereto. It is the intention of the parties that the provisions of this Note
shall be governed by and construed in accordance with the laws of the State of
California.
"BORROWER"
TELENETICS CORPORATION
a California corporation
By:______________________________________
Michael A. Armani, President
2
<PAGE>
EXHIBIT "D"
SECURED
PROMISSORY NOTE
---------------
$115,535.00 Lake Forest, California
December 31, 1997
FOR VALUE RECEIVED, Telenetics Corporation, a California corporation
("Borrower"), hereby promises to pay to the order of SMC Communications Group,
Inc. ("Lender"), the principal sum of One Hundred Fifteen Thousand Five Hundred
Thirty Five and No/100 Dollars ($115,535.00) with interest thereon at the rate
of ten percent (10%) per annum.
1. Payments.
--------
a) This Note may be prepaid, in part or in full, at any time and from
time to time without premium or penalty. Borrower waives demand,
presentment, notice of nonpayment or dishonor, diligence in
collecting, grace, notice and protest, and consent to all
extensions without notice for any period or periods of time and
partial payment, before or after maturity, without prejudice to the
holder.
b) Accrual of interest commences on April 1998. No interest is accrued
or due between the date of this note and April 1, 1998
c) Interest is due and payable every quarter.
d) Principal and any unpaid accrued interest shall be paid in full by
December 31, 1999.
2. Security. This Note is secured by a Security Agreement between Lender
--------
and Borrower dated December 31, 1997 and hereto attached.
3. Events of Default and Remedies. Upon the happening of an event of
------------------------------
default with respect to this Note, the whole sum of principal and interest still
outstanding pursuant to the terms of this Note shall become due and payable
immediately, at the option of the Lender, unless said default is cured within
thirty (30) business days. The following shall constitute events of default
hereunder: (1) the failure of the Borrower to pay principal when due and
payable; (2) a decree or order by a court having jurisdiction in the premises
being entered adjudging the Borrower a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, readjustment, arrangement,
composition or similar relief for the Borrower under the Federal bankruptcy
laws, or any other similar applicable Federal or state law, and such decree or
order shall have continued undischarged or unstayed for a period of sixty (60)
days; or (3) a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy
or insolvency of the Borrower, or a substantial part of its property or for the
winding-up or liquidation of its affairs, shall have been entered, and such
decree or order shall have remained in force discharged or unstayed for a
<PAGE>
period of sixty (60) days; or (4) any substantial part of the property of the
Borrower, on a consolidated basis, shall be sequestered or attached and shall
not be returned to the possession of the Borrower or released from such
attachment within sixty (60) days thereafter; or (5) the Borrower shall
institute proceedings to be adjudicated a voluntary bankrupt or shall consent to
the filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization, readjustment, arrangement, composition
or similar applicable Federal or state law, or shall consent to the filing of
any such petition, or shall consent to the appointment of a receiver,
liquidator, trustee or assignee in bankruptcy or insolvency of it or a
substantial part of its property, or shall make an assignment for the benefit of
creditors.
4. Miscellaneous. This Note shall be binding upon and inure to the
-------------
benefit of the heirs, executors, administrators, and successors of the parties
hereto. It is the intention of the parties that the provisions of this Note
shall be governed by and construed in accordance with the laws of the State of
California.
"BORROWER"
TELENETICS CORPORATION
a California corporation
By:
----------------------------
Michael A. Armani, President
2
<PAGE>
EXHIBIT "E"
SECURED
PROMISSORY NOTE
---------------
$250,000.00 Lake Forest, California
December 30, 1997
FOR VALUE RECEIVED, Telenetics Corporation, a California corporation
("Borrower"), hereby promises to pay to the order of Shala Shashani, d.b.a. SMC
Group ("Lender"), the principal sum of Two Hundred Fifty Thousand and No/100
Dollars ($250,000.00) with interest thereon at the rate of ten percent (7%) per
annum.
1. Payments.
--------
a) This Note may be prepaid, in part or in full, at any time and from
time to time without premium or penalty. Borrower waives demand,
presentment, notice of nonpayment or dishonor, diligence in
collecting, grace, notice and protest, and consent to all
extensions without notice for any period or periods of time and
partial payment, before or after maturity, without prejudice to the
holder.
b) Accrual of interest commences on April 1998. No interest is accrued
or due between the date of this note and April 1, 1998
c) Interest is due and payable every quarter.
d) Principal and any unpaid accrued interest shall be paid in full by
December 31, 1999.
2. Security. This Note is secured by a Security Agreement between Lender
--------
and Borrower dated February 7, 1992 and any amendments thereafter.
3. Events of Default and Remedies. Upon the happening of an event of
------------------------------
default with respect to this Note, the whole sum of principal and interest still
outstanding pursuant to the terms of this Note shall become due and payable
immediately, at the option of the Lender, unless said default is cured within
thirty (30) business days. The following shall constitute events of default
hereunder: (1) the failure of the Borrower to pay principal when due and
payable; (2) a decree or order by a court having jurisdiction in the premises
being entered adjudging the Borrower a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, readjustment, arrangement,
composition or similar relief for the Borrower under the Federal bankruptcy
laws, or any other similar applicable Federal or state law, and such decree or
order shall have continued undischarged or unstayed for a period of sixty (60)
days; or (3) a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy
or insolvency of the Borrower, or a substantial part of its property or for the
winding-up or liquidation of its affairs, shall have been entered, and such
decree or order shall have remained in force discharged or unstayed for a
<PAGE>
period of sixty (60) days; or (4) any substantial part of the property of the
Borrower, on a consolidated basis, shall be sequestered or attached and shall
not be returned to the possession of the Borrower or released from such
attachment within sixty (60) days thereafter; or (5) the Borrower shall
institute proceedings to be adjudicated a voluntary bankrupt or shall consent to
the filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization, readjustment, arrangement, composition
or similar applicable Federal or state law, or shall consent to the filing of
any such petition, or shall consent to the appointment of a receiver,
liquidator, trustee or assignee in bankruptcy or insolvency of it or a
substantial part of its property, or shall make an assignment for the benefit of
creditors.
4. Miscellaneous. This Note shall be binding upon and inure to the
-------------
benefit of the heirs, executors, administrators, and successors of the parties
hereto. It is the intention of the parties that the provisions of this Note
shall be governed by and construed in accordance with the laws of the State of
California.
"BORROWER"
TELENETICS CORPORATION
a California corporation
By:
----------------------------
Michael A. Armani, President
2
<PAGE>
EXHIBIT 10.8
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT made as of the 31st day of December 1997 by and
between TELENETICS CORPORATION a California corporation, (the "Company") and SMC
COMMUNICATIONS GROUP, Inc., a California corporation, ("SMC"),
WITNESSETH:
WHEREAS, the Company is indebted to SMC in the amount of $115,535 in the
form of certain promissory note of even date herewith evidencing the Company's
obligation to pay to SMC the principal and accrued interest on the terms and
subject to the conditions set forth therein (the "Note").
NOW, THEREFORE, the Company agrees to the following:
1. Security Interest. The Company hereby grants SMC a security interest
------------------
(the "Security Interest") in all of the following property now owned or at any
time hereafter acquired by it, or in which it now has or at any time in the
future may acquire any right, title or interest (the "Collateral"):
(a) all Accounts Receivable and all contract rights and other general
intangibles related to the Accounts Receivable and associated therewith and the
proceeds and products thereof (including without limitation proceeds of
insurance) and all additions, accessions and substitutions thereto or therefor;
and
(b) all assets and other personal property and fixtures of the Company,
including, without limitation, inventory, equipment, goods, documents,
instruments, contract rights, general intangibles and chattel paper in which the
Company now has or hereafter may acquire any right, title or interest and the
proceeds and products thereof (including without limitation, proceeds of
insurance) and all additions, accessions and substitutions thereto or therefor.
Terms used in clauses (a) and (b) of this Section which are defined in the
Uniform Commercial Code as enacted and in effect in the State of California (the
"Code") are used as so defined in the Code.
2. Obligations. This Agreement and the Security Interest shall secure the
------------
following obligations (the "Obligations"):
(a) Any and all obligations of the Company under the terms of the Note
or under any other agreement or instrument executed and delivered pursuant
thereto, including without limitation all reimbursement and indemnification
obligations of the Company; and
<PAGE>
(b) Any and all other liabilities and obligations of every kind and
nature whatsoever of the Company to SMC under the Terms of the Note or
otherwise, whether such liabilities and obligations be direct or indirect,
absolute or contingent, secured or unsecured, now existing or hereafter arising
or acquired, due or to become due.
3. Financing Statements and Other Action. The Company will do all lawful
--------------------------------------
acts which SMC deems necessary or desirable to protect the Security Interest or
otherwise to carry out the provisions of this Agreement, including, but not
limited to, the execution of Uniform Commercial Code financing, continuation,
amendment and termination statements and similar instruments in form
satisfactory to SMC and the procurement of waivers and disclaimers of interest
in the Collateral by the owners of any real estate on which the Collateral is
located and will promptly pay on demand any filing fees or other costs in
connection with the filing or recordation of such statements and instruments.
The Company irrevocably appoints SMC as its attorney in fact during the term of
this Agreement, to do all acts which it may be required to do under this
Agreement, such appointment being deemed to be a power coupled with an interest.
4. Places of Business. The Company warrants that its principal place of
-------------------
business, chief executive office and the place where the records concerning its
accounts and contract rights are located at the address for notices set forth in
the Note. None of the Accounts Receivable is evidenced by a promissory note or
other instrument. The Company will keep its principal place of business and
chief executive office and the office where it keeps its records concerning its
accounts and contract rights at the location therefor specified in the previous
sentence or, upon 30 days' prior written notice to SMC, at any other locations
in a jurisdiction where all actions required by this Section 4 shall have been
taken with respect to the Collateral. The Company will hold and preserve its
records concerning its accounts and contract rights and will permit
representatives of SMC at any time during normal business hours to inspect and
make abstracts from such records.
5. Encumbrances. The Company warrants that it has title to the Collateral
-------------
purportedly owned by it and that there are no sums owed or claims, liens,
security interests or other encumbrance (collectively, "Liens") against the
Collateral other than as set forth on Schedule 1 hereto. The Company will
notify SMC of any Liens against the Collateral, will defend the Collateral
against any Liens adverse to SMC, except for liens having priority listed on
Schedule 1 hereto, and will not create, incur, assume, or suffer to exist now or
at any time throughout the duration of the term of this Security Agreement, any
Liens against the Collateral, whether now owned or hereafter acquired, except
liens in favor of SMC and liens listed on Schedule 1.
6. Maintenance of Collateral. The Company shall preserve the Collateral
--------------------------
for the benefit of SMC. Without limiting the generality of the foregoing, the
Company shall:
(a) make all such repairs, replacements, additions and improvements to
its equipment as in its judgment are necessary to permit such business to be
properly and advantageously conducted at all times;
<PAGE>
(b) maintain and preserve its inventory except as sold in the ordinary
course of business;
(c) preserve all beneficial contract rights to the extent commercially
reasonable;
(d) in conjunction with, and at the direction of, SMC, take
commercially reasonable steps to collect all accounts; and
(e) pay all taxes, assessments or other charges on the Collateral when
due, unless the amount or validity of such taxes, assessments or charges are
being contested in good faith by appropriate proceedings and reserves have been
provided on its books with respect thereto in conformity with generally accepted
accounting principles.
Nothing contained herein shall be construed to prohibit the Company from
buying and selling equipment and inventory in the ordinary course of business.
7. Additional Provisions Concerning the Collateral.
------------------------------------------------
(a) The Company authorizes SMC to file, without the signature of the
Company, where permitted by law, one or more financing or continuation
statements, and amendments thereto, relating to the Collateral. SMC may file a
photographic or other reproduction of this Agreement in lieu of a financing or
continuation statement in any filing office where it is permissible to do so.
(b) The Company irrevocably appoints SMC as its attorney-in-fact (which
power of attorney is coupled with an interest) and proxy, with full authority in
the place and stead of the Company and in its name or otherwise, from time to
time in SMC's discretion, including: (i) to obtain and adjust insurance required
to be paid to SMC pursuant to Section 8 hereof; (ii) to ask, demand, collect,
sue for, recover, compound, receive, and give notice and receipts for moneys due
and to become due under or in respect of any of the Collateral; (iii) to
receive, endorse, and collect any checks, drafts or other instruments,
documents, and chattel paper in connection with clause (i) or clause (ii) above;
(iv) to sign the Company's name on any invoice or bill of lading relating to any
account, on drafts against customers, on schedules and assignments of accounts,
on notices of assignment, financing statements and other public records, on
verification of accounts and on notices to customers (including notices
directing customers to make payment directly to SMC); (v) if a Default (as
defined in the Note) has occurred and is continuing, to notify the postal
authorities to change the address for delivery of its mail to an address
designated by SMC, to receive, open and process all mail addressed to the
Company, to send requests for verification of accounts to customers; and (vi) to
file any claims or take any action or institute any proceedings which SMC may
deem necessary or desirable for the collection of any of the Collateral or
otherwise to enforce the rights of SMC with respect to any of the Collateral.
The Company ratifies and approves all acts of said attorney; and so long as the
attorney acts in good faith and without gross negligence it shall have no
liability to the Company for any act or omission as such attorney.
<PAGE>
(c) If the Company fails to perform any agreement contained herein,
SMC may itself perform, or cause performance of, such agreement or obligation,
and the costs and expenses of SMC incurred in connection therewith shall be
payable by the Company and shall be fully secured hereby.
(d) The powers conferred on SMC hereunder are solely to protect its
interest in the Collateral and shall not impose any duty upon SMC to exercise
any such powers. Except for the safe custody of any Collateral in its possession
and the accounting for moneys actually received by it hereunder, SMC shall have
no duty as to any Collateral or as to the taking of any necessary steps to
preserve rights against prior parties or any other rights pertaining to any
Collateral.
(e) Anything herein to the contrary notwithstanding, (i) the Company
shall remain liable under any contracts and agreements relating to the
Collateral, to the extent set forth therein, to perform all of its obligations
thereunder, to the same extent as if this Agreement had not been executed; (ii)
the exercise by SMC of any of its rights hereunder shall not release the Company
from any of its obligations under the contracts and agreements relating to the
Collateral; and (iii) SMC shall not have any obligation or liability by reason
of this Agreement under any contracts and agreements relating to the Collateral,
nor shall SMC be obligated to perform any of the obligations or duties of the
Company thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
8. Insurance. The Company shall maintain insurance covering the
----------
Collateral with financially sound and reputable insurers satisfactory to SMC
against such risks as are customarily insured by a business in the same or a
similar industry and similarly situated for an amount not less than the full
replacement value of such Collateral. All such insurance policies covering
property on and after the date such property becomes subject to the Security
Interest shall be written so as to be payable in the event of loss to the
Company and SMC as their interests shall appear and shall provide for at least
thirty (30) days prior written notice to SMC prior to the cancellation or
modification of each such policy. At the request of SMC, all insurance policies
covering property subject to the Security Interest shall be furnished to and
held by SMC. If, while any Obligations are outstanding, any proceeds with
respect to any casualty loss are paid to SMC under such policies on account of
such casualty loss, and no Default (as defined in the Note) has occurred and is
continuing, SMC will pay over such proceeds in whole or in part to the Company,
for the purpose of repairing or replacing the Collateral destroyed or damaged,
with any such repaired or replaced Collateral to be secured by this Agreement.
If a Default has occurred and is continuing, SMC may apply the proceeds in its
discretion to any of the Obligations. SMC is hereby appointed during the term
of this Agreement as irrevocable attorney-in-fact to collect the proceeds of
such insurance, to settle any claims with the insurers in the event of loss or
damage, to endorse settlement drafts and upon the occurrence and during the
continuance of a Default to cancel, assign or surrender any insurance policies.
9. Remedies. If any Default (as defined in the Note) shall have occurred
---------
and be continuing:
<PAGE>
(a) SMC may exercise in respect of the Collateral, in addition to other
rights and remedies provided for herein or otherwise available to it, all the
rights and remedies of a secured party on default under the Code (whether or not
the Code applies to the affected Collateral), and also may (i) require the
Company to, and the Company hereby agrees that it will at its expense and upon
request of SMC forthwith, assemble all or part of the Collateral as directed by
SMC and make it available to SMC at a place to be designated by SMC which is
reasonably convenient to both parties and (ii) without notice except as
specified below, sell the Collateral or any part thereof in one or more parcels
at public or private sale, at any of SMC's offices or elsewhere, for cash, on
credit or for future delivery, and upon such other terms as SMC may deem
commercially reasonable. The Company agrees that, to the extent notice of sale
shall be required by law, at least ten days' notice to the Company of the time
and place of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification. SMC shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. SMC
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and any such sale may, without further notice, be
made at the time and place to which it was so adjourned.
(b) Any cash held by SMC as Collateral and all cash proceeds received
by SMC in respect of any sale of, collection from, or other realization upon all
or any part of the Collateral may, in the discretion of SMC, be held by SMC as
Collateral for, and/or then or any time thereafter be applied in whole or in
part by SMC against, all or any part of the Obligations in such order as SMC
shall elect. Any surplus of such cash or cash proceeds held by SMC and remaining
after payment in full of all the Obligations shall be paid over to the Company
or to whomsoever may be lawfully entitled to receive such surplus.
(c) SMC may exercise any and all rights and remedies of the Company
under or in connection with the Collateral, including, without limitation, any
and all rights of the Company to demand or otherwise require payment of any
amount under, or performance of any provision of, any account, contract or
agreement.
(d) All payments received by the Company under or in connection with
the Collateral shall be received in trust for the benefit of SMC, shall be
segregated from other funds of the Company and shall be forthwith paid over to
SMC in the same form as so received (with any necessary endorsement).
10. Payment of Taxes, Charges, Etc. SMC, at its option, after notice to
-------------------------------
the Company, may discharge any taxes, charges, assessments, security interests,
liens or other encumbrances upon the Collateral or otherwise protect the value
thereof. All such expenditures incurred by SMC shall become payable by the
Company to SMC upon demand, shall bear interest at an annual rate equal at all
times to the lesser of 15 percent per annum or the highest legal interest rate
from the date incurred to the date of payment, and shall be secured by the
Collateral.
11. Duties with Respect to Collateral. SMC shall have no duty to the
----------------------------------
Company with respect to the Collateral other than the duty to use reasonable
care in the safe custody of any of
<PAGE>
the Collateral in its possession. Without limiting the generality of the
foregoing, SMC, although it may do so at its option, shall be under no
obligation to the Company to take any steps necessary to preserve rights in the
Collateral against other parties.
12. Waivers. To the extent permitted by law, the Company hereby waives
--------
demand for payment, notice of dishonor or protest and all other notices of any
kind in connection with the Obligations except notices required herein, by law
or by any other agreement between the Company and SMC. SMC may release,
supersede, exchange or modify any collateral or security which it may from time
to time hold and may release, surrender or modify the liability of any third
party without giving notice hereunder to the Company. Such modifications,
changes, renewals, releases or other actions shall in no way affect the
Company's obligations hereunder.
13. Termination. This Agreement and the Security Interest shall terminate
------------
upon the expiration, cancellation or other termination of the Note, provided
that all Obligations have been paid or discharged in full. Upon termination of
the Security Interest, SMC will deliver to the Company appropriate termination
statements with respect to Collateral so released from the Security Interest for
filing with each filing officer with which financing statements have been filed
by SMC to perfect the Security Interest in such Collateral.
14. Successors and Assigns. This Agreement shall be binding upon and
-----------------------
inure to the benefit of the Company and SMC and their respective successors and
assigns.
15. Severability of Provisions. Any provision of this Agreement which is
---------------------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
16. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
------------------------
JURISDICTION OF ANY CALIFORNIA STATE COURT OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT
A FINAL JUDGMENT IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT,
AFTER ALL APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
--------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
18. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL
------------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the date first above written.
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-----------------------------------
Michael Armani
President & Chief Executive Officer
SMC COMMUNICATIONS GROUP, Inc.
By: /s/ SHALA SHASHANI
-----------------------------------
Shala Shashani
President
<PAGE>
EXHIBIT 10.9
AMENDMENT TO SECURITY AGREEMENT
-------------------------------
THIS SECURITY AGREEMENT made as of the 31st day of March 30, 1998 by and
between TELENETICS CORPORATION a California corporation, (the "Company") and SMC
GROUP, a sole Proprietorship ("SMC"),
WITNESSETH:
WHEREAS, the Company is indebted to SMC in the amount of $391,500 in the
form of two promissory notes of even dates, one for the sum of $250,000 and
another for the sum of $141,500, herewith evidencing the Company's obligation to
pay to SMC the principal and accrued interest on the terms and subject to the
conditions set forth therein (the "Notes").
WHEREAS, there exists a certain prior Security Agreement between the
parties, dated February 7, 1992 (the Prior Agreement).
WHEREAS, at the time this Amendment was signed, the obligations by the
Company under the terms of the Prior Agreement had not been fully or partially
fulfilled.
NOW, THEREFORE, the Company agrees to amend the Prior Agreement as follows:
1. Security Interest. The Company hereby grants SMC a security interest
------------------
(the "Security Interest") in all of the following property now owned or at any
time hereafter acquired by it, or in which it now has or at any time in the
future may acquire any right, title or interest (the "Collateral"):
(a) all Accounts Receivable and all contract rights and other general
intangibles related to the Accounts Receivable and associated therewith and the
proceeds and products thereof (including without limitation proceeds of
insurance) and all additions, accessions and substitutions thereto or therefor;
and
(b) all assets and other personal property and fixtures of the Company,
including, without limitation, inventory, equipment, goods, documents,
instruments, contract rights, general intangibles and chattel paper in which the
Company now has or hereafter may acquire any right, title or interest and the
proceeds and products thereof (including without limitation, proceeds of
insurance) and all additions, accessions and substitutions thereto or therefor.
Terms used in clauses (a) and (b) of this Section which are defined in the
Uniform Commercial Code as enacted and in effect in the State of California (the
"Code") are used as so defined in the Code.
<PAGE>
2. Obligations. This Agreement and the Security Interest shall secure the
------------
following obligations (the "Obligations"):
(a) Any and all obligations of the Company under the terms of the Notes or
under any other agreement or instrument executed and delivered pursuant thereto,
including without limitation all reimbursement and indemnification obligations
of the Company; and
(b) Any and all other liabilities and obligations of every kind and nature
whatsoever of the Company to SMC under the Terms of the Notes or otherwise,
whether such liabilities and obligations be direct or indirect, absolute or
contingent, secured or unsecured, now existing or hereafter arising or acquired,
due or to become due.
3. Financing Statements and Other Action. The Company will do all lawful
--------------------------------------
acts which SMC deems necessary or desirable to protect the Security Interest or
otherwise to carry out the provisions of this Agreement, including, but not
limited to, the execution of Uniform Commercial Code financing, continuation,
amendment and termination statements and similar instruments in form
satisfactory to SMC and the procurement of waivers and disclaimers of interest
in the Collateral by the owners of any real estate on which the Collateral is
located and will promptly pay on demand any filing fees or other costs in
connection with the filing or recordation of such statements and instruments.
The Company irrevocably appoints SMC as its attorney in fact during the term of
this Agreement, to do all acts which it may be required to do under this
Agreement, such appointment being deemed to be a power coupled with an interest.
4. Places of Business. The Company warrants that its principal place of
-------------------
business, chief executive office and the place where the records concerning its
accounts and contract rights are located at the address for notices set forth in
the Notes. None of the Accounts Receivable is evidenced by a promissory note or
other instrument. The Company will keep its principal place of business and
chief executive office and the office where it keeps its records concerning its
accounts and contract rights at the location therefor specified in the previous
sentence or, upon 30 days' prior written notice to SMC, at any other locations
in a jurisdiction where all actions required by this Section 4 shall have been
taken with respect to the Collateral. The Company will hold and preserve its
records concerning its accounts and contract rights and will permit
representatives of SMC at any time during normal business hours to inspect and
make abstracts from such records.
5. Encumbrances. The Company warrants that it has title to the Collateral
-------------
purportedly owned by it and that there are no sums owed or claims, liens,
security interests or other encumbrance (collectively, "Liens") against the
Collateral other than as set forth on Schedule 1 hereto. The Company will notify
SMC of any Liens against the Collateral, will defend the Collateral against any
Liens adverse to SMC, except for liens having priority listed on Schedule 1
hereto, and will not create, incur, assume, or suffer to exist now or at any
time throughout the duration of the term of this Security Agreement, any Liens
against the Collateral, whether now owned or hereafter acquired, except liens
in favor of SMC and liens listed on Schedule 1.
<PAGE>
6. Maintenance of Collateral. The Company shall preserve the Collateral
--------------------------
for the benefit of SMC. Without limiting the generality of the foregoing, the
Company shall:
(a) make all such repairs, replacements, additions and improvements to its
equipment as in its judgment are necessary to permit such business to be
properly and advantageously conducted at all times;
(b) maintain and preserve its inventory except as sold in the ordinary
course of business;
(c) preserve all beneficial contract rights to the extent commercially
reasonable;
(d) in conjunction with, and at the direction of, SMC, take commercially
reasonable steps to collect all accounts; and
(e) pay all taxes, assessments or other charges on the Collateral when due,
unless the amount or validity of such taxes, assessments or charges are being
contested in good faith by appropriate proceedings and reserves have been
provided on its books with respect thereto in conformity with generally accepted
accounting principles.
Nothing contained herein shall be construed to prohibit the Company from
buying and selling equipment and inventory in the ordinary course of business.
7. Additional Provisions Concerning the Collateral.
------------------------------------------------
(a) The Company authorizes SMC to file, without the signature of the
Company, where permitted by law, one or more financing or continuation
statements, and amendments thereto, relating to the Collateral. SMC may file a
photographic or other reproduction of this Agreement in lieu of a financing or
continuation statement in any filing office where it is permissible to do so.
(b) The Company irrevocably appoints SMC as its attorney-in-fact (which
power of attorney is coupled with an interest) and proxy, with full authority in
the place and stead of the Company and in its name or otherwise, from time to
time in SMC's discretion, including: (i) to obtain and adjust insurance required
to be paid to SMC pursuant to Section 8 hereof; (ii) to ask, demand, collect,
sue for, recover, compound, receive, and give notice and receipts for moneys due
and to become due under or in respect of any of the Collateral; (iii) to
receive, endorse, and collect any checks, drafts or other instruments,
documents, and chattel paper in connection with clause (i) or clause (ii) above;
(iv) to sign the Company's name on any invoice or bill of lading relating to any
account, on drafts against customers, on schedules and assignments of accounts,
on notices of assignment, financing statements and other public records, on
verification of accounts and on notices to customers (including notices
directing customers to make payment directly to SMC); (v) if a Default (as
defined in the Notes) has occurred and is continuing, to notify the postal
authorities to change the address for delivery of
<PAGE>
its mail to an address designated by SMC, to receive, open and process all mail
addressed to the Company, to send requests for verification of accounts to
customers; and (vi) to file any claims or take any action or institute any
proceedings which SMC may deem necessary or desirable for the collection of any
of the Collateral or otherwise to enforce the rights of SMC with respect to any
of the Collateral. The Company ratifies and approves all acts of said attorney;
and so long as the attorney acts in good faith and without gross negligence it
shall have no liability to the Company for any act or omission as such attorney.
(c) If the Company fails to perform any agreement contained herein, SMC may
itself perform, or cause performance of, such agreement or obligation, and the
costs and expenses of SMC incurred in connection therewith shall be payable by
the Company and shall be fully secured hereby.
(d) The powers conferred on SMC hereunder are solely to protect its
interest in the Collateral and shall not impose any duty upon SMC to exercise
any such powers. Except for the safe custody of any Collateral in its
possession and the accounting for moneys actually received by it hereunder, SMC
shall have no duty as to any Collateral or as to the taking of any necessary
steps to preserve rights against prior parties or any other rights pertaining to
any Collateral.
(e) Anything herein to the contrary notwithstanding, (i) the Company shall
remain liable under any contracts and agreements relating to the Collateral, to
the extent set forth therein, to perform all of its obligations thereunder, to
the same extent as if this Agreement had not been executed; (ii) the exercise by
SMC of any of its rights hereunder shall not release the Company from any of its
obligations under the contracts and agreements relating to the Collateral; and
(iii) SMC shall not have any obligation or liability by reason of this Agreement
under any contracts and agreements relating to the Collateral, nor shall SMC be
obligated to perform any of the obligations or duties of the Company thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.
8. Insurance. The Company shall maintain insurance covering the
----------
Collateral with financially sound and reputable insurers satisfactory to SMC
against such risks as are customarily insured by a business in the same or a
similar industry and similarly situated for an amount not less than the full
replacement value of such Collateral. All such insurance policies covering
property on and after the date such property becomes subject to the Security
Interest shall be written so as to be payable in the event of loss to the
Company and SMC as their interests shall appear and shall provide for at least
thirty (30) days prior written notice to SMC prior to the cancellation or
modification of each such policy. At the request of SMC, all insurance policies
covering property subject to the Security Interest shall be furnished to and
held by SMC. If, while any Obligations are outstanding, any proceeds with
respect to any casualty loss are paid to SMC under such policies on account of
such casualty loss, and no Default (as defined in the Notes) has occurred and is
continuing, SMC will pay over such proceeds in whole or in part to the Company,
for the purpose of repairing or replacing the Collateral destroyed or damaged,
with any such repaired or replaced Collateral to be secured by this Agreement.
If a Default has occurred and is continuing, SMC may apply the proceeds in its
discretion to any of
<PAGE>
the Obligations. SMC is hereby appointed during the term of this Agreement as
irrevocable attorney-in-fact to collect the proceeds of such insurance, to
settle any claims with the insurers in the event of loss or damage, to endorse
settlement drafts and upon the occurrence and during the continuance of a
Default to cancel, assign or surrender any insurance policies.
9. Remedies. If any Default (as defined in the Notes) shall have occurred
---------
and be continuing:
(a) SMC may exercise in respect of the Collateral, in addition to other
rights and remedies provided for herein or otherwise available to it, all the
rights and remedies of a secured party on default under the Code (whether or not
the Code applies to the affected Collateral), and also may (i) require the
Company to, and the Company hereby agrees that it will at its expense and upon
request of SMC forthwith, assemble all or part of the Collateral as directed by
SMC and make it available to SMC at a place to be designated by SMC which is
reasonably convenient to both parties and (ii) without notice except as
specified below, sell the Collateral or any part thereof in one or more parcels
at public or private sale, at any of SMC's offices or elsewhere, for cash, on
credit or for future delivery, and upon such other terms as SMC may deem
commercially reasonable. The Company agrees that, to the extent notice of sale
shall be required by law, at least ten days' notice to the Company of the time
and place of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification. SMC shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. SMC
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and any such sale may, without further notice, be
made at the time and place to which it was so adjourned.
(b) Any cash held by SMC as Collateral and all cash proceeds received by
SMC in respect of any sale of, collection from, or other realization upon all or
any part of the Collateral may, in the discretion of SMC, be held by SMC as
Collateral for, and/or then or any time thereafter be applied in whole or in
part by SMC against, all or any part of the Obligations in such order as SMC
shall elect. Any surplus of such cash or cash proceeds held by SMC and
remaining after payment in full of all the Obligations shall be paid over to the
Company or to whomsoever may be lawfully entitled to receive such surplus.
(c) SMC may exercise any and all rights and remedies of the Company under
or in connection with the Collateral, including, without limitation, any and all
rights of the Company to demand or otherwise require payment of any amount
under, or performance of any provision of, any account, contract or agreement.
(d) All payments received by the Company under or in connection with the
Collateral shall be received in trust for the benefit of SMC, shall be
segregated from other funds of the Company and shall be forthwith paid over to
SMC in the same form as so received (with any necessary endorsement).
10. Payment of Taxes, Charges, Etc. SMC, at its option, after notice to
-------------------------------
the Company, may discharge any taxes, charges, assessments, security interests,
liens or other encumbrances
<PAGE>
upon the Collateral or otherwise protect the value thereof. All such
expenditures incurred by SMC shall become payable by the Company to SMC upon
demand, shall bear interest at an annual rate equal at all times to the lesser
of 15 percent per annum or the highest legal interest rate from the date
incurred to the date of payment, and shall be secured by the Collateral.
11. Duties with Respect to Collateral. SMC shall have no duty to the
----------------------------------
Company with respect to the Collateral other than the duty to use reasonable
care in the safe custody of any of the Collateral in its possession. Without
limiting the generality of the foregoing, SMC, although it may do so at its
option, shall be under no obligation to the Company to take any steps necessary
to preserve rights in the Collateral against other parties.
12. Waivers. To the extent permitted by law, the Company hereby waives
--------
demand for payment, notice of dishonor or protest and all other notices of any
kind in connection with the Obligations except notices required herein, by law
or by any other agreement between the Company and SMC. SMC may release,
supersede, exchange or modify any collateral or security which it may from time
to time hold and may release, surrender or modify the liability of any third
party without giving notice hereunder to the Company. Such modifications,
changes, renewals, releases or other actions shall in no way affect the
Company's obligations hereunder.
13. Termination. This Agreement and the Security Interest shall terminate
------------
upon the expiration, cancellation or other termination of the Notes, provided
that all Obligations have been paid or discharged in full. Upon termination of
the Security Interest, SMC will deliver to the Company appropriate termination
statements with respect to Collateral so released from the Security Interest for
filing with each filing officer with which financing statements have been filed
by SMC to perfect the Security Interest in such Collateral.
14. Successors and Assigns. This Agreement shall be binding upon and
-----------------------
inure to the benefit of the Company and SMC and their respective successors and
assigns.
15. Severability of Provisions. Any provision of this Agreement which is
---------------------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
16. CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
------------------------
JURISDICTION OF ANY CALIFORNIA STATE COURT OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT
A FINAL JUDGMENT IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT,
AFTER ALL APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
<PAGE>
17. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
--------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
18. JURY TRIAL WAIVER. THE PARTIES HERETO DO HEREBY WAIVE ANY AND ALL
------------------
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the date first above written.
TELENETICS CORPORATION
/s/ MICHAEL ARMANI
By: _______________________________
Michael Armani
President & Chief Executive Officer
SMC GROUP
/s/ SHALA SHASHANI
By: ________________________________
Shala Shashani
<PAGE>
EXHIBIT 10.10
TECHNOLOGY TRANSFER AGREEMENT
This Technology Transfer Agreement (the "Transfer Agreement") is made as of
the 29th day of October 1997, by and between Telenetics Corporation, a
California Corporation ("Telenetics") and SMC Communications Group, Inc., a
California Corporation ("SMC Inc.").
RECITALS:
1. Telenetics, among its other business activities, is in the business of
designing, developing, manufacturing, selling and servicing modems and other
communication devices.
2. Telenetics manufactures and sells a modem product under brand name
HideAway Line Powered Modem ("the Product"). See exhibits "A" and "B".
3. The Product was originally designed by Vocal Technologies, LTD
("Vocal") and all rights design and manufacturing of the Product was exclusively
and perpetually transferred to SMC Inc. on March 24, 1994 ("the SMC/Vocal
Agreement"). See exhibits "C".
4. Prior to March 24, 1994 the Product in its finished form was purchased
by SMC Inc. from Vocal and resold to Telenetics under an agreement signed on
January 11, 1994 ("the Resell Agreement") See exhibits "D".
5. Since March 24, 1994, SMC has been manufacturing and reselling the
"product" to Telenetics under the terms of the Resell Agreement.
6. As of this date, the product remains to be a profitable and viable
product for Telenetics, as it is evident through attached exhibit "F".
NOW, THEREFORE, the Parties agree to the following:
1. SMC Inc. hereby transfers all rights and designs it obtained under the
terms of the SMC/Vocal Agreement to Telenetics.
2. In consideration, Telenetics will issue to SMC Inc. a 5 year warrant to
purchase One Million Five Hundred Thousand (1,500,000) shares of common stock of
Telenetics for exercise price of One Tenth of a US Dollar ($.10) per share which
is more than the current bid price of the common stock at the time of this
Transfer Agreement.
CONSENT TO JURISDICTION. EACH PARTY HERETO IRREVOCABLY SUBMITS TO THE
------------------------
JURISDICTION OF ANY CALIFORNIA STATE COURT OVER ANY SUIT, ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH PARTY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH PARTY AGREES THAT
A FINAL JUDGMENT IN ANY SUCH SUIT ACTION OR PROCEEDING BROUGHT IN SUCH A COURT,
AFTER ALL APPROPRIATE APPEALS, SHALL BE CONCLUSIVE AND BINDING UPON IT.
<PAGE>
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the date first above written.
TELENETICS CORPORATION
By: /s/ MICHAEL ARMANI
-----------------------------------
Michael Armani
President & Chief Executive Officer
SMC COMMUNICATIONS GROUP, Inc.
By: /s/ SHALA SHASHANI
-----------------------------------
Shala Shashani
President
<PAGE>
EXHIBIT A
SELF POWERED
DIAL MODEM
[LOGO OF TELENETICS]
HIDEAWAY(TM) SERIES
MODEL HA2400LP
DIAL MODEM
[ARTWORK OF HIDEAWAY]
Technical Specifications:
DATA RATES: 2400/1200/300/75 bps Asynchronous
COMPATIBILITY: Bell 103/212 - CCITT V.22, V.22bis
MODULATION: QAM in 2400 bps * DPSK in 1200 bps * FSK in 0-300
bps
OPERATION: Full or half-duplex
COMMAND SET: Hayes(TM) AT Command Set; 40 character buffer
TRANSMIT LEVEL: -12 dBm
RECEIVE SENSITIVITY: -43 dBm
DROPOUT LEVEL: -48 dBm
NON-VOLATILE MEMORY: Two stored user profiles
Four stored phone numbers
POWER: Line powered; No battery or AC adapter required
SIZE: 2.2"W x 3"D x .83"H
WEIGHT: 2.3 ounces (67 grams)
ENVIRONMENT: Operating Temperature: 0 to 40(degrees) C
Humidity: 0 to 95% non Condensing
. Powered from RS232 Interface
. No Batteries, No AC Adapter
. 2400bps (V.22bis)
. Fully Hayes(TM) AT Compatible
. Auto Fallback, Auto Answer
. Full & Half Duplex
The HA2400LP is designed for those applications where no external source of
power is available. The HideAway derives its power from two isolated sources:
Power from the RS232 interface (TXD, RTS & DTR) activates the HideAway's RS232
drivers, the AT Command set controller and the optical relay that picks up the
telephone line; Power from the telephone line then activates the data pump and
ancillary telephone line components.
HideAway is uniquely designed to adapt to a wide range of applications in the
commercial and industrial environments. Current users include manufacturers of
equipment which require remote diagnostics and maintenance. They include utility
and telephone companies, test and diagnostic equipment and PBX manufacturers,
who require remote access to their equipment for maintenance and data
acquisition.
HideAway is also used by companies providing special services and equipment such
as energy management and security services. HideAway could be installed in an
energy management unit, enabling it to report energy consumption of a remote
site to a host. Since the HideAway is a full duplex two way modem, it may
receive or initiate a call.
Despite its miniature size of 2.2" x 3" x .83" and its weight of less than 2.3
ounces, HideAway is as powerful as larger desktop modems. Neither the size, nor
the low current requirements, affects the superb performance of this unique
device. HideAway is fully Hayes(TM) compatible. It complies with CCITT
standards V.22bis and V.22 as well as Bell 103 and Bell 212A protocols. HideAway
is a smart, rate adaptable modem that adjusts itself to the data rate of the
corresponding modem.
<PAGE>
EXHIBIT B
[LOGO OF TELENETICS]
HIDEAWAY
[ARTWORK OF TELENETICS]
A truly global modem that works without DC power or batteries anywhere in the
world* with the power of standard telephone lines. It weighs less than 3 oz. and
easily fits in your shirt pocket.
(Actual size 2" x 2 3/4" x 3/4")
. 2400, 1200 AND 300 BPS
. AUTOMATIC FALLBACK
. EXTENDED AT COMMAND SET
. AUTO DIAL
. TONE AND PULSE DIALING
. STANDARD RS-232
. NON-VOLATILE MEMORY
*RJ11 Connector is required
The HideAway is a full featured, 2400 baud, line powered pocket modem ideally
suited for business, personal and portable computers, as well as industrial
application or environment where power is not readily available. By combining
all the functions of larger modems together with the convenience of line power
in one of the smallest packages in the world, the HideAway establishes the state
of the art in pocket modem technology for use in portable and desktop
applications.
Featuring small size, ease of use and extended AT command set compatibility, the
HideAway is ideal for use with portable computers. The HideAway is also ideal
for use with a personal or home computer because it leaves expansion slots free
for other uses and it can be easily moved as the computer is upgraded.
The secret to the HideAway is line powering. HideAway gets all the power it
needs from the telephone line. No longer does a bulky AC adaptor need to be
carried around. Never again is a session interrupted because of a low battery.
The HideAway is ready for use 24 hours a day, every day of the week.
Though small in size, the HideAway does not give up any of the features of its
larger relatives. The HideAway implements the industry standard AT command set
including the latest extensions. Furthermore, the HideAway has internal
non-volatile memory for saving the modem configuration and up to four commonly
called phone numbers. Full compatibility with the AT command set allows the
HideAway to be used with virtually any communication package on just about any
computer. The call's status is easily monitored with the AT command set's
extended return messages. Through the use of the AT command set, full control of
both auto-dialing and auto-answering is provided. Simple commands are used to
initiate and answer a telephone call. Most computer communications programs
already provide the commands and only a single telephone number has to be given
to the computer.
The HideAway extends the state of the art in pocket modems by providing a full
featured modem without the need for an external AC adaptor or internal
batteries. With its small size and nearly universal compatibility, the HideAway
is one of the best modems on the market for business, portable and desktop
applications.
TELENETICS(TM)
TELENETICS CORPORATION
26772 VISTA TERRACE DR.
LAKE FOREST, CA 92630
(714) 455-4000
FAX: (714) 455-4010
<PAGE>
EXHIBIT C
PRODUCT MANUFACTURING AGREEMENT
-------------------------------
THIS AGREEMENT made and entered into on this 23 day of March, 1994, by and
between SMC COMMUNICATIONS GROUP, INC. ("SMC"), a California corporation,
located at 26772 Vista Terrace Drive, Lake Forest, California 92630 and VOCAL
TECHNOLOGIES, Ltd., ("VOCAL") located at 3032 Scott Blvd., Santa Clara,
California 95054. In consideration of the mutual covenants contained herein,
the parties agree as follows:
A.1.1 The purpose of this agreement is to provide SMC with the exclusive rights
to the manufacturing, sales and marketing of a product designed and developed by
VOCAL and described in Exhibit "A" (the "PRODUCT"), under SMC private label.
B.1.1 SMC shall have the right to market and sell the PRODUCT anywhere in the
world under its own brand name, ("BRAND NAME").
B.1.2 It is agreed and understood that the BRAND NAME shall be a valuable
proprietary asset belonging to SMC and that VOCAL has no right or interest to
that name, and shall have no right or authority to use the BRAND NAME on any
product.
B.1.3 SMC shall have the right to private label to a third party.
C.1.1 VOCAL shall not with respect to PRODUCT or with respect to any other
product that competes with the PRODUCT, circumvent or bypass SMC by contacting
or conducting business with any customer or potential customer that SMC is
working with. In the events that the technical requirements of a customer or
potential customer necessitates direct involvement of VOCAL employees and
staff, VOCAL shall treat such contact as a proprietary and confidential contact
of SMC as defined and covered by non-disclosure paragraph of this Agreement.
C.1.2 In consideration for the exclusive right to manufacture the PRODUCT and
providing the schematics, part list, and any other engineering documents
necessary for the manufacturing of the PRODUCT, SMC shall pay a one time fee of
$20,000 to VOCAL at the time this agreement is signed and all the documents are
transferred to SMC.
D.1.1 The parties agree that the responsibilities set forth in the agreement
become effective upon the signing of the agreement and that the terms shall
commence from the date of signature by both parties and be valid into
perpetuity.
E.1.1 VOCAL agrees to provide four hours technical support and training to SMC
staff regarding the PRODUCT sold hereunder.
F.1.1 VOCAL warrants that the PRODUCT sold to SMC does not infringe any US or
foreign patent or other rights and in the event SMC or any of its customers
receives a claim that the PRODUCT or any part thereof infringes on any patent,
copyrights, or trademarks, SMC shall immediately notify VOCAL in writing of such
claims. VOCAL shall defend or settle such claim at its option. In any event,
VOCAL will indemnify and hold SMC harmless from any resulting cost of damages
including reasonable attorneys fees. VOCAL shall prosecute claims against
others manufacturing or marketing products which infringe on VOCAL's patent or
other rights, or may choose to delegate the right to prosecute such infringement
to SMC.
Page 1
<PAGE>
G.1.1. Vocal retains the right to sell or otherwise transfer the patent rights
for the PRODUCT, provided, however, that any such sale or transfer shall be
subject to the rights of SMC hereunder which rights will not be affected by such
sale or transfer.
H.1.1 The confidentiality of SMC's and VOCAL's proprietary information will be
guarded by both parties as if they were their own. All such confidential
information will be marked as such by both parties and remain the property of
its originator. The confidentiality agreement set forth in this section will
not be effective if a) either party is required to disclose such information by
court order b) information has been disclosed by a party seeking to maintain
confidentiality or c) information is already publicly disclosed or available.
H.2.1 VOCAL retains all proprietary rights in and to all designs, engineering
details, and other data pertaining to any product specified in this Agreement.
H.2.2 VOCAL retains the right to use the patented power circuitry design,
described in Exhibit "C", in other products that do not compete with the
PRODUCT.
I.1.1 This Agreement shall be construed in accordance with the laws of the
State of California.
I.2.1 In the event that any provisions of this Agreement shall be
unenforceable or illegal, such provision shall be severed; and the entire
agreement shall not fail, but the balance of the Agreement shall continue in
full force and effect.
I.2.2 The rights and obligations created hereunder are personal in nature and
cannot be assigned by either party voluntarily or by operation of the law
without the written consent of the other party.
I.3.1 The persons executing this Agreement warrant that they have the right,
power, legal capacity, and appropriate authority to enter into this Agreement on
behalf of the entity for whom they sign.
I.4.1 This Agreement may be executed in any number of counterparts, and each
of which shall be deemed to be an original, but all of which together shall
constitute but one instrument.
I.4.2 This Agreement and the letter from VOCAL president dated March 23, 1994
herein attached as exhibit "B" constitutes the entire understanding of the
parties and no representations or statements made by a representative of the
parties which is not stated herein shall be binding.
SMC Communications Group, Inc VOCAL Technologies, Ltd.
By: /s/ SHALA SHASHANI By: /s/ MICHAEL ARMANI
------------------------- -------------------------
Title: President Title:
------------------------- -------------------------
Date: ------------------------- Date: -------------------------
Page 2
<PAGE>
EXHIBIT D
AGREEMENT
THIS AGREEMENT is made between TELENETICS CORPORATION ("TELENETICS"), a
California corporation, and SMC COMMUNICATIONS GROUP, INC. ("SMC"), a California
corporation.
WHEREAS, SMC owns certain manufacturing rights to a line powered modem product
(the "PRODUCT") as more fully described in the Exhibit "A" to this agreement;
WHEREAS, TELENETICS has been marketing the PRODUCT under its own brand name, the
HIDEAWAY, as shown in the Exhibit B;
SMC agrees to sell the PRODUCT to TELENETICS at price of $85.00 per unit for the
indefinite period of time, until either parties decide to terminate this
agreement with a 30 day written notice.
SMC will have the right to use TELENETICS' brand name in its own marketing
effort, as long as this agreement is in effect.
Due to the inability of TELENETICS to purchase the PRODUCT from SMC on a cash on
delivery basis, SMC will provide TELENETICS with a line of credit at SMC's sole
discretion. SMC will have the right to collect the checks from those customers
to which the PRODUCT is sold through TELENETICS, (the "CUSTOMERS"), as listed in
Exhibit "C", and, after deducting the monies it is owed to by TELENETICS,
reimburse the difference to TELENETICS.
This agreement, further obligates TELENETICS to open a bank account under its
own corporate name and to authorize SMC to be the sole signer on that account
for the purpose of depositing checks from the CUSTOMERS.
Furthermore, TELENETICS agrees, that if so desired by SMC, to issue a security
agreement covered under UCC-1 filing, or to amend its current Security Agreement
with SMC Group, to cover monies owed to SMC COMMUNICATIONS GROUP, Inc.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed below
by their duly authorized representatives, as of the date listed below.
SMC COMMUNICATIONS GROUP, INC.
/s/ SHALA SHASHANI
- -------------------------
Date: 1-11-94
TELENETICS CORPORATION
/s/ MICHAEL ARMANI
- -------------------------
Date: January 11-1994
<PAGE>
EXHIBIT F
SALES BY MODEM BY MONTH
-----------------------
<TABLE>
<CAPTION>
SALES BY Years ACT_SHIP
MODEM BY -------- --------
MONTH 1997 1998
- --------- ------------------------------ ------------------
COMMODITY Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Grand Total
- --------- -------- -------- -------- -------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
202T $326,347 $232,561 $143,411 $267,392 $46,114 $1,015,826
14.4 $148,983 $104,746 $129,028 $379,307 $20,640 $ 782,704
ALPHA $258,650 $330,703 $138,548 $ 727,900
HA $ 35,194 $ 34,086 $ 39,804 $152,236 $ 9,712 $ 271,032
2400 $ 22,458 $ 42,415 $ 27,194 $ 49,128 $20,013 $ 161,207
14.4L $ 5,960 $ 10,174 $ 13,427 $ 31,411 $23,296 $ 84,267
9.6FP $ 6,805 $ 2,020 $ 12,660 $ 16,542 $ 1,604 $ 39,631
2496 $ 1,777 $ 8,949 $ 4,028 $ 18,358 $ 33,112
9.6FD $ 18,597 $ 2,970 $14,740 $ 36,307
28.8 $ 3,086 $ 4,563 $ 2,417 $ 4,806 $ 14,871
LDM $ 720 $ 5,125 $ 3,564 $ 2,592 $ 12,001
2496L $ 1,418 $ 2,534 $ 707 $ 850 $ 1,699 $ 7,208
FO $ 4,790 $ 471 $ 1,456 $ 6,717
PUR $ 619 $ 707 $ 288 $ 3,740 $ 3,580 $ 8,934
ASSY $ 638 $ 1,053 $ 842 $ 443 $ 25 $ 3,001
2.4 $ 690 $ 690
(blank) $ 486 $ 3,762 $ 4,248
</TABLE>
6/5/98 CONFIDENTIAL 1
<PAGE>
EXHIBIT 10.11
COMMERCIAL LEASE
This lease is made between SMC Group, herein called Lessor, and Telenetics
Corporation, herein called Lessee.
Lessee hereby offers to lease from Lessor the premises situated in the City
of Lake Forest , County of Orange , State of California , described as the two
story industrial property located at the industrial complex at the corner of
Lake Forest Drive and Vista Terrace Drive (26772 Vista Terrace drive), upon the
following TERMS and CONDITIONS:
1. Term and Rent. Lessor demises the above premises for a term of 5 years,
commencing August 1, 1994 and terminating on July 31, 1999 or sooner as
provided herein at the annual rental of :
$42,000 for the first two years; and
$54,000 for the third and forth year ; and
$78,000 for the fifth year;
payable in equal installments in advance on the first day of each month for
that month's rental, during the term of this lease. All rental payments shall
be made to Lessor, at the address specified above.
2. Use. Lessee shall use and occupy the premises for conducting general
legitimate business of Telenetics Corporation. The premises shall be used for
no other purpose. Lessor represents that the premises may lawfully be used
for such purpose.
3. Care and Maintenance of Premises. Lessee acknowledges that the premises are
in good order and repair, unless otherwise indicated herein. Lessee shall, at
his own expense and at all times, maintain the premises in good and safe
condition, including plate glass, electrical wiring, plumbing and heating
installations and any other system or equipment upon the premises, and shall
surrender the same at termination hereof, in as good condition as received,
normal wear and tear excepted. Lessee shall be responsible for all repairs
required, excepting the roof, exterior walls, structural foundations, and:
4. Alterations. Lessee shall not, without first obtaining the written consent
of Lessor, make any alterations, additions, or improvements, in, to or about
the premises.
5. Ordinances and Statutes. Lessee shall comply with all statutes, ordinances
and requirements of all municipal, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the premises,
occasioned by or affecting the use thereof by Lessee.
6. Assignment and Subletting. Lessee shall not assign this lease or sublet any
portion of the premises without prior written consent of the Lessor, which
shall not be unreasonably withheld. Any such assignment or subletting without
consent shall be void and, at the option of the Lessor, may terminate this
lease.
7. Utilities. All applications and connections for necessary utility services
on the demised premises shall be made in the name of Lessee only, and Lessee
shall be solely liable for utility charges as they become due, including
those for sewer, water, gas, electricity, and telephone services.
8. Entry and Inspection. Lessee shall permit Lessor or Lessor's agents to enter
upon the premises at reasonable times and upon reasonable notice, for the
purpose of inspecting the same, and will permit Lessor at any time within
sixty (60) days prior to the expiration of this lease, to place upon the
premises any usual "To Let" or "For Lease" signs, and permit persons desiring
to lease the same to inspect the premises thereafter.
<PAGE>
9. Possession. If Lessor is unable to deliver possession of the premises at
the commencement hereof, Lessor shall not be liable for any damage caused
thereby, nor shall this lease be void or voidable, but Lessee shall not be
liable for any rent until possession is delivered. Lessee may terminate this
lease if possession is not delivered within 5 days of the commencement of
the term hereof.
10. Indemnification of Lessor. Lessor shall not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on the
demised premises or any part thereof, and Lessee agrees to hold Lessor
harmless from any claim for damages, no matter how caused.
11. Insurance. Lessee, at his expense, shall maintain plate glass and public
liability insurance including bodily injury and property damage insuring
Lessee and Lessor with minimum coverage as follows: Lessee shall provide
Lessor with a Certificate of Insurance showing Lessor as additional insured.
The Certificate shall provide for a ten-day written notice to Lessor in the
event of cancellation or material change of coverage. To the maximum extent
permitted by insurance policies which may be owned by Lessor or Lessee,
Lessee and Lessor, for the benefit of each other, waive any and all rights
of subrogation which might otherwise exist.
12. Eminent Domain. If the premises or any part thereof or any estate therein,
or any other part of the building materially affecting Lessee's use of the
premise, shall be taken by eminent domain, this lease shall terminate on the
date when title vests pursuant to such taking. The rent, and any additional
rent, shall be apportioned as of the termination date, and any rent paid for
any period beyond that date shall be repaid to Lessee. Lessee shall not be
entitled to any part of the award for such taking or any payment in lieu
thereof, but Lessee may file a claim for any taking of fixtures and
improvements owned by Lessee, and for moving expenses.
13. Destruction of Premises. In the event of a partial destruction of the
premises during the term hereof, from any cause, Lessor shall forthwith
repair the same, provided that such repairs can be made within sixty (60)
days under existing governmental laws and regulations, but such partial
destruction shall not terminate this lease, except that Lessee shall be
entitled to a proportionate reduction of rent while such repairs are being
made, based upon the extent to which the making of such repairs shall
interfere with the business of Lessee on the premises. If such repairs
cannot be made within said sixty (60) days, Lessor, at his option, may make
the same within a reasonable time, this lease continuing in effect with the
rent proportionately abated as aforesaid, and in the event that Lessor shall
not elect to make such repairs which cannot be made within sixty (60) days,
this lease may be terminated at the option of either party. In the event
that the building in which the demised premises may be situated is destroyed
to an extent of not less than one-third of the replacement costs thereof,
Lessor may elect to terminate this lease whether the demised premises be
injured or not. A total destruction of the building in which the premises
may be situated shall terminate this lease.
14. Lessor's Remedies on Default. If Lessee defaults in the payment of rent, or
any additional rent, or defaults in the performance of any of the other
covenants or conditions hereof, Lessor may give Lessee notice of such
default and if Lessee does not cure any such default within 10 days, after
the giving of such notice (or if such other default is of such nature that
it cannot be completely cured within such period, if Lessee does not
commence such curing within such 20 days and thereafter proceed with
reasonable diligence and in good faith to cure such default), then Lessor
may terminate this lease on not less than 25 days' notice to Lessee. On the
date specified in such notice the term of this lease shall terminate, and
Lessee shall then quit and surrender the premises to Lessor, but Lessee
shall remain liable as hereinafter provided. If this lease shall have been
so terminated by Lessor, Lessor may at any time thereafter resume possession
of the premises by any lawful means and remove Lessee or other occupants and
their effects. No failure to enforce any term shall be deemed a waiver.
15. Security Deposit. Lessee shall deposit with Lessor on the signing of this
lease the sum of $3,500 as security deposit for the performance of Lessee's
obligations under this lease, including without limitation, the surrender of
possession of the premises to Lessor as herein provided. If Lessor applies
any part of the deposit to cure any default of Lessee, Lessee shall on
demand deposit with Lessor the amount so applied so that Lessor shall have
the full deposit on hand at all times during the term of this lease.
<PAGE>
16. Tax Increase. In the event there is any increase during any year of the
term of this lease in the City, County or State real estate taxes over and
above the amount of such taxes assessed for the tax year during which the
term of this lease commences, whether because of increased rate or
valuation, Lessee shall pay to Lesser upon presentation of paid tax bills an
amount equal to 50 % of the increase in taxes upon the land and building in
which the leased premises are situated. In the event that such taxes are
assessed for a tax year extending beyond the term of the lease, the
obligation of Lessee shall be proportionate to the portion of the lease term
included in such year.
17. Common Area Expenses. In the event the demised premises are situated in a
shopping center or in a commercial building in which there are common areas,
Lessee agrees to pay his pro-rata share of maintenance, taxes, and insurance
for the common area.
18. Attorney's Fees. In case suit should be brought for recovery of the
premises, or for any sum due hereunder, or because of any act which may
arise out of the possession of the premises, by either party, the prevailing
party shall be entitled to all costs incurred in connection with such
action, including a reasonable attorney's fee.
19. Notices. Any notice which either party may, or is required to give, shall
be given by mailing the same, postage prepaid, to Lessee at the premises, or
Lessor at the address shown below, or at such other places as may be
designated by the parties from time to time.
20. Heirs, Assigns, Successors. This lease is binding upon and inures to the
benefit of the heirs, assigns and successors in interest to the parties.
21. Option to Renew. Provided that Lessee is not in default in the performance
of this lease, Lessee shall have the option to renew the lease for an
additional term of 12 months commencing at the expiration of the initial
lease term. All of the terms and conditions of the lease shall apply during
the renewal term except that the monthly rent shall be the sum of $7,500 .
The option shall be exercised by written notice given to Lessor not less
than 30 days prior to the expiration of the initial lease term. If notice is
not given in the manner provided herein within the time specified, this
option shall expire.
22. Subordination. This lease is and shall be subordinated to all existing and
future liens and encumbrances against the property.
23. Entire Agreement. The foregoing constitutes the entire agreement between
the parties and may be modified only by a writing signed by both parties.
The following Exhibits, if any, have been made a part of this lease before
the parties' execution hereof:
Signed this 30th day of July , 1994 .
For Telenetics Corporation For SMC Group
By /s/ MICHAEL ARMANI By /s/ SHALA SHASHANI
------------------ ------------------
Lessee Lessor
