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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended _______________
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from April 1, 1998 to December
31, 1998
Commission File Number 0-16580
TELENETICS CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 33-0061894
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26772 VISTA TERRACE DRIVE
LAKE FOREST, CALIFORNIA 92630
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(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 the nine months ended December 31, 1998 were
$3,559,539 and for the year ended March 31, 1998 were $2,897,484.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on April 12, 1999 was approximately $8,311,307.
The number of shares outstanding of the registrant's only class of Common
Stock, no par value per share, was 9,527,165 on April 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting to be
held May 21, 1999 are incorporated herein by reference into Part III.
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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 had 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"), for over seven
years until the filing of its Form 10-KSB covering the fiscal year ended March
31, 1998. On December 31, 1998, the Company's Board of Directors approved a
change in the Company's fiscal year end from March 31 to December 31.
Between 1992 and 1998, under the direction of new management, the Company's
strategic focus was redirected 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.
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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:
o 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.
o 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.
o 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.
o 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.
o 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
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:
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o 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.
o 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.
o 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.
o 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.
o 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
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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 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 real time 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 real time
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 real time 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
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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 Duquesne Light
Company, Schlumberger, ABB, PSI, Landis & Gyr, Scientific Atlanta, Power
Measurement and General Electric.
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.
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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.
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 as well.
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. In January 1999, the Company's Myriad(TM) Rack Mount Modem Bank with
a PE202T modem was selected by Autotote Lottery Corporation, a leading provider
of lottery systems, for use in the expansion and upgrade of the Montana State
Lottery.
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.
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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.
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,
1999, the Company's sales force consisted of seven persons, including four in
the Industrial Automation marketing group, and one in the OEM and Specialty
Markets 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 April 1998 through December 1998, the Company exhibited its products at
five national trade shows. For the nine months ended December 31, 1998, the
sales and marketing budget for advertising, travel, trade shows and sales
literature was less than 3% of total revenues. Sales and marketing salaries,
bonuses, commissions and other compensation expense was approximately 8% of
total revenues. Accordingly, management anticipates that approximately 6% of
total revenues will be spent on sales and marketing expenses and compensation of
sales and marketing personnel during 1999. In addition, the Company expects to
increase the number of its sales personnel during 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 be 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 18 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
nine months ended December 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 relatively
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"). In addition,
in March 1999, the Company was advised by one of its customers, Alsthom ESCA,
that the Company's modems had been selected for a major distribution automation
project with the Korean Electric Power Company. Due primarily to these recent
developments, along with increased interest in the Company's products among
Pacific Rim companies, management of the Company anticipates a substantial
increase in international sales over the next several years and expects as much
as $2,000,000 in revenue to be generated during 1999.
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
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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.
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(TM) Series
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 list prices, are set forth below:
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION AVERAGE LIST PRICE
- ------------ ------------------- ---------------------
<S> <C> <C>
OmegaTM AMR Communication The OmegaTM Series is a simple $1,250-$1,500
Interface Cabinet modem for connection to several
power revenue meters at commercial and
industrial sites. The OmegaTM Series
integrates a cellular transceiver, 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 OmegaTM
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
communications on 2 line wires or full
duplex communications on 4 wires.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION AVERAGE LIST PRICE
- ------------ ------------------- ---------------------
<S> <C> <C>
MIU9.6FPD and MIU/ The MIU9.6FPD modems are $535
PowerPort9.6FPD Digital sophisticated digital modems that are
Fast Poll Modems 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.
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.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION AVERAGE LIST PRICE
- ------------ ------------------- ---------------------
<S> <C> <C>
Hideaway(TM) Series Model The HA2400LP is designed for those $150
HA2400LP Dial Modem 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.
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.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
PRODUCT NAME PRODUCT DESCRIPTION AVERAGE LIST PRICE
- ------------ ------------------- ---------------------
<S> <C> <C>
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 simple send and
receive signals and operate at full or
half-duplex on dial-up or 2-wire and
4-wire leased line systems.
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 can $700
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:
o 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.
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<PAGE>
o 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.
o 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 March 31, 1999, the Company employed ten persons in engineering, six
of whom were engaged primarily in product development. The Company's engineering
and product development expenses increased to $300,952 during the nine months
ended December 31, 1998 from $151,239 during the nine months ended December 31,
1997, and increased as a percentage of net sales from approximately 7.8% during
the nine months ended December 31, 1997 to approximately 8.5% during the nine
months ended December 31, 1998.
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.
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 eighteen 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 fixed labor costs 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
12
<PAGE>
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, financial condition and results of
operations.
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 March 31, 1999, the Company had 16
employees in the area of product testing and quality assurance.
STRATEGIC RELATIONSHIPS
On July 13, 1998, the Company and Duquesne Light Company ("Duquesne")
entered into a ten-year Marketing and Technology Agreement ("Strategic
Agreement") to achieve the following objectives:
o 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.
o 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.
o 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.
13
<PAGE>
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 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, 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.
14
<PAGE>
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)
ITRON China Light & Power
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
Sales to Duquesne and ITRON accounted for approximately 32% and 17%,
respectively, of net sales for the nine months ended December 31, 1998.
INTELLECTUAL PROPERTY
The Company currently does not hold any patents and relies on a combination
of contractual rights, copyrights, trademarks and trade secrets to protect its
proprietary rights. Historically, the Company believed that because of the
rapid pace of technological change in the modem and data communications
industry, the legal intellectual property protection for many of 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. However, the Company now believes that
several of the Company's current products and some of those products in
development could benefit from patent protection. Accordingly, the Company has
recently retained the services of a large patent and trademark law firm to file
patent applications for those products with the U.S. Patent and Trademark
Office. Although the Company currently relies to a great extent on trade secret
protection for much of its technology and in the future will also rely on
patents to protect a portion 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 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
15
<PAGE>
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 March 31, 1999, the Company had approximately $4 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 purchase commitments 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 purchase commitment
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 ultimately 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 March 31, 1999, the Company employed approximately 34 people, of whom
approximately 14 were hourly employees and approximately 20 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.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices occupy approximately 6,675 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 $78,000 under the terms of the lease.
On April 12, 1999, the Company entered into a lease agreement for
approximately 26,232 square feet at 25111 Arctic Ocean, Lake Forest, California,
with an initial lease term of five years and one five year option to extend. The
initial monthly base rent is $23,871.12. The lease includes an annual rent
escalation provision based upon three percent per year and an option to purchase
at $3,121,608 (based on $119/per sq. ft.) if the Company exercises the option to
purchase during year one of the lease, and $3,277,688.40 (based on $124.95/per
sq. ft.) if the Company exercises the option to purchase during year two of the
lease. The landlord is required to contribute $275,000 towards the tenant
improvements. The Company is required to contribute $175,000 towards the tenant
improvements and the cost of the tenant improvements in excess of $450,000. In
the event the cost of the tenant improvement is estimated to exceed $450,000,
the Company may change the specifications to reduce the cost of the tenant
improvements. The Company anticipates occupying the new premises prior to the
expiration of its current lease. The Company believes that its new facilities
will be adequate for its current needs and that additional facilities in the
area are available to meet future needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other than
legal proceedings occurring in the ordinary course of business. Such other legal
proceedings in the aggregate are believed by management to be immaterial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) On December 15, 1998, the Company mailed to its shareholders a notice
of actions to be taken pursuant to the written consent of such
shareholders.
(b) Not applicable.
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(c) (i) PROPOSAL ONE: A one-for-five reverse stock split of the
Company's issued and outstanding shares of Common Stock:
For: 27,229,656
Against: 8,500
Abstain: 37,800
Broker Non-Voting: 1,005,374
(c) (ii) PROPOSAL TWO: The restatement and amendment of the
Company's Restated Articles of Incorporation:
For: 27,162,011
Against: 67,645
Abstain: 37,800
Broker Non-Voting: 1,005,374
(c) (iii) PROPOSAL THREE: The restatement and amendment of the
Company's Restated and Amended Bylaws:
For: 27,201,511
Against: 28,145
Abstain: 37,800
Broker Non-Voting: 1,005,374
(d) Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
After being de-listed from the Nasdaq National Market System in 1991 and
prior to October 16, 1998, the Common Stock of the Company had 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. On October 16, 1998, the Company's Common Stock began trading on the
OTC Electronic Bulletin Board under the symbol "TLNT." Set forth below are the
high and low bid prices of the Common Stock during each quarter of the nine
months ended December 31, 1998, as reported by a member firm of the NASD that
effects transactions in stocks quoted on the OTC Electronic Bulletin Board and
acts as one of the market makers for the Company's Common Stock. The quotations
listed below reflect interdealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions. The quotations listed
below do not reflect the Company's one-for-five reverse stock split effected
January 8, 1999. Between October 1, 1996 and March 31, 1998, the high and low
bid prices for the Company's Common Stock ranged from $.19 to $.01,
respectively.
Stock Prices
------------
High Low
NINE MONTHS ENDED DECEMBER 31, 1998
April 1 - June 30 $ .16 $ .03
July 1 - September 30 $ .31 $ .05
October 1 - December 31 $ .30 $ .06
At March 12, 1999, there were approximately 147 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.
17
<PAGE>
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 March 1996, the Company issued an aggregate of 40,000 shares of Common
Stock to two non-affiliates as employee bonuses.
In July 1996, the Company issued 600,000 shares of Common Stock to Michael
Armani in partial satisfaction of $300,000 of deferred salary, bonuses and
unpaid approved expenses as of July 31, 1996.
In September 1996, the Company issued an aggregate of 66,000 shares of
Common Stock to four non-affiliates as employee bonuses.
In October 1996, the Company issued an aggregate of 1,257,075 shares of
Common Stock in consideration of the cancellation of promissory notes in the
aggregate amount of $687,756.
In December 1996, the Company issued (i) 22,000 shares of Common Stock in
consideration of the cancellation of a promissory note in the amount of $11,629,
(ii) 80,000 shares of Common Stock in partial consideration of the settlement of
litigation concerning a promissory note (the amount attributed to such issuance
was $29,447) and (iii) 4,000 shares of Common Stock in partial consideration of
the satisfaction of a judgment (the amount attributed to such issuance was
$23,000).
In February 1997, the Company issued 2,000 shares to a non-affiliate to the
acquisition of certain electronic test equipment.
In July 1997, the Company issued an aggregate of 284,000 shares of Common
Stock in consideration of the cancellation of promissory notes in the aggregate
amount of $167,525.
In December 1997, the Company issued an aggregate of 127,000 shares of
Common Stock to ten non-affiliates as employee bonuses.
In March 1998, the Company issued 1,000,000 shares of Common Stock to SMC
in partial satisfaction of the Company's payment obligations of $288,382 under
an amended compromise agreement.
In July 1998, the Company issued 600,000 shares of Common Stock to an
affiliate for aggregate consideration of $30,000 in connection with the exercise
of an option.
In October 1998, the Company issued (i) 300,000 shares of Common Stock to
an affiliate in exchange for cancellation of indebtedness in the amount of
$150,000 in connection with the exercise of a warrant issued pursuant to the
Technology Transfer Agreement between the Company and SMC Group and (ii) 50,000
shares of Common Stock to an affiliate for consideration comprised of a $50,000
reduction in a promissory note in connection with the exercise of a warrant.
In November 1998, the Company issued an aggregate of 21,000 shares of
Common Stock to eight non-affiliates as employee bonuses.
In December 1998, the Company issued (i) 200,000 shares of its Common Stock
to Bibicoff & Associates, the Company's investment relations firm, in
consideration for $25,000 cash and prior services rendered to the Company by
Bibicoff & Associates; (ii) 80,000 shares of Common Stock to a creditor of the
Company in exchange for cancellation of indebtedness in the aggregate amount of
$100,000; and (iii) an aggregate of 20,000 shares of Common Stock to two
non-affiliates for an aggregate consideration of $20,000 in connection with the
exercise of two warrants.
In April 1999, the Company issued (i) 628,571 shares of its Series A 7.0%
Convertible Redeemable Preferred Stock and (ii) five year warrants to purchase
up to 628,571 shares of Common Stock at an exercise price of $1.875 per share
for cash consideration, net of commissions, of $990,000.
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
Act"), as transactions not involving a public offering, and reflect the
Company's one-for-five reverse stock split. 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 with
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 Financial Statements and Notes thereto included elsewhere in this
Transition 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 Transition Report on Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Transition 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 elsewhere in this
Transition Report on Form 10-KSB.
18
<PAGE>
OVERVIEW
Telenetics Corporation designs and manufactures high quality, industrial
grade modems, fiber optic drivers and radio modems within the industrial
automation industry. The Company is also 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.
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 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 periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Nine Months Ended Dec. 31, Twelve Months Ended
--------------------------
1998 1997 March 31, 1998
---- ---- -------------------
(unaudited)
<S> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales.......................... 62.9 60.8 55.9
------ ------ ------
Gross profit........................... 37.1 39.2 44.1
Selling, general and administrative.... 28.8 30.0 31.6
Engineering and product development.... 8.5 7.8 6.9
------ ------ ------
Operating income (loss)................ (0.2) 1.4 5.6
Interest expense ...................... (6.8) (2.5) (5.7)
Benefit from relief of indebtedness.... -- 3.6 3.3
------ ------ ------
Net income (loss)...................... (7.0)% 2.5% 3.2%
====== ====== ======
</TABLE>
19
<PAGE>
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
NET SALES. Net sales for the nine months ended December 31, 1998 were
$3,559,539 as compared to $1,940,394 for the nine months ended December 31,
1997, an increase of $1,619,145 or approximately 83%. This increase in net sales
was primarily a result of increased purchases of the Company's products by
Duquesne, GE/Harris and Bailey Network Systems.
GROSS PROFIT. Gross profit decreased as a percentage of net sales by 2.1%
to 37.1% for the nine months ended December 31, 1998 as compared to 39.2% for
the nine months ended December 31, 1997. This decrease was primarily
attributable to the nominal gross profit margins obtained in connection with
sales of the Company's Omega(TM) Series products. Cost of sales increased by
$1,059,796, or approximately 90%, to $2,239,688 during the nine months ended
December 31, 1998 from $1,179,892 during the nine months ended December 31,
1997. The increase of cost of sales resulted from a significant increase in the
volume of sales and corresponding increase in purchases of components from
vendors at less than optimal price points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $443,280, or approximately 76.1%, to
$1,025,753 during the nine months ended December 31, 1998 from $582,473 during
the nine months ended December 31, 1997, but decreased as a percentage of net
sales from approximately 30.0% during the nine months ended December 31, 1997 to
approximately 28.8% during the nine months ended December 31, 1998. The increase
in dollar terms of selling, general and administrative expenses resulted
primarily from an increase in sales and marketing expenses, an increase in
expenses related to the preparation of reports required under the Securities
Exchange Act of 1934 and costs associated with the private placement of the
Company's subordinated promissory notes. 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.
ENGINEERING AND PRODUCT DEVELOPMENT. Engineering and product development
expense increased by $149,713, or approximately 99.0%, to $300,952 during the
nine months ended December 31, 1998 from $151,239 during the nine months ended
December 31, 1997, and increased as a percentage of net sales from approximately
7.8% during the nine months ended December 31, 1997 to approximately 8.5% during
the nine months ended December 31, 1998. This increase in engineering and
product development expense was primarily attributable to the development of the
Omega(TM) Series product line and other future product lines.
BENEFIT FROM RELIEF OF INDEBTEDNESS. During the nine months ended December
31, 1998, the Company did not record a benefit from the relief of indebtedness.
For the nine months ended December 31, 1997, the Company recorded benefit from
relief of indebtedness of $70,611. The benefit from relief of indebtedness
recorded during the nine months ended December 31, 1997 was attributable to the
resolution of litigation matters for amounts less than the carrying values for
those obligations.
INTEREST EXPENSE. Interest expense during the nine months ended December
31, 1998 increased by $193,532 or approximately 397%, to $242,299, or 6.8% of
net sales, from $48,767, or 2.5% of net sales, during the nine months ended
December 31, 1997. The increase is a result of higher levels of borrowing during
the nine months ended December 31, 1998 attributable in large part to borrowings
under the Company's prior factoring arrangement with Access Capital. The Company
terminated the factoring arrangement in February 1999.
NET INCOME (LOSS). Net loss for the nine months ended December 31, 1998 was
$249,306, or approximately (7.0)% of net sales, as compared to net income for
the nine months ended December 31, 1997 of $48,455, representing approximately
2.5% of net sales.
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 1998 AND TWELVE MONTHS ENDED
MARCH 31, 1998
NET SALES. Net sales for the nine months ended December 31, 1998 were
$3,559,539 as compared to $2,897,484 for the twelve months ended March 31, 1998,
an increase of $662,055 or approximately 22.8%. This increase in net sales was
primarily a result of increased purchases by Duquesne, GE/Harris and Bailey
Network Systems.
GROSS PROFIT. Gross profit decreased as a percentage of net sales by 7.0%
to 37.1% for the nine months ended December 31, 1998 as compared to 44.1% for
the twelve months ended March 31, 1998. This decrease was primarily attributable
to the introduction of the Company's new Omega(TM) Series product line. The
Company believes that the gross profit margins recorded for the twelve months
ended March 31, 1998 better reflect the Company's anticipated gross profit
margin in the future. The Company further believes that future product
introductions will not have as great an effect on future gross profit margins as
the Omega(TM) series product line had on the Company's gross profit margin for
the nine months ended December 31, 1998. Cost of sales increased by $619,843, or
20
<PAGE>
approximately 38.3%, to $2,239,688 during the nine months ended December 31,
1998 from $1,619,845 during the twelve months ended March 31, 1998. The increase
of cost of sales resulted from a significant increase in the volume of sales and
corresponding increase in purchases of components from vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $109,333, or approximately 11.9%, to
$1,025,753 during the nine months ended December 31, 1998 from $916,420 during
the twelve months ended March 31, 1998, but decreased as a percentage of net
sales from approximately 31.6% during the twelve months ended March 31, 1998 to
approximately 28.8% during the nine months ended December 31, 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. During the nine months ended December
31, 1998, the Company did not record a benefit from the relief of indebtedness.
For the twelve months ended March 31, 1998, the Company recorded a benefit from
relief of indebtedness of $96,240. The benefit from relief of indebtedness
recorded during the twelve months ended March 31, 1998 was attributable to the
resolution of litigation matters for amounts less than the carrying values for
those obligations.
INTEREST EXPENSE. Interest expense during the nine months ended December
31, 1998 increased by $76,668 or approximately 46.3%, to $242,299, or 6.8% of
net sales, from $165,631, or 5.7% of net sales, during the twelve months ended
March 31, 1998. The increase is a result of higher levels of borrowing during
the nine months ended December 31, 1998 attributable in large part to borrowings
under the Company's prior factoring arrangement with Access Capital.
NET INCOME (LOSS). Net loss for the nine months ended December 31, 1998 was
$249,306, or approximately (7.0)% of net sales, as compared to net income for
the twelve months ended March 31, 1998 of $93,654.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year(s) in which the
differences are expected to reverse.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's loss during the nine months ended December 31, 1998 and
uncertainties surrounding the realization of the net operating loss
carryforwards, management has determined that the realization of deferred tax
assets is not more likely than not. Accordingly, a valuation allowance equal to
the net deferred tax asset amount has been recorded as of December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended December 31, 1998, the Company financed its
operations and capital expenditures primarily through borrowings under the
Company's prior factoring agreement with Access Capital and the private
placement of the Company's subordinated promissory notes.
As of December 31, 1998, the Company had working capital of $521,200 and an
accumulated deficit of $11,610,638. As of that date, the Company had no cash, a
subscription receivable of $300,000 and $1,189,456 in accounts receivable. The
Company also had convertible and other promissory notes outstanding in the
aggregate amount of approximately $1,246,398 as of December 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 until their maturity.
On April 2, 1999, the Company secured a revolving line of credit with
Celtic Capital Corporation, a division of Foothill Capital Corporation. The line
of credit bears interest, at the greater of prime rate plus 3% or 10.75% per
annum, is collateralized by substantially all of the assets of the Company and
expires on October 2, 2000. The borrowing base under the line of credit is 80%
of eligible accounts receivable up to a maximum borrowing of $3,000,000.
In April 1999, the Company sold an aggregate of 628,571 shares of its
Series A 7.0% Convertible Redeemable Preferred Stock at $1.75 per share and five
year warrants to purchase an aggregate of 628,571 shares of the Company's Common
Stock with an exercise price of $1.875 per share in a private equity offering to
six accredited investors. The cash proceeds of the offering, net of commissions,
was $990,000.
The cash proceeds from the private equity offering of Series A 7.0%
Convertible Redeemable Preferred Stock, together with anticipated borrowings
under the Company's line of credit with Celtic Capital Corporation, will be used
as working capital to fund research and development costs associated with the
Company's products, costs associated with manufacturing and marketing the
Company's products and costs associated with the continued growth and expansion
of the Company.
The Company believes that current and future available capital resources,
cash flow from operations, and other existing sources of liquidity, including
the Company's revolving line of credit with Celtic Capital Corporation and the
proceeds of the recent private placement of the Company's Series A 7.0%
Convertible Redeemable Preferred Stock, 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
21
<PAGE>
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
The Company has identified substantially all of its major hardware and
software platforms in use and is continually modifying and upgrading its
software and information technology ("IT") and non-IT systems. The Company has
modified its current financial software to be Year 2000 ("Y2K") compliant. The
Company does not believe that, with upgrades of existing software and/or
conversion to new software, the Y2K issue will pose significant operational
problems for its internal computer systems. The Company expects all systems to
be Y2K compliant by September 30, 1999 through the use of internal and external
resources. The Company has incurred insignificant costs to date associated with
Y2K compliance and the Company presently believes estimated future costs will
not be material. However, the systems of other companies on which the Company
may rely also may not be timely converted, and failure to convert by another
company could have an adverse effect on the Company's systems. The Company
presently believes the Y2K problem will not pose significant operational
problems and is not anticipated to have a material effect on its financial
position or results of operations in any given year. However, actual results
could differ materially from the Company's expectations due to unanticipated
technological difficulties or project delays by the Company or its suppliers. If
the Company and third parties upon which it relies are unable to address the
issue in a timely manner, it could result in a material financial risk to the
Company. In order to assure that this does not occur, the Company is in the
process of developing a contingency plan and plans to devote all resources
required to attempt to resolve any significant Y2K issues in a timely manner.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on its
net sales or profitability in recent years.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS 133") issued by
the FASB is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
does not expect the adoption of SFAS 133 to have a material effect on its
financial position or results of operations.
LOOKING AHEAD
Set forth below are major highlights of the Company's business plan for
1999. Management believes that the significant upward trend in increased sales
and bookings as well as greater cost efficiencies that began in the latter part
of 1998 will continue through 1999.
During 1999 a significant portion of revenues will be realized from those
opportunities that were uncovered and developed during the nine months ended
December 31, 1998. Some of these developments are as follows:
o STRATEGIC RELATIONSHIP WITH DUQUESNE. The Company anticipates that it
will continue to derive revenues from sales of its products to Duquesne
and to expand overall sales through the Company's Strategic Agreement
with Duquesne.
o INCREASE IN AUTOMATED METER READING MARKET. The Company anticipates
that a significant portion of its business in 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.
o GROWTH THROUGH ACQUISITIONS. To expand its markets, the Company's
business strategy includes growth through acquisitions. The Company
anticipates that some portion of its growth during 1999 will be the
result of strategic acquisitions.
22
<PAGE>
o EXISTING MAJOR CUSTOMERS. The Company anticipates that its general
business with its major customers will continue to grow in 1999. During
the nine months ended December 31, 1998, the Company's top ten
customers were responsible for approximately $2.9 million of net sales.
o 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 1999.
o DISTRIBUTION. The Company believes that its aggressive plan in
identifying and hiring distributors, value added resellers and system
integrators during the nine months ended December 31, 1998 will result
in additional revenues in this sector in 1999 and beyond.
o 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 $2 million of additional
revenues during the next 18 months.
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 Transition Report on Form 10-KSB, risks associated with
managing the Company's growth, as well as those factors discussed in "Risk
Factors" described in the Company's Annual Report on Form 10-KSB for the fiscal
year ended March 31, 1998. 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:
o Given the significant backlog of orders at December 31, 1998 and at
March 31, 1998, there can be no assurance that there will be no delays
in procuring, manufacturing, testing and shipping such a large volume
of products.
o Although the Company's business strategy includes growth through
acquisitions, identifying and pursuing acquisition opportunities and
integrating acquired products and businesses requires a significant
amount of management time and skill. There can be no assurance that the
Company will be able to identify suitable acquisition candidates,
consummate any acquisition on acceptable terms or successfully
integrate any acquired business into the Company's operations. There
also can be no assurance that any future acquisition will not have an
adverse effect upon the Company's operating results, particularly in
the fiscal quarters immediately following consummation of the
acquisition while the acquired business is being integrated into the
Company's operations.
o 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 to
cancel or delay a portion or all of their orders.
23
<PAGE>
o The Company has experienced significant growth during the last 18
months. As a result of this rapid growth, the Company has had to raise
equity capital to fund its liquidity needs. The timing of which has, on
occasions, resulted in the Company being required to purchase product
components at less then optimal price points. As a result, the
Company's gross margins on many of its product lines may fluctuate on a
quarterly basis.
o As of March 1999, 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.
o The Company has limited experience in marketing and selling its
products in international markets. International customs, standards,
approvals and political and economic uncertainties may adversely affect
the Company's ability to ship its products internationally in a timely
and profitable manner.
o The trading price of the Company's Common Stock, like other technology
stocks, is subject to significant volatility due to factors impacting
the overall market which are unrelated to the Company's performance.
The historical results of operations and financial position of the
Company are not necessarily indicative of future financial performance.
If revenues or earnings fail to meet securities analysts' expectations,
there could be an immediate and significant adverse impact on the
trading price of the Company's Common Stock.
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
financial position, results of operations or cash flows.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company and its subsidiaries are submitted
as a separate section of this Transition Report on Form 10-KSB on pages F-1
through F-26.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
On January 20, 1999, George F. Rombach, C.P.A. resigned as the principal
accountant of the Company. Mr. Rombach's reports on the Company's financial
statements for the fiscal years ended March 31, 1997 and 1998 contained no
adverse opinion and no disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles. The Company's
decision to accept the resignation of George F. Rombach was approved by the
Company's Board of Directors. The Company's Board of Directors also approved the
engagement of BDO Seidman, LLP as independent accountants for the Company and to
advise the Company on accounting matters, effective as of January 20, 1999.
Prior to the appointment of BDO Seidman, LLP, the Company had not consulted with
BDO Seidman, LLP regarding the application of accounting principles.
In the Company's two most recent fiscal years (i.e., March 31, 1997 and
1998) and the subsequent interim periods preceding the resignation of George F.
Rombach, there were no disagreements with Mr. Rombach on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Mr. Rombach, would have caused Mr. Rombach to make a reference to the subject
matter of the disagreement in connection with his reports.
The Company requested George F. Rombach to furnish it with a letter
addressed to the Securities and Exchange Commission ("Commission") stating
whether he agrees with the above statements. A copy of that letter, dated
January 20, 1999, was filed with the Commission as an exhibit to the Company's
Form 8-K dated January 20, 1999. The Form 8-K also reported the engagement of
BDO Seidman, LLP as the Company's certifying accountants.
24
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information appearing under the caption "Election of Directors,"
including the subcaption "Compliance with Beneficial Ownership Reporting Rules,"
contained in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders to be held May 21, 1999 (the "Proxy Statement") is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information appearing under the caption "Election of Directors,"
including the subcaption "Executive Compensation," contained in the Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the caption "Election of Directors,"
including the subcaption "Principal Shareholders," contained in the Proxy
Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing under the caption "Certain Relationships and
Related Transactions" contained in the Proxy Statement is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Restated and Amended Articles of Incorporation of the Company
3.2 Certificate of Determination of Rights, Preferences, Privileges
and Restrictions of Series A 7.0% Convertible Redeemable
Preferred Stock of the Company
3.3 Certificate of Determination of Rights, Preferences, Privileges
and Restrictions of Series B Convertible Preferred Stock of the
Company
3.4 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.*
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<PAGE>
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*
10.12 Loan and Security Agreement dated as of April 2, 1999 between
Celtic Capital Corporation and the Company
10.13 Asset Purchase Agreement dated April 5, 1999 between Greenland
Corporation and the Company
10.14 Commercial Lease dated April 12, 1999 between Mark IV Capital
Properties, Inc. and the Company
27.1 Financial Data Schedule
- ---------------------
* Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year
ended March 31, 1998.
(b) Reports on Form 8-K.
None.
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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: April 14, 1999 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, April 14, 1999
- ----------------------- Chief Executive Officer, Chief
Michael A. Armani Financial Officer and Director
(principal executive officer and
principal accounting officer)
/S/SHALA SHASHANI Secretary and Director April 14, 1999
- -----------------------
Shala Shashani
/S/CARL SHAIFER Director April 14, 1999
- -----------------------
Carl Shaifer
/S/GEORGE LEVY, M.D. Director April 14, 1999
- -----------------------
George Levy, M.D.
<PAGE>
TELENETICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants (BDO Seidman, LLP) F-2
Report of Independent Auditor (George F. Rombach) F-3
Balance Sheets as of December 31, 1998 and unaudited pro forma as of
December 31, 1998 F-4
Statements of Operations for the nine months ended
December 31, 1998 and 1997 (unaudited) and the year
ended March 31, 1998 F-6
Statements of Shareholders' Deficiency for the nine months ended
December 31, 1998 and the year ended March 31, 1998 F-7
Statements of Cash Flows for the nine months ended
December 31, 1998 and 1997 (unaudited) and the year
ended March 31, 1998 F-8
Notes to Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Telenetics Corporation
We have audited the accompanying balance sheet of Telenetics
Corporation as of December 31, 1998, and the related statements of operations,
shareholders' deficiency and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Telenetics
Corporation at December 31, 1998, and the results of its operations and its cash
flows for the nine months then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Orange County, California
March 18, 1999, except as
to Note 14, which is as of
April 15, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors
and Shareholders of
Telenetics Corporation
I have audited the accompanying statements of operations, shareholders'
deficiency and cash flows of Telenetics Corporation for the year ended March 31,
1998. 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 results of operations and cash flows of Telenetics
Corporation for the year ended March 31, 1998 in conformity with generally
accepted accounting principles.
GEORGE F. ROMBACH
Newport Beach, California
July 13, 1998
F-3
<PAGE>
TELENETICS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
DECEMBER 31, 1998
1998 (NOTE 14)
---- ---------
(UNAUDITED)
ASSETS (NOTES 4 AND 5)
<S> <C> <C>
Current assets:
Cash $ -- $ 990,000
Accounts receivable, net of allowance
for doubtful accounts of $61,629 1,189,456 1,189,456
Subscription receivable (Note 6) 300,000 300,000
Receivable from related parties 106,362 106,362
Inventories (Note 2) 2,939,088 2,939,088
-------------- --------------
Total current assets 4,534,906 5,524,906
Property, plant and equipment, net (Note 3) 88,780 88,780
Other assets 86,449 86,449
-------------- --------------
$ 4,710,135 $ 5,700,135
============== ==============
</TABLE>
F-4
<PAGE>
TELENETICS CORPORATION
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31,
DECEMBER 31, 1998
1998 (NOTE 14)
---- ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
<S> <C> <C>
Current liabilities:
Bank overdraft $ 18,010 $ 18,010
Obligations under factoring agreement (Note 4) 289,627 289,627
Current portion of related party debt (Note 5) 41,713 41,713
Accounts payable 1,960,964 1,960,964
Accrued expenses 295,952 295,952
Advance payments from customers 1,407,440 1,407,440
-------------- --------------
Total current liabilities 4,013,706 4,013,706
Related party debt, less current portion (Note 5) 250,000 250,000
Subordinated unsecured promissory notes (Note 6) 954,685 954,685
-------------- --------------
Total liabilities 5,218,391 5,218,391
-------------- --------------
Commitments and contingencies (Note 11)
Subsequent events (Notes 4, 11 and 14)
Shareholders' equity (deficiency) (Notes 5, 6, 7 and 8):
Preferred stock, no par value. Authorized 5,000,000
shares; no shares issued or outstanding (628,571
shares of Series A Convertible Redeemable Preferred Stock
issued and outstanding pro forma) -- 990,000
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 9,527,165 shares 11,102,382 11,102,382
Accumulated deficit (11,610,638) (11,610,638)
-------------- --------------
Total shareholders' equity (deficiency) (508,256) 481,744
-------------- --------------
$ 4,710,135 $ 5,700,135
============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
TELENETICS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Net sales (Note 12) $ 3,559,539 $ 1,940,394 $ 2,897,484
Cost of sales 2,239,688 1,179,892 1,619,845
-------------- -------------- --------------
Gross profit 1,319,851 760,502 1,277,639
Selling, general and administrative 1,025,753 582,473 916,420
Engineering and product development 300,952 151,239 199,863
-------------- -------------- --------------
Income (loss) from operations (6,854) 26,790 161,356
Interest expense (242,299) (48,767) (165,631)
Benefit from the relief of indebtedness -- 70,611 96,240
Other income 647 621 2,489
-------------- -------------- --------------
Income (loss) before income taxes (248,506) 49,255 94,454
Income taxes (Note 9) 800 800 800
-------------- -------------- --------------
Net income (loss) $ (249,306) $ 48,455 $ 93,654
============== ============== ==============
Basic and diluted earnings (loss)
per share (Note 10) $ (.03) $ .01 $ .01
============== ============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-6
<PAGE>
TELENETICS CORPORATION
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
Balance at March 31, 1997 6,845,165 $ 10,116,145 $ (11,454,986) $ (1,338,841)
Stock issued in settlement with
related party (Note 5) 1,000,000 288,382 -- 288,382
Stock issued upon debt conversion
(Note 7) 284,000 167,525 -- 167,525
Stock issued for employee bonuses 127,000 6,350 -- 6,350
Net income -- -- 93,654 93,654
-------------- -------------- -------------- --------------
Balance at March 31, 1998 8,256,165 10,578,402 (11,361,332) (782,930)
Stock issued upon exercise of
options (Note 8) 600,000 30,000 -- 30,000
Stock issued upon exercise of
warrants (Notes 5 and 6) 370,000 220,000 -- 220,000
Stock issued upon debt
conversion (Note 7) 80,000 100,000 -- 100,000
Stock issued for debt offering
costs (Note 6) 120,635 38,000 -- 38,000
Stock issued for cash 79,365 25,000 -- 25,000
Stock issued for employee
bonuses 21,000 6,615 -- 6,615
Warrants issued with
subordinated promissory
notes (Note 6) -- 104,365 -- 104,365
Net loss -- -- (249,306) (249,306)
-------------- -------------- -------------- --------------
Balance at December 31, 1998 9,527,165 $ 11,102,382 $ (11,610,638) $ (508,256)
============== ============== ============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-7
<PAGE>
TELENETICS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (249,306) $ 48,455 $ 93,654
Adjustments to reconcile net income (loss) to cash
used in operations:
Depreciation and amortization 27,922 7,191 9,782
Benefits from debt relief -- (70,611) (96,240)
Provision for inventory obsolescence 22,327 -- --
Stock issued for employee bonuses 6,615 -- 6,350
Changes in operating assets and liabilities:
Accounts receivable (656,663) 94,686 (166,294)
Inventories (2,368,740) (54,500) (19,500)
Other assets (43,472) (31) (44)
Accounts payable 1,630,572 (200,745) (380,323)
Accrued expenses 86,576 (11,228) 12,586
Advance payments from customers 1,402,549 7,891 16
-------------- -------------- --------------
Net cash used in operating activities (141,620) (178,892) (540,013)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (68,102) -- --
Amounts collected from (advanced to) related parties 22,613 (100,433) (93,152)
-------------- -------------- --------------
Net cash used in investing activities (45,489) (100,433) (93,152)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 18,010 -- --
Net increase (decrease) in obligations under
factoring agreement (391,112) 298,071 680,739
Repayments of convertible notes payable (11,317) (41,500) (49,133)
Proceeds from related party debt 34,500 307,082 307,082
Repayments of related party debt (147,372) (287,500) (312,500)
Proceeds from subordinated promissory notes 650,000 -- --
Proceeds from sale of common stock 25,000 -- --
-------------- -------------- --------------
Net cash provided by financing activities 177,709 276,153 626,188
-------------- -------------- --------------
</TABLE>
F-8
<PAGE>
TELENETICS CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH (9,400) (3,172) (6,977)
Cash, beginning of period 9,400 16,377 16,377
-------------- -------------- --------------
Cash, end of period $ -- $ 13,205 $ 9,400
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 190,334 $ 23,114 $ 114,222
============== ============== ==============
Income taxes $ 800 $ 800 $ 800
============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock upon exercise of options in
exchange for increase in receivable from related
parties $ 30,000 $ -- $ --
============== ============== ==============
Issuance of common stock upon exercise of warrants
in exchange for reduction in subordinated
promissory notes and related party debt $ 220,000 $ -- $ --
============== ============== ==============
Issuance of common stock upon conversion of debt $ 100,000 $ $ 167,525
============== ============== ==============
Issuance of common stock for debt offering costs $ 38,000 $ -- $ --
============== ============== ==============
Issuance of common stock in settlement with related
party $ -- $ 288,382 $ 288,382
============== ============== ==============
Warrants issued in connection with issuance of
subordinated promissory notes $ 104,365 $ -- $ --
============== ============== ==============
Subordinated promissory notes issued for
subscription receivable $ 300,000 $ -- $ --
============== ============== ==============
Subordinated promissory notes issued upon conversion
of note payable $ 179,050 $ -- $ --
============== ============== ==============
Equipment acquired under capital lease $ -- $ 32,956 $ 32,956
============== ============== ==============
Promissory note issued for reduction in
accounts payable $ -- $ -- $ 257,035
============== ============== ==============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
F-9
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Telenetics Corporation ("Telenetics" or the "Company") designs and
manufactures 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,
electric relays, flow measurement devices, traffic controllers and the oil
and gas industry.
FISCAL YEARS
Beginning with the period ended December 31, 1998, the Company changed its
fiscal year end from March 31 to December 31. Accordingly, the accompanying
financial statements include audited financial statements for the nine
months ended December 31, 1998 and the year ended March 31, 1998 and
unaudited financial statements for the nine months ended December 31, 1997.
REVENUE RECOGNITION
Revenue is recognized upon shipment, or receipt of the product by the
customer, pursuant to the terms of the respective contractual arrangement.
Cash received in advance of the delivery of products has been recorded as
advance payments from customers in the accompanying balance sheet.
RECEIVABLE FROM RELATED PARTIES
Receivable from related parties is comprised primarily of advances to an
executive officer and director of the Company. Such advances are
non-interest bearing and are payable upon demand.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the estimated useful lives
of the assets (or lease term, if shorter), which range up to five years.
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
F-10
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUANCE COSTS
The costs related to the issuance of the subordinated promissory notes are
capitalized and amortized over the term of the related debt.
LONG-LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods of
twelve to eighteen months. Estimated warranty costs are recognized at the
time of the sale.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Deferred income taxes are recognized based
on the differences between financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is
recognized for its employee stock option plans, unless the exercise price
of options granted is less than fair market value on the date of grant. The
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
F-11
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE AND SHARES OUTSTANDING
Earnings (loss) per share is calculated pursuant to the Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Basic earnings (loss) per share includes no dilution and is computed by
dividing income (loss) available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted earnings
(loss) per share reflects the potential dilution of securities that could
share in the earnings of the Company.
The share and per share information has been adjusted for all periods
presented to reflect the one-for-five reverse stock split which occurred on
January 8, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires all entities to disclose the
fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to
estimate fair value. This statement defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. As of December 31, 1998, the
fair value of all financial instruments approximated carrying value.
The carrying amount of accounts receivable, accounts payable and accrued
expenses are reasonable estimates of their fair value because of the short
maturity of these items. The Company believes the carrying amounts of its
related party long-term debt and subordinated promissory notes approximate
fair value because the interest rates on these instruments approximate
market interest rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and accounts
receivable. The Company places its cash with high quality financial
institutions. At times, cash balances may be in excess of the amounts
insured by the Federal Deposit Insurance Corporation.
F-12
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history and generally does not
require collateral. Credit losses are provided for in the financial
statements and consistently have been within management's expectations.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income". This statement establishes
standards for reporting the components of comprehensive income and requires
that all items that are required to be recognized under accounting
standards as components of comprehensive income be included in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income includes net income as well as certain
items that are reported directly within a separate component of
shareholders' equity and bypass net income. The Company adopted the
provisions of this statement in 1998. These disclosure requirements had no
impact on the Company's financial position or results of operations. The
Company has no elements of other comprehensive income, as defined by this
statement.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related
Information". The provisions of this statement require disclosures of
financial and descriptive information about an enterprise's operating
segments in annual and interim financial reports issued to shareholders.
The statement defines an operating segment as a component of an enterprise
that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating
decision maker in the determination of resource allocation and performance,
and for which discrete financial information is available. The Company
adopted the provisions of this statement for 1998 annual reporting. These
disclosure requirements had no impact on the Company's financial position
or results of operations, or the Company's existing disclosures.
NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS 133")
issued by the FASB is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company does not expect the adoption of SFAS 133 to
have a material effect on its financial position or results of operations.
F-13
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the December 31, 1998 presentation.
2. INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1998
--------------
Raw materials $ 1,008,377
Work-in-process 671,692
Finished goods 1,259,019
--------------
$ 2,939,088
==============
F-14
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
1998
--------------
Furniture and fixtures $ 146,885
Equipment 123,338
--------------
270,223
Accumulated depreciation and amortization (181,443)
--------------
$ 88,780
==============
4. OBLIGATIONS UNDER FACTORING AGREEMENT
In November 1997, the Company entered into a factoring agreement with a
finance company to sell certain accounts receivable due to the Company from
its customers. The finance company has a security interest in substantially
all of the Company's assets. Advances are subject to a 15% per annum
service fee and a 2.5% administrative fee on all accounts receivable
purchased by the factor during the term of the agreement. Factoring costs
which aggregated approximately $178,000 for the nine months ended December
31, 1998 and $55,000 for the year ended March 31, 1998 are included in
interest expense in the accompanying statements of operations.
In February 1999, the Company terminated the factoring agreement with the
finance company.
5. RELATED PARTY DEBT
A summary of related party debt follows:
DECEMBER 31,
1998
--------------
Payable to SMC $ 250,000
Payable to estate of Fred Curizo 41,713
--------------
291,713
Current portion (41,713)
--------------
$ 250,000
==============
F-15
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
5. RELATED PARTY DEBT (CONTINUED)
SMC AND SMC COMMUNICATIONS GROUP, INC.
Since 1992, Shala Shashani (dba SMC) and SMC Communications Group, Inc.
(which is owned and operated by Shala Shashani, a director of the Company)
(collectively, "SMC") have advanced funds to the Company to purchase common
stock and have provided various products, services and facilities for the
Company.
In September 1996, the Company and SMC 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, 1,000,000
shares of the Company's common stock were issued to SMC and its assignees
in March 1998. As of March 31, 1998, the aggregate amount owed by the
Company to SMC was $536,895.
In connection with the amended compromise agreement, the Company agreed to
enter into a technology transfer agreement with SMC whereby SMC transferred
all right, title and interest in certain products sold by the Company. In
exchange, the Company issued SMC a five-year warrant to purchase 300,000
shares of common stock at an exercise price of $.50. In October 1998, the
outstanding SMC balance was reduced by $150,000 to exercise the warrant for
300,000 shares of common stock. In addition, $125,000 of the outstanding
SMC loan balance was converted into a subordinated promissory note with an
attached warrant to purchase shares of common stock. The warrant was
exercised immediately by converting $50,000 of the subordinated promissory
note to common stock (see Note 6).
In April 1998, SMC agreed to extend the due date for all unpaid obligations
to December 31, 2000 and increased the interest rate to 10%. As of December
31, 1998, the aggregate amount of the obligations to SMC was $250,000.
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.
ESTATE OF FRANK CURZIO
During the year ended March 31, 1998, the Company and the estate of Frank
Curzio, a past director, stipulated to a judgement to settle various
disputes and legal proceedings relating to amounts owed to Mr. Curzio and
Fredco Productions, Inc. The judgement provides for the payment of the
aggregate sum of $175,000 payable in various installments through May 1999.
F-16
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
6. SUBORDINATED UNSECURED PROMISSORY NOTES
During the nine months ended December 31, 1998, the Company issued
$1,129,050 of subordinated unsecured promissory notes, including notes
aggregating $314,500 which have been issued to certain officers and
directors of the Company. The notes bear interest at 10% per annum and such
interest is payable on a quarterly basis. All principal and accrued and
unpaid interest is due at maturity on September 30, 2000. Included with the
sale of such notes were a total of 451,620 warrants to purchase the
Company's common stock, exercisable at $1 per share and expiring September
30, 2000 (see Note 8). The Company has ascribed an estimated fair value to
these warrants aggregating $104,365 and accordingly has discounted the
subordinated unsecured promissory notes balance as of the date of issuance.
Such discount is recognized as additional interest expense over the life of
the notes.
As of December 31, 1998, the Company had a subscription receivable
aggregating $300,000 relating to the issuance of the subordinated
promissory notes.
The Company issued 120,635 shares of common stock with a fair market value
of $38,000 to an individual for services provided in connection with the
offering of the subordinated promissory notes. Such debt issuance costs
have been capitalized and are included in other assets in the accompanying
balance sheet.
During the nine months ended December 31, 1998, the holders of certain
subordinated promissory notes exercised their warrants to purchase 70,000
shares of common stock by exchanging subordinated promissory notes with an
aggregate principal amount of $70,000 (see Note 8).
The subordinated promissory notes include certain non-financial covenants
and also restrict the Company's ability to declare and pay dividends and
redeem or repurchase any of its common stock. The Company was in compliance
with all covenants at December 31, 1998.
7. CONVERTIBLE NOTES PAYABLE
Between December 1995 and August 1996, the Company issued $890,000 of
convertible notes which bore interest at 7% per annum and were due and
payable six months from the date of issuance. At March 31, 1998, two notes
aggregating $156,051 were outstanding. During the nine months ended
December 31, 1998, one note for $100,000 was converted into 80,000 shares
of common stock. In addition, the remaining unpaid balance of the second
note was converted into a subordinated promissory note with an attached
warrant to purchase shares of common stock (see Note 6).
F-17
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
8. STOCK OPTIONS AND WARRANTS
In August 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan (the "Plan"), subject to shareholder approval. The Plan is
administered by a committee appointed by the Board of Directors (the
"Committee") which determines the recipients and the terms of the options
granted. The Plan provides that options granted may be either incentive
stock options or non-qualified options. Options may be granted to eligible
employees, directors and consultants to purchase shares of the Company's
common stock at a price generally not less than 100% of the fair market
value of the common stock on the date of grant for incentive stock options
and not less than 85% for non-qualified stock options. The Plan provides
for the granting of options for up to 1,000,000 shares of the Company's
common stock. Subject to termination of employment, options may expire up
to ten years from the date of grant.
The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for
these plans and arrangements for current employees whose grants provide for
exercise prices at or above the market price on the date of grant.
Compensation or other expense is recorded based on intrinsic value (excess
of market price over exercise price on date of grant) for employees, and
fair value of the option awards for others.
In September 1998, the Company granted options to purchase 560,000 shares
of common stock, pursuant to the 1998 Stock Option Plan. As the Plan
requires shareholder approval, the Company has not recorded any
compensation expense in connection with the options granted during the nine
month period ended December 31, 1998. Such compensation expense, if any,
will be computed upon shareholder approval of the Plan.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF PRICE PER AGGREGATE EXERCISE
SHARES SHARE PRICE PRICE
--------------------------------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance, March 31, 1997 and 1998 600,000 $ .05 $ 30,000 $ .05
Options granted 560,000 1.06 - 1.25 684,800 1.22
Options exercised (600,000) .05 (30,000) .05
--------------------------------------- -------------- -------------- -------------- ---------------
Balance, December 31, 1998 560,000 $ 1.06 - 1.25 $ 684,800 $ 1.22
======================================= ============== ============== ============== ===============
</TABLE>
F-18
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- --------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.06 80,000 9.66 $ 1.06 -- $ --
1.25 480,000 9.66 1.25 44,000 1.25
--------------------------------------------------------------------------------------------------------
$ 1.06 - 1.25 560,000 9.66 $ 1.22 44,000 $ 1.25
========================================================================================================
</TABLE>
If the Company had elected the fair value method of accounting for
stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair
value at date of grant for options granted during the nine months ended
December 31, 1998 has been estimated based on a modified Black-Scholes
valuation model with the following assumptions: no dividend yield; expected
volatility of 50% based on historical results; risk-free interest rate of
4.9%; and average expected lives of five years.
The weighted average fair value of the options granted during the nine
months ended December 31, 1998 was $.62 per share.
The following table sets forth the net income (loss) and earnings (loss)
per share amounts for the periods presented as if the Company had elected
the fair value method of accounting for stock options.
<TABLE>
<CAPTION>
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998
-------------- --------------
<S> <C> <C>
NET INCOME (LOSS)
As reported $ (249,306) $ 93,654
============== ==============
Pro forma $ (276,388) $ 93,654
============== ==============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
As reported $ (.03) $ .01
</TABLE>
F-19
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
============== ==============
Pro forma $ (.03) $ .01
============== ==============
</TABLE>
F-20
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
8. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
Additional incremental compensation expense includes the excess of fair
values of options granted during the period over any compensation amounts
recorded for options whose exercise prices were less than the market value
at date of grant, and for any expense recorded for non-employee grants.
All such incremental compensation is amortized over the related vesting
period, or expensed immediately if fully vested. The above calculations
include the effects of all grants in the periods presented. Because options
often vest over several years and additional awards are made each year, the
results shown above may not be representative of the effects on net income
(loss) in future years.
The Board of Directors has authorized the issuance of common stock purchase
warrants to a director during the year ended March 31, 1998 (see Note 5)
and also in connection with the issuance of the 10% subordinated unsecured
promissory notes (see Note 7).
A summary of the common stock purchase warrants activity is as follows:
<TABLE>
<CAPTION>
WARRANT PRICE
--------------------------------
NUMBER OF
SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Balance outstanding, March 31, 1997 -- $ -- $ --
Warrants issued 300,000 .50 150,000
-------------- -------------- --------------
Balance outstanding, March 31, 1998 300,000 .50 150,000
Warrants issued 451,620 1.00 451,620
Warrants exercised (370,000) .50 - 1.00 (220,000)
-------------- -------------- --------------
Balance outstanding, December 31, 1998 381,620 $ 1.00 $ 381,620
============== ============== ==============
At December 31, 1998, the total number of shares reserved for issuance upon
exercise of stock options and warrants was 1,381,620 shares.
</TABLE>
F-21
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
9. INCOME TAXES
The provision for income taxes for the nine months ended December 31, 1998
and the year ended March 31, 1998 is comprised of the minimum current state
income tax. Differences between the statutory and effective tax rates are
primarily due to valuation allowances recorded to offset deferred tax
benefits associated with net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Components of
the Company's deferred tax assets and liabilities are not material to the
accompanying financial statements, except the deferred tax asset as a
result of the Company's net operating loss carryforward. Such deferred tax
asset was approximately $900,000 at December 31, 1998, and is offset by a
valuation allowance on the total net deferred tax asset balance.
As of December 31, 1998, the Company has a federal net operating loss
carryforward of approximately $2,400,000 which expires at various dates
through 2018 and a state net operating loss carryforward of approximately
$800,000 which expires at various dates through 2003.
The utilization of the net operating loss carryforwards could be limited
due to restrictions imposed under federal and state laws upon a change in
ownership. The amount of the limitation, if any, has not been determined at
this time. A valuation allowance is provided when it is more likely than
not that some poriton or all of the deferred tax assets will not be
realized. As a result of the Company's loss during the nine months ended
December 31, 1998 and uncertainties surrounding the realization of the net
operating loss carryforwards, management has determined that the
realization of deferred tax assets is not more likely than not.
Accordingly, a valuation allowance equal to the net deferred tax asset
amount has been recorded as of December 31, 1998.
10. EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1998 1998
-------------- --------------
<S> <C> <C>
NUMERATOR:
Net income (loss) $ (249,306) $ 93,654
============== ==============
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 8,792,088 7,161,513
-------------- --------------
Basic and diluted earnings (loss) per share $ (.03) $ .01
============== ==============
</TABLE>
F-22
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
10. EARNINGS (LOSS) PER SHARE (CONTINUED)
The computation of diluted earnings (loss) per share excludes the effect of
incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive due
to losses incurred by the Company or such instruments had exercise prices
greater than the average market price of the common shares during periods
presented. See summary of outstanding stock options and warrants in Note 8.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities from SMC, an entity owned and controlled
by a director of the Company. The lease has an initial term that expires on
July 31, 1999 and an option to extend for an additional year. The annual
rental was $54,000 and was increased to $78,000 on August 1, 1998. As of
March 31, 1998, the amount of unpaid rents due under this arrangement
aggregated $141,500. As part of the compromise agreement, the Company
agreed to pay this obligation by December 31, 1999 (see Note 5).
Subsequent to December 31, 1998, the Company entered into a lease agreement
to lease a new corporate and manufacturing facility (see Note 14).
The future minimum rental payments required under operating leases,
including the new facility lease, that have initial or remaining
noncancellable lease terms in excess of one year are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------- -------------------
1999 $ 188,727
2000 200,751
2001 299,473
2002 308,457
2003 317,711
Thereafter 161,203
-------------------
$ 1,566,322
===================
Total rent expense, primarily for the related party lease, for the nine
months ended December 31, 1998 and the year ended March 31, 1998 was
$50,500 and $54,000, respectively.
F-23
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTIES UNDER STRATEGIC AGREEMENT
In July 1998, the Company entered into a ten-year Marketing and Technology
Agreement ("Strategic Agreement") with Duquesne Light Company ("Duquesne").
The Strategic Agreement has the following objectives: (i) to jointly pursue
the deployment of new technology developed by the Company; (ii) to validate
the Company's new technology developments; and (iii) to take mutual
advantage of the resulting technology advancements through joint efforts to
market the Company's products.
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 similar uses and Duquesne, along
with the Company, will promote these products to other utility companies
throughout the United States and abroad.
Pursuant to the Strategic Agreement, the Company is obligated to pay
certain royalties to Duquesne in connection with sales generated through
Duquesne's effort. No royalties were earned through December 31, 1998.
LITIGATION
The Company is subject to certain legal proceedings and claims arising in
connection with its business. In the opinion of management, the ultimate
resolution of these claims will not have a material adverse affect on the
Company's financial position, results of operations or cash flows.
12. MAJOR CUSTOMER AND SUPPLIER INFORMATION
The Company had sales to two customers which accounted for approximately
32% and 17%, respectively, of net sales for the nine months ended December
31, 1998. The accounts receivable balance from these customers aggregated
approximately 44% of total accounts receivable at December 31, 1998. In
addition, two suppliers accounted for approximately 37% and 10%,
respectively, of purchases for the nine months ended December 31, 1998.
The Company had sales to three customers which accounted for approximately
22%, 19% and 15%, respectively, of net sales for the year ended March 31,
1998. The accounts receivable balance from these customers aggregated
approximately 37% of total accounts receivable at March 31, 1998. In
addition, four suppliers accounted for approximately 23%, 12%, 11% and 10%
respectively, of purchases for the year ended March 31, 1998.
F-24
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
13. FINAL QUARTER ADJUSTMENTS
The Company previously recognized certain amounts as revenues during the
quarters ended June 30, 1998 and September 30, 1998 for which the earnings
process was not complete. These recorded revenues were the result of
certain advance billings, billings for customer deposits and billings for
shipments made after the end of the respective quarter. The Company has
since determined the recognition of revenue in these instances was not
appropriate. The amounts should not have been recognized as revenue until a
sale had occurred and title to the products had passed to the customer.
The net amounts inappropriately included in revenue and the aggregate
effect of such amounts if they had been properly recognized are as follows:
<TABLE>
<CAPTION>
AGGREGATE EFFECT ON
--------------------------------
REVENUE EARNINGS
QUARTER ENDED RECOGNIZED NET INCOME PER SHARE
---------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
June 30 $ 535,000 $ (501,000) $ (.06)
September 30 513,000 (306,000) (.03)
December 31 (856,000) 615,000 .07
--------------
$ 192,000
==============
</TABLE>
The Company considers these amounts to be material and therefore intends to
restate its financial statements for the quarterly periods ended June 30,
1998 and September 30, 1998 on Form 10-QSB/A for each period.
14. SUBSEQUENT EVENTS
REVOLVING LINE OF CREDIT
On April 2, 1999, the Company entered into a revolving line of credit
agreement for borrowings of up to $3,000,000, which is collateralized by
substantially all assets of the Company. Borrowings under this revolving
line of credit are based on 80% of eligible accounts receivable. Interest
is payable monthly at the greater of the bank's prime rate plus 3% or
10.75%, with principal and accrued interest due October 2, 2000.
F-25
<PAGE>
TELENETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1998
14. SUBSEQUENT EVENTS (CONTINUED)
ASSET PURCHASE AGREEMENT
On April 5, 1999, the Company entered into an agreement with Greenland
Corporation to purchase its AirLink(TM) wireless technology and related
intellectual property rights, as well as assume certain contracts in
exchange for 128,571 shares of the Company's Series B Convertible Preferred
Stock. The Series B Convertible Preferred Stock has a liquidation
preference of $7.00 per share, aggregating $900,000, which is subordinated
to the liquidation preference of the Company's Series A Convertible
Redeemable Preferred Stock. In addition, each share of the Series B
Convertible Preferred Stock is initially convertible into one share of
common stock, subject to certain adjustments.
LEASE
On April 12, 1999, the Company entered into an agreement with an unrelated
party to lease a new corporate and manufacturing facility. The lease has an
initial term of five years and one five-year option to extend. The initial
monthly base rent is $23,871 and the lease includes an annual 3% rent
escalation provision. The lease also provides for certain options for the
Company to purchase the building.
PRIVATE EQUITY OFFERING
On April 9 and 15, 1999, the Company sold an aggregate of 628,571 shares of
Series A 7% Convertible Redeemable Preferred Stock ("Series A Preferred
Stock") at $1.75 per share and five year warrants to purchase up to 628,571
shares of common stock at an exercise price of $1.875 per share, subject to
certain adjustments, in a private equity offering. The cash proceeds of
this offering, net of commissions, were $990,000.
The Series A Preferred Stock has a liquidation preference of $1.75 per
share, aggregating $1,100,000. In addition, each share of the Series A
Preferred Stock is initially convertible into one share of common stock,
subject to certain adjustments. The holders of Series A Preferred Stock are
entitled to receive cumulative dividends at the rate of $0.1225 per share
per year, payable quarterly, which dividends are subject to certain
increases.
The unaudited pro forma December 31, 1998 balance sheet information has
been presented to reflect the Company's financial position, assuming that
the aforementioned private equity offering had occurred on December 31,
1998.
F-26
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated and Amended Articles of Incorporation of the Company
3.2 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series A 7.0% Convertible
Redeemable Preferred Stock of the Company
3.3 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of Series B Convertible Preferred
Stock of the Company
3.4 Restated and Amended By-Laws of the Company
10.12 Loan and Security Agreement dated as of April 2, 1999 between
Celtic Capital Corporation and the Company
10.13 Asset Purchase Agreement dated April 5, 1999 between
Greenland Corporation and the Company
10.14 Commercial Lease dated April 12, 1999 between Mark IV Capital
Properties, Inc. and the Company
27.1 Financial Data Schedule
<PAGE>
RESTATED AND AMENDED 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 Restated Articles of Incorporation of the corporation shall be
restated and amended 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 thirty million (30,000,000) shares of capital stock, of
which twenty-five million (25,000,000) shares shall be designated Common Stock,
without par value, and five million (5,000,000) shares shall be designated
Preferred Stock, without par value. Shares of Preferred Stock may be issued from
time to time in one or more classes or series as the Board of Directors, by
resolution or resolutions, may from time to time determine. The voting powers,
preferences, privileges and relative, participating, optional, and other special
rights, and the qualifications, limitations or restrictions, if any, of each
such class or series may differ from those of any and all other classes or
series of Preferred Stock at any time outstanding, and the Board of Directors is
hereby expressly granted authority to fix or alter, before issuance, by
resolution or resolutions, the designation, number, voting powers, preferences,
privileges and relative, participating, optional and other special rights, and
the qualifications, limitations and restrictions of, each such class or series.
Upon the restatement and amendment of this article to read as herein set forth,
every five (5) shares of Common Stock outstanding shall be converted into and
thereafter deemed for all purposes to be one (1) fully paid and nonassessable
share of Common Stock; PROVIDED, HOWEVER, that any fractional shares resulting
from such reverse stock split and conversion shall be rounded up to the nearest
whole share.
FOURTH: The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
FIFTH: This corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
Bylaw provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits set forth in Section 204 of the California Corporations Code with respect
to actions for breach of duty to the corporation and its shareholders.
<PAGE>
3. The foregoing restated and amended articles of incorporation have
been approved by the Board of Directors of the corporation.
4. The foregoing restated and amended articles of incorporation were
approved by the required vote of the shareholders of the corporation in
accordance with Section 902 of the California Corporations Code. The total
number of outstanding shares entitled to vote with respect to the foregoing
restated and amended articles of incorporation was 44,355,826 shares of Common
Stock. The number of outstanding shares voting in favor of the foregoing
restated and amended articles of incorporation was 27,229,656 (approximately
61%), which equaled or exceed the vote required. The percentage vote required to
approve the foregoing restated and amended articles of incorporation was more
than fifty percent (50%).
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: January 4, 1999 /S/ MICHAEL A. ARMANI
---------------------------------------
Michael A. Armani, President
/S/ SHALA SHASHANI
---------------------------------------
Shala Shashani, Secretary
<PAGE>
CERTIFICATE OF DETERMINATION
OF RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS
OF
SERIES A 7.0% CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF TELENETICS CORPORATION
Michael Armani and Shala Shashani certify that:
A. They are President and Secretary, respectively, of Telenetics
Corporation, a California corporation ("Corporation").
B. Pursuant to authority given by the Corporation's Restated and Amended
Articles of Incorporation (the "Articles"), the Board of Directors of the
Corporation has duly adopted the following preambles and resolutions:
WHEREAS, the Board of Directors of the Corporation has fixed and
determined the designation of, the number of shares constituting and
the rights, preferences, privileges and restrictions relating to a
series of Preferred Stock designated as Series A 7.5% Convertible
Redeemable Preferred Stock, and the President and Secretary of the
Corporation filed on March 16, 1999 with the Secretary of State of the
State of California a Certificate of Determination of Rights,
Preferences, Privileges and Restrictions of Series A 7.5% Convertible
Redeemable Preferred Stock of the Corporation (the "Original
Certificate of Determination"); and
WHEREAS, the Corporation has not issued any shares of such Series A
7.5% Convertible Redeemable Preferred Stock; and
WHEREAS, the Board of Directors of the Corporation desires, pursuant to
the authority given by California Corporations Code section 401(c) and
Article THIRD of the Articles, to decrease the number of shares
constituting the Series A 7.5% Convertible Redeemable Preferred Stock
to zero, with the result that the Series A 7.5% Convertible Redeemable
Preferred Stock will no longer be an authorized series of the
Corporation; and
WHEREAS, the Articles provide for a class of shares known as
undesignated Preferred Stock, issuable from time to time in one or more
series; and
WHEREAS, the Board of Directors of the Corporation is authorized to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of undesignated
Preferred Stock, to fix the number of shares constituting any such
series and to determine the designation thereof, or any of them; and
<PAGE>
WHEREAS, the Board of Directors of the Corporation desires, pursuant to
the authority described above, to determine and fix the rights,
preferences, privileges and restrictions relating to a series of
undesignated Preferred Stock and the number of shares constituting and
the designation of that series.
NOW, THEREFORE, BE IT RESOLVED, that the number of shares constituting
the Series A 7.5% Convertible Redeemable Preferred Stock is decreased
to zero and that Section 2 of the Original Certificate of Determination
is hereby amended to read in its entirety as follows:
2. NUMBER AND RANK. The number of shares constituting the Series A
Convertible Preferred Stock shall be zero.
RESOLVED FURTHER, that the Board of Directors hereby fixes and
determines the designation of, the number of shares constituting and
the rights, preferences, privileges and restrictions relating to, a
series of Preferred Stock as set forth below:
1. DESIGNATION. There is hereby created a series of Preferred Stock
designated as "Series A 7.0% Convertible Redeemable Preferred Stock" ("Series A
Convertible Preferred Stock") with the rights, preferences, privileges and
restrictions set forth below.
2. NUMBER AND RANK. The number of shares constituting the Series A
Convertible Preferred Stock shall be 1,500,000. All shares of the Series A
Convertible Preferred Stock shall rank on a parity with each other and shall be
preferred to the common stock, no par value ("Common Stock"), of the
Corporation, and to the Series B Convertible Preferred Stock of the Corporation,
and, except as expressly provided in Section 5(c)(iii) below, any other series
or class of stock of the Corporation, as to the payment of dividends and the
distribution of assets upon the liquidation, dissolution or winding up of the
Corporation. The Corporation shall have the right to create other classes of
Preferred Stock which shall rank below the Series A Convertible Preferred Stock
without the consent of the holders of the Series A Convertible Preferred Stock.
3. DIVIDENDS.
(a) Subject to provisions contained in paragraphs (b) and (c) of
this Section 3, dividend rates on the shares of Series A Convertible Preferred
Stock shall be at a rate of $0.1225 per share per annum (i) for the period (the
"Initial Dividend Period") pro rated on a daily basis from the Original Issue
Date (as hereinafter defined) to and including June 30, 1999, and (ii) for each
quarterly dividend period (the "Quarterly Dividend Period"), which Quarterly
Dividend Periods shall commence on April 1, July 1, October 1 and January 1, in
each year and shall end on and include the day immediately preceding the first
day of the next Quarterly Dividend Period. Such dividends shall be cumulative
(but not compounded) and accrue quarterly from the date of original issue of
such shares
2
<PAGE>
and shall be payable, if, when, and as declared by the Board of Directors out of
funds legally available therefor, on July 1, 1999 (in respect of the Initial
Dividend Period), on April 1 (in respect of the Quarterly Dividend Period
beginning the preceding January 1), on July 1 (in respect of the Quarterly
Dividend Period beginning the preceding April 1), on October 1 (in respect of
the Quarterly Dividend Period beginning the preceding July 1) and on January 1
(in respect of the Quarterly Dividend Period beginning the preceding October 1)
of each year thereafter. Each such dividend shall be paid to the holders of
record of the Series A Convertible Preferred Stock as they shall appear on the
stock register of the Corporation on such record date, not exceeding thirty (30)
days nor less than ten (10) days preceding the payment date thereof, as shall be
fixed by the Board of Directors of the Corporation or a duly authorized
committee thereof. If declared, dividends shall be payable in cash. If the
Corporation cannot, as determined by the Board of Directors in its sole
discretion, pay any declared dividends in cash on any dividend payment date, the
Corporation shall pay such dividends in shares of Series A Convertible Preferred
Stock valued at eighty percent (80%) of the lesser of: (a) $1.75 and (b) the
Market Price (as hereinafter defined) of the Common Stock on the relevant
dividend record date multiplied by the quotient of (1) $1.75 divided by (2) the
Conversion Price (as hereinafter defined). For purposes of this paragraph (a) of
Section 3, the term "Market Price" shall mean the average closing bid price on
the Market (as hereinafter defined) for the ten (10) consecutive trading days
immediately prior to the date in question. For purposes hereof, the term
"Market" shall mean the National Association of Securities Dealers Automated
Quotation System, the Nasdaq OTC Bulletin Board, the New York Stock Exchange,
the American Stock Exchange or wherever the Common Stock then trades.
(b) Commencing with the Quarterly Dividend Period beginning on July
1, 2002, the dividend rate on the shares of Series A Convertible Preferred Stock
shall be increased by $0.06125 per share for such Quarterly Dividend Period and
for each subsequent Quarterly Dividend Period up to maximum dividend rate on the
shares of Series A Convertible Preferred Stock of $0.3675 per share per annum.
(c) In the event that: (i) the Corporation does not report diluted
earnings per share of its Common Stock of at least $0.20 for fiscal 1999 as set
forth in its statement of operations for the fiscal year ended December 31,
1999, which statement will be included in the Corporation's Form 10-KSB for the
fiscal year ended December 31, 1999; and (ii) the average bid price for the
Corporation's Common Stock for the month of April 2000 is below $1.75 per share,
then commencing with the Quarterly Dividend Period beginning April 1, 2000, the
dividend rate per share per annum on the shares of Series A Convertible
Preferred Stock shall increase by $0.06125 per Quarterly Dividend Period (e.g.,
the dividend rate commencing April 1, 2000 will be $0.18375 per share per annum
and the dividend rate commencing July 1, 2000 will be $0.2450 per share per
annum). In addition, if the Company does not file its Form 10-KSB for the fiscal
year ended December 31, 1999 by March 31, 2000, then commencing with the
Quarterly Dividend Period beginning April 1, 2000, the dividend rate per share
per annum on the shares of Series A Convertible Preferred Stock shall increase
by $0.06125 per Quarterly Dividend Period (e.g., the dividend rate commencing
April 1, 2000 will be $0.18375 per share per annum and the dividend rate
commencing July 1, 2000 will be $0.2450 per share per annum). In no event,
however, shall the dividend rate on the Series A Convertible Preferred Stock be
increased pursuant to this Section 3(c) to an amount in excess of $0.3675 per
share per annum.
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(d) No dividends shall be payable on any shares of any class of the
Corporation's capital stock ranking junior to the Series A Convertible Preferred
Stock as to the payment of dividends unless all accrued dividends on the Series
A Convertible Preferred Stock to the record date of the proposed dividends on
the junior class shall have been paid or have been declared and a sum sufficient
for the payment of those dividends reserved.
(e) Upon any conversion of any shares of Series A Convertible
Preferred Stock as described in Section 6, the holders thereof shall be entitled
to receive in cash, any accumulated, accrued or unpaid dividends in respect of
such shares of the Series A Convertible Preferred Stock through and including
the Conversion Date (as hereinafter defined).
4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation,
the holders of shares of the Series A Convertible Preferred Stock shall be
entitled to receive, out of the assets of the Corporation, whether such assets
are capital or surplus and whether or not any dividends as such are declared,
$1.75 per share plus an amount equal to all accrued and unpaid dividends thereon
to the date fixed for distribution, and no more, before any distribution shall
be made to the holders of the Common Stock or any other class of shares or
series thereof ranking junior to the Series A Convertible Preferred Stock with
respect to the distribution of assets.
(b) For purposes of this Section 4, a merger or consolidation of the
Corporation with or into any other corporation or corporations, or the merger of
any other corporation or corporations with or into the Corporation, or the sale
of all or substantially all of the assets of the Corporation, or any other
corporate reorganization, in which consolidation, merger, sale of assets or
reorganization the shareholders of the Corporation receive distributions in cash
or securities of another corporation or corporations as a result of such
consolidation, merger, sale of assets or reorganization, shall be treated as a
liquidation, dissolution or winding up of the Corporation, unless the
shareholders of this Corporation hold more than fifty percent (50%) of the
voting equity securities of the successor or surviving corporation immediately
following such consolidation, merger, sale of assets or reorganization in which
case such consolidation, merger, sale of assets or reorganization shall not be
treated as a liquidation, dissolution, or winding up within the meaning of this
Section 4.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, stating a payment
date and the place where the distributive amounts shall be payable, shall be
given by mail, postage prepaid, not less than thirty (30) days prior to the
payment date stated therein, to the holders of record of the Series A
Convertible Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation.
(d) No payment on account of such liquidation, dissolution or
winding up of the affairs of the Corporation shall be made to the holders of any
class or series of stock ranking on a parity with the Series A Convertible
Preferred Stock in respect of the distribution of assets, unless there shall
likewise be paid at the same time to the holders of the Series A Convertible
Preferred
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Stock like proportionate distributive amounts, ratably, in proportion to the
fully distributive amounts to which they and the holders of such parity stock
are respectively entitled with respect to such preferential distribution.
5. VOTING RIGHTS.
(a) In addition to all voting rights provided by applicable law, the
holders of Series A Convertible Preferred Stock shall have the voting rights set
forth in this Section 5.
(b) The holders of Series A Convertible Preferred Stock and the
holders of Common Stock shall be entitled to notice of any shareholders' meeting
and to vote as a single class upon any matter submitted to the shareholders for
a vote, as follows: (i) each holder of Series A Convertible Preferred Stock
shall have one vote for each full share of Common Stock into which its
respective shares of Series A Convertible Preferred Stock would be convertible
on the record date for the vote, and (ii) the holders of Common Stock have one
vote per share of Common Stock.
(c) The affirmative vote or consent of the holders of a majority of
the shares of the Series A Convertible Preferred Stock at the time outstanding,
given in person or by proxy, either in writing without a meeting or by vote at
any meeting called for the purpose, shall be necessary for effecting or
validating:
(i) Any amendment, alteration or repeal of any of the provisions
of this Certificate of Determination, of the Restated and Amended Articles of
Incorporation, or of the Restated and Amended By-Laws of the Corporation, which
affects adversely the voting powers, preferences and relative, participating,
optional and other special rights of the holders of shares of the Series A
Convertible Preferred Stock;
(ii) Any authorization, creation or issuance of, or increase in
the authorized amount of, any stock that ranks senior to the Series A
Convertible Preferred Stock; or
(iii) The creation of any class of equity securities which ranks
equal to or senior to the Series A Convertible Preferred Stock.
(d) The holders of Series A Convertible Preferred Stock shall be
entitled to receive all communications sent by the Corporation to the holders of
Common Stock.
6. CONVERSION.
6.1 VOLUNTARY CONVERSION. Each share of Series A Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share and prior to the Automatic
Conversion Date (as defined below) or the date fixed for redemption, if any, at
the office of the Corporation or if the Corporation shall have appointed a
transfer agent for the Series A Convertible Preferred Stock, at the office of
such transfer agent, into such number of fully paid and nonassessable shares of
Common Stock at the Conversion Price in effect at the time of conversion
determined as provided herein. With respect to voluntary conversions, shares of
the Series A Convertible Preferred Stock shall be deemed to have been converted
as of the
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date (the "Conversion Date") of receipt by the Corporation of the surrendered
shares of Series A Convertible Preferred Stock for conversion, and the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
on such date.
6.2 AUTOMATIC CONVERSION. Each share of Series A Convertible
Preferred Stock shall automatically be convertible into fully paid and
nonassessable shares of Common Stock, immediately upon the happening of the
following events: (a) the shares of Common Stock issued or issuable upon
conversion of the Series A Convertible Preferred Stock have been registered
pursuant to the Securities Act of 1933, as amended, and such registration is
then currently effective; and (b) either (1) the average of the closing bid
price of the Common Stock on the Market is at least 175% of the Conversion Price
for twenty (20) trading days within a thirty (30) consecutive trading day
period, or (2) the Company has completed an underwritten public offering of its
Common Stock in which the aggregate gross proceeds exceeds $7.5 million and the
offering price exceeds $4.75 per share of Common Stock (appropriately adjusted
for subdivisions and combinations of shares of Common Stock). Upon the automatic
conversion of the Series A Convertible Preferred Stock into shares of Common
Stock, the Company shall pay to all registered holders of Series A Convertible
Preferred Stock all accrued and unpaid dividends through and including the date
of such automatic conversion (the "Automatic Conversion Date"), and the person
or persons entitled to receive the Common Stock issuable upon such automatic
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock on the date following the Automatic Conversion Date.
6.3 CONVERSION PRICE. The Series A Convertible Preferred Stock shall
be convertible into the number of shares of Common Stock that results from
dividing the Conversion Price per share in effect at the time of conversion into
$1.75 for each share of Series A Convertible Preferred Stock being converted.
The Conversion Price per share for the Series A Preferred Stock shall initially
be $1.75. The initial Conversion Price for the Series A Convertible Preferred
Stock shall be subject to adjustment from time to time as provided herein.
6.4 MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon any conversion of Series A Convertible Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction. Before any holder of
Series A Convertible Preferred Stock shall be entitled to convert the same into
full shares of Common Stock and to receive certificates therefor, the holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or if the Corporation shall have appointed a transfer
agent for the Series A Convertible Preferred Stock, at the office of such
transfer agent, and shall give written notice to the Corporation at either such
office that the holder elects to convert the same; PROVIDED, HOWEVER, that in
the event of any automatic conversion pursuant to Section 6.2, the outstanding
shares of Series A Convertible Preferred Stock shall be converted automatically
without any further action by the holders of such shares, whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent, if any; and PROVIDED, FURTHER, that the Corporation shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such automatic conversion unless the certificates evidencing such shares of
Series A Convertible Preferred Stock are either delivered to the Corporation or
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its transfer agent, if any, as provided above, or the holder notifies the
Corporation or its transfer agent, if any, that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. The Corporation shall, as soon as practicable
(but in no event more than five (5) business days) after such delivery, or such
agreement and indemnification in the case of a lost certificate, issue and
deliver to such holder of Series A Convertible Preferred Stock at the address of
such holder as shown on the books of the Corporation, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock.
6.5 ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR CONSOLIDATIONS OF
COMMON STOCK. If at any time or from time to time after the date on which the
first share of the Series A Convertible Preferred Stock was originally issued
("Original Issue Date") the outstanding shares of Common Stock are subdivided
(by stock split, stock dividend or otherwise), into a greater number of shares
of Common Stock, the Conversion Price then in effect immediately prior to such
subdivision, shall be proportionately decreased. Conversely, if the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
then in effect immediately prior to such combination or consolidation, shall be
proportionately increased. Any adjustment under this Section 6.5 shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
6.6 ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time, or from time to time after the Original Issue Date for
the Series A Convertible Preferred Stock shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock,
then and in each such event the Conversion Price for the Series A Convertible
Preferred Stock then in effect shall be decreased as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date, by multiplying the Conversion Price for
the Series A Convertible Preferred Stock then in effect by a fraction:
(a) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(b) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
PROVIDED, HOWEVER, that if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully
made on the date fixed therefor, the Conversion Price for the Series A
Convertible Preferred Stock shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion
Price for the Series A Convertible Preferred Stock shall be adjusted
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pursuant to this Section 6.6 as of the time of actual payment of such
dividends or distributions.
6.7 ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time after the Original Issue Date for
the Series A Convertible Preferred Stock makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
(excluding any repurchases of securities by the Corporation not made on a pro
rata basis from all holders of any class of the Corporation's securities)
payable in property or in securities of the Corporation other than shares of
Common Stock, and other than as otherwise adjusted in this Section 6, then and
in each such event the holders of Series A Convertible Preferred Stock shall
receive at the time of such distribution, the amount of property or the number
of securities of the Corporation that they would have received had their Series
A Convertible Preferred Stock been converted into Common Stock on the date of
such event.
6.8 ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
Except as provided in Section 4, upon any liquidation, dissolution or winding up
of the Corporation, if the Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock is changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the number of shares of Common Stock
into which each share of Series A Convertible Preferred Stock may be converted
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series A Convertible
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series A Convertible Preferred Stock immediately
before the change.
6.9 REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
any capital reorganization or reclassification of the capital stock of the
Corporation, or any consolidation or merger of the Corporation with or into
another corporation or other entity, or the sale of all or substantially all of
the Corporation's assets to another corporation or other entity shall be
effected in such a way that holders of shares of Common Stock shall be entitled
to receive stock, securities, other evidence of equity ownership or assets with
respect to or in exchange for shares of Common Stock, then, as a condition of
such reorganization, reclassification, consolidation, merger or sale (except as
otherwise provided below in this Section 6.9), lawful and adequate provisions
shall be made whereby the holders of Series A Convertible Preferred Stock shall
thereafter have the right to receive upon the conversion of Series A Convertible
Preferred Stock and upon the basis and upon the terms and conditions specified
herein, such shares of stock, securities, other evidence of equity ownership or
assets as may be issued or payable with respect to or in exchange for a number
of outstanding shares of Common Stock equal to the number of shares of Common
Stock immediately theretofore purchasable and receivable upon the conversion of
Series A Convertible Preferred Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provisions shall be made with respect to the rights and interests of the holders
to the end that the provisions hereof (including, without limitation, provisions
for adjustments of the Conversion Price and of the number of shares of Common
Stock receivable upon the conversion of
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Series A Convertible Preferred Stock) shall thereafter be applicable, as nearly
as may be, in relation to any shares of stock, securities, other evidence of
equity ownership or assets thereafter deliverable upon the conversion of Series
A Convertible Preferred Stock (including an immediate adjustment, by reason of
such consolidation or merger, of the Conversion Price to the value for the
Common Stock reflected by terms of such consolidation or merger if the value so
reflected is less than the Conversion Price in effect immediately prior to such
consolidation or merger). Subject to the terms of the Series A Convertible
Preferred Stock, in the event of a merger or consolidation of the Corporation
with or into another corporation or other entity as a result of which the number
of shares of Common Stock of the surviving corporation or other entity issuable
to holders of Common Stock of the Corporation, is greater or lesser than the
number of shares of Common Stock of the Corporation outstanding immediately
prior to such merger or consolidation, then the Conversion Price in effect
immediately prior to such merger or consolidation shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of Common Stock of the Corporation. The Corporation shall not effect any
such consolidation, merger or sale, unless prior to the consummation thereof,
the successor corporation (if other than the Corporation) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed or delivered to the holders, the
obligation to deliver to such holders such shares of stock, securities, other
evidence of equity ownership or assets as, in accordance with the foregoing
provisions, such holders may be entitled to receive or otherwise acquire. If a
purchase tender or exchange offer is made to and accepted by the holders of more
than fifty (50%) percent of the outstanding shares of Common Stock of the
Corporation, the Corporation shall not effect any consolidation, merger or sale
with the person having made such offer or with any affiliate of such person,
unless prior to the consummation of such consolidation, merger or sale the
holders of Series A Convertible Preferred Stock shall have been given a
reasonable opportunity to then elect to receive upon the conversion of Series A
Convertible Preferred Stock, the amount of stock, securities, other evidence of
equity ownership or assets then issuable with respect to the number of shares of
Common Stock of the Corporation in accordance with such offer. Notwithstanding
the preceding, in the event of a merger or consolidation of the Corporation with
or into any other corporation or corporations or the sale of all or
substantially all of the assets of the Corporation in which the shareholders of
the Corporation hold less than fifty percent (50%) of the voting equity
securities of the successor or surviving corporation immediately following such
consolidation, merger or sale of assets, the holders of Series A Convertible
Preferred Stock shall have a right to convert their shares of Series A
Convertible Preferred Stock into shares of Common Stock immediately prior to
such transaction at a conversion price equal to the lesser of (a) the Conversion
Price or (b) the price per share of Common Stock paid in such transaction.
6.10 ADJUSTMENTS RELATING TO REGISTRATION RIGHTS OBLIGATIONS. If the
Corporation fails to file a registration statement (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") in
accordance with its registration rights obligations contained in the Preferred
Stock Purchase Agreement between the Corporation and the holders of the Series A
Convertible Preferred Stock by July 31, 1999, the Conversion Price shall be
reduced (and concomitantly the number of shares of Common Stock issuable upon
the conversion of the Series A Convertible Preferred Stock shall increase) by
the percentage resulting from multiplying six (6%) percent by the number of
thirty (30) day periods, or any part thereof, beyond July 31, 1999, until the
initial registration statement described herein covering the shares of Common
Stock issuable upon conversion of the Series A Convertible Preferred Stock is
filed with the Commission and/or (ii) if the
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Registration Statement is not declared effective by December 31, 1999, the
Conversion Price shall be reduced (and concomitantly the number of shares of
Common Stock issuable upon the conversion of the Series A Convertible Preferred
Stock shall increase) by the percentage resulting from multiplying six (6%)
percent by the number of thirty (30) day periods, or any part thereof, beyond
December 31, 1999, until the Registration Statement is declared effective by the
Commission. The maximum reduction pursuant to this Section 6.10 shall be
thirty-six (36%) percent.
6.11 ANTI-DILUTION ADJUSTMENTS. If the Corporation, through either a
private placement or a public offering (but other than pursuant to options
granted pursuant to the Corporation's directors' and employee stock option and
stock purchase plans or shares or options issued in an acquisition or shares
issuable pursuant to the exercise of warrants outstanding on February 16, 1999
or shares issuable pursuant to the exercise of warrants issued to any placement
agent or its designees in connection with the offering of the Series A
Convertible Preferred Stock or any purchase of shares of Series A Convertible
Preferred Stock or the issuance by the Corporation (other than in the
transactions described in this parenthetical) of up to 500,000 shares of Common
Stock in the aggregate) issues shares of Common Stock, or options to purchase
Common Stock or rights to subscribe for Common Stock or securities convertible
into or exchangeable for Common Stock at a price less than the Conversion Price
(the "Lower Price"), the Conversion Price shall automatically be reduced to the
Lower Price. No adjustment will be made if the Corporation pays a dividend in
cash to the holders of Common Stock. The Corporation will give the holders of
Series A Convertible Preferred Stock written notice at least thirty (30) days
prior to the record date for the cash dividend that the Corporation intends to
declare a cash dividend.
6.12 NO IMPAIRMENT. Except as provided in Section 7, the Corporation
will not, by amendment of its Restated and Amended Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 6 and in the
taking of all such action as may be necessary or appropriate in order to protect
the conversion rights of the holders of the Series A Convertible Preferred Stock
against impairment.
6.13 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock which each
share of Series A Convertible Preferred Stock may be converted into pursuant to
this Section 6, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series A Convertible Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.
6.14 NOTICES OF RECORD DATE. If the Corporation proposes at any time
to:
(a) declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
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(b) offer for subscription pro rata to the holders of any class
or series of its capital stock any additional shares of capital stock of any
class or series or other rights;
(c) effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
(d) merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up;
then, in connection with each such event, this Corporation shall send to the
holders of the Series A Convertible Preferred Stock:
(1) at least twenty (20) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights (and specifying the date on which the holders of Common
Stock shall be entitled thereto) or for determining rights to vote in respect of
the matters referred to in (a) and (b) above; and
(2) in the case of the matters referred to in (c) and (d)
above, at least twenty (20) days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by first class
mail, postage prepaid, addressed to the holders of the Series A Convertible
Preferred Stock at the address for each such holder as shown on the books of
this Corporation.
6.15 AMENDMENT TO THE RESTATED AND AMENDED ARTICLES OF
INCORPORATION. In the case of any amendment to the Restated and Amended Articles
of Incorporation of the Corporation to change the designation of the Common
Stock or the rights, preferences, privileges and restrictions in respect to the
Common Stock or division of the Common Stock, the Series A Convertible Preferred
Stock shall be adjusted so as to provide that upon conversion thereof the holder
shall receive, in lieu of shares of Common Stock theretofore issuable upon such
conversion, the kind and amount of shares, other securities, money and property
receivable upon such designation, change or division by such holder issuable
upon such conversion had the conversion occurred immediately prior to such
designation, change or division. The Series A Convertible Preferred Stock shall
be deemed thereafter to provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
6.15. The provisions of this Section 6.15 shall apply in the same manner to
successive reclassifications, changes, consolidations and mergers.
7. STATUS OF CONVERTED STOCK. If any shares of Series A Convertible
Preferred Stock are repurchased or converted pursuant to Section 6, the shares
so repurchased or converted shall not be reissued, shall be retired and shall
thereafter have the status of authorized and unissued shares of
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Preferred Stock which may be reissued by the Corporation at any time as shares
of any series of Preferred Stock, including shares of Series A Convertible
Preferred Stock.
8. REDEMPTION.
(a) The Corporation at any time after the third anniversary of the
date of the last closing in connection with the sale of shares of Series A
Convertible Preferred Stock in the private offering commencing March 16, 1999
may, at its option, redeem all of the outstanding shares of Series A Convertible
Preferred Stock at a redemption price equal to $1.75 per share, plus accrued
dividends to the redemption date.
(b) To exercise its option to redeem all of the shares of Series A
Convertible Preferred Stock, the Corporation shall mail by first-class mail a
notice of the redemption not less than thirty (30) and not more than sixty (60)
days prior to the date fixed for redemption to all of the holders of record of
Series A Convertible Preferred Stock. Such notice shall specify the redemption
price, the date fixed for redemption and the office where payment of the
redemption price will be made. The holder of each share of Series A Convertible
Preferred Stock that is called for redemption shall surrender to the Corporation
at its principal office or if the Corporation shall have appointed a transfer
agent for the Series A Convertible Preferred Stock, at the office of such
transfer agent, on or after the date of redemption the certificate representing
that share against payment to the holder of the redemption price. If the
Corporation shall have given notice in accordance with this subparagraph and on
the date of redemption and thereafter funds necessary for the redemption shall
be held by the Corporation in a segregated account and are available for payment
of the redemption price, then, notwithstanding that the certificate representing
shares of Series A Convertible Preferred Stock called for redemption shall not
have been surrendered, those shares shall no longer be deemed outstanding and
the accrual of dividends and all other rights with respect to those shares shall
terminate, except only the right of the holder to receive the redemption price,
without interest, upon surrender of the certificate. Any share of Series A
Convertible Preferred Stock that has been called for redemption may be
converted, at the option of the holder, as provided in Section 6, at any time
prior to the date set for redemption, and if the option to convert is timely
exercised with respect to a share of Series A Convertible Preferred Stock, the
call for redemption of that share shall be null and void.
9. RESERVATION OF SHARES. The Corporation shall at all times reserve
and keep available out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the shares of Series A Convertible
Preferred Stock, the full number of shares of Common Stock then deliverable upon
the conversion of all shares of Series A Convertible Preferred Stock then
outstanding. If shares of Common Stock are listed on any securities exchange,
the Corporation shall make application for the listing thereon, on notice of
issuance, of the shares of Common Stock deliverable upon the conversion of the
outstanding shares of Series A Convertible Preferred Stock and shall use its
best efforts to effect such listing.
10. TRANSFER TAXES. The Corporation will pay any and all transfer taxes
that may be payable in respect of the issue or delivery of shares of Common
Stock on conversion of shares of Series A Convertible Preferred Stock. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of transfer involved in the issue and delivery of shares of
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Common Stock in a name other than that in which the shares of the Series A
Convertible Preferred Stock so converted were registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
11. REPLACEMENT CERTIFICATES.
11.1 MUTILATED CERTIFICATE. If any mutilated certificate of Series
A Convertible Preferred Stock is surrendered to the Corporation, the Corporation
or its transfer agent shall deliver in exchange therefor a new certificate for
Series A Convertible Preferred Stock of like tenor and principal amount, bearing
a number not contemporaneously outstanding.
11.2 DESTROYED, LOST OR STOLEN CERTIFICATES. If there is delivered
to the Corporation (i) evidence to its reasonable satisfaction of the
destruction, loss or theft of any certificate of Series A Convertible Preferred
Stock and (ii) such reasonable security or indemnity as may be required by it to
save it harmless, then, in the absence of notice to the Corporation that such
certificate of Series A Convertible Preferred Stock has been acquired by a bona
fide purchaser, the Corporation or its transfer agent shall deliver in lieu of
any such destroyed, lost or stolen certificate of Series A Convertible Preferred
Stock, a new certificate of Series A Convertible Preferred Stock of like tenor
and principal amount and bearing a number not contemporaneously outstanding.
11.3 STATUS OF NEW CERTIFICATE. Upon the issuance of any new
certificate of Series A Convertible Preferred Stock under Section 11, the
Corporation may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. Every new certificate of Series A Convertible
Preferred Stock issued pursuant to Section 11, in lieu of any destroyed, lost or
stolen certificate of Series A Convertible Preferred Stock, shall constitute an
original additional contractual obligation of the Corporation, whether or not
the destroyed, lost or stolen certificate of Series A Convertible Preferred
Stock shall be at any time enforceable by anyone. Any new certificate for Series
A Convertible Preferred Stock delivered pursuant to Section 11 shall be so dated
that neither gain nor loss in interest shall result from such exchange. The
provisions of this Section 11 are exclusive and shall preclude (to the extent
lawful) all other rights and remedies with respect to the replacement or payment
of mutilated, destroyed, lost or stolen certificates of Series A Convertible
Preferred Stock.
C. The authorized number of shares of Series A Convertible Preferred Stock
is 1,500,000, none of which has been issued.
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.
[Signature page follows.]
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IN WITNESS WHEREOF, the undersigned have executed this Certificate of
Determination of Rights, Preferences, Privileges and Restrictions of Series A
7.0% Convertible Redeemable Preferred Stock in Lake Forest, California, this 8th
day of April, 1999.
/s/ Michael Armani
---------------------------
Michael Armani
/s/ Shala Shashani
---------------------------
Shala Shashani
<PAGE>
CERTIFICATE OF DETERMINATION OF
RIGHTS, PREFERENCES, PRIVILEGES
AND RESTRICTIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF TELENETICS CORPORATION
Michael Armani and Shala Shashani certify that:
A. They are President and Secretary, respectively, of Telenetics
Corporation, a California corporation (the "Corporation").
B. Pursuant to authority given by the Corporation's Restated and Amended
Articles of Incorporation, the Board of Directors of the Corporation has duly
adopted the following preambles and resolutions:
WHEREAS, the Restated and Amended Articles of Incorporation of the
Corporation provide for a class of shares known as undesignated
Preferred Stock, issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Corporation is authorized to
determine or alter the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued series of undesignated
Preferred Stock, to fix the number of shares constituting any such
series and to determine the designation thereof, or any of them; and
WHEREAS, the Board of Directors now desires, pursuant to the authority
described above, to determine and fix the rights, preferences,
privileges and restrictions relating to a series of Preferred Stock and
the number of shares constituting and the designation of that series.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
fixes and determines the designation of, the number of shares
constituting and the rights, preferences, privileges and restrictions
relating to a series of Preferred Stock as follows:
1. DESIGNATION. There is hereby created a series of Preferred Stock
designated as "Series B Convertible Preferred Stock" ("Series B Convertible
Preferred Stock") with the rights, preferences, privileges and restrictions set
forth below.
2. NUMBER AND RANK. The number of shares constituting the Series B
Convertible Preferred Stock shall be 128,571. The Series B Convertible Preferred
Stock shall rank (i) senior to the common stock, no par value per share (the
"Common Stock"), of the Corporation as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, and (ii) junior to shares of the Corporation's Series A 7.5%
Convertible Redeemable Preferred Stock and shares of any senior series of
Preferred Stock of any class which the
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Board of Directors or the shareholders may from time to time authorize, as to
distributions of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary.
3. DIVIDENDS. No dividends shall be payable on any shares of Series B
Convertible Preferred Stock.
4. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of
the affairs of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation,
including the liquidation preference payable on any shares of any class or
series of the Corporation's capital stock ranking senior to the Series B
Convertible Preferred Stock as to the payment of a liquidation preference, the
holders of shares of Series B Convertible Preferred Stock shall be entitled to
receive out of the assets of the Corporation, whether such assets are capital or
surplus, $7.00 per share, and no more, before any distribution shall be made to
the holders of the Common Stock or any other class of shares or series thereof
ranking junior to the Series B Convertible Preferred Stock with respect to the
distribution of assets.
(b) For purposes of this Section 4, a merger or consolidation of the
Corporation with or into any other corporation or corporations, or the merger of
any other corporation or corporations with or into the Corporation, or the sale
of all or substantially all of the assets of the Corporation, or any other
corporate reorganization, in which consolidation, merger, sale of assets or
reorganization the shareholders of the Corporation receive distributions in cash
or securities of another corporation or corporations as a result of such
consolidation, merger, sale of assets or reorganization, shall be treated as a
liquidation, dissolution or winding up of the Corporation, unless the
shareholders of this Corporation hold more than fifty percent (50%) of the
voting equity securities of the successor or surviving corporation immediately
following such consolidation, merger, sale of assets or reorganization in which
case such consolidation, merger, sale of assets or reorganization shall not be
treated as a liquidation, dissolution, or winding up within the meaning of this
Section 4.
(c) Written notice of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, stating a payment
date and the place where the distributive amounts shall be payable, shall be
given by mail, postage prepaid, not less than thirty (30) days prior to the
payment date stated therein, to the holders of record of the Series B
Convertible Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation.
(d) No payment on account of such liquidation, dissolution or
winding up of the affairs of the Corporation shall be made to the holders of any
class or series of stock ranking on a parity with the Series B Convertible
Preferred Stock in respect of the distribution of assets, unless there shall
likewise be paid at the same time to the holders of the Series B Convertible
Preferred Stock like proportionate distributive amounts, ratably, in proportion
to the fully distributive amounts to which they and the holders of such parity
stock are respectively entitled with respect to such preferential distribution.
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5. VOTING RIGHTS. In addition to all voting rights provided by
applicable law, the affirmative vote or consent of the holders of a majority of
the shares of the Series B Convertible Preferred Stock at the time outstanding,
given in person or by proxy, either in writing without a meeting or by vote at
any meeting called for the purpose, shall be necessary for effecting or
validating any merger or consolidation of the Corporation with or into any other
corporation which would result in the holders of the outstanding equity
securities of the Corporation immediately prior to such transaction holding less
than fifty percent (50%) of the voting equity securities of the surviving entity
immediately following such transaction, or any sale, lease or conveyance of all
or substantially all of its property or business, or any liquidation,
dissolution or winding up of the Corporation.
6. CONVERSION.
6.1 VOLUNTARY CONVERSION. Each share of Series B Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the
Corporation or if the Corporation shall have appointed a transfer agent for the
Series B Convertible Preferred Stock, at the office of such transfer agent, into
such number of fully paid and nonassessable shares of Common Stock at the
Conversion Price (as hereinafter defined) in effect at the time of conversion
determined as provided herein.
6.2 AUTOMATIC CONVERSION. Each share of Series B Convertible
Preferred Stock shall automatically be converted into fully paid and
nonassessable shares of Common Stock at the then effective Conversion Price,
immediately upon the completion of an underwritten public offering of shares of
Common Stock in which the aggregate gross proceeds exceed $12,000,000 and the
public offering price per share of Common Stock exceeds $7.00 (appropriately
adjusted for subdivisions and combinations of shares of Common Stock).
6.3 CONVERSION PRICE. The Series B Convertible Preferred Stock shall
be convertible into the number of shares of Common Stock that results from
dividing the Conversion Price per share in effect at the time of conversion into
$7.00 for each share of Series B Convertible Preferred Stock being converted.
The Conversion Price per share for the Series B Preferred Stock shall initially
be $7.00. The initial Conversion Price for the Series B Convertible Preferred
Stock shall be subject to adjustment from time to time as provided herein.
6.4 MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon any conversion of Series B Convertible Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction. Before any holder of
Series B Convertible Preferred Stock shall be entitled to convert the same into
full shares of Common Stock and to receive certificates therefor, the holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or if the Corporation shall have appointed a transfer
agent for the Series B Convertible Preferred Stock, at the office of such
transfer agent, and shall give written notice to the Corporation at either such
office that the holder elects to convert the same; PROVIDED, HOWEVER, that in
the event of any automatic conversion pursuant to Section 6.2, the outstanding
shares of Series B Convertible Preferred Stock shall be converted automatically
without any further action by the holders of such shares, whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent, if any; and PROVIDED, FURTHER, that the Corporation shall not be
obligated to issue certificates
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evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Series B Convertible Preferred
Stock are either delivered to the Corporation or its transfer agent, if any, as
provided above, or the holder notifies the Corporation or its transfer agent, if
any, that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. The Corporation shall,
as soon as practicable after such delivery, or such agreement and
indemnification in the case of a lost certificate, issue and deliver at such
office to such holder of Series B Convertible Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which the holder shall
be entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock. In the case of any automatic conversion pursuant to Section 6.2,
such conversion shall be deemed to have been made immediately prior to the close
of business on the date of the event causing the required conversion. The person
or persons entitled to receive the shares of Common Stock issuable upon any such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
6.5 ADJUSTMENTS FOR SUBDIVISIONS, COMBINATIONS OR CONSOLIDATIONS OF
COMMON STOCK. If at any time or from time to time after the date on which the
first share of the Series B Convertible Preferred Stock was originally issued
("Original Issue Date") the outstanding shares of Common Stock are subdivided
(by stock split, stock dividend or otherwise), into a greater number of shares
of Common Stock, the Conversion Price then in effect immediately prior to such
subdivision shall be proportionately decreased. Conversely, if the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
then in effect immediately prior to such combination or consolidation, shall be
proportionately increased. Any adjustment under this Section 6.5 shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
6.6 ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time, or from time to time, after the Original Issue Date for
the Series B Convertible Preferred Stock shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in additional shares of Common Stock,
then and in each such event the Conversion Price for the Series B Convertible
Preferred Stock then in effect shall be decreased as of the time of such
issuance or, in the event such a record date shall have been fixed, as of the
close of business on such record date, by multiplying the Conversion Price for
the Series B Convertible Preferred Stock then in effect by a fraction:
(a) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
(b) the denominator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number of shares
of Common Stock issuable in payment of such dividend or distribution;
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<PAGE>
PROVIDED, HOWEVER, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price for the Series B Convertible Preferred
Stock shall be recomputed accordingly as of the close of business on such record
date and thereafter the Conversion Price for the Series B Convertible Preferred
Stock shall be adjusted pursuant to this Section 6.6 as of the time of actual
payment of such dividends or distributions.
6.7 ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the
Corporation at any time or from time to time after the Original Issue Date for
the Series B Convertible Preferred Stock makes or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
(excluding any repurchases of securities by the Corporation not made on a pro
rata basis from all holders of any class of the Corporation's securities)
payable in property or in securities of the Corporation other than shares of
Common Stock, and other than as otherwise adjusted in this Section 6, then and
in each such event the holders of Series B Convertible Preferred Stock shall
receive at the time of such distribution, the amount of property or the number
of securities of the Corporation that they would have received had their Series
B Convertible Preferred Stock been converted into Common Stock on the date of
such event.
6.8 ADJUSTMENTS FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
Except as provided in Section 4, upon any liquidation, dissolution or winding up
of the Corporation, if the Common Stock issuable upon conversion of the Series B
Convertible Preferred Stock is changed into the same or a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares provided for above), the number of shares of Common Stock
into which each share of Series B Convertible Preferred Stock may be converted
shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series B Convertible
Preferred Stock shall be convertible into, in lieu of the number of shares of
Common Stock which the holders would otherwise have been entitled to receive, a
number of shares of such other class or classes of stock equivalent to the
number of shares of Common Stock that would have been subject to receipt by the
holders upon conversion of the Series B Convertible Preferred Stock immediately
before the change.
6.9 REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If
at any time or from time to time there is a capital reorganization of the Common
Stock (other than a subdivision, combination, consolidation, reclassification,
substitution or exchange of shares provided for elsewhere in this Section 6), or
a merger or consolidation of the Corporation with or into another corporation,
or the sale of all or substantially all of the Corporation's properties and
assets to any other person, then, as a part of such reorganization, merger,
consolidation or sale, provision shall be made so that the holders of the Series
B Convertible Preferred Stock shall thereafter be entitled to receive upon
conversion of the Series B Convertible Preferred Stock, the number of shares of
stock or other securities or property of the Corporation, or of the successor
corporation resulting from such merger or consolidation or sale, to which a
holder of Common Stock deliverable upon conversion would have been entitled on
such capital reorganization, merger, consolidation, or sale. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 6 with respect to the rights of the holders of the Series B
Convertible Preferred Stock after the
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<PAGE>
reorganization, merger, consolidation or sale to the end that the provisions of
this Section 6 shall be applicable after that event as nearly equivalent as may
be practicable.
6.10 ADJUSTMENT RELATING TO FAIR MARKET VALUE OF COMMON STOCK. If on
October 2, 2000 (the "Adjustment Date"), the Fair Market Value (as defined
below) of a share of Common Stock is less than the Conversion Price, then the
Conversion Price shall be adjusted downward to equal the Fair Market Value. For
purposes of this Section 6.10, Fair Market Value shall mean: (i) the average of
the closing bid price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any, for the five trading days
immediately preceding the Adjustment Date; or (ii) if the Common Stock is not
traded on an exchange but is quoted on Nasdaq or a successor quotation system,
the average of the closing bid price of a share of Common Stock as reported by
Nasdaq or the successor quotation system for the five trading days immediately
preceding the Adjustment Date; or (iii) if the Common Stock is not publicly
traded on an exchange and not quoted on Nasdaq or a successor quotation system,
the fair market value established by the Board of Directors acting in good
faith.
6.11 NO IMPAIRMENT. Except as provided in Section 7, the Corporation
will not, by amendment of its Restated and Amended Articles of Incorporation or
through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation but will at all times in good faith
assist in the carrying out of all the provisions of this Section 6 and in the
taking of all such actions as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series B Convertible
Preferred Stock against impairment.
6.12 CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the number of shares of Common Stock into which
each share of Series B Convertible Preferred Stock may be converted pursuant to
this Section 6, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series B Convertible Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.
7. STATUS OF CONVERTED STOCK. If any shares of Series B Convertible
Preferred Stock are repurchased or converted pursuant to Section 6, the shares
so repurchased or converted shall not be reissued, shall be retired and shall
thereafter have the status of authorized and unissued shares of Preferred Stock
which may be reissued by the Corporation at any time as shares of any series of
Preferred Stock, including shares of Series B Convertible Preferred Stock.
C. The authorized number of shares of Series B Convertible Preferred Stock
is 128,571, none of which has been issued.
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.
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IN WITNESS WHEREOF, the undersigned has executed this certificate in Lake
Forest, California, this 1st day of April, 1999.
/s/ Michael Armani
-------------------------------
Michael Armani, President
/s/ Shala Shashani
-------------------------------
Shala Shashani, Secretary
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RESTATED AND AMENDED BYLAWS
OF
TELENETICS CORPORATION
A California corporation
<PAGE>
TABLE OF CONTENTS
DESCRIPTION PAGE NO.
ARTICLE I. CORPORATE OFFICES................................................1
Section 1. Principal Office..........................................1
Section 2. Other Offices.............................................1
ARTICLE II. MEETINGS OF SHAREHOLDERS........................................1
Section 1. Place of Meetings.........................................1
Section 2. Annual Meeting............................................1
Section 3. Special Meeting...........................................1
Section 4. Notice of Shareholders' Meetings..........................2
Section 5. Manner of Giving Notice; Affidavit of Notice..............2
Section 6. Organization..............................................3
Section 7. Quorum....................................................3
Section 8. Adjourned Meeting; Notice.................................3
Section 9. Voting; Proxies...........................................3
Section 10. Validation of Meetings; Waiver of Notice; Consent.........4
Section 11. Shareholder Action by Written Consent Without
a Meeting.................................................4
Section 12. Record Date for Shareholder Notice; Voting; Giving
Consents..................................................4
Section 13. Inspectors of Election....................................5
ARTICLE III. DIRECTORS......................................................5
Section 1. Powers....................................................5
Section 2. Number of Directors.......................................6
Section 3. Election and Term of Office of Directors..................6
Section 4. Resignations and Vacancies................................6
Section 5. Place of Meetings; Meetings by Telephone..................7
Section 6. Organization..............................................7
Section 7. Regular Meetings..........................................7
Section 8. Special Meetings; Notice..................................7
Section 9. Quorum....................................................7
Section 10. Waiver of Notice..........................................8
Section 11. Adjournment...............................................8
Section 12. Notice of Adjournment.....................................8
Section 13. Board Action by Written Consent Without A Meeting.........8
Section 14. Advisory Directors........................................8
Section 15. Fees and Compensation of Directors........................8
ARTICLE IV. COMMITTEES......................................................9
Section 1. Committees of Directors...................................9
Section 2. Meetings and Actions of Committees........................9
ARTICLE V. OFFICERS.........................................................9
Section 1. Officers..................................................9
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TABLE OF CONTENTS (CONT'D)
DESCRIPTION PAGE NO.
Section 2. Election of Officers.....................................10
Section 3. Subordinate Officers.....................................10
Section 4. Removal and Resignation of Officers......................10
Section 5. Vacancies in Office......................................10
Section 6. Chairman of the Board....................................10
Section 7. President................................................10
Section 8. Vice Presidents..........................................10
Section 9. Secretary................................................11
Section 10. Chief Financial Officer..................................11
ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS, ETC....................12
Section 1. Indemnification of Directors and Officers................12
Section 2. Indemnification of Others................................12
Section 3. Payment of Expenses in Advance...........................13
Section 4. Procedure for Effecting Indemnification..................13
Section 5. Indemnity Not Exclusive..................................13
Section 6. Insurance Indemnification................................13
Section 7. Conflicts................................................14
ARTICLE VII. RECORDS AND REPORTS...........................................14
Section 1. Inspection of Share Register.............................14
Section 2. Maintenance and Inspection of Bylaws.....................14
Section 3. Maintenance and Inspection of Other Corporate Records....14
Section 4. Inspection by Directors..................................15
Section 5. Annual Report to Shareholders; Waiver....................15
Section 6. Financial Statements.....................................15
Section 7. Representation of Shares of Other Corporations...........16
ARTICLE VIII. GENERAL MATTERS..............................................16
Section 1. Record Date for Purposes Other Than Notice and Voting....16
Section 2. Checks; Drafts; Evidences of Indebtedness................16
Section 3. Corporate Contracts and Instruments; How Executed........17
Section 4. Certificates for Shares..................................17
Section 5. Lost Certificates........................................17
Section 6. Accounting Year..........................................17
Section 7. Construction; Definitions................................17
ARTICLE IX. AMENDMENTS.....................................................18
Section 1. Amendment By Shareholders................................18
Section 2. Amendment By Directors...................................18
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<PAGE>
RESTATED AND AMENDED BYLAWS
OF
TELENETICS CORPORATION
ARTICLE I
CORPORATE OFFICES
SECTION 1. PRINCIPAL OFFICE. The corporation may have its principal
executive office at such place within or outside of the State of California as
the Board of Directors may from time to time fix or the business of the
corporation may require. The corporation may have additional offices at such
places within or outside of the State of California as the Board of Directors
may from time to time fix or the business of the corporation may require. Until
changed by approval of a majority of the authorized members of the Board of
Directors of the corporation, the principal executive office of the corporation
shall be 26772 Vista Terrace Drive, Lake Forest, California.
SECTION 2. OTHER OFFICES. The Board of Directors may at any time
establish, or may designate an officer of the corporation to establish, branch
or subordinate offices 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
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the shareholders shall be
held on such date, at such time and at such place within or outside of the State
of California as the Board of Directors may from time to time designate. In the
absence of any such designation, shareholders' meetings shall be held at the
principal executive office of the corporation.
SECTION 2. ANNUAL MEETING. The annual meeting of shareholders shall be
held each year on a date and at a time designated by the Board of Directors. In
the absence of such designation, the annual meeting of shareholders shall be
held within five (5) months after the close of the fiscal year of the
corporation. At the annual meeting, the shareholders then entitled to vote shall
elect the directors of the corporation and transact such other business as may
properly be brought before the meeting.
SECTION 3. SPECIAL MEETING. A special meeting of the shareholders of
the corporation for any purpose or purposes for which meetings may lawfully be
called, may be called at any time for any purpose or purposes by the Board of
Directors or by any person or committee expressly so authorized by the Board of
Directors, or by the Chairman of the Board or the President, or by the holders
of shares entitled to cast not less than ten percent (10%) of the votes at the
meeting and by no other person or persons.
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At any time, upon written request of any person or persons who
have duly called a special meeting, which written request shall state the
purpose or purposes of the meeting, it shall be the duty of the Secretary to fix
the date of the meeting to be held at such date and time as the Secretary may
fix, not less than thirty-five (35) nor more than sixty (60) days after the
receipt of the request, and to give due notice thereof to each shareholder of
record entitled to vote at such meeting. If the Secretary shall neglect or
refuse to fix the time and date of such meeting and give notice thereof within
twenty (20) days after the receipt of the request, the person or persons calling
the meeting may do so as provided in Section 601(c) of the General Corporation
Law of the State of California.
SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. Written notice of the
place, date and hour of every meeting of the shareholders, whether annual or
special, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder of record entitled to vote at
the meeting. Every notice of a special meeting shall state the purpose or
purposes thereof.
Any shareholder approval at a meeting, other than unanimous
approval by those entitled to vote, pursuant to Section 310 (relating to
interested director transactions), 902 (relating to amendment of articles), 1201
(relating to reorganization), 1900 (relating to voluntary dissolution) or 2007
(relating to distributions upon dissolution) of the General Corporation Law of
the State of California shall be valid only if the general nature of the
proposal so approved was stated in the notice of meeting or in any written
waiver of notice.
SECTION 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written notice
of any meeting of shareholders shall be given either (i) personally or (ii) by
first-class mail or (iii) by third-class mail but only if the corporation has
outstanding shares held of record by five hundred (500) or more persons
(determined as provided in Section 605 of the General Corporation Law of the
State of California) on the record date for the shareholders' meeting, or (iv)
by telegraphic or other written communication. Notices not personally delivered
shall be sent charges prepaid and shall be addressed to the shareholder at the
address of that shareholder appearing on the books of the corporation or given
by the shareholder to the corporation for the purpose of notice. If no such
address appears on the corporation's books or is given, notice shall be deemed
to have been given if sent to that shareholder by mail or telegraphic or other
written communication to the corporation's principal executive office, or if
published at least once in a newspaper of general circulation in the county
where that office is located. Notice shall be deemed to have been given at the
time when delivered personally or deposited in the mail or sent by telegram or
other means of written communication.
If any notice addressed to a shareholder at the address of
that shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any
notice of any shareholders' meeting, executed by the Secretary, assistant
secretary or any transfer agent of the corporation giving the notice, shall be
prima facie evidence of the giving of such notice.
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SECTION 6. ORGANIZATION. At every meeting of the stockholders, the
Chairman of the Board, or in the case of vacancy in office or absence of the
Chairman of the Board, the President of the corporation, or such other person as
may be designated by the Board of Directors, shall act as Chairman of such
meeting, and the Secretary, or, in his absence, an assistant secretary, or in
the absence of both the Secretary and the assistant secretaries, a person
appointed by the Chairman of the Meeting shall act as Secretary.
SECTION 7. QUORUM. The presence in person or by proxy of the holders of
a majority of the shares entitled to vote thereat constitutes a quorum for the
transaction of business at all meetings of shareholders. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
initially constitute a quorum.
SECTION 8. ADJOURNED MEETING; NOTICE. Any shareholders' meeting, annual
or special, whether or not a quorum is present, may be adjourned from time to
time by the vote of the majority of the shares represented at that meeting,
either in person or by proxy. In the absence of a quorum, no other business may
be transacted at that meeting except as provided in Section 7 of this Article II
of these Bylaws.
When any meeting of shareholders, annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken. However, if a new record date for the adjourned meeting is
fixed or if the adjournment is for more than forty-five (45) days from the date
set for the original meeting, then notice of the adjourned meeting shall be
given. Notice of any such adjourned meeting shall be given to each shareholder
of record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 4 and 5 of this Article II of these Bylaws. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
SECTION 9. VOTING; PROXIES. The shareholders entitled to vote at any
meeting of shareholders shall be determined in accordance with the provisions of
Section 12 of this Article II of these Bylaws, subject to the provisions of
Sections 702 through 704 of the General Corporation Law of the State of
California (relating to voting shares held by a fiduciary, in the name of a
corporation or in joint ownership).
Each shareholder shall at every meeting of the shareholders be entitled
to one vote in person or by proxy for each share of common stock and the number
of votes per share as designated in the designation of rights adopted with
respect to each share of preferred stock registered in his name on the books of
the corporation on the record date for such meeting. The vote upon any matter
need not be by written ballot and need not be conducted by an inspector or
inspectors of election unless the holders of a majority of the outstanding
shares entitled to vote in person or by proxy at such meeting shall so
determine. No proxy shall be voted after three years from its date, unless the
proxy provides for a longer period. Every proxy shall be executed in writing by
the shareholder or by his duly authorized attorney-in-fact and filed with the
Secretary of the corporation. A proxy, unless coupled with an interest, shall be
revocable at will, notwithstanding any other agreement or any provisions in the
proxy to the contrary, but the revocation of a proxy shall not be effective
until notice thereof has been given to the Secretary of the corporation. 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 proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. A proxy shall not be revoked by the death
or incapacity of the maker unless, before the vote is counted or the authority
is exercised, written notice of such death or incapacity is given to the
Secretary of the corporation.
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If a quorum is present, the affirmative vote of the majority
of the shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or a vote by
classes is required by the General Corporation Law of the State of California or
by the Articles of Incorporation of the corporation, as then in effect.
SECTION 10. VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. The
transactions of any meeting of shareholders, either annual or special, however
called and noticed, and wherever held, shall be as valid as though they had been
taken 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 the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or consent to the holding of the meeting
or an approval of the minutes thereof. The waiver of notice or consent or
approval need not specify either the business to be transacted or the purpose of
any annual or special meeting of shareholders, except that if action is taken or
proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 4 of this Article II of these Bylaws, the waiver of
notice or consent or approval shall state the general nature of the proposal.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a
waiver of notice of and presence at that meeting, except when the person objects
at the beginning of the meeting to the transaction of any business because the
meeting is not lawfully called or convened. Attendance at a meeting is not a
waiver of any right to object to the consideration of matters required by the
General Corporation Law of the State of California to be included in the notice
of the meeting, but only if that objection is expressly made at the meeting.
SECTION 11. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Unless otherwise provided in the Articles of Incorporation, any action which may
be taken at any annual or special meeting of such 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 stock 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. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those shareholders who have not consented in writing.
SECTION 12. RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the Board of Directors may fix, in advance, a record
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date, which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting nor more than sixty (60) days before any
such action without a meeting, and in such event only shareholders of record on
the date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the records date, except as otherwise provided in the General
Corporation Law of the State of California. If no record date is fixed by the
Board of Directors, the record date: (i) for determining shareholders entitled
to notice of, or to vote at a meeting of the 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; (ii) for determining shareholders entitled to express
consent to corporate action in writing without a meeting, to the extent
permitted by these Bylaws, shall be the day on which the written consent is
expressed; and (iii) 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.
SECTION 13. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Directors may appoint an inspector or inspectors of election to act
at the meeting or its adjournment. If no inspector of election is so appointed,
then the chairman of the meeting may, and, on the request of any shareholder or
his or her proxy which request is approved by the holders of a majority of the
outstanding shares entitled to vote in person or by proxy at such meeting,
shall, appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of shareholders or proxies, then
the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any shareholder or
a shareholder's proxy shall, appoint a person to fill that vacancy.
Such inspector(s) shall: (i) determine the number of shares
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, and the authenticity, validity and
effect of proxies; (ii) receive votes, ballots or consents; (iii) hear and
determine all challenges and questions in any way arising in connection with the
right to vote; (iv) count and tabulate all votes or consents; (v) determine when
the polls shall close; (vi) determine the result; and (vii) do any other acts
that may be proper to conduct the election or vote with fairness to all
shareholders.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. The business and affairs of the corporation shall be
managed by and under the direction of the Board of Directors; and all powers of
the corporation, except those specifically reserved or granted to the
shareholders by statute, the Articles of Incorporation or these Bylaws, are
hereby granted to and vested in the Board of Directors. The Board of Directors
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 by and all corporate powers
shall be exercised under the ultimate direction of, the Board of Directors.
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SECTION 2. NUMBER OF DIRECTORS. The Board of Directors shall consist of
such number of directors, not less than three (3) or more than five (5), as may
be determined from time to time by the Board of Directors subject to the
provisions of the Articles of Incorporation. The exact number of directors shall
be four (4) until changed by the Board of Directors pursuant to and in
accordance with the provisions of this Section 2 of this Article III of these
Bylaws. 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 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be
elected at each annual meeting of shareholders to hold office until the next
annual meeting. The term of each director shall be for one year from the date of
his election; however, each director shall serve until his successor shall have
been duly elected and qualified, unless he shall resign, become disqualified,
disabled or shall otherwise be removed. At each annual election, the directors
chosen to succeed those whose terms then expire shall be for the same term as
the directors they succeed.
SECTION 4. RESIGNATIONS AND VACANCIES. Any director may resign
effective on giving written notice to the Chairman of the Board, the President,
the Secretary or the Board of Directors, unless the notice specifies a later
time for that resignation to become effective. If the resignation of a director
is effective at a future time, the Board of Directors may elect a successor to
take office when the resignation becomes effective.
Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until his successor
shall have been duly elected and qualified unless he shall resign, become
disqualified, disabled or shall otherwise be removed. If there are no directors
in office, then an election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board of Directors (as constituted immediately prior to any such
increase), the shareholder or shareholders holding a majority of the shares at
the time outstanding having the right to vote for such directors may summarily
order an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
A vacancy or vacancies in the Board of Directors shall be
deemed to exist (i) in the event of the death, resignation or removal or any
director, (ii) 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, (iii) if the authorized number of directors is
increased, or (iv) 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 elected 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 other than to fill a vacancy created by removal, if by written consent,
shall require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
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SECTION 5. PLACE OF MEETINGS; MEETINGS BY TELEPHONE. Regular meetings
of the Board of Directors may be held at any place within or outside of the
State of California that have been designated from time to time by resolution of
the Board. In the absence of such a designation, regular meetings shall he held
at the principal executive office of the corporation. Special meetings of the
Board may be held at any place within or outside of the State of California that
has been designated in the notice of the meeting or, if not stated in the notice
or there is no notice, at the principal executive office of the corporation. Any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all directors participating in the meeting
can hear one another; and all such directors shall be deemed to be present in
person at the meeting.
SECTION 6. ORGANIZATION. At every meeting of the Board of Directors,
the Chairman of the Board, if there be one, or, in the case of a vacancy in the
office or absence of the Chairman of the Board, one of the following officers
present in the order stated: the President; a Vice President; or a Chairman
chosen by a majority of the directors present, shall preside, and the Secretary,
or, in his or her absence, an Assistant Secretary, or in the absence of the
Secretary and the Assistant Secretaries, any person appointed by the Chairman of
the meeting, shall act as Secretary of the meeting.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice if the times of such meetings are fixed by the Board
of Directors.
SECTION 8. SPECIAL MEETINGS; NOTICE. Special meetings of the Board if
Directors for any purpose or purposes may be called at any time by the Chairman
of the Board, the President, any Vice President, the Secretary or any two (2)
directors.
Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone or telegram, it shall be delivered personally or by
telephone or to the telegraph company at least forty-eight hours before the time
of the holding of the meeting. Any oral notice given personally or by telephone
may be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
SECTION 9. QUORUM. At all meetings of the Board of Directors, a
majority of the total number of directors shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
Articles of Incorporation. If a quorum shall not be present at any meeting of
the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present. 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 at least a majority of the required quorum for
that meeting.
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SECTION 10. WAIVER OF NOTICE. Notice of a meeting need not be given to
any director (i) who signs a waiver of notice or a consent to holding the
meeting or an approval of the minutes thereof, whether before or after the
meeting or (ii) who attends the meeting without protesting, prior thereto, or at
its commencement, the lack of notice to such directors. All such waivers,
consents and approvals shall be filed with the corporate records or made part of
the minutes of the meeting. A waiver of notice need not specify the purpose of
any regular or special meeting of the Board of Directors.
SECTION 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and place.
SECTION 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than twenty-four (24) hours. If the meeting is adjourned for more than
twenty-four (24) hours, then notice of the time and place of the adjourned
meeting shall be given before the adjourned meeting takes place, in the manner
specified in Section 8 of this Article III of these Bylaws, to the directors who
were not present at the time of the adjournment.
SECTION 13. BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless
otherwise restricted by the Articles of Incorporation or these Bylaws, any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting, if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee, as the case may be. Such action by written consent
shall have the same force and effect as a unanimous vote of the Board of
Directors.
SECTION 14. ADVISORY DIRECTORS. The Board of Directors from time to
time may appoint 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
Board of Directors, to attend meetings of the Board of Directors upon invitation
and to furnish consultation to the Board of Directors. The period during which
the title of Advisory Director shall be held may be prescribed by the Board of
Directors. If no period is prescribed, the title of Advisory Director shall be
held at the pleasure of the Board of Directors.
SECTION 15. FEES AND COMPENSATION OF DIRECTORS. Directors and members
of committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Directors. This Section 14 of this Article III of these Bylaws shall
not be construed to preclude any director from serving the corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for those services.
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ARTICLE IV
COMMITTEES
SECTION 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any 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, the member or members thereof 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. Any such committee,
to the extent provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have power or authority in reference to amending the
certificate of incorporation, adopting an agreement of merger or consolidation,
recommending to the shareholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
shareholders a dissolution of the corporation or a revocation of dissolution,
removing or indemnifying directors or amending these Bylaws; and unless the
resolution expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Unless
the Board of Directors otherwise provides, each committee may adopt, amend and
repeal rules for the conduct of its business. 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 members of such
committee 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 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.
SECTION 2. MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with, the
bylaw provisions applicable to meetings and actions of the Board of Directors as
provided in Article III of these Bylaws, with such changes in the context of
those Bylaws as are necessary to substitute the committee and its members for
the Board of Directors and its members; provided, however, that the time of
regular meetings of committees may be determined either by resolution of the
Board of Directors or by resolution of the committee and that special meetings
of committees may also be called by resolution of the Board of Directors. The
Board of Directors may adopt rules for the government of any committee not in
violation of or otherwise inconsistent with the laws of the State of California,
the Articles of Incorporation of the corporation or the provisions of these
Bylaws.
ARTICLE V
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be chosen by
the Board of Directors and shall be a President, a Chief Financial Officer, and
a Secretary. The corporation may also have,
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at the discretion of the Board of Directors, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers and such other
officers as may be elected in accordance with the provisions of Section 3 of
this Article V. One person may hold more than one office. Officers may be, but
need not be, directors or shareholders of the corporation.
SECTION 2. ELECTION OF OFFICERS. The officers of the corporation,
except those elected by delegated authority pursuant to Section 3 of this
Article V, shall be chosen by the Board of Directors, and each such officer
shall hold his office until his successor shall have been elected and qualified,
or until his earlier resignation or removal, subject to the rights, if any, of
an officer under any contractor of employment.
SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may from time
to time appoint such other officers, employees or other agents as it deems
necessary, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as are provided in these Bylaws, or as the Board
of Directors may from time to time determine. The Board of Directors may
delegate to any officer or committee the power to elect subordinate officers and
to retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer or agent may
be removed, either with or without cause, by the Board of Directors at any
regular or special meeting of the Board or, except in case of an officer chosen
by the Board of Directors, 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 Board of Directors, or to the President or the
Secretary of the corporation. Any such resignation shall take effect at the date
of the receipt of such notice or at any later time specified therein and, unless
otherwise specified therein, the acceptance of such 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 5. VACANCIES IN OFFICE. A vacancy in any office because of
death, resignation, removal, disqualification, or any other cause, shall be
filled by the Board of Directors or by the officer or committee to which the
power to fill such officer has been delegated pursuant to Section 3 of this
Article V, as the case may be, and if the office is one for which these Bylaws
prescribe a term, shall be filled for the unexpired portion of the term.
SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the
shareholders and of the Board of Directors, and shall exercise and perform such
other powers and duties as may from time to time be assigned to him by the Board
of Directors or as may be prescribed by these Bylaws. If there is no President,
then the Chairman of the Board shall have powers and authority identical to
those of the President.
SECTION 7. PRESIDENT. The President, if such an officer be elected,
shall, subject to the control of the Board of Directors, have general and active
supervision of the affairs, business, officers and employees of the corporation.
He shall have authority to sign, execute, and acknowledge, in the name of the
corporation deeds, mortgages, bonds, contracts or other instruments, authorized
by the Board
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of Directors, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors, or these Bylaws, to some other
officer or agent of the corporation. He shall, from time to time, in his
discretion or at the order of the Board of Directors, submit to the Board of
Directors reports of the operations and affairs of the corporation. He shall
also perform such other duties and have such other powers as may be assigned to
him from time to time by the Board of Directors. If there is no Chairman of the
Board, the President shall preside at all meetings of the shareholders and of
the Board of Directors.
SECTION 8. VICE PRESIDENTS. The corporation may have one or more Vice
Presidents, having such duties as from time to time may be determined by the
Board of Directors, the President, these Bylaws or the Chairman of the Board. 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, a vice
president designated by the Board of Directors, shall perform all the duties of
the President and when so acting shall have all of the powers of, and be subject
to all the restrictions upon, the President.
SECTION 9. SECRETARY. The Secretary shall keep or cause to be kept full
minutes of all meetings of the shareholders and of the Board of Directors; shall
be ex officio Secretary of the Board of Directors; shall attend all meetings of
the shareholders and of the Board of Directors; and shall record all the votes
of the shareholders and of the directors and the minutes of the meetings of the
shareholders and of the Board of Directors and of committees of the Board in a
book or books to be kept for that purpose. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof. The Secretary shall also
keep, or cause to be kept, a share register, or a duplicate share register
showing the names of all shareholders and their addresses, the number and
classes of shares held by each, the number and date of certificates evidencing
such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notices of all
meetings of the shareholders of the corporation and of the Board of Directors;
shall be the custodian of the seal of the corporation and see that it is affixed
to all documents to be executed on behalf of the company under its seal; shall
have responsibility for the custody and safekeeping of all permanent records and
other documents of the corporation; and, in general, shall perform all duties
incident to the office of Secretary and such other duties as may be prescribed
by the Board of Directors or by the President, under whose supervision he or she
shall be. The Board of Directors may elect one or more assistant secretaries to
perform such duties as shall from time to time be assigned to them by the Board
of Directors or the President.
SECTION 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
have or provide for the custody of all funds, securities and other property of
the corporation; shall collect and receive or provide for the collection or
receipt of money earned by or in any manner due to or received by the
corporation; shall deposit or cause to be deposited all said moneys in such
banks or other depositories as the Board of Directors may from time to time
designate; shall make disbursements of corporate funds upon appropriate
vouchers; shall keep full and accurate accounts of transactions of his office in
books belonging to the corporation; shall, whenever so required by the Board of
Directors, render
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an accounting showing his transactions as Chief Financial Officer, and the
financial condition of the corporation; and, in general, shall discharge any
other duties as may from time to time be assigned to him by the Board of
Directors. The Board of Directors may elect one or more assistant treasurers to
perform the duties of the Chief Financial Officer as shall from time to time be
assigned to them by the Board of Directors or the Chief Financial Officer.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, ETC.
SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation
shall, to the maximum extent and in the manner permitted by the General
Corporation Law of the State of California, indemnify each of its directors and
officers of the corporation against expenses, judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation if he or she 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 that 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 reasonable cause to believe
that his conduct was unlawful. For purposes of this Article VI, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
SECTION 2. INDEMNIFICATION OF OTHERS. The corporation shall have the
power to the extent and in the manner permitted by the General Corporation Law
of the State of California to indemnify each of its employees and agents (other
than directors and officers) against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation if he or she 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 that 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 reasonable cause to believe
that his conduct was unlawful. For purposes of this Article VI, an "employee" or
"agent" of the corporation (other than a director or officer) includes any
person (i) who is or was an employee or agent of the corporation, (ii) who is or
was serving at the request of the corporation as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or (iii) who
was an employee or agent of a corporation which was a predecessor corporation of
the corporation or of another enterprise at the request of such predecessor
corporation.
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SECTION 3. PAYMENT OF EXPENSES IN ADVANCE. Expenses (including
attorneys' fees) incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of an authorized representative to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as required in this Article VI or authorized by law.
SECTION 4. PROCEDURE FOR EFFECTING INDEMNIFICATION. Indemnification
under Sections 1 or 2 of this Article VI shall be made when ordered by a court
and shall be made in a specific case upon a determination that indemnification
of the authorized representative is required or proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 1
and 2 of this Article VI. Such determination shall be made: (i) 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 (ii) if such a quorum is not
obtainable, or, even if obtainable a majority vote of a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(iii) by the shareholders of the corporation.
If a claim under this Article VI is not paid in full by the corporation
within ninety days after a written claim has been received by the corporation,
the claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim, and if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought to
enforce a claim for expenses incurred in defending any action, suit or
proceeding in advance of its final disposition where the required undertaking
has been tendered to the corporation) that the claimant has not met the
standards of conduct that make it permissible for the corporation to indemnify
the claimant for the amount claimed, but the burden of proving such defense
shall be on the corporation. Neither the failure of the corporation (including
its Board of Directors, independent legal counsel or its shareholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he had
met the applicable standard of conduct, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel, or its
shareholders) that the claimant has not met such applicable standard of conduct
shall be a defense to the action or create a presumption that claimant had not
met the applicable standard of conduct.
SECTION 5. INDEMNITY NOT EXCLUSIVE. The indemnification provided by
this Article VI shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office, to the extent that such additional rights to indemnification are
authorized in the Articles of Incorporation of the corporation..
SECTION 6. INSURANCE INDEMNIFICATION. The corporation shall have the
power to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation against any liability
asserted against or incurred by such person in such capacity or arising out of
such person's status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of this
Article VI.
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SECTION 7. CONFLICTS. No indemnification or advance shall be made under
this Article VI, except where such indemnification or advance is mandated by law
or the order, judgment or decree of any court of competent jurisdiction, in any
circumstance where it appears: (i) that it would be inconsistent with a
provision of the Articles of Incorporation of the corporation, these Bylaws, a
resolution of the shareholders or an agreement in effect at the time of the
accrual of the alleged cause of the action asserted in the proceeding in which
the expenses were incurred or other amounts were paid, which prohibits or
otherwise limits indemnification; or (ii) that it would be inconsistent with any
condition expressly imposed by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
SECTION 1. INSPECTION OF SHARE REGISTER. A shareholder or shareholders
of the corporation who hold at least five percent (5%) in the aggregate of the
outstanding voting shares of the corporation or who holds at least one percent
(1%) of such voting shares and has filed a Schedule 14B with the Securities and
Exchange Commission relating to the election of directors, may (i) inspect and
copy the records of shareholders' names, addresses, and share holdings during
usual business hours on at least five (5) days' written demand on the
corporation, (ii) obtain from the transfer agent of the corporation, on written
demand and on the tender of such transfer agent's usual charges for such list, a
list of the names and addresses of the shareholders who are entitled to vote for
the election of directors, and their share holdings, as of the most recent
record date for which that list has been compiled or as of a date specified by
the shareholder after the date of demand. Such list shall be made available to
any such shareholder by the transfer agent on or before the later of five (5)
days after the demand is received or five (5) days after the date specified in
the demand as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
SECTION 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office or, if its principal executive office is
not in the State of California, at its principal business office in California,
the original or a copy of these Bylaws as amended to date, which Bylaws shall be
open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside the State
of California and the corporation has no principal business office in such
state, then the secretary shall, upon the written request of any shareholder,
furnish to that shareholder a copy of these Bylaws as amended to date.
SECTION 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and the minutes of proceedings of the shareholders,
of the Board of Directors, and of any committee or committees of the Board of
Directors shall be kept at such place or places as are
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designated by the Board of Directors or, in the absence of such designation, at
the principal executive office of the corporation. The minutes shall be kept in
written form, and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate, at any reasonable time during usual business hours, for a
purpose reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or by
an agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
SECTION 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind as well as the physical properties of the corporation
and each of its subsidiary corporations. Such inspection by a director may be
made in person or by an agent or attorney. The right of inspection includes the
right to copy and make extracts of documents.
SECTION 5. ANNUAL REPORT TO SHAREHOLDERS; WAIVER. 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 year adopted by
the corporation. Such report shall be sent at least fifteen (15) days (or, if
sent by third-class mail, thirty-five (35) days) before the annual meeting of
shareholders to be held during the next fiscal year and in the manner specified
in Section 5 of Article II of these Bylaws for giving notice to shareholders of
the corporation.
The annual report shall contain (i) a balance sheet as of the end of
the fiscal year, (ii) an income statement, (iii) a statement of changes in
financial position for the fiscal year, and (iv) 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.
The foregoing requirement of an annual report shall be waived so long
as the shares of the corporation are held by fewer than one hundred (100)
holders of record. 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.
SECTION 6. FINANCIAL STATEMENTS. If no annual report for the fiscal
year has been sent to shareholders, then the corporation shall, upon the written
request of any shareholder made more than one hundred twenty (120) days after
the close of such fiscal year, deliver or mail to the person making the request,
within thirty (30) days thereafter, a copy of a balance sheet as of the end of
such fiscal year and an income statement and statement of changes in financial
position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of
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the corporation as of the end of that period, then the Chief Financial Officer
shall cause that statement to be prepared, if not already prepared, and shall
deliver personally or mail that statement or statements to the person making the
request within thirty (30) days after the receipt of the request. If the
corporation has not sent to the shareholders its annual report for the last
fiscal year, the statements referred to in the first paragraph of this Section 6
shall likewise be delivered or mailed to the shareholder or shareholders within
thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
SECTION 7. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman
of the Board, the President or any vice president, the Chief Financial Officer,
the Secretary or an assistant secretary of the corporation, or any person
authorized by the Board of Directors or the President, is authorized to vote,
represent, and exercise on behalf of the corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
the corporation. The authority herein granted may be exercised either by such
person director or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
SECTION 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or the shareholders
entitled to exercise any rights in respect of any other lawful action (other
than action by shareholders by written consent without a meeting), the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
(60) days before any such action. In that case, only shareholders of record at
the close of business on the date so fixed are entitled to receive the dividend,
distribution or allotment of rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date so fixed, except as otherwise provided in the General
Corporation Law of the State of California.
If the Board of Directors does not so fix a record date, then the
record date for determining shareholders for any such purpose shall be at the
close of business on the day on which the Board adopts the applicable resolution
or the sixtieth (60th) day before the date of that action, whichever is later.
SECTION 2. CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS. From time to
time, the Board of Directors shall determine by resolution which person or
persons may sign or endorse all checks, drafts, other orders for payment of
money, notes or other evidences of indebtedness that are issued in the name of
or payable to the corporation, and only the persons so authorized shall sign or
endorse those instruments.
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SECTION 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board
of Directors, except as otherwise provided in these Bylaws, may authorize any
officer or officers, or 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 or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
SECTION 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the corporation shall be issued to each shareholder when any of such
shares are fully paid. The Board of Directors may authorize the issuance of
certificates for shares partly paid provided that these certificates shall state
the total amount of the consideration to be paid for them and the amount
actually paid. All certificates shall be signed in the name of the corporation
by the Chairman of the Board or the Vice Chairman of the Board or the President
or a vice president and by the Chief Financial Officer or an assistant treasurer
or the Secretary or an 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 ceases 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. The Board of
Directors may appoint one or more transfer agents or transfer clerks, and one
ore more registrars, either domestic or 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. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificates for shares shall be issued to replace a previously issued
certificate unless the latter is surrendered to the corporation and canceled at
the same time. The Board of Directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed, authorize the
issuance of replacement certificates on such terms and conditions as the Board
may require; the Board may require indemnification of the corporation secured by
a bond or other adequate security sufficient to protect the corporation against
any claim that may be made against it, including any expense or liability, on
account of the alleged loss, theft or destruction of the certificate or the
issuance of the replacement certificate.
SECTION 6. ACCOUNTING YEAR. The accounting year of the corporation
shall be fixed by resolution of the Board of Directors.
SECTION 7. CONSTRUCTION; DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of California shall govern the construction
of these Bylaws. Without limiting the generality of this provision, the singular
number includes the plural, the plural number includes the singular, and the
term "person" includes both a corporation and a natural person.
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ARTICLE IX
AMENDMENTS
SECTION 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these Bylaws 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, then the authorized number of
directors may be changed only by an amendment of the Articles of Incorporation.
SECTION 2. AMENDMENT BY DIRECTORS. Subject to the rights of
shareholders as provided in Section 1 of this Article IX of these Bylaws,
bylaws, other than bylaws or an amendment of a bylaw changing the authorized
number of directors (except to fix the authorized number of directors pursuant
to a bylaw providing for a variable number of directors), may be adopted,
amended or repealed by the Board of Directors.
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CERTIFICATE OF SECRETARY
OF
TELENETICS CORPORATION
(a California corporation)
I hereby certify that I am the duly elected and acting Secretary of
Telenetics Corporation, a California corporation, and that the foregoing
Restated and Amended Bylaws, comprising 18 pages, constitute the Bylaws of said
corporation as duly adopted by the Board of Directors and shareholders of said
corporation.
Dated as of November 12, 1998
/S/ SHALA SHASHANI
-----------------------------
Shala Shashani, Secretary
<PAGE>
LOAN AND SECURITY AGREEMENT
NOTICE - CONTAINS WAIVER OF TRIAL BY JURY
THIS LOAN AND SECURITY AGREEMENT is entered into as of April 2, 1999,
between TELENETICS CORPORATION, a California corporation ("Borrower"), and
CELTIC CAPITAL CORPORATION ("Lender").
1. CERTAIN RULES OF CONSTRUCTION; CERTAIN DEFINITIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles and practices consistently applied. All
references herein to the singular or plural shall also mean the plural or
singular, respectively. All terms used herein which are defined in the
California Uniform Commercial Code (as amended from time to time) shall have the
meanings ascribed thereto therein unless otherwise defined in this Agreement. As
used herein, the following terms shall have the following meanings:
1.1 "ACCOUNT DEBTOR" - the obligor on any Account.
1.2 "ACCOUNT" - an account arising in the ordinary course of
Borrower's business.
1.3 "ADVANCES" - see Section 2.1.1 hereof.
1.4 "AGREEMENT" - this Loan and Security Agreement, together with
all exhibits and schedules hereto, as the same may be amended from time to time
in accordance with the terms hereof.
1.5 "ALLOWABLE AMOUNT" - the lesser of the Borrowing Base and the
Maximum Commitment.
1.6 "ANNIVERSARY DATE" - the date which is eighteen months from the
date of the first Credit Accommodation hereunder.
1.7 "AVAILABILITY RESERVES" - shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Advances which would otherwise be available
to Borrower hereunder: (a) to reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, do or may affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, (ii) the assets, business or prospects of Borrower or any Obligor, or
(iii) the security interest and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (b) to
reflect Lender's good faith belief that any Collateral report or financial
information furnished by or on behalf of Borrower or any Obligor to Lender is or
may have been incomplete, inaccurate or misleading in any material respect, or
(c) in respect of any state of facts which Lender determines in good faith
constitutes an Event of Default or may, with notice or passage of time or both,
constitute an Event of Default.
1.8 "BALANCE SUBJECT TO INTEREST" - the aggregate unpaid balance of
Credit Accommodations.
1.9 "BORROWER'S ACCOUNT" - the deposit account of Borrower, account
number 8713104086, maintained by Borrower with Washington Mutual at its office
located at 27752 Vista Del Lago, Mission Viejo, CA 92692.
1.10 "BORROWING BASE" - eighty percent (80%) of the Net Face Amount
of Eligible Accounts.
1.11 "COLLATERAL" -
1.11.1 all of the following present and future assets of
Borrower, together with all collateral now or hereafter described in any form
UCC-1 filed against Borrower naming Lender as the secured party:
1.11.1.1 Accounts, returned, reclaimed or repossessed
goods with respect thereto and rights as an unpaid vendor; contract rights;
chattel paper; general intangibles (including, but not limited to, tax and duty
refunds, registered and unregistered patents, trademarks, service marks,
copyrights, trade names, and applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer lists, licenses, whether as
licensor or licensee, choses in action and other claims, and existing and future
leasehold interests in equipment, and fixtures); documents; instruments; letters
of credit, deposits accounts;
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1.11.1.2 goods, including, but not limited to:
1.11.1.2.1 inventory, wherever located,
including raw materials, work-in-process, finished goods, and all names or marks
affixed to or to be affixed thereto for purposes of selling same by the seller,
manufacturer, lessor or licensor thereof;
1.11.1.2.2 equipment and fixtures, including,
without limitation, all motor vehicles, furniture, and any and all additions,
substitutions, replacements (including spare parts) accessions thereof and
thereto;
1.11.2 any goods in Borrower's possession, custody, or control;
1.11.3 books and records relating to any of the above
including, without limitation, all computer programs, printed output and
computer readable data in the possession or control of the Borrower, any
computer service bureau or other third party;
1.11.4 products and proceeds of the foregoing in whatever form
and wherever located, including, without limitation, all insurance proceeds, all
claims against third parties for loss or destruction of or damage to any of the
foregoing, and all income from the lease or rental of any of the foregoing.
1.11.5 any claim of Borrower on any policy of insurance,
including claims for premium refund under any workmen's compensation policy, or
claims under any business interruption or similar coverage;
1.11.6 all investment property.
1.12 "COLLATERAL MANAGEMENT FEE" - three-tenths of one percent (.3%)
per month, of the average monthly balance of gross face amount of the Accounts
outstanding.
1.13 "CREDIT ACCOMMODATION" - any Advance or other extension of
credit by Lender to or on behalf of Borrower hereunder or under any Evidence of
Special Credit Accommodation.
1.14 "DEFAULT RATE" - four percentage points (4%) per annum in
excess of the Interest Rate. To the extent the Default Rate is calculated with
reference to the Prime Rate, any change in the Default Rate shall be effective
as of the date of any change in Prime Rate.
1.15 "DELINQUENT ACCOUNT" - an Account which remains uncollected
more than ninety days from invoice date.
1.16 "DOCUMENTS" - this Agreement, any riders, supplements and
amendments thereto, and all other documents, instruments or agreements now or
hereafter executed and/or delivered in connection with this Agreement, including
but not limited to any Evidences of Special Credit Accommodations, mortgages,
Security Agreements, assignments, pledges, Subordination Agreements, and
Guaranties.
1.17 "ELIGIBLE ACCOUNT" - an Account, excluding the following:
1.17.1 A Delinquent Account;
1.17.2 An Account due from an Account Debtor which has suffered
a business failure or the termination of its existence, or as to which a
dissolution, insolvency or bankruptcy proceeding has been commenced, any
assignment for the benefit of creditors has been made, or a trustee, receiver or
conservator has been appointed for all or any part of the assets of such Account
Debtor;
1.17.3 An Account due from an Account Debtor affiliated with
Borrower in any manner, including, without limitation, as stockholder, owner,
officer, director, agent or employee;
1.17.4 An Account with respect to which payment is or may be
conditional;
1.17.5 An Account due from an Account Debtor who is not a
resident or citizen of, located in, or subject to service of process in, the
United States of America;
1.17.6 An Account due from an Account Debtor who is any
national government including, without limitation, any instrumentality,
division, agency, body or department thereof;
1.17.7 An Account arising from progress billings or retainages
or "bill and hold" sales or any other similar arrangements;
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1.17.8 An Account due from an Account Debtor as to which
twenty-five percent or more of the aggregate dollar amount of all outstanding
Accounts owing from such Account Debtor are Delinquent Accounts;
1.17.9 That portion of an Account due from an Account Debtor
which is in excess of twenty-five percent of Borrower's aggregate dollar amount
of all outstanding Accounts;
1.17.10 An Account as to which Borrower is or may become liable
to the Account Debtor for any reason;
1.17.11 An Account which is not free of all liens,
encumbrances, charges, rights and interest of any kind;
1.17.12 An Account which is supported or represented by a
promissory note, post-dated check or letter of credit unless such instrument is
actually delivered to Lender;
1.17.13 An Account which is unsuitable for purposes of
determining the Borrowing Base, as determined by Lender in its sole and good
faith discretion.
1.18 "EVENTS OF DEFAULT" - see Section 10 hereof.
1.19 "EVIDENCE OF SPECIAL CREDIT ACCOMMODATION" - see Section 2.2
hereof.
1.20 "GUARANTORS" - all entities now or hereafter guaranteeing the
Obligations.
1.21 "GUARANTY" - a continuing guaranty in form and substance
acceptable to Lender by which a Guarantor guarantees the Obligations.
1.22 "INTEREST RATE" - the greater of:
1.22.1 three percentage points (3%), per annum, in excess of
the Prime Rate; and
1.22.2 ten and three-quarters percent (10.75%) per annum. To
the extent the Interest Rate is calculated with reference to the Prime Rate, any
change in the Interest Rate shall be effective as of the first day of the month
following the date of any change in Prime Rate.
1.23 "KEY EMPLOYEE" - Michael A. Armani.
1.24 "LENDING OFFICE" - Lender's office described in Section 21.1.2
hereof.
1.25 "LIEN" - any lien, mortgage, security interest, pledge,
encumbrance, or charge of any kind, including, but not limited to, any
conditional sale or other title retention arrangement or similar preferential
arrangement.
1.26 "LOAN FEE" - $30,000, to be paid annually.
1.27 "MAXIMUM COMMITMENT" - $3,000,000.00.
1.28 "MINIMUM MONTHLY CHARGE" - $7,500.00.
1.29 "MISDIRECTED PAYMENT FEE" - fifteen percent (15%) percent of
the amount of any payment on an Account where said payment has been received by
Borrower and not delivered in kind by Borrower to Lender within three (3)
business days of receipt thereof.
1.30 "MONETARY COLLATERAL" - cash, checks or other proceeds of
Collateral in tangible form.
1.31 "NEGOTIABLE COLLATERAL" - see Section 5.6 hereof.
1.32 "NET FACE AMOUNT" - with respect to an Account, the gross face
amount of such Account less all trade discounts or other deductions to which the
Account Debtor is entitled.
1.33 "OBLIGATED PARTY" - see Section 5.2.2 hereof.
1.34 "OBLIGATIONS" - all present and future obligations owing by
Borrower to Lender whether or not for the payment of money, whether or not
evidenced by any note or other instrument, whether direct or indirect, absolute
or contingent, due or to become due, joint or several, primary or secondary,
liquidated or unliquidated, secured or unsecured, original or renewed or
extended, whether arising before, during or after the commencement of any case
with respect to Borrower under the United States Bankruptcy
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Code or any similar statute, including but not limited to: any obligations
arising pursuant to letters of credit or acceptance transactions or any other
financial accommodations; and all principal, interest, fees, charges, expenses,
attorneys' fees and accountants' fees chargeable to Borrower or incurred by
Lender in connection with this Agreement and/or the transaction(s) related
thereto.
1.35 "OBLIGORS" - Borrower and all Guarantors.
1.36 "PRIME RATE" - at any time any determination thereof is to be
made, the "prime rate", base rate or reference rate announced by Wells Fargo
Bank, N.A. at its head office in San Francisco, California.
1.37 "SECURITY AGREEMENT" - any security agreement which grants or
purports to grant Lender a security interest in the Collateral.
1.38 "SPECIAL CREDIT ACCOMMODATION" - see Section 2.2 hereof.
1.39 "SPECIAL CREDIT ACCOMMODATION FEE" - three percent (3%) of the
original amount of any Special Credit Accommodation.
1.40 "STANDARD FEE SCHEDULE" - the schedule of Lender's standard
fees for services.
1.41 "SUBORDINATING CREDITOR" - SMC Group.
1.42 "SUBORDINATION AGREEMENT" - a subordination agreement in form
and substance acceptable to Lender whereby a subordinating creditor subordinates
in favor of Lender obligations owed to it by Borrower.
1.43 "TERMINATION DATE" - the earlier of the next Anniversary Date
(unless extended pursuant to the terms hereof) or the date on which Lender
elects to terminate this Agreement pursuant to the terms herein.
1.44 "TERMINATION CHARGES" - the greater of:
1.44.1 the monthly average of all interest and fees paid by
Borrower to Lender hereunder for the 180 days (or portion thereof if Obligations
have not been outstanding for at least 180 days) preceding the date which this
calculation is to be made, for the period from the date on which this
determination is to be made to the next Anniversary Date; or
1.44.2 the Minimum Monthly Charge for the period from the date
on which this determination is to be made to the next Anniversary Date.
2. CREDIT FACILITIES.
2.1 REVOLVING CREDIT FACILITY. Subject to the terms and conditions
of this Agreement, from the date on which this Agreement becomes effective and
until termination pursuant to the terms hereof:
2.1.1 ADVANCES. Lender shall, from time to time make advances
("Advances") to Borrower, less any Availability Reserves, so long as, before and
after such Advance, the Obligations do not exceed the Allowable Amount.
2.1.2 Lender may, in its reasonable discretion, from time to
time, upon not less than five (5) days prior notice to Borrower, reduce the
Borrowing Base to the extent that Lender determines in good faith that: (a) the
dilution with respect to the Accounts for any period (based on the ratio of (i)
the aggregate amount of reductions in Accounts other than as a result of
payments in cash to (ii) the aggregate amount of total sales) has increased in
any material respect or may be reasonably anticipated to increase in any
material respect above historical levels, or (b) the general creditworthiness of
Account Debtors has declined. In determining whether to reduce the Borrowing
Base, Lender may consider events, conditions, contingencies or risks which are
also considered in determining Eligible Accounts or in establishing Availability
Reserves.
2.2 SPECIAL CREDIT ACCOMMODATIONS. Lender may in its sole and
absolute discretion, from time to time, extend Credit Accommodations to Borrower
in excess of the Allowable Amount (any Credit Accommodation extended to Borrower
pursuant to this Section being a "Special Credit Accommodation"). Each Special
Credit Accommodation shall be evidenced by a writing in form and substance
satisfactory to Lender in its sole discretion (any such writing, an "Evidence of
Special Credit Accommodation"). Notwithstanding the terms and provisions of any
Evidence of Special Credit Accommodation, each Special Credit Accommodation
shall be payable upon demand.
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2.3 GENERAL PROVISIONS.
2.3.1 CREDITING OF BORROWER'S ACCOUNT. All Advances by Lender
may be made by deposits or transfers to Borrower's Account.
2.3.2 AUTHORIZATION FOR CREDIT ACCOMMODATIONS. Subject to the
terms and conditions of this Agreement, Lender is authorized to make Credit
Accommodations:
2.3.2.1 upon telephonic, facsimile or other instructions
received from anyone purporting to be an officer, employee or representative of
Borrower; or
2.3.2.2 at the sole discretion of Lender, and
notwithstanding any other provision in this Agreement, if necessary to meet any
Obligations, including but not limited to any interest not paid when due.
2.4 CONDITIONS OF LENDER'S OBLIGATIONS. All conditions of Lender's
obligation to make Advances hereunder are imposed solely and exclusively for the
benefit of Lender and may be freely waived or modified in whole or in part by
Lender at any time.
3. PAYMENTS BY BORROWER.
3.1 IN GENERAL.
3.1.1 PLACE OF PAYMENTS. All payments hereunder shall be made by
Borrower to Lender at the Lending Office, or at such other place as Lender may
designate in writing.
3.1.2 CREDITING OF PAYMENTS.
3.1.2.1 INTEREST CALCULATIONS. Any payments received by
Lender from Account Debtors shall, for the purpose of computation of interest,
be credited to the Obligations on the fourth (4th) business day after receipt by
Lender.
3.1.2.2 GENERALLY. No payments received by Lender
purportedly in satisfaction of any of the Obligations shall constitute payment
thereof unless and until final payment thereof.
3.1.3 PREPAYMENTS; APPLICATION OF PAYMENTS. Borrower shall have
the right to make payments at any time in reduction of the Obligations, in whole
or in part, provided, however, that Lender may apply any payments received to
the Obligations in any manner and in any order as Lender may determine in its
sole discretion, notwithstanding contrary instructions.
3.2 INTEREST AND FEES.
3.2.1 LOAN FEE. Borrower shall pay the Loan Fee to Lender on an
annual basis without offset, deduction, demand or proration (i) concurrently
with the first Credit Accommodation hereunder ("Loan Fee Date") and (ii) on each
anniversary of such Loan Fee Date. Any portion not paid when due shall accrue
interest at the applicable interest rate set forth herein.
3.2.2 BASIC INTEREST. Subject to Section 3.2.3 hereof, Borrower
shall pay Lender interest on the average daily balance of the Balance Subject to
Interest, computed on the basis of a three hundred sixty (360) day year, for the
actual number of days elapsed. Interest shall assessed at the Interest Rate, and
shall be payable monthly, in arrears, on the first day of each month following
the accrual thereof.
3.2.3 DEFAULT INTEREST. In lieu of Basic Interest, immediately
upon the occurrence and during the continuance of an Event of Default, unless
waived by Lender, Borrower shall pay Lender interest at the default rate.
3.2.4 CALCULATION OF INTEREST. All interest charged hereunder
shall be computed on the basis of a three hundred sixty (360) day year for the
actual number of days elapsed. Notwithstanding anything to the contrary
contained herein, any interest rate calculated hereunder shall be rounded to the
closest 1/4 of 1%, with no adjustment made for rate changes of less than 1/4 of
1%.
3.2.5 COLLATERAL MANAGEMENT FEE. Borrower shall pay Lender the
Collateral Management Fee monthly, in arrears, on the first day of each month
following the accrual thereof.
3.2.6 SPECIAL CREDIT ACCOMMODATION FEE. Simultaneously with the
making of a Special Credit Accommodation, Borrower shall pay to Lender the
Special Credit Accommodation Fee.
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3.2.7 ADDITIONAL FEES. Borrower shall pay Lender fees for such
services as Lender customarily charges fees, as set forth in Lender Standard Fee
Schedule, a copy of which will be provided to Borrower on demand. Lender shall
have the right to change all or any of such fees upon ten (10) days notice to
Borrower.
3.2.8 MINIMUM MONTHLY CHARGE.
3.2.8.1 For any full month in which the sum of (i)
interest, and (ii) the Collateral Management Fee earned by Lender, is less than
the Minimum Monthly Charge, Lender shall debit the difference to the Obligations
as of the first day of the following month, until the date on which all
Obligations have been fully repaid (whether or not this Agreement has heretofore
been terminated).
3.2.8.2 In the event that this Agreement begins on other
than the first day of a month, or that the Obligations are fully repaid on other
than the last day of a month, the preceding section shall apply pro-rata to such
month.
3.2.8.3 If Borrower requests Lender to consent to
termination of this Agreement on a date earlier than Section 11 permits,
Borrower shall pay Lender the Termination Charges.
3.2.9 MISDIRECTED PAYMENT FEE. Immediately upon accrual,
Borrower shall pay any Misdirected Payment Fee to Lender.
3.3 PAYMENTS UPON TERMINATION. Upon the Termination Date, the unpaid
balance of the Obligations shall be due and payable without demand or notice.
4. GRANT OF SECURITY INTEREST. To secure the payment and performance in
full of all of the Obligations, Borrower hereby grants to Lender a continuing
security interest in the Collateral.
5. COLLECTION AND ADMINISTRATION OF ACCOUNTS.
5.1 COLLECTION.
5.1.1 MONETARY COLLATERAL. Borrower is authorized to collect
Monetary Collateral on behalf of and in trust for Lender, at Borrower's expense,
but such authority shall automatically terminate upon an Event of Default.
Lender may modify or terminate such authority at any time irrespective of
whether an Event of Default has occurred and directly collect any of the
Monetary Collateral. Borrower shall, at Borrower's expense and in the manner
requested by Lender from time to time, direct that Monetary Collateral be (or,
if received by Borrower, shall cause same to be):
5.1.1.1 sent to a post office box designated by and/or in
the name of Lender, or in the name of Borrower, but as to which access is
limited solely to Lender and/or
5.1.1.2 deposited into a bank account maintained in the
name of Lender and/or a blocked bank account under arrangements with the
depository bank under which all funds deposited to such blocked bank account are
required to be transferred to Lender. In connection therewith, Borrower shall
execute such post office box and/or blocked bank account agreements as Lender
shall specify.
5.1.2 ELECTRONIC PROCEEDS OF COLLATERAL. In the event Borrower
receives proceeds of Collateral in the form of wire transfer or other intangible
funds transfer mechanism, Borrower shall immediately pay such proceeds to
Lender.
5.2 NOTIFICATIONS, ETC. Lender may, at any time, irrespective of
whether an Event of Default has occurred, without notice to or the assent of
Borrower:
5.2.1 notify any entity obligated with respect to any Monetary
Collateral (an "Obligated Party"), by means of the letter attached as Exhibit A,
the form and substance of which Borrower hereby consents, that the underlying
Monetary Collateral has been assigned to Lender by Borrower and that payment
thereof is to be made to the order of and directly and solely to Lender;
5.2.2 send, or cause to be sent by its designee, requests (which
may identify the sender by a pseudonym) for verification of any Monetary
Collateral directly to the appropriate Obligated Party or any bailee with
respect thereto;
5.2.3 demand, collect or enforce payment of any Collateral, but
without any duty to do so, and Lender shall not be liable for any failure to
collect or enforce payment thereof; and
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5.2.4 At Lender's request, all invoices and statements sent to
any Obligated Party or any bailee, shall state that the relevant Monetary
Collateral has been assigned to Lender and that any payments in respect thereof
are payable directly and solely to Lender.
5.3 LENDER'S POWERS. Borrower hereby authorizes Lender and any
designee of Lender, at Borrower's sole expense, to exercise at any times in
Lender's or such designee's discretion all or any of the following powers, which
powers are irrevocable until all of the Obligations have been paid in full:
5.3.1 receive, take, endorse, assign, deliver, accept and
deposit, in the name of Lender or Borrower, any and all cash, checks, commercial
paper, drafts, remittances and other instruments and documents relating to the
Collateral or the proceeds thereof;
5.3.2 transmit to any Obligated Party or any bailee notice of
the interest of Lender in the Collateral or request from any such entity, at any
time, in the name of Borrower or Lender or any designee of Lender, information
concerning the Monetary Collateral and any amounts owing with respect thereto;
5.3.3 notify any Obligated Party to make payment directly and
solely to Lender, or notify bailees as to the disposition of Collateral,
5.3.4 take or bring, in the name of Lender or Borrower, all
steps, actions, suits or proceedings deemed by Lender necessary or desirable to
effect collection of or other realization upon any Collateral;
5.3.5 after an Event of Default, change the address for delivery
of mail to Borrower and to receive and open mail addressed to Borrower;
5.3.6 after an Event of Default, upon any terms and conditions,
extend the time of payment of, compromise, or settle for cash, credit, return of
merchandise, any and all Monetary Collateral and discharge or release any
Obligated Party without affecting any of the Obligations;
5.3.7 execute in the name of Borrower and file against Borrower
in favor of Lender financing statements or amendments with respect to any or all
of the Collateral; and
5.3.8 execute in the name of Borrower and file on behalf of
Borrower with such governmental authorities as are appropriate such documents
(including, without limitation, applications, certificates, and tax returns) as
may be required for purposes of having Borrower qualified to transact business
in a particular state or geographic location.
5.4 RELEASE. Borrower hereby releases and exculpates Lender, its
officers, employees, agents, designees, attorneys, and accountants from any
liability arising from any acts under this Agreement or in furtherance thereof,
whether of omission or commission, and whether based upon any error of judgment
or mistake of law or fact, except for gross negligence or willful misconduct. In
no event shall Lender have any liability to Borrower for lost profits or other
special or consequential damages.
5.5 NO AMENDMENTS. After written notice by Lender to Borrower, and
automatically, without notice, after an Event of Default, Borrower shall not,
without the prior written consent of Lender in each instance:
5.5.1 grant any extension of time for payment of any Monetary
Collateral;
5.5.2 compromise or settle any Monetary Collateral for less than
the full amount thereof;
5.5.3 release in whole or in part any Obligated Party, or
5.5.4 grant any credits, discounts, allowances, deductions,
return authorizations or the like with respect to any Monetary Collateral.
5.6 DELIVERY OF COLLATERAL. At such times as Lender may request
and in the manner specified by Lender, Borrower shall deliver to Lender or
Lender's representative original invoices, agreements, proof of rendition of
services and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to any of the Collateral, together with customer
statements, schedules describing the Monetary Collateral and/or statements of
account and confirmatory assignments to Lender of the Monetary Collateral, in
form and substance satisfactory to Lender and duly executed by Borrower. Without
limiting the provisions of any other section of this Agreement, Borrower will
promptly notify Lender, in writing, of Borrower's granting of credits,
discounts, allowances, deductions, return authorizations or the like with
respect to any Monetary Collateral. In no event shall any such schedule or
confirmatory assignment (or the absence
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thereof or omission of any Monetary Collateral therefrom) limit or in any way be
construed as a waiver, limitation, or modification of the Liens or rights of
Lender or the warranties, representations, and covenants of Borrower under this
Agreement.
In addition, in the event that any Collateral, including
proceeds, is evidenced by or consists of a contract, letter of credit, advice of
credit, instrument, money, negotiable documents, chattel paper, or similar
property (collectively, the "Negotiable Collateral"), Borrower shall,
immediately upon written request therefor from Lender, endorse and assign such
Negotiable Collateral over to Lender and deliver actual physical possession of
the Negotiable Collateral to Lender.
5.7 INSPECTION. From time to time as requested by Lender, at the
sole expense of Borrower, Lender or its designee shall have access, during
reasonable business hours if prior to an Event of Default and at any time if on
or after an Event of Default, to all premises where Collateral is located for
the purposes of inspecting (and removing, if after the occurrence of an Event of
Default) any of the Collateral, including Borrower's books and records, and
Borrower shall permit Lender or its designee to make copies of such books and
records or extracts therefrom as Lender may request. Without expense to Lender,
Lender may use any of Borrower's personnel, equipment, including computer
equipment, programs, printed output and computer readable media, supplies and
premises for the collection of accounts and realization on other Collateral as
Lender, in its sole discretion, deems appropriate. Borrower hereby irrevocably
authorizes all accountants and third parties, in the form attached hereto as
EXHIBIT B, to disclose and deliver to Lender at Borrower's expense all financial
information, books and records, management reports and other information in
their possession relating to Borrower. In addition to the foregoing, Borrower
hereby authorizes Lender at any time to access electronically information
concerning any accounts maintained by Borrower with any bank or other financial
institution so long as such access is in furtherance of, or to monitor
compliance with, the terms of this Agreement.
6. CONDITIONS PRECEDENT TO ALL CREDIT ACCOMMODATIONS. Subject to the
other terms and conditions contained herein, Lender's obligation to make any
Credit Accommodation available to Borrower is subject to the satisfaction of, or
waiver of, immediately prior to or concurrently with the making of such Credit
Accommodation, the following conditions precedent:
6.1 REPRESENTATIONS AND WARRANTIES. All representations and
warranties of Borrower to Lender set forth herein or in any of the Documents
shall be true and accurate and complete in all respects;
6.2 NO EVENT OF DEFAULT. There shall not exist an Event of Default
or an event which with the giving of notice or the passage of time, or both,
would be or become an Event of Default; and
6.3 PAYMENT OF ALL FEES. Borrower shall have paid to Lender all
accrued and unpaid fees and other amounts due and payable hereunder and pursuant
to the terms hereof.
7. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and
warrants to Lender as follows, the truth and accuracy of which, and compliance
with which, shall be continuing conditions of the making of any Credit
Accommodations:
7.1 PRIORITY INTEREST. Except for the Subordinating Creditor, no
entity other than Lender has (or, in the case of after-acquired Collateral, will
have, at the time Borrower acquires rights therein) any interest in the
Collateral, including but not limited to any security interest or other lien or
charge.
7.2 ACCOUNTS. Each Account is and shall remain an Eligible Account,
and except as disclosed in writing to Lender at the time such Account arises:
(a) each is valid and legally enforceable and represents an undisputed bona fide
indebtedness incurred by the account debtor for the sum reported to Lender; (b)
each arises from an absolute and unconditional sale of goods, without any right
of return or consignment, or from a completed rendition of services; (c) each is
not, at the time such Account arises, subject to any defense, offset, dispute,
contra relationship, counterclaim, or any given or claimed credit, allowance or
discount; and (d) all statements made and all unpaid balances and other
information appearing in the invoices, agreements, proofs of rendition of
services and delivery of goods and other documentation relating to the Accounts,
and all confirmatory assignments, schedules, statements of account and books and
records with respect thereto, are true and correct and in all respects what they
purport to be.
7.3 CONDITION OF EQUIPMENT. With respect to Borrower's equipment,
Borrower shall keep the equipment in good order and repair, and in running and
marketable condition, ordinary wear and tear excepted.
8. BORROWER'S AFFIRMATIVE COVENANTS. Until payment in full of the
Obligations, Borrower agrees to:
8.1 FINANCIAL STATEMENTS, REPORTS AND CERTIFICATIONS. Furnish to
Lender, in form and substance satisfactory to Lender:
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8.1.1 ANNUAL FINANCIAL STATEMENTS. As soon as possible after the
end of each fiscal year of Borrower, and in any event within ninety (90) days
thereafter:
8.1.1.1 a complete copy of Borrower's financial
statements, including but not limited to (I) the management letter, if any, (ii)
the balance sheet as of the close of the fiscal year, and (iii) the income
statement for such year, together with a statement of cash flows, reviewed by
certified public accountants selected by Borrower and satisfactory to Lender;
and
8.1.1.2 a statement certified by the chief financial
officer of Borrower that Borrower is in compliance with all the terms,
conditions, covenants and warranties of this Agreement; and
8.1.2 OTHER FINANCIAL STATEMENTS. No later than 30 days after
the close of each month (an "Accounting Period"), Borrower's balance sheet as of
the close of such Accounting Period and its income statement for that portion of
the then current fiscal year through the end of such Accounting Period certified
by Borrower's chief financial officer as being complete, correct, and fairly
representing its financial condition and results of operations.
8.2 EXPENSES.
8.2.1 GENERALLY. Pay all reasonable out-of-pocket expenses of
Lender (including, but not limited to, reasonable fees and disbursements of
Lender's counsel) incident to (whether by judicial proceedings or otherwise, and
whether any resulting dispute resolution procedure involving tort, contract or
other claims):
8.2.1.1 the preparation, negotiation, execution,
administration and enforcement of the Documents, any amendments, extensions and
renewals thereof, and any other documents prepared in connection with any
transactions between Borrower and Lender, whether or not executed;
8.2.1.2 any expenses incurred by Lender (whether or not
for the benefit of Borrower) under this Agreement, including, without
limitation, all expenses for postage relating to the mailing of statements,
invoices, and verifications, and all expenses relating to any audits of all or
any portion of the Collateral;
8.2.1.3 the protection of Lender's rights under the
Documents;
8.2.1.4 defending against any and all claims against
Lender relating to any of its acts of commission or omission directly or
indirectly relating to the Documents; and
8.2.1.5 or in any way arising out of a bankruptcy
proceeding commenced by or against Borrower, including but not limited to
expenses incurred in enforcing or defending Lender's claims against Borrower or
the Collateral, defending any avoidance actions, and expenses related to the
administration of said proceeding.
8.2.2 INDEMNIFICATION. Indemnify and save Lender harmless from
any and all liability with respect to any stamp or other taxes (other than
transfer or income taxes) which may be determined to be payable in connection
with the execution of the Documents or any action of Lender with respect to the
Collateral, including, without limitation, the transfer of the Collateral to
Lender's name or that of Lender's nominee or any purchaser at a foreclosure
sale.
8.3 COSTS AND EXPENSES - ENFORCEMENT OF JUDGMENTS. Reimburse Lender
for all costs and expenses, including reasonable attorneys' fees, which Lender
incurs in enforcing any judgment rendered in connection with this Agreement.
This provision is severable from all other provisions hereof and shall survive,
and not be deemed merged into, any such judgment.
8.4 TAXES AND EXPENSES REGARDING BORROWER'S ASSETS.
8.4.1 Make timely payment or deposit of all taxes, assessments
or contributions required of Borrower. If Borrower fails to make any such
payment or deposit or furnish proof of such payment immediately upon Lender's
request, Lender may, in its sole discretion and without notice to Borrower:
8.4.1.1 make payment of the same or any part thereof, or
8.4.1.2 set up such reserves against the Obligations as
Lender deems necessary to satisfy the liability therefore, or both.
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8.4.2 Lender may conclusively rely on statements of the amount
owing or other official statements issued by the appropriate governmental
agency. Any payment made by Lender shall constitute neither:
8.4.2.1 an agreement by Lender to make similar payments in
the future, nor
8.4.2.2 a waiver by Lender of any default under the
Documents. Lender need not inquire into, nor contest the validity of, any
expense, tax, security interest, encumbrance or lien, and the receipt of the
usual official notice requiring the payment thereof shall be conclusive evidence
that the same was validly due and owing.
8.5 LOCATION OF COLLATERAL. Give Lender written notice immediately
upon forming an intention to change the location of its chief place of business
or any of the Collateral.
8.6 CHANGE IN NAME. Give Lender written notice immediately upon
forming an intention to change its name or form of business organization.
8.7 INSURANCE. At all times maintain, with financially sound and
reputable insurers, casualty insurance with respect to the Collateral and other
assets. All such insurance policies shall be in such form, substance, amounts
and coverage as may be satisfactory to Lender and shall provide for thirty (30)
days prior written notice to Lender of cancellation or reduction of coverage.
Borrower hereby irrevocably authorizes Lender and any designee of Lender to
obtain at Borrower's expense, and, after an Event of Default, to adjust or
settle any claim or other matter under or arising pursuant to such insurance or
to amend or cancel such insurance. Borrower shall deliver to Lender evidence of
such insurance and a Lender's loss payable endorsement naming Lender as loss
payee as to all existing and future insurance policies relating to the
Collateral. Borrower shall deliver to Lender, in kind, all instruments
representing proceeds of insurance received by Borrower. Lender may apply any
and all insurance proceeds received at any time to the cost of repairs to or
replacement of any portion of the Collateral and/or, at Lender's option, to the
payment of or as security for any of the Obligations, whether or not due, in any
order or manner as Lender determines.
9. BORROWER'S NEGATIVE COVENANT. Until full and indefeasible payment of
the Obligations, Borrower will not suffer to exist any Lien (other than the Lien
held by the Subordinating Creditor) upon any of its assets.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. Each of the following events or conditions
shall constitute an "Event of Default":
10.1.1 Borrower defaults in the payment of any Obligations
when due, whether at maturity, upon acceleration, or otherwise, if not cured
within five (5) days after written notice from Lender to Borrower pursuant to
paragraph 21.1;
10.1.2 Borrower is in default with respect to the Documents;
10.1.3 The Obligations at any time exceed the Allowable Amount
if not cured within five (5) days after written notice from Lender to Borrower
pursuant to paragraph 21.1;
10.1.4 Borrower or any Guarantor fails to pay any loan when
due if not cured within five (5) days after written notice from Lender to
Borrower pursuant to paragraph 21.1;
10.1.5 Borrower or any Guarantor fails to pay any payroll tax
obligation when due if not cured within fifteen (15) days after written notice
from Lender to Borrower pursuant to paragraph 21.1;
10.1.6 An order for relief is entered against any Obligor by
any United States Bankruptcy Court; or any Obligor does not generally pay its
debts as they become due (within the meaning of 11 U.S.C. 303(h) as at any time
amended, or any successor statute thereto); or any Obligor makes an assignment
for the benefit of creditors; or any Obligor applies for or consents to the
appointment of a custodian, receiver, trustee, or similar officer for it or for
all or any substantial part of its assets, or such custodian, receiver, trustee,
or similar officer is appointed without the application or consent of any
Obligor; or any Obligor institutes (by petition, application, answer, consent,
or otherwise) any bankruptcy, insolvency, reorganization, moratorium,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application, or otherwise) against
any Obligor and such Obligor has consented to or failed to have dismissed such
proceeding within thirty (30) days after such proceeding is initiated; or any
judgment, writ, warrant of attachment, execution, or similar process shall be
issued or levied against a substantial portion of the assets of any Obligor; or
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10.1.7 An adverse change occurs with respect to the financial
condition or operations of Borrower which results in a material impairment of
the prospect of repayment of the Obligations;
10.1.8 A sale, hypothecation or other disposition is made of
twenty percent (20%) or more of the beneficial interest in any class of voting
stock of Borrower by either (i) any Key Employee, or (ii) Shala Shashani in a
private sale transaction. Borrower shall give Lender written notice of any such
transaction within ten (10) days after closing of such transaction;
10.1.9 Any Guarantor fails to perform or observe any of such
Guarantor's obligations under any Guaranty, or shall notify Lender of its
intention to rescind, modify, terminate or revoke the Guaranty with respect to
future transactions, or the Guaranty shall cease to be in full force and effect
for any reason whatever;
10.1.10 Any Subordinating Creditor fails to perform or observe
any of such Subordinating Creditor's obligations under any Subordination
Agreement, or notifies Lender of the Subordinating Creditor's intention to
rescind, modify, terminate or revoke the Subordination Agreement with respect to
future transactions, or the Subordination Agreement ceases to be in full force
and effect for any reason whatsoever;
10.1.11 Any Key Employee fails to devote 100% of their efforts
in furtherance of the business affairs of Borrower for any two consecutive
months, or ceases to be employed by Borrower unless, in either case, Borrower's
Board of Directors appoints a temporary or permanent replacement for the Key
Employee and such replacement is approved by Lender.
10.2 REMEDIES.
10.2.1 Upon the occurrence of any Event of Default (other than
an Event of Default arising under Section 10.1.6 hereof), at Lender's option:
10.2.1.1 Lender may declare this Agreement and all of
Lender's obligations hereunder terminated;
10.2.1.2 Lender may declare all Obligations to be
immediately due and payable, without presentment, demand, protest, or notice of
any kind, all of which are hereby expressly waived by Borrower;
10.2.1.3 all Obligations shall accrue interest at the
Default Rate; and
10.2.1.4 Lender may, immediately and without expiration
of any period of grace, enforce payment of all Obligations and exercise any and
all other remedies granted to it under the Documents, at law, in equity, or
otherwise.
10.2.2 Upon the occurrence of any Event of Default arising
under Section 10.1.6 hereof:
10.2.2.1 this Agreement and all of Lender's obligations
hereunder shall automatically terminate;
10.2.2.2 all Obligations shall be immediately due and
payable, without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived by Borrower;
10.2.2.3 all Obligations shall accrue interest at the
Default Rate; and
10.2.2.4 Lender may, immediately and without expiration
of any period of grace, enforce payment of all Obligations and exercise any and
all other remedies granted to it under the Documents, at law, in equity, or
otherwise.
11. TERMINATION. This Agreement shall continue in effect until the next
Anniversary Date, and shall thereafter be automatically renewed from year to
year thereafter unless:
11.1. Lender gives Borrower notice of non-renewal, in which event
this Agreement shall terminate sixty days from the date of such notice; or
11.2. Borrower gives Lender notice of non-renewal, in which event
this Agreement shall terminate on the Anniversary Date, which is at least sixty
days from the date on which such notice of termination is actually received by
Lender.
11
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12. REVOCATION OF BORROWER'S RIGHT TO SELL INVENTORY FREE AND CLEAR OF
LENDER'S SECURITY INTEREST. Lender may, upon the occurrence of an Event of
Default, revoke Borrower's right to sell inventory free and clear of Lender's
security interest therein, and notify Borrower's account debtors, or any other
party(ies), of such revocation by means of language substantially equivalent to
that contained in EXHIBIT A attached hereto.
13. NO LIEN TERMINATION WITHOUT RELEASE. In recognition of Lender's
right to have all its attorneys' fees and other expenses incurred in connection
with this Agreement secured by the Collateral, notwithstanding payment in full
of all Obligations by Borrower, Lender shall not be required to record any
terminations or satisfactions of any of its liens on the Collateral unless and
until Borrower and all Guarantors have executed and delivered to Lender general
releases which conform to California Civil Code ss. 1541-2.
14. DISCLAIMER FOR NEGLIGENCE. Lender shall not be liable for any
claims, demands, losses or damages made, claimed or suffered by Borrower, except
such as may arise through or could be caused by Lender's gross negligence or
willful misconduct.
15. LIMITATION OF CONSEQUENTIAL DAMAGE. Lender shall not be responsible
for any lost profits of Borrower arising from any breach of contract, tort
(excluding the Lender's gross negligence or willful misconduct), or any other
wrong arising from the establishment, administration or collection of the
Obligations.
16. ACCOUNT STATED. Lender shall render to Borrower a statement setting
forth the transactions arising hereunder. Each statement shall be considered
correct and binding upon Borrower as an account stated, except to the extent
that Lender receives, within thirty (30) days after the mailing of such
statement, written notice from Borrower of any specific exceptions by Borrower
to that statement.
17. RETENTION OF RECORDS. Lender shall retain any documents, schedules,
invoices or other papers delivered by Borrower only for such period as Lender,
at its sole discretion, may determine necessary, after which time Lender may
destroy such records without notice to or consent from Borrower.
18. NOTICES TO THIRD PARTIES. Lender shall have the right at any time
to give any Guarantor or Subordinating Creditor notice of any fact or event
relating to this Agreement, as Lender may deem necessary or desirable in
Lender's sole discretion, including, without limitation, Borrower's financial
condition. Borrower shall provide to each Guarantor and Subordinating Creditor a
copy of each notice, statement or report required to be given to Lender under
any of the paragraphs of this section.
19. INFORMATION TO PARTICIPANTS. Lender may furnish any financial or
other information concerning Borrower, or any of its subsidiaries, heretofore or
hereafter provided by Borrower to Lender, pursuant to this Agreement or
otherwise, to any prospective or actual purchaser of any participation or other
interest in any loans made by Lender to Borrower (whether under this Agreement
or otherwise), or to any prospective purchaser of any securities issued or to be
issued by Lender.
20. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding among and between the parties hereto, and supersedes all prior or
contemporaneous agreements and understandings between said parties, verbal or
written, express or implied, relating to the subject matter hereof. No promises
of any kind have been made by Lender or any third party to induce Borrower to
execute this Agreement. No course of dealing, course of performance or trade
usage, and no parol evidence of any nature, shall be used to supplement or
modify any terms of this Agreement.
21. MISCELLANEOUS.
21.1 NOTICES.
21.1.1 All notices required to be given to any entity other
than Lender shall be deemed given upon the first to occur of:
21.1.1.1 deposit thereof in a receptacle under the
control of the United States Postal Service;
21.1.1.2 transmittal by electronic means to a receiver
under the control of such entity; or
21.1.1.3 actual receipt by such party or an employee or
agent of such entity.
21.1.2 All notices required to be given to Lender hereunder
shall be deemed given upon actual receipt by the President of Lender. For the
purposes hereof, notices hereunder shall be sent to the following addresses, or
to such other addresses as each such entity may in writing hereafter indicate:
12
<PAGE>
BORROWER
--------
TELENETICS CORPORATION
ADDRESS: 26772 Vista Terrace Dr.
Lake Forest, CA 92630
Telephone Number: (949) 455-4000
Telefacsimile Number: (949) 455-4010
Attention: Michael A. Armani
WITH COPY TO
------------
Larry A. Cerutti, Esq.
Rutan & Tucker, LLP
611 Anton Blvd., 14th Floor
Costa Mesa, CA 92626
Telephone Number: (714) 641-5100
Telefacsimile Number: (714) 546-9035
LENDER
------
(Lending Office)
ADDRESS: CELTIC CAPITAL CORPORATION
2951 28th Street
Suite 2030
Santa Monica, CA 90405
Telephone Number: (310) 314-7333
Telefacsimile Number: (310) 314-7338
Attention: Mark Hafner, President
WITH COPY TO
------------
Craig A. Barbarosh, Esq.
Pillsbury Madison & Sutro LLP
650 Town Center Drive, 7th Floor
Costa Mesa, CA 92626-7122
Telephone Number: (714) 436-6800
Telefacsimile Number: (714) 436-2800
21.2 SURVIVAL. All representations, warranties and agreements herein
contained on the part of Borrower shall survive the making of Advances
hereunder, and all such representations, warranties and agreements shall be
effective so long as any obligations owed to Lender by Borrower remain
unsatisfied or for such longer periods as may be expressly stated.
21.3 ATTORNEYS' FEES. Borrower shall pay Lender its reasonable
attorneys fees and expenses incurred in the administration or enforcement of
this Agreement (whether or not the result of litigation). It shall be presumed
(subject to rebuttal only by the introduction of competent evidence to the
contrary) that the amount recoverable is the amount billed to the Lender by its
counsel and that such amount will be reasonable if based on counsel customary
billing rates charged to Lender by its counsel in similar matters. For the
purposes of Section 1717 of the California Civil Code, Lender shall be the
"prevailing party" if it recovers ANY FUNDS WHATSOEVER from Borrower, whether by
settlement, judgment or otherwise.
21.4 AMENDMENT AND WAIVER. Neither this Agreement nor any provisions
hereof may be changed, waived, discharged or terminated, nor may any consent to
the departure from the terms hereof be given, orally (even if supported by new
consideration), but only by an instrument in writing signed by all parties to
this Agreement. Any waiver or consent so given shall be effective only in the
specific instance and for the specific purpose for which given.
21.5 NO WAIVER. No failure to exercise and no delay in exercising
any right, power, or remedy hereunder shall impair any right, power, or remedy
which Lender may have, nor shall any such delay be construed to be a waiver of
any of such rights, powers, or remedies, or any acquiescence in any breach or
default hereunder; nor shall any waiver of any breach or default of Borrower
hereunder be deemed a waiver of any default or breach subsequently occurring.
All rights and remedies granted to Lender hereunder shall remain in full force
and effect notwithstanding any single or partial exercise of, or any
discontinuance of action begun to enforce, any such right or remedy. The rights
and remedies specified herein are cumulative and not exclusive of each other or
of any rights or remedies which Lender would otherwise have. Any waiver, permit,
consent or approval by Lender of any breach or default hereunder must be in
writing and shall be effective only to the extent set forth in such writing and
only as to that specific instance.
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<PAGE>
21.6 CHOICE OF LAW. This Agreement and all transactions contemplated
hereunder and/or evidenced hereby shall be governed by, construed under, and
enforced in accordance with the internal laws of the State of California.
21.7 CONSTRUCTION. This Agreement and all agreements relating to the
subject matter hereof are the product of negotiation and preparation by and
among each party and its respective attorneys, and shall be construed
accordingly. The parties waive the provisions of California Civil Code
Section1654.
21.8 WAIVER OF STATUTE OF LIMITATIONS. Borrower waives the pleading
of any statute of limitations with respect to any and all actions in connection
herewith. To the extent that Borrower may now or in the future have any claim
against Lender, arising out of this agreement or the transaction contemplated
herein whether in contract or tort or otherwise, Borrower must assert such claim
within one year of it accruing. Failure to assert such claim within one year
shall constitute a waiver thereof. Borrower agrees that such period is
reasonable and sufficient for it to investigate and act upon the claim. This
Section shall survive any termination of this agreement. A copy of the waiver
may be filed as a written consent in any judicial proceeding.
21.9 VENUE. The parties agree that any suit, action or proceeding
arising out of the subject matter hereof, or the interpretation, performance or
breach of this Agreement, shall, if Lender so elects, be instituted in the
United States District Court for the Southern District of California or any
court of the State of California located in Los Angeles County (the "Acceptable
Forums"), each party agrees that the Acceptable Forums are convenient to it, and
each party irrevocably submits to the jurisdiction of the Acceptable Forums,
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT, and waives any and all objections to jurisdiction or venue
that it may have under the laws of the State of California or otherwise in those
courts in any such suit, action or proceeding. Should such proceeding be
initiated in any other forum, Borrower waives any right to oppose any motion or
application made by Lender as a consequence of such proceeding having been
commenced in a forum other than an Acceptable Forum.
21.10 WAIVER OF TRIAL BY JURY. IN RECOGNITION OF THE HIGHER COSTS
AND DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT
TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING
HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY
SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH
A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED; AND EACH PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
21.11 SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement is held to be invalid, illegal or unenforceable in
any respect, then such provision shall be ineffective only to the extent of such
prohibition or invalidity, and the validity, legality, and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
21.12 COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if all
signatures were upon the same instrument. Delivery of an executed counterpart of
the signature page to this Agreement by telefacsimile shall be effective as
delivery of a manually executed counterpart of this Agreement, and any party
delivering such an executed counterpart of the signature page to this Agreement
by telefacsimile to any other party shall thereafter also promptly deliver a
manually executed counterpart of this Agreement to such other party, PROVIDED
that the failure to deliver such manually executed counterpart shall not affect
the validity, enforceability, or binding effect of this Agreement.
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
TELENETICS CORPORATION
/s/ Michael Armani
------------------------------------
By: Michael A. Armani
Title: President
CELTIC CAPITAL CORPORATION
/s/ Mark Hafner
------------------------------------
By: Mark Hafner
Title: President
15
<PAGE>
EXHIBIT A
Attention: Accounts Payable
RE: TELENETICS CORPORATION (THE "CLIENT")
Ladies and Gentlemen:
We are pleased to advise that, to enable the Client to better service
its customers, the Client has assigned its present and future accounts to us.
To the extent that you are now indebted or may in the future become
indebted to the Client, payment thereof is to be made to us and not to the
Client or any other entity. The payments should be mailed to us at the following
address:
CELTIC CAPITAL CORPORATION
Department 73000
P.O. Box 79120
City of Industry, CA 91716-9120
This letter may only be revoked by a writing signed by one of our
officers and acknowledged before a notary public.
TO ASSIST US IN APPLYING PAYMENTS PLEASE FAX A COPY OF THIS INDICATING
YOUR FEDERAL TAX I.D. NUMBER IN THIS SPACE:______________
Please do not allow this letter to cause you any confusion, and we
thank you in advance for continuing your fine payment record.
Very truly yours,
CELTIC CAPITAL CORPORATION
/s/ Mark Hafner
Mark Hafner
President
AUTHORIZED
- ----------
Telenetics Corporation
By: /s/ Michael Armani
----------------------------------
Michael A. Armani
Title: President
-------------------------------
<PAGE>
EXHIBIT B
April 2, 1999
Mr. Douglas D. Naylor
B. D. O. Seidman, LLP
3200 Bristol St., Suite 400
Costa Mesa, CA 92626
Dear Douglas:
We hereby instruct you to:
(1) send to Celtic Capital Corporation ("Lender") all financial
statements, all tax returns prepared by your office, including QUARTERLY PAYROLL
TAX RETURNS, and all reports which are prepared as a result of any audit or
other review of our operations, finances or internal controls, specifically
including any reports dealing with improper accounting practices, defalcations,
financial reporting errors or misstatements or fraud perpetrated on us or by any
of our employees or agents; and
(2) upon Lender's request, meet with Lender to discuss said financial
statements, to answer any questions regarding same and to make available to them
any of the books and records which may be in your possession.
Please be advised that one of the principal purposes of the audited
financial statements which you may be asked to prepare is to provide Lender with
information regarding our financial condition.
All of the foregoing must be sent to Lender prior to or
contemporaneously with said reports being sent to us.
These instructions may only be revoked by a writing signed by an
officer of Lender and acknowledged before a notary public.
Thank you.
Very truly yours,
TELENETICS CORPORATION
By: /s/ Michael Armani
--------------------------------
Michael A. Armani
Title: President
cc: Celtic Capital Corporation
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into on
April 5, 1999, by and between Telenetics Corporation, a California corporation
(the "Buyer"), and Greenland Corporation, a Nevada corporation (the "Seller").
This Agreement contemplates a transaction in which the Buyer will purchase
certain assets and assume certain contracts from the Seller in return for the
consideration described herein.
NOW, THEREFORE, in consideration of the premises and the mutual
promises made in this Agreement, and in consideration of the representations,
warranties and covenants contained in this Agreement, the parties agree as
follows.
1. DEFINITIONS.
"Acquired Assets" means the following assets of the Seller:
(a) All right, title and interest in and to the Wireless Technology.
(b) All Intellectual Property associated with the Wireless
Technology.
(c) All rights under all Assumed Contracts.
(d) All RF meter modules, software, firmware, codes, documents and
other personal property or information held or used by the Seller in connection
with the Wireless Technology.
(e) All marketing plans and sales leads.
(f) All right, title and interest in and to the "Airlink" name and
trademark.
"Assumed Contracts" means the contracts identified in the Disclosure
Schedule to be assigned to the Buyer.
"Closing" and "Closing Date" have the meanings set forth in Section
2(d) below.
"Disclosure Schedule" has the meaning set forth in Section 3 below.
"Intellectual Property" means (a) patents, patent applications,
patent disclosures, and improvements thereto, (b) trademarks, service marks,
trade dress, logos, trade names and corporate names and registrations and
applications for registration thereof, (c) copyrights and registrations and
applications for registration thereof, (d) mask works and registration and
applications for registration thereof, (e) trade secrets and confidential
business information (including ideas, formulas, compositions, inventions
(whether patentable or unpatentable and whether or not reduced to practice),
know-how, manufacturing and production processes and techniques, research and
development information, drawings, specifications, designs, plans, proposals,
technical data,
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<PAGE>
copyrightable works, financial, marketing and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information), (f) other proprietary rights, and (g) copies and tangible
embodiments thereof (in whatever form or medium).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice.
"Purchase Price" has the meaning set forth in Section 2(c) below.
"Wireless Technology" has the meaning set forth in EXHIBIT A.
2. BASIC TRANSACTION.
(a) PURCHASE AND SALE OF THE ACQUIRED ASSETS. On and subject to the
terms and conditions of this Agreement, the Buyer agrees to purchase from the
Seller, and the Seller agrees to sell, transfer, convey, and deliver to the
Buyer, all of the Acquired Assets at the Closing for the consideration specified
below in this Section 2.
(b) ASSUMPTION OF LIABILITIES. On and subject to the terms and
conditions of this Agreement, the Buyer agrees to assume and become responsible
for all of the Assumed Contracts at the Closing as described in the Assignment
and Assumption of Assumed Contracts in the form attached as an exhibit to this
Agreement. The Buyer will not assume or have any responsibility, however, with
respect to any other obligations or liabilities of the Seller which are not
Assumed Contracts.
(c) PURCHASE PRICE. At the Closing, the Buyer shall deliver to the
Seller a certificate representing 128,571 shares (the "Shares") of the Buyer's
Series B Convertible Preferred Stock (the "Purchase Price"). The Shares shall
have the rights, preferences, privileges and restrictions set forth in the form
of Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series B Convertible Preferred Stock attached hereto as EXHIBIT
B (the "Certificate of Determination").
(d) THE CLOSING. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Rutan &
Tucker, LLP, 611 Anton Boulevard, Suite 1200, Costa Mesa, California 92626,
concurrently with the execution of this Agreement by all parties or at such
other place and time as may be agreed by the parties (the "Closing Date").
(e) DELIVERIES AT THE CLOSING. At the Closing, each party shall
deliver to the other all such agreements, documents and instruments contemplated
by this Agreement or necessary for the conveyance of the Acquired Assets to the
Buyer and the assumption of the Assumed Contracts by the Buyer. In addition, the
Seller shall provide to the Buyer a list of persons who have prior experience
with the installation of the Wireless Technology and who may be able to provide
assistance to the Buyer in connection with the Buyer's installation of the
Wireless Technology.
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<PAGE>
(f) ALLOCATION. The parties agree to allocate the Purchase Price
(and all other capitalizable costs) among the Acquired Assets for all purposes
(including financial accounting and tax purposes) in the manner determined by
the Buyer.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller represents
and warrants to the Buyer that the statements contained in this Section 3 are
correct and complete as of the date of this Agreement and shall be true and
correct as of the Closing Date, except as set forth in the Disclosure Schedule
and initialed by the parties.
(a) ORGANIZATION OF THE SELLER. The Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada. The Seller is duly qualified to conduct business as a foreign
corporation in the State of California and is in good standing under the laws of
the State of California.
(b) AUTHORIZATION OF TRANSACTION. The Seller has full power and
authority to execute and deliver this Agreement and to perform its obligations
hereunder. Without limiting the generality of the foregoing, the Seller has
taken all actions required for the execution, delivery and performance of this
Agreement by the Seller and the sale of the Acquired Assets as provided herein.
This Agreement constitutes the valid and legally binding obligation of the
Seller, enforceable in accordance with its terms. The person or persons who have
executed this Agreement on behalf of the Seller are duly authorized to do so by
the Board of Directors of the Seller.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge or other restriction of any government, governmental agency
or court to which the Seller is subject or any provision of the articles or
bylaws, as amended, of the Seller or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify or cancel, or require a notice under
any contract, lease, sublease, license, sublicense, franchise, permit,
indenture, agreement or mortgage for borrowed money, instrument of indebtedness,
security interest or other arrangement to which the Seller is a party or by
which the Seller is bound or to which any of the Seller's assets is subject. The
Seller need not give any notice to, make any filing with, or obtain any
authorization, consent or approval of any government or governmental agency in
order for the parties to consummate the transactions contemplated by this
Agreement.
(d) TITLE TO THE ACQUIRED ASSETS. The Seller has good and marketable
title, free and clear of all mortgages, liens, pledges, claims, easements,
rights of way, conditions, security interests, encumbrances, restrictions,
charges, imperfections of title or equities of any nature whatsoever, to all of
the Acquired Assets, respectively, real and personal, tangible and intangible,
to be sold, conveyed, transferred and delivered hereunder. At the Closing, the
Buyer will obtain good and marketable title to the Acquired Assets, free and
clear of all mortgages, liens, pledges, claims, easements, rights of way,
conditions, security interests, encumbrances, restrictions, charges,
imperfections of title or equities of any nature whatsoever. All of the
equipment and tangible personal property constituting a portion of the Acquired
Assets is in good operating condition and repair, normal wear and tear excepted.
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<PAGE>
(e) ASSUMED CONTRACTS. Set forth in the Disclosure Schedule is a
list of all written agreements, leases, contracts and commitments relating to
the Acquired Assets to which the Seller is a party or is otherwise bound as of
the date of this Agreement. The Seller has supplied the Buyer with true, correct
and complete copies of each such Assumed Contract. The Seller makes no
representations or warranties regarding the enforceability or validity of the
Assumed Contracts. Notwithstanding the foregoing, the Seller acknowledges
receipt of the following sums (the "Deposits") from certain utilities (the
"Utilities") in connection with pilot projects (the "Pilot Projects") relating
to the Acquired Assets: (i) $15,000 from Emerald People Utility District in
Eugene, Oregon; (ii) $10,000 from Third Taxing District in Norwalk, Connecticut;
and (iii) $10,000 from Springville Electric in Springville, Utah. The Seller
agrees that it is now and shall remain at all times after the Closing liable for
return of the Deposits to the Utilities and that the Buyer assumes no liability
therefor. The Seller further agrees that it will provide reasonable cooperation
to the Buyer in connection with the Buyer's pursuit, if any, of the Pilot
Projects.
(f) INTELLECTUAL PROPERTY. None of the Acquired Assets or any
Intellectual Property held or used by the Seller in connection with the Acquired
Assets infringes the Intellectual Property or other proprietary rights of any
other party. All Intellectual Property developed for the Seller was so developed
under agreements with employees, consultants or others that provide that the
Intellectual Property so developed is a "work made for hire" or otherwise
providing for the assignment of all rights thereto to the Seller. To the
knowledge of the Seller, the manufacture, use, sale, marketing or distribution
of the Acquired Assets does not violate or infringe on any patent or any
proprietary or personal right of any person or firm.
(g) COMPLIANCE WITH LAWS. The business of the Seller has been
operated in compliance with all federal, state, local and foreign laws,
regulations and orders, the violation of which would have a material adverse
effect upon any of the Acquired Assets. All reports and filings required to be
made by the Seller with respect to the Acquired Assets under foreign, federal,
state and local statutes, laws, regulations, rules and ordinances relating to
health, safety and protection of the environment have been filed in a timely
manner, and no such reports or filings are currently required that have not been
made.
(h) CONSENTS. No approvals or consents of or assignments by any
person (including, without limitation, any federal, state or local governmental
or administrative authorities) are necessary in connection with the execution,
delivery or performance of this Agreement.
(i) TAX MATTERS. All taxes, including, without limitation, income,
excise, property, sales, transfer, use, franchise, payroll, employees' income
withholding and social security taxes imposed or assessed by the United States
or by any foreign country or by any state, municipality, subdivision or
instrumentality of the United States or of any foreign country, or by any other
taxing authority, which are due or payable by the Seller with respect to the
Acquired Assets, and all interest, penalties and additions thereon, whether
disputed or not, have been paid in full; all tax returns or other documents
required to be filed in connection therewith have been accurately prepared and
duly and timely filed. No issues have been raised (or are currently pending) by
the Internal Revenue Service or any other taxing authority in connection with
any of the returns and reports referred to above, and no waivers of statutes of
limitations have been given or requested with respect to the Seller in
connection therewith.
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<PAGE>
(j) LITIGATION. There is no claim, dispute, action, proceeding
(including arbitration), suit, appeal or investigation, at law or in equity,
pending (other than those, if any, with respect to which service of process or
similar notice has not yet been made and which are not within the knowledge of
the Seller) or, to the knowledge of the Seller, threatened against the Seller
involving the Wireless Technology or any of the Acquired Assets before any
court, agency, authority, arbitration panel or other tribunal. The Seller is not
subject to or in default with respect to any notice, order, writ, injunction or
decree of any court, agency, authority, arbitration panel or other tribunal
involving the Wireless Technology or any of the Acquired Assets.
(k) RELATED PARTIES. No officer, director or other affiliate of the
Seller, directly or indirectly, is party to any material arrangement affecting
the design, development, marketing, distribution or use of the Wireless
Technology or the Acquired Assets.
(l) UNDERLYING DOCUMENTS. Copies of all documents listed or
described in the Disclosure Schedule have been furnished or made available to
the Buyer. All such documents are true and complete copies, and there are no
amendments or modifications thereto, except as expressly noted in the Disclosure
Schedule.
(m) BROKERS' FEES. The Seller has no liability or obligation to pay
any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Buyer could become
liable or obligated.
(n) DISCLOSURE. Neither this Agreement nor any of the schedules or
exhibits hereto contains any untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they were made, not misleading, and there is
no fact which has not been disclosed to the Buyer that materially affects
adversely or could reasonably be anticipated to materially affect adversely the
Wireless Technology or the Acquired Assets.
(o) INVESTMENT REPRESENTATIONS. The Seller hereby represents and
warrants to the Buyer with respect to the acquisition of the Shares as follows:
(i) INVESTMENT EXPERIENCE. The Seller has substantial experience
in evaluating and investing in private placement transactions of securities in
companies similar to the Buyer so that the Seller is capable of evaluating the
merits and risks of its investment in the Buyer and has the capacity to protect
its own interests.
(ii) ACCREDITED INVESTOR. The Seller is either (i) an
"accredited investor" as that term is defined in Securities and Exchange
Commission Rule 501 of Regulation D, as presently in effect, or (ii) has a
preexisting personal or business relationship with the Buyer or any of its
officers, directors or controlling persons, or by reason of the Seller's
business or financial experience or the business or financial experience of the
Seller's professional advisors who are unaffiliated with and who are not
compensated by the Buyer or any affiliate or selling agent of the Buyer,
directly or indirectly, has the capacity to protect the Seller's own interests
in connection with the acquisition of the Shares.
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(iii) INVESTMENT. The Seller is acquiring the Shares for
investment by the Seller and its affiliates, not as a nominee or agent, and not
with the view to, or for resale in connection with, any distribution thereof.
The Seller understands that the Shares have not been, and will not be,
registered under the Securities Act of 1933 ("Securities Act") by reason of a
specific exemption from the registration provisions of the Securities Act, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Seller's representations as
expressed herein.
(iv) RULE 144. The Seller acknowledges that the Shares must be
held indefinitely unless subsequently registered under the Securities Act or
unless an exemption from such registration is available. The Seller is aware of
the provisions of Rule 144 promulgated under the Securities Act which permit
limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things, the existence
of a public market for the shares, the availability of certain current public
information about the Buyer, the resale occurring not less than a specified
number of years after a party has purchased and paid for the security to be
sold, the sale being effected through a "broker's transaction" or in
transactions directly with a "market maker" and the number of shares being sold
during any three-month period not exceeding specified limitations.
(v) ACCESS TO DATA. The Seller has had an opportunity to discuss
the Buyer's business, management and financial affairs with its management. The
Seller also has had an opportunity to ask questions of officers of the Buyer,
which questions were answered to its satisfaction. The Seller understands that
such discussions, as well as any written information issued by the Buyer, were
intended to describe certain aspects of the Buyer's business and prospects but
were not a thorough or exhaustive description. The Seller's decision to enter
into the transactions contemplated hereby is based on its own evaluation of the
risks and merits of the purchase and the Buyer's proposed business activities.
Without limiting the generality of the foregoing, the Seller has had the
opportunity to obtain and to review the following documents of the Buyer: (1)
Form 10-KSB for the fiscal year ended March 31, 1998; (2) Form 10-QSB for the
quarter ended June 30, 1998; and (3) Form 10-QSB for the quarter ended September
30, 1998, in each case as filed with the SEC. The Buyer understands that its
investment in the Shares involves a high degree of risk.
(vi) TAX LIABILITY. The Seller has reviewed with its own tax
advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. With respect to
such tax consequences, the Seller relies solely on such advisors and not on any
statements or representations of the Buyer or any of its agents. The Seller
understands and agrees that it (and not the Buyer) shall be responsible for any
of its own tax liability that may arise as a result of this investment or the
transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents
and warrants to the Seller that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement.
(a) ORGANIZATION AND CAPITALIZATION OF THE BUYER. The Buyer is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California. As
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of March 31, 1999, the authorized capital stock of the Buyer consisted of (a)
25,000,000 shares of Common Stock, without par value, (b) 2,500,000 shares of
Series A 7.5% Convertible Redeemable Preferred Stock ("Series A Preferred
Stock") and (b) 2,500,000 shares of undesignated Preferred Stock. Upon the
filing of the Certificate of Determination with the California Secretary of
State, the authorized capital stock of the Buyer shall consist of (a) 25,000,000
shares of Common Stock, (b) 2,500,000 shares of Series A Preferred Stock, (c)
128,571 shares of Series B Convertible Preferred Stock and (c) 2,371,429 shares
of undesignated Preferred Stock.
(b) AUTHORIZATION OF TRANSACTION. The Buyer has all necessary
corporate power and corporate authority to execute and deliver this Agreement
and to perform its obligations hereunder. Without limiting the generality of the
foregoing, the Buyer has taken all actions required for the execution, delivery
and performance of this Agreement by the Buyer, the purchase of the Acquired
Assets and the issuance of the Shares to the Seller as provided herein. This
Agreement constitutes the valid and legally binding obligation of the Buyer,
enforceable in accordance with its terms except as enforceability may be limited
by the effect of bankruptcy, insolvency, reorganization, moratorium or other
similar laws generally affecting creditors' rights and the application of
general principles of equity including, but not limited to, the inability to
exercise the right to specific performance in certain circumstances. The person
or persons who have executed this Agreement on behalf of the Buyer have been
duly authorized to do so by the Buyer.
(c) NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the actions contemplated hereby, will (i)
violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge or other restriction of any government, governmental agency
or court to which the Buyer is subject or any provision of its charter or bylaws
or (ii) conflict with, result in a breach of, constitute a default under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify, or cancel, or require any notice under any contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, security interest, or other arrangement to which the Buyer is a
party or by which it is bound or to which any of its assets is subject in a
manner or to an extent that would materially and adversely affect the
validity or enforceability of, or the authority or ability of the Buyer to
perform its obligations under, this Agreement or any of the other documents
contemplated by this Agreement. Other than federal and state securities law
notices in connection with the issuance of the Shares, the Buyer does not need
to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order for the
parties to consummate the transactions contemplated by this Agreement.
(d) CONCERNING THE SHARES. The Shares have been duly authorized and,
when issued in accordance with this Agreement, and the shares of Common Stock
underlying the Shares, when issued upon conversion of the Shares, will be duly
and validly issued, fully paid and non-assessable and will not subject the
holder thereof to personal liability by reason of being such holder. There are
no preemptive rights of any stockholder of the Buyer, as such, to acquire any of
the Shares.
(e) APPROVALS. No authorization, approval or consent of or filing
with any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the shareholders of the Buyer is
required to be obtained by the Buyer for the issuance and sale of the
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Shares and the Common Stock issuable upon conversion thereof other than the
requirements of any applicable blue sky laws. The Buyer has taken or will take
all actions necessary to satisfy the requirements of applicable blue sky laws.
(f) INFORMATION PROVIDED. The information provided by or on behalf
of the Buyer to the Seller and referred to in Section 3(o)(v) of this Agreement
does not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they are made, not misleading.
(g) LITIGATION. There is no action, suit, proceeding, inquiry or
investigation before or by any court, public board or body pending or, to the
knowledge of the Buyer or any of its subsidiaries, threatened against or
affecting the Buyer or any of its subsidiaries, wherein an unfavorable decision,
ruling or finding would materially and adversely affect the validity or
enforceability of, or the authority or ability of the Buyer to perform its
obligations under, this Agreement or any of the other documents contemplated by
this Agreement.
(h) BROKERS' FEES. The Buyer has no liability or obligation to pay
any fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Seller could become
liable or obligated.
5. POST-CLOSING COVENANTS AND AGREEMENTS. The parties agree as follows
with respect to the period following the Closing.
(a) GENERAL. If at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, each of the
parties will take such further action (including, without limitation, the
execution and delivery of such further instruments and documents) as the other
party may reasonably request. The Seller expressly agrees that it will, without
demanding any further consideration therefor, at the request of the Buyer,
provide all assistance and execute any papers deemed necessary or desirable by
the Buyer, its successors, assigns and legal representatives, for perfecting the
Buyer's right, title and interest in and to the Intellectual Property and the
Acquired Assets, including without limitation, the acquisition, sustenance,
reexamination or reissuance of patents relating to the Intellectual Property and
the maintenance and perfection of the rights of the Buyer and its successors and
assigns to such patents. The Seller further expressly agrees that it will
promptly, at the request of the Buyer, cause the inventors and other prior
owners, if any, of the Intellectual Property and the Acquired Assets, to provide
all assistance and execute all such papers for the purposes described in this
paragraph, without cost to the Buyer.
(b) CONDITION TO TRANSFER OF CERTAIN CONTRACTS. At the Closing, the
Buyer may elect to close the transactions contemplated hereby notwithstanding
the fact that the Seller may have failed to obtain consents to the transfer of
one or more Assumed Contracts which by their terms require the consent of any
other contracting party thereto to the assignment thereof to the Buyer. The
terms of this paragraph (b) shall govern the transfer of the benefits of each
such Assumed Contract. Notwithstanding anything herein to the contrary, the
parties acknowledge and agree that at the Closing the Seller will not assign to
the Buyer any Assumed Contract which by its terms requires the consent of any
other contracting party thereto unless each consent has been obtained prior to
the Closing Date. With respect to each such unassigned Assumed Contract, after
the Closing Date the
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Seller shall continue to deal with the other contracting party(ies) to that
Assumed Contract as the prime contracting party and shall use its best efforts
to obtain the consent of all required parties to the assignment of such Assumed
Contract, but the Buyer shall be entitled to the benefits of such Assumed
Contract accruing after the Closing Date to the extent that the Seller may
provide the Buyer with such benefits without violating the terms of such Assumed
Contract; and the Buyer agrees to perform at its sole expense all of the
obligations of the Seller to be performed under such Assumed Contract the
benefits of which the Buyer is receiving after the Closing Date.
(c) DELIVERY OF HARDWARE DESIGN AND RELATED MATERIALS. The Seller
expressly agrees that it will promptly, but in any event no later than two weeks
following the Closing Date, deliver to the Buyer all hardware design and related
materials relating to the Wireless Technology, including without limitation, the
RF Module designed under contract by Mr. Greg Gillis and the notes, design
specifications and related materials produced by Mr. Gillis and/or the Seller,
as more particularly described in the memo dated April 5, 1999 delivered to the
Buyer by Mr. Lou Montulli.
(d) INTRODUCTIONS. The Seller agrees to introduce the Buyer to the
Utilities and to Centro de Pesquisas de Energia Eletrica and the other party or
parties, if any, who had expressed an interest in the Wireless Technology, as
soon as practicable, but in no event later than two weeks, following the
Closing.
(e) SURVIVAL. Notwithstanding anything to the contrary contained in
this Agreement, the covenants and agreements described in this Section 5 shall
survive the Closing and continue forever.
6. INDEMNIFICATION.
(a) INDEMNIFICATION OF LOSSES. The Seller hereby indemnifies the
Buyer against Losses (as defined below), and the Buyer hereby indemnifies the
Seller against Losses, as set forth in this Section 6. If the Buyer shall have
suffered a Loss by reason of (i) the breach of any of the representations or
warranties or covenants made by the Seller herein, or (ii) any liability or
claim arising prior to the Closing with respect to the Acquired Assets, the
Buyer shall be indemnified for such Loss by the Seller as set forth in this
Section 6; if the Seller shall have suffered a Loss by reason of (iii) the
breach of any of the representations or warranties or covenants made by the
Buyer herein, (iv) the manufacture or sale of any of the Acquired Assets by the
Buyer after the Closing, or (v) the Assumed Contracts, the Seller shall be
indemnified for such Loss by the Buyer as set forth in Section 6. The party who
is requested to provide indemnity is herein referred to as "Indemnitor" and the
party requesting indemnity is herein referred to as "Indemnitee." "Loss" shall
mean any losses, liabilities, claims, damages and expenses incurred including,
without limitation, penalties, fines, interest, amounts paid in settlement and
reasonable fees and disbursements of counsel, and reasonable expenses incurred
in connection with any investigation, action, suit or proceeding instituted
against Indemnitee.
(b) PAYMENT. At such time as the indemnifiable amount of a Loss as
been determined in accordance with this Section 6 (a "Liquidated Claim"), (A) if
resulting from a claim made by the Buyer, the Seller shall immediately pay the
Buyer the amount of the Liquidated Claim, or (B) if resulting from a claim made
by the Seller, the Buyer shall immediately pay the Seller the
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amount of the Liquidated Claim, as the case may be. No forbearance of Indemnitee
in demanding payment from an Indemnitor shall act as a waiver of any right of
Indemnitee to receive payment from Indemnitor, nor shall it relieve Indemnitor
of any obligation to Indemnitee under this Agreement.
(c) NOTICE OF CLAIMS. If Indemnitee has any claim for a Loss (a
"Claim"), it will give prompt written notice thereof to Indemnitor, including in
such notice a brief description of the facts upon which Claim is based and the
amount thereof.
(d) THIRD PARTY CLAIMS. If Indemnitee becomes aware of a Third Party
Claim that it believes may result in a Claim (a "Third Party Claim"), Indemnitee
shall notify Indemnitor of such Third Party Claim, and Indemnitor shall be
entitled, at the expense of Indemnitor, to defend such Third Party Claim.
(e) DISPUTED CLAIMS. If Indemnitor objects to any Claim or Third
Party Claim, it shall give written notice of such objection and brief statement
of the grounds of such objection to Indemnitee within 20 business days after
notice is received. If no such notice is given, such claim shall be a Liquidated
Claim. If such objection is made, Indemnitor and Indemnitee shall meet and use
their best efforts to settle the dispute in writing which, when resolved, shall
be a Liquidated Claim.
(f) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the parties set forth in this Agreement will continue for a
period of three years from the Closing Date.
7. MISCELLANEOUS.
(a) PRESS RELEASES AND ANNOUNCEMENTS. No party shall issue any press
release or announcement relating to the subject matter of this Agreement without
the prior written approval of the other party; provided, however, that any party
may make any public disclosure it believes in good faith is required by law or
regulation (in which case the disclosing party will advise the other party prior
to making the disclosure).
(b) NO THIRD PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any person other than the parties and their
respective successors and permitted assigns.
(c) ENTIRE AGREEMENT. This Agreement (including the documents
referred to herein) constitutes the entire agreement between the parties and
supersedes any prior understandings, agreements, or representations by or
between the parties, written or oral, that may have related in any way to the
subject matter hereof, including, without limitation, the Memorandum of
Understanding entered into by and between the parties effective as of January
18, 1999.
(d) SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties named herein and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of its rights, interests or obligations hereunder without the prior written
approval of the other party.
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(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(f) HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(g) NOTICES. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand, claim
or other communication hereunder shall be deemed duly given three business days
after mailing if sent by registered or certified mail, return receipt requested,
postage prepaid and addressed to the intended recipient as set forth below:
If to the Seller:
Greenland Corporation
7084 Miramar Road, Fourth Floor
San Diego, California 92121
Attention: Chief Executive Officer
If to the Buyer:
Telenetics Corporation
26772 Vista Terrace Drive
Lake Forest, California 92630
Attention: President
With a copy to:
Rutan & Tucker, LLP
611 Anton Boulevard, Suite 1200
Costa Mesa, California 92626
Attention: Larry A. Cerutti, Esq.
Any party may give any notice, request, demand, claim, or other
communication hereunder using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary mail, or
electronic mail), but no such notice, request, demand, claim or other
communication shall be deemed to have been duly given unless and until it any is
received by the person for whom it is intended. Any party may change the address
to which notices, requests, demands, claims and other communications hereunder
are to be delivered by giving the other party notice in the manner herein set
forth.
(h) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of California.
(i) AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Seller.
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(j) EXPENSES. Each of the Buyer and the Seller will bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby.
(k) CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party. Any reference to
any federal, state, local or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
(l) INCORPORATION OF EXHIBITS AND SCHEDULES. The exhibits and
schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
(m) BULK TRANSFER LAWS. The Buyer acknowledges that the Seller will
not comply with the provisions of any bulk transfer laws of any jurisdiction in
connection with the transactions contemplated by this Agreement. The Seller
shall indemnify the Buyer for any liability with respect to any such
non-compliance.
[Remainder of page intentionally left blank.]
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(n) TRANSFER TAXES. Any and all sales, use or other transfer taxes
arising from the transactions contemplated by this Agreement will be paid by the
Seller.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
TELENETICS CORPORATION,
a California corporation
By: /s/ Michael Armani
-------------------------------------
Michael A. Armani, President
GREENLAND CORPORATION,
a Nevada corporation
By: /s/ Lou Montulli
-------------------------------------
Lou Montulli, Chief Executive Officer
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Disclosure Schedule
The Assumed Contracts are:
1. The three Pilot Projects referred to in Section 3(e) of the
Agreement; and
2. The Seller's contact with Centro de Pesquisas de Energia
Eletrica and the other party or parties, if any, who had
expressed an interest in the Wireless Technology.
<PAGE>
Exhibit A -- Wireless Technology
WIRELESS, FIXED NETWORK AUTOMATED METER READING NETWORK
Utilities are going through a period of rapid change triggered by government's
deregulation mandate. While the real race may be to develop unique products and
services to capture (and hold) the customer, the bottom line is the urgency for
utilities to capitalize on the interactive services that technology is making
possible.
Utilities, like telecommunications service providers, face massive regulatory
change that is reshaping the business landscape. The principal challenge is to
manage the transformation from monopolies to competitive service-oriented
businesses.
With competition comes a two-headed monster: Utility companies must learn to
drive cost out of their operations while improving service quality and adding
new features.
Meters, which measure the flow of commodity resources (electricity, natural gas,
water) are a utility's lifeline. Information retrieval, however, is an expensive
and inefficient process that is both labor-intensive and error- prone.
Furthermore, the meter reading process is generally limited to daylight hours;
and it results in only a single data point of the total resource consumed. This
method provides practically no statistical energy management information.
Automated meter reading ("AMR") of electric, gas, and water meters has the most
obvious benefit of reducing utility company costs. However, the most significant
benefit to such automation is enhanced information retrieval and management.
Additional benefits include utility load control management, theft and tamper
detection, service interruption detection, and automation of some parts of the
distribution system ("SCADA"). A "smart" network will enable utilities to manage
costs and service quality efficiently and effectively.
Greenland has developed such a network - Airlink, a completely wireless, fixed
network AMR system designed as a communications link between a utility and every
individual user of resources in its service area!
WHY AUTOMATE?
The major issues facing the utility metering process are: (1) access to the
meter (which may be in the basement of the home., or in a remote location); (2)
having enough qualified personnel to handle the work load; (3) assurance of the
accuracy of the information (hand writing the information in the field and then
transferring it to billing computers breeds inaccuracy); (4) costs (including
salaries, employee benefits, insurance, fleet maintenance, etc.); (5) cash flow
(some utilities can send bills to its customers only once every 2 months;
automation can decrease the length of the billing cycle because meters can be
read more frequently); and (6) energy management (utilities need information at
the point of use in order to get better information as to resource usage,
including time, amount of use and, in some cases, power interruption status).
WHY IS AIRLINK A SUPERIOR SOLUTION?
Most AMR solutions rely on either a hard-wired solution or a wireless solution
that requires the collection device to be in relatively close proximity to the
meter. Other wireless systems require meter reading personnel to be deployed in
the field to accomplish data collection. Advanced wireless technology is a major
differentiating characteristic of the AirLink system. The system enables a
utility to read meters, regardless of location, without the need to use
hard-wired connections or to send reading personnel near the location. The
system is an entirely remote-controlled network, with collector stations
strategically placed in the general area of the meters. A single collection
station can accommodate thousands of meters. Meters can be polled many times
daily. (AirLink defaults to reading meters in 15-minute increments.) Data is
collected in real-time, without the need for field personnel. Additionally, the
system automatically informs the main office of power interruption at the meter
site. Power failure or tampering with the system is detected within seconds of
such an event.
<PAGE>
STATE OF THE MARKET
As one would expect, the United States represents the most sizeable market for
delivery of essential utility services such as water, electricity, and natural
gas. Accordingly, the U.S. represents the largest single market for meter
systems and services, approximately 102 million homes comprising 300 million
meters.
Radio telemetry devices, until recently, have been limited to collection of data
by a mobile platform to collect the data from meter sensing devices via radio
telemetry. The basic requirements of these systems to be successful are that (1)
the system must provide more than a single data point; (2) the system must be
non- intrusive and capable of retrofitting to the installed base of meters; (3)
the operator interface must be designed so that it can be easily used by
existing meter reading personnel; (4) the system must be reliable, inexpensive,
and capable of operating in harsh environments; and (5) the meter reading unit
must be capable of being mounted to the meter in such a way as to allow for the
manual reading of the meter in case of system failure. Unfortunately, such
systems have not met such requirements in total. A major disadvantage is that
meter reading personnel must still be used for the data collection process.
Notwithstanding the reduction in personnel requirements, staff must be retrained
and re-deployed to serve the system from vehicles designed to interact with the
communication of data from each meter to the collection point(s). A second major
disadvantage is that these systems have not been designed to adequately function
in all conditions (i.e. in sunlight, or harsh weather conditions). Additional
technical challenges have yet to be solved to a reasonable degree to insure
total system reliability. These include transmission inconsistencies, route
coordination, etc. Also, traditional meter reading methodology does not provide
utilities the ability to implement incremental billing to enable differential
charges for usage based upon usage patterns that impact resource management.
In an increasingly automated age, utility companies must adapt to technologies
that have the potential to increase their productivity and level of customer
service. Automating meter reading is one of the principle methods by which
utilities can positively transform their operations.
AIRLINK TECHNOLOGY
The key to the AirLink network is Greenland's patent-pending radio frequency
(RF) technology; and associated technology devoted to the unique requirements of
utility meter reading and information management.
The AirLink wireless meter reading network is made up of essentially two parts:
(1) the meter reading device that is installed on the utility meter itself, and
collection devices, which are located at intervals throughout the service area.
The system electronically takes an electronic "picture" of the meter's output,
creates a digital "packet" of the actual meter reading, and transmits the data
to the collection station. The data is then available to the utility company to
incorporate into its existing computer systems for billing and statistical
analysis. (A database software interface is provided for virtually any system.)
The meter reading device ("MRU") is easy to install and to maintain. Most
installations are estimated at 10 minutes in duration. Greenland recommends a
project management change-out approach, which calls for a meter shop "bench"
retrofit installation. MRU devices can also be installed in the field.
METER READING DEVICE
AirLink MRU's are available for any kind of utility meter. Circuitry is provided
to capture data from the meter and to translate it for digital transmission. The
major components include a transmitter with a specialized, horizontally
polarized antenna, receiver, power supply with supercapacitor (battery), an
internal computer to translate data, and memory for storage of data.
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The AirLink MRU is designed to last for many years without the need for repair
or replacement. The AirLink electric meter MRU is powered by line voltage and a
supercapacitor. Water and natural gas MRU's use long- life lithium batteries
that may be either replaced or re-charged every three to ten years (depending
upon how frequently meter must transmit data).
The meter reading device has its own computer circuitry, including memory, in
order to save data to provide redundancy of data, and to insure against data
loss due to vandalism, power outage, etc.
COMMUNICATIONS
The AirLink system addresses two main technological issues related to automating
the process of meter reading: (1) meter reading accuracy and (2) communications
integrity. Greenland's patent-pending communications protocol and associated
technology will enable utilities to receive data from millions of meters in
short periods of time. The system effectively deals with the challenges related
to data compression and signal integrity; particularly when applied to the needs
of utilities to transmit from thousands of data points in short periods of time.
AIRLINK IS A 2-WAY SYSTEM
The AirLink system provides for communications both to each meter and from each
meter back to its local collection station. The system polls each meter and each
meter scans for a clear, open channel prior to transmission of data to
collection units. AirLink's proprietary communications protocol enables the
system to function efficiently and effectively, even in high density RF traffic.
There are a number of additional benefits to this 2-way solution. Value-added
enhancements can be added to the AirLink system as it communicates
bi-directionally. These might include the ability to remotely activate or
deactivate nodes on the system, reading multiple meters at each location, etc.
CELL SITE DATA CORRECTION/TRANSMISSION
Collection computers are arrayed strategically as "cell sites" in order to
receive data from each meter and to transmit the data to the central computer at
the utility's billing office.
Each stop in the data network has its own requirements in order to provide
accurate, redundant information on resource usage. Utilities will find the
system useful in saving reading costs, providing a variety of value added
services, and in the increased management reporting capabilities provided by an
AirLink network.
A data accumulator is built-in to the system to enable the collection of load
management information. The system can provide separate daily usage levels and
stores data related to highest and peak demand data. The system allows utilities
to incorporate time-differential billing by segregating data into hourly (or
sub-hourly) periods.
The AirLink device at the meter also includes circuitry that detects power
interruption. In the event of a power failure or tampering at the meter site,
the system will transmit such status when polled by the network (at
user-programmable intervals).
A number of safeguards and security features are incorporated to enhance
performance, reliability, and maintenance. Internal diagnostic circuitry will
detect low power (including battery power levels in water and gas meters) and
communications errors.
Each receiver cell site may be linked to transfer the collected data to the main
billing office, or collected data may be transferred by other methods such as
telephone link, memory card swap, or mobile RF links.
-3-
<PAGE>
WHAT ABOUT WATER?
Greenland's AirLink system can be deployed for use in water meter applications.
The technology is designed to meet the special technological and environmental
challenges that are faced by water utilities. Since most water meters are
located below ground, in dark, inhospitable conditions without readily available
power or communications links, water system AMR presents unique difficulties.
The AirLink system uses the same MRU/CRU deployment as for electric and gas
meters, with the additional elements of protective housings for electronics. The
AirLink MRU is equipped with sensors that can function with all kinds of output
devices used in AMR-ready water meters.
Power is provided by long-life batteries to run the AirLink device. In
installations in which water and electricity are monitored, data from the water
meter can be transmitted to the electric meter, which will reduce the need for
electricity. The antenna is horizontally polarized and is of the same design as
those used for electricity and gas.
AIRLINK PERFORMANCE FEATURES
PRICE PER DATA POINT - AirLink pricing, at this time, is approx. $65 per meter
in order to retrofit an electric meter with AirLink electronic circuitry. No new
meters are required for the system.
TERMS OF SALE - AirLink is made available for sale to utilities. Greenland
charges additional fees for ongoing technical and operations support. Under
certain circumstances, utilities can elect to pay per read and have Greenland
operate the system under a service agreement.
INTEGRATION OF ELECTRIC, GAS, AND WATER METERS - The AirLink system will enable
the integration of all utility meters, as well as other sensing devices, in an
integrated 2-way system. Generally, gas and water meters, which require battery
power, can be configured to report over short distances to the electric meter.
SIGNAL DISTANCE - METER TO COLLECTION STATION - AirLink is installed using
either the FCC Part 15 or Part 90 communications specifications. AirLink is
unique in that the network can be "tuned" to most available frequencies. AirLink
systems are estimated to provide coverage of a 1/2-mile to 15-mile radius from
data point to collection point, depending upon whether Part 15 or Part 90 is
used.
DATA THROUGHPUT - The AirLink system sends data packets at a maximum effective
throughput of 100,000 bits per second. The speed of transmission enables AirLink
to accommodate a far greater number of meters in the system. Traditional, slow
transmission data rates complicate the AMR challenge because only small amounts
of data can be transferred in order to avoid interference. In a 2-way system
such as AirLink, it allows for the system to poll each data point and to confirm
the reception of information (including reads, status, etc.)
RETROFIT OF EXISTING INSTALLED METERS - The AirLink system is designed to
retrofit most existing meters. The benefit to this is that the utility's
existing investment in meters is protected. Moreover, all of the standard single
phase electric meters in the system are transformed into time-of-use meters. In
competitive systems, special meters are required in order to provide network
connectivity, which can add substantially to the cost of deploying an AMR
network.
READING ACCURACY - Naturally, reading accuracy is a critical component of an AMR
system. AirLink's delivery specification is to read meters with a minimum of 99%
accuracy.
-4-
<PAGE>
WIDE AREA NETWORK (WAN) COMPATIBILITY - AirLink is compatible with other systems
via RS-232 serial interface (input and output). In situations where the network
must be interconnected with others, this interface is generally suitable and
reliable. Other, competitive systems, which have proprietary interfaces may not
be compatible with other networks, such as telephone, fiber-optic cable,
cellular, etc.)
DATABASE SOFTWARE REQUIREMENTS - AirLink is an "open" system. All data is fed to
a flat-file database that is accessible to other system software (such as
billing systems) in use by the utility. No special software interfaces are
required to access the AirLink database. Alternative systems generally require a
custom-designed database structure.
NETWORK MANAGEMENT SOFTWARE REQUIREMENTS - AirLink provides, as part of its
overall system, software to enable system management in conjunction with the
database. This software is primarily used to create and transmit commands (read,
status, etc.) to each data point (meter) in the system. It will also manage the
protocol that polls meters and reports anomalies in meter status (power
interruption, etc.) The basis of this protocol is that there are 10,000 data
"slots" per second. Slots are available for status changes, etc.
DISTRIBUTION AUTOMATION (SCADA) - The AirLink system enables utilities to use
its components for distribution automation (SCADA) applications, including
monitoring switching stations, load management, etc. Each AirLink module that is
deployed for this purpose becomes an individual data point in the system and is
managed by the network with a specific protocol and command structure.
OTHER FEATURES - AirLink provides a number of other features and functions; some
of which are unique and others which are competitive. These include remote
connect/disconnect of meters, remote configuration of data points, demand
metering, tamper and outage detection and advanced metering features for
large-scale industrial users.
AIRLINK'S COMPETITIVE ADVANTAGE
The AirLink wireless, fixed-network meter reading network will significantly
increase a utility's ability to manage its resource consumption by providing
information that is not readily available through existing metering technology.
AirLink technology provides improved resource management, time-of-use (TOU)
information, outage management data, better peak-demand monitoring, potential
SCADA applications, and security. Its ability to provide differential billing
real-time usage information for PUC reporting has the potential of further
reducing overall costs for the utility.
-5-
<PAGE>
Exhibit B -- Form of Certificate of Determination of
Rights, Preferences, Privileges and Restrictions of
Series B Convertible Preferred Stock
[Attachment is contained at Exhibit 3.3 to the Form 10-KSB
of which this page is a part.]
<PAGE>
Exhibit C -- Form of Bill of Sale
BILL OF SALE
THIS BILL OF SALE made this ____ day of April, 1999, by Greenland
Corporation, a Nevada corporation ("Seller"), for the benefit of Telenetics
Corporation, a California corporation ("Buyer").
WHEREAS, Seller and Buyer have entered into an Asset Purchase Agreement
of even date herewith (the "Agreement"), pursuant to which Seller has agreed to
transfer certain of its assets to Buyer.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, Seller grants, sells, conveys, transfers, assigns, releases and
delivers to Buyer the Acquired Assets (as defined in the Agreement), to have and
to hold all and such singular such assets to Buyer, and its successors and
assigns, to their own use and benefit forever.
Seller, at any time at or after the date hereof, will execute,
acknowledge and deliver any further deeds, assignments, conveyances and other
assurances, documents, and instruments of transfer requested by Buyer and will
take any other action consistent with the terms of this Bill of Sale that may be
requested by Buyer for the purpose of assigning, transferring, granting,
conveying and confirming to Buyer, or reducing to possession, any or all of the
Acquired Assets.
This Bill of Sale has been executed by a duly authorized officer of
Seller as of the day and year first above written.
GREENLAND CORPORATION,
a Nevada corporation
By: ____________________________________
Lou Montulli, Chief Executive Officer
<PAGE>
Exhibit D -- Form of Assignment and Assumption of
the Assumed Contracts
ASSIGNMENT AND ASSUMPTION OF ASSUMED CONTRACTS
THIS ASSIGNMENT AND ASSUMPTION OF ASSUMED CONTRACTS (this
"Assignment") is made and effective on ________________, 1999, by and between
Greenland Corporation, a Nevada corporation ("Assignor"), and Telenetics
Corporation, a California corporation ("Assignee"), pursuant to an Asset
Purchase Agreement (the "Purchase Agreement") dated the date hereof, under which
Assignor agreed to transfer certain contracts to Assignee.
Assignor, by this instrument, does hereby sell, transfer, assign and
delegate to Assignee, its successors and assigns, all of Assignor's rights under
the Assumed Contracts and all of Assignor's obligations under the Assumed
Contracts arising on or after the date hereof.
True, correct and complete copies of the Assumed Contracts have been
provided to Assignee and are described in the Disclosure Schedule to the
Purchase Agreement.
Assignee, by acceptance of this Assignment, agrees to become liable for
the performance of all of the provisions, covenants and obligations of Assignor
set forth in the Assumed Contracts arising on or after the date of this
Assignment. It is expressly understood and agreed that Assignee shall not be
liable for any liabilities, claims or obligations of Assignor of any kind or
nature other than those expressly set forth herein.
This Assignment has been executed by the duly authorized officers of
Assignor and Assignee as of the date first above written.
GREENLAND CORPORATION,
a Nevada corporation
By: ____________________________________
Lou Montulli, Chief Executive Officer
TELENETICS CORPORATION,
a California corporation
By: ____________________________________
Michael A. Armani, President
<PAGE>
Exhibit E -- Form of Trademark Assignment
TRADEMARK ASSIGNMENT
Whereas, GREENLAND CORPORATION, a Nevada corporation, having a place of
business at 7084 Miramar Road, San Diego, California 92121 ("Assignor"), has
adopted, used, is using and is the owner of the trademark "AIRLINK" (the
"Trademark"), which Trademark was registered on June 16, 1998 on the principal
register of the United States Patent and Trademark Office, registration no.
2,165,596 for class number 9; and
Whereas, TELENETICS CORPORATION, a California corporation
("Telenetics"), has succeeded to a portion of the business, assets and
appurtenant goodwill of said Assignor.
Now, therefore, in consideration of the sum of one dollar and other
good and valuable consideration, the receipt of which is hereby acknowledged,
Assignor hereby assigns, as more particularly set forth in that certain Asset
Purchase Agreement by and between Assignor and Telenetics dated April ___, 1999,
to Telenetics all right, title and interest, in the United States and any other
countries in which Assignor has acquired similar rights, in and to the Trademark
and all corresponding registrations and/or applications, together with the
goodwill of the business symbolized by the Trademark and the registrations or
applications to register said Trademark.
Signed at __________________________ as of April ___, 1999.
GREENLAND CORPORATION,
a Nevada corporation
By:_________________________________
Printed Name: _______________________
Its: ________________________________
<PAGE>
State of California )
)
County of San Diego ) ss.
On April ___, 1999, before me, _____________________, a Notary Public,
personally appeared ________________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the entity upon behalf of which the person acted, executed the
instrument on behalf of its successor and assignee Telenetics and pursuant to
authority duly received.
WITNESS my hand and official seal.
______________________________________ (Seal)
Signature
<PAGE>
Exhibit F -- Form of Patent Assignment
ASSIGNMENT OF UNITED STATES PATENT APPLICATION
Whereas, GREENLAND CORPORATION, a Nevada corporation, having a place of
business at 7084 Miramar Road, 4th Floor, San Diego, California 92121
("Assignor"), is the sole owner of the entire right, title and interest in and
to the following application for United States Letters Patent: Serial Number
08/835,496, filed April 8, 1997, entitled "Optical Emitter and Detector
Circuit," inventor: James M. Morgan ("Patent"); and
Whereas, TELENETICS CORPORATION, a California corporation having a
place of business in Lake Forest, California ("Assignee"), is desirous of
acquiring the entire right, title and interest in and to the Patent.
Now, therefore, for good and valuable consideration, the receipt and
sufficient of which are hereby acknowledged, effective April ___, 1999, Assignor
has sold, assigned and transferred, and by these presents does hereby sell,
assign and transfer, Assignor's entire right, title and interest in and to the
Patent, the inventions disclosed therein, all divisions, continuations and
continuations-in-part thereof, and all patents issuing on any of the foregoing,
and all reissues, reexaminations and extensions thereof, and the right to apply
for Letters Patent in foreign countries with full benefit of such priorities as
may now or hereafter be granted to Assignor by local laws or by treaty,
including any international convention for the protection of intellectual
property, all said rights to be held and enjoyed by Assignee for its own use and
for the use of its successors, assigns or other legal representatives, to the
full end of the term for which the Patent and other patents on such other
applications will be granted, reexamined, extended or reissued, as fully and
entirely as the same would have been held and enjoyed by Assignor if this
assignment and sale had not been made.
Assignor does hereby request and authorize the Commissioner of Patents
and Trademarks, U.S.A., to issue the Patent, when granted, in accordance with
this Assignment. Assignor further agrees that Assignor will, without demanding
any further consideration therefor, at the request of Assignee, provide all
assistance and execute any papers deemed necessary by Assignee, its successors,
assigns and legal representatives, for obtaining, sustaining, reexamining or
reissuing the Patent, and for maintaining and perfecting Assignee's right to the
Patent.
In witness whereof, GREENLAND CORPORATION has caused these presents to
be signed by its duly authorized officer below named at San Diego, California.
GREENLAND CORPORATION,
a Nevada corporation
By:___________________________________
Printed Name: __________________________
Its: ___________________________________
<PAGE>
State of California )
)
County of San Diego ) ss.
On April ____, 1999, before me, _____________________, a Notary Public,
personally appeared ________________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the entity upon behalf of which the person acted, executed the
instrument on behalf of its successor and assignee Telenetics and pursuant to
authority duly received.
WITNESS my hand and official seal.
______________________________________ (Seal)
Signature
<PAGE>
ASSIGNMENT OF UNITED STATES PATENT APPLICATION
Whereas, GREENLAND CORPORATION, a Nevada corporation, having a place of
business at 7084 Miramar Road, Suite 400, San Diego, California 92121
("Assignor"), is the sole owner of the entire right, title and interest in and
to the following application for United States Letters Patent: Serial Number
08/589,454, entitled "Digital to Analog Modulator and Analog to Digital
Demodulator," inventors: James M. Morgan and A. Mark Hunt ("Patent"); and
Whereas, TELENETICS CORPORATION, a California corporation having a
place of business in Lake Forest, California ("Assignee"), is desirous of
acquiring the entire right, title and interest in and to the Patent.
Now, therefore, for good and valuable consideration, the receipt and
sufficient of which are hereby acknowledged, effective April ___, 1999, Assignor
has sold, assigned and transferred, and by these presents does hereby sell,
assign and transfer, Assignor's entire right, title and interest in and to the
Patent, the inventions disclosed therein, all divisions, continuations and
continuations-in-part thereof, and all patents issuing on any of the foregoing,
and all reissues, reexaminations and extensions thereof, and the right to apply
for Letters Patent in foreign countries with full benefit of such priorities as
may now or hereafter be granted to Assignor by local laws or by treaty,
including any international convention for the protection of intellectual
property, all said rights to be held and enjoyed by Assignee for its own use and
for the use of its successors, assigns or other legal representatives, to the
full end of the term for which the Patent and other patents on such other
applications will be granted, reexamined, extended or reissued, as fully and
entirely as the same would have been held and enjoyed by Assignor if this
assignment and sale had not been made.
Assignor does hereby request and authorize the Commissioner of Patents
and Trademarks, U.S.A., to issue the Patent, when granted, in accordance with
this Assignment. Assignor further agrees that Assignor will, without demanding
any further consideration therefor, at the request of Assignee, provide all
assistance and execute any papers deemed necessary by Assignee, its successors,
assigns and legal representatives, for obtaining, sustaining, reexamining or
reissuing the Patent, and for maintaining and perfecting Assignee's right to the
Patent.
In witness whereof, GREENLAND CORPORATION has caused these presents to
be signed by its duly authorized officer below named at San Diego, California.
GREENLAND CORPORATION,
a Nevada corporation
By:_____________________________________
Printed Name: ____________________________
Its: _____________________________________
<PAGE>
State of California )
)
County of San Diego ) ss.
On April ___, 1999, before me, _____________________, a Notary Public,
personally appeared ________________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he/she executed
the same in his/her authorized capacity, and that by his/her signature on the
instrument the entity upon behalf of which the person acted, executed the
instrument on behalf of its successor and assignee Telenetics and pursuant to
authority duly received.
WITNESS my hand and official seal.
______________________________________ (Seal)
Signature
<PAGE>
Exhibit G -- AMR Inventory List
Box of 16
1 AirLink powers supply's at various stages
2 AirLink PCB's Photo receptor, Serial interface and Maxim transceivers
3 Plessey Transceivers
4. Plessey Transceivers
5 Plessey Transceivers
6 Final AirLink AMR test radios - 700 mw - 3/4 mile radius
7 Various components
8 DVP part 15 radios
9 Various IC's, PCB's and components
10 Various IC's, PCB's and components
11 Various IC's, PCB's and components + RF connectors
12 Plastic Meter Covers
13 Plastic Meter Covers
14 Meters - Electric, Gas, and water
15 Plastic meter Covers
16 Badger AMR water meter interface and specifications
1 Water Closet Demo
2 Power Conditioning Supplies - for screen rooms.
<PAGE>
Exhibit H -- "AirLink AMR"
AirLink(TM) AMR
HISTORY
o March 1996 Greenland Corporation began developing a one way AMR
solution.
o October 1996 Greenland installed its first AMR system in
Emerald Peoples Utility District (EPUD).
- Read the mechanical meter using Infra Red Detection.
- Store Reads in Serial EEPROM.
- Send Reads every hour from installation.
- Benefits
- Very inexpensive - $15 per meter.
- Read transmitted every hour so monthly reads
were guaranteed.
- Problems
- Transmit times varied after 24 hours and
reporting conflicts made actual read through
put at 60%.
- Customer wanted accurate reads every hour
and really every 15 minutes.
- Solution
- AMR system has to be a two way system -
Meter interrogation is a must.
o November 1996 Greenland Starts to Develop the AirLink Two Way AMR
Solution.
o Design 1 - Part 15 radio based on the Plessey Transceiver chip
set.
- November 1997
- Greenland determined that a part 15 solution
was not viable.
-1-
<PAGE>
- Hiring a new RF Engineer. Greenland
proceeded to build a Part 90 solution using
the Maxim Transceiver chip.
- March 1998
- It was determined and confirmed that the
Maxim Transceiver chip had an error.
- March 1998 Greenland acquired Check Central
- All budgetary demands for the AirLink AMR
was placed secondary. RF engineer was
discharged.
- June 1998
- Greg Gillis was retained by Greenland's CEO
to build a radio solution.
- Robert Hunt continued to try and find a
solution using the Plessey Radios.
- July 1998
- After a conversation with the FCC Robert
Hunt took the Plessey radios and attempted
to amplify them to 1 watt.
- September 1998
- Greenland successfully amplified the Plessey
radios to 700mw. field test produced 3/4
mile range.
- It was determined that for $35,000 the
Plessy radios could be brought into Part 90
compliance and preliminary installations at
the three participating utilities could be
accomplished. For an additional $66,000 all
pilots would have been completed.
AMR SOLUTION CONSISTS OF:
1 MRU (Meter Responder Unit)
2 CRU (Collector Repeater Unit)
3 Base (CRU)
4 User Software
-2-
<PAGE>
o MRU Consist of:
o Quiet power supply - 240V - 5V
o Read Meter
o Detect Power
o Watchdog Timer
o Respond to Commands
o Store reads in non volatile memory
o MRU
[Graphical representation of side view of MRU, with arrows indicating
IR Mechanical Pickup, Off Line Power Supply, CPU & Nonvolatile Memory, and
AirLink Digital Radio.]
CRU CONSIST OF:
o CRU
o AirLink Radio links to MRU
o Spread Spectrum Radio links to CRU
o CPU and non volatile memory
o Battery backup power supply
[Graphical representation of CRU, with arrows indicating AirLink Radio,
Spread Spectrum Radio, CRU CPU Board, and Power Supply and battery Backup.]
BASE STATION CONSISTS OF:
o CRU
o CRU with a serial link to a command computer at the utility's
main office
-3-
<PAGE>
USER SOFTWARE CONSISTS OF:
o User Software
o Automates data collection from central computer
o Stores reads
o Notes MRU Status for utility use
PROTOCOL
o Protocol
o Star network protocol - only the base computer requests
information
o Localized CRU's collect data from MRU's after being commanded
by the Base Station
o Timing
o Packet sent to time all CRU's and MRU's
o Read
o Read command for last 15 minute read period
o Direct Read
o Read at time of request
o Status
o Status request for Power outage
o Packet Structure (CRU/MRU to BASE)
- SYNC 11 Bits
- Address 24
- Status 08
- Data 24
- CRC 24
--
91 Bits
-4-
<PAGE>
BENEFITS OF:
o Differential Billing
o Power Outage
o Failure Point Determination
o Tampering Detection
BENEFITS OF 15-MINUTE READS
o Load Profiling - Okay
o Every evening computers can compare each day's usage (Red)
versus the average usage (Green)
[Graphical chart indicating average usage vs. last day's usage
omitted.]
o Load Profiling - Problem
o Notice that the usage never dropped below 4800 watts. This
may indicate a pump or electric water heater on continuously.
Time for customer service to visit!
[Graphical chart indicating average usage vs. last day's usage
omitted.]
OPTIMIZING TRANSFORMERS
o Transformer Supplying Too Much Power
25 kV Transformer Supplying 35 kV
[Graphical representation of Exploding Transformer omitted.]
AirLink System calculates the load on transformers every day helping to
alleviate this problem.
o Transformer Supplying Too Little Power
35 kV Transformer Supplying 15 kV
WASTED POWER
------------
[Graphical representation of transformer transmitting power away from
power lines omitted.]
-5-
<PAGE>
DIFFERENTIAL BILLING
o Virtual Load Shedding
o 15 Minute Reads, Differential Billing Becomes a Reality
POWER OUTAGE REPORTING
o Power outage reported within 5 minutes of occurrence.
o Ability to search system to determine failure point.
POWER OUTAGE TAMPERING
o A Single Outage
o Anytime an outage occurs, AirLink AMR notes the time, date of
the event and the exact reading. If the readings by AirLink
AMR and the meter are incorrect, by using the collected data
the utility can prove mathematically that the meter was
turned upside down and has been tampered with.
INSTALLATION
o Installation Is Very Simple and Straight Forward
[Photo of workers installing CRU or MRU omitted.]
INSTALLING CRU
[Photo of installed CRU omitted.]
o Install CRU to 20' Mast
o Connect Data/Power Cable to CRU
o Install Mast
o Connect Power Cable to AirLink AMR Power Supply
o Connect Data Cable to Serial Port on Collection Computer
o Install User Software
-6-
<PAGE>
o Start at Collection Point
o Place CRU's on 2-mile Grids
o Place on Light Poles or Utility Poles 20' - 30' Above the
Ground
o Supply 120V AC @ 5 Amps
o Test Spread spectrum Links
INSTALLING MRU
o Attach MRU Power Clips to Each Power Leg on Meter
o Attach MRU IR Mechanical Sensor to Inside Bottom Plate 50 Mils From
Rotating Disk
o Twist on AirLink Housing to Meter Base
o Press Into Meter Socket, Ring and Tag
o Place IR Programmer Near MRU IR Programming Port
o Program Kh Value
o Program Current Meter Reading
o Validate Working MRU
o Log Installation As Required
SUMMARY
o Current Status
o Hardware
- Plessey Radio design needs to be amplified to 1 - 2
watts
- Side band suppression to comply to FCC part 90
o Firmware
- Up and Running
-7-
<PAGE>
o User Software
- Up and running
- Software is "Bare Bones"
(fastfwd) Mapping for visual system
(fastfwd) Power outage search
(fastfwd) Control room
-8-
<PAGE>
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(Do not use this form for Multi-Tenant Property)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This lease ("Lease"), dated for reference purposes only, March
17, 1999, is made by and between Mark IV Capital Properties, Inc., a California
corporation ("Lessor") and Telenetics corporation, a California corporation
("Lessee") (collectively the "Parties," or individually a "Party").
1.2 PREMISES: That certain real property, including all improvements therein
or to be provided by Lessor under the terms of this Lease, and commonly known by
the street address of 25111 Arctic Ocean, Lake Forest, located in the County of
Orange, State of California and generally described as (describe briefly the
nature of the property) an approximately 26,232 square foot free standing
building, as more specifically described in Exhibit "A" attached hereto
("Premises"). (See Paragraph 2 for further provisions.)
1.3 TERM: five (5) years and zero (0) months ("ORIGINAL TERM") commencing See
Addendum, Paragraph 49 ("Commencement Date") and ending five (5) years
thereafter ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: None See Addendum, Paragraph 60 ("EARLY POSSESSION
DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $23,871.12 per month ("BASE RENT"), payable on the first
day of each month commencing See Addendum, Paragraph 50 (See Paragraph 4 for
further provisions.) [x] If this Box is checked, there are Provisions in this
lease for the base rent to the adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $23,871.12 as Base Rent for the first
month's rent.
1.7 SECURITY DEPOSIT:$50,000 ( "SECURITY DEPOSIT" ). (See Paragraph 5 for
further provisions.)
1.8 PERMITTED USE: Assembly of electronic metering devices and ancillary
offices thereto (See paragraph 6 for further provisions.)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated
herein. (See paragraph 8 for further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the
"BROKERS" ) and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
CB Richard Ellis (Jon Marchiorlatti and Chris Bates) represents
[x] Lessor exclusively ("LESSOR'S BROKER" ); [ ] both Lessor and Lessee, and
CB Richard Ellis (Jeff Carr) represents
[x] Lessee exclusively ("LESSEE'S BROKER" ) ; [ ]both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by Michael Armani (" GUARANTOR" ). ( See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 49 through 61 and Exhibits A, B,C, D, and E all of which constitute
a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of
debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify saying that Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants
to Lessee that the improvements on the Premises comply with all applicable
covenants or restrictions of record and applicable building codes, regulations
and ordinances in effect on the Commencement Date. Said warranty does not apply
to the use to which Lessee will put the Premises or to any Alterations or
Utility Installation (as defined in Paragraph 7.3 (a)) made or to be made by
Lessee. If the Premises do not comply with said warranty, Lessor shall, except
as otherwise provided in this Lease, promptly after receipt of written notice
from Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify the same at Lessor's expense. If lessee does
not give Lessor written notice of a non-compliance with this warranty within six
(6) months following the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been
advised by the Brokers to satisfy itself with respect to the condition of the
Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or term of
this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made
any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises
prior to the Commencement Date, the obligation to pay Base Rent shall be abated
for the periods of such early possession. All other terms of this Lease,
however, (including but not limited to the obligations to pay Real Property
Taxes and insurance premiums and to maintain the Premises) shall be in effect
during such period. Any such early possession shall not affect nor advance the
Expiration Date of the Original Term.
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3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of
the Premises to Lessee as agreed herein by the Early Possession Date, if one is
specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liabilities therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent for perform any
other obligation of Lessee under of terms of this Lease until Lessor delivers
possession of Premises to Lessee. If possession of the Premises is not delivered
to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its
option, by notice in writing to Lessor within ten (10) days thereafter, cancel
this Lease, in which event of Parties shall be discharged from all obligations
hereunder; provided, however, that if such written notice by Lessee is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
this Lease shall terminate and be of no further force or effect. Except as may
be otherwise provided, and regardless of when the term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to what Lessee
would otherwise have enjoyed under the terms hereof, but minus any days of delay
caused by the acts, changes or omissions of Lessee.
4. RENT
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor act its address stated herein or to such other persons
or at such other addresses as Lessor may from time to time designate in writing
to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit, for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee under this Lease.
6. USE
6.1 USE. Lessee shall use and occupy the Premises only for the purposes set
forth in Paragraph 1.8, or any other use which is comparable thereto, and for no
other purpose. Lessee shall not use or permit the use of Premises in a manner
that creates waste or a nuisance, or that disturbance owners and/or occupants
of, or causes damage to, neighboring premises or properties. Lessor hereby
agrees to not unreasonably withhold or delay its consent to any written request
by Lessee, Lessee's assignees or subtenants, and by prospective assignees and
subtenants of the Lessee, its assignees and subtenants, for a modification of
said permitted purpose for which the premises may be used or occupied, so long
as the same will not impair the structural integrity of the improvements on the
Premises, the mechanical or electrical systems therein, is not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance" as used
in this Lease shall mean any product, substance, chemical, material or waste
whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any accuracy in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filled with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Success with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance, or a condition involving or resulting from
same, has come to be located in, on, under or about the Premises, other than as
previously consented to by Lessor, Lessee shall immediately give written notice
of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any
statement, report, notice, registration, application, permit, business plan,
license, claim action or proceeding given to, or received from, any governmental
authority or private party, or persons entering or occupying the Premises,
concerning the presence, spill, release, discharge of, or exposure to, any
Hazardous Substance or contamination in, on, or about the Premises, including
but not limited to all such documents as may be involved in any Reportable Uses
involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders, and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgements, costs, claims, liens, expenses, penalties, permit and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration, and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing that the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease,
Lessee, shall at Lessee's sole cost and expense, fully, diligently and in a
timely manner, comply with all "Applicable Law," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, assessments and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receiopt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3 (a)) shall have the right to enter the Premises at any time. In
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The cost and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expensive of such
inspections.
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7.MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS
7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraph 2.2
(Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance
with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and
destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part therof in good order,
condition and repair, structural and non-structural (whether or not such portion
of the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Leasee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities serving the Premises, such as
plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or
standpipe and hose or other automatic fire extinguishing system, including fire
alarm and/or smoke detection systems and equipment, fire hydrants, fixtures,
walls (interior and exterior), foundations, ceilings, roofs, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking lots, fences,
retaining walls, signs, sidewalks, and parkways located in, on, about, or
adjacent to the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of the
Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to involving any
Hazardous Substance and/or storage tank brought onto the appointment Premises by
or for Lessee or under its control. Lessee, in keeping the Premises in good
order, condition and repair, shall exercise and perform good maintenance
practices. Lessee's obligations shall include restorations, replacement or
renewals when necessary to keep the Premises and all improvements thereon or a
part thereof in good order, condition and state of repair. If Lessee occupies
the Premises for seven (7) years or more, Lessor may require Lessee to repaint
the exterior of the buildings on the Premises as reasonably required, but not
more frequently than once every seven (7) years.
(b) Lessee shall, at Lessee's sole cost and expense, procure and maintain
contracts, with copies to Lessor, in customary form and substance for and with
contractors specializing and experienced in, the inspection, maintenance and
service of the following equipment and improvements, if any, located on the
Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler,
fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and
hose or other automatic fire extinguishing systems, including fire alarm and/or
smoke detection, (iv) landscaping, and irrigation system, (v) root covering and
drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor
contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the premises, the
improvements located thereon, or the equipment therein, whether structural or
non structural, all of which obligations are intended to be that of the lessee
under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repairs of the Premises. Lessee and Lessor expressly waived the benefit of
any statute now or hereafter in effect to the extent it is inconsistent with the
terms of this Lease with respect to, or which affords Lessee the right to make
repairs at the expense of Lessor or to terminate this Lease by reason of any
needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used
in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication system, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing and fencing in, or on or about the Premises.
The term " TRADE FIXTURES" shall mean Lessee's machinery and equipment that can
be removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. In Paragraph 7.4(a), Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.
(b) CONSENT. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities, (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon, and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and in compliance with all Applicable Law.
Lessee shall promptly upon completion thereof furnish Lessor with as-built plans
and specifications therefor. Lessor may (but without obligation to do so)
condition its consent to any requested Alteration or Utility Installation that
costs $10,000 or more upon Lessee's providing Lessor with a lien and completion
bond in an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation and/or upon Lessee's posting an additional
Security Deposit with Lessor under Paragraph 36 hereof.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided law. If Lessee
shall, in good faith, contest the validity of any such lien, claim or demand,
then Lessee shall, at its sole expense defend and protect itself, Lessor and the
Premises against the same and shall pay and satisfy any such adverse judgment
that may be rendered thereon before the enforcement thereof against the Lessor
or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a
surety bond satisfactory to Lessor in an amount equal to one and one-half times
the amount of such contested lien claim or demand, indemnifying Lessor against
liability for the same, as required by law for the holding of the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay Lessor's attorney's fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or become
the owner thereof as hereinafter provided in this Paragraph 7.4 all Alterations
and Utility Additions made to the Premises by Lessee shall be the property of
and owned by Lessee, but considered a part of the Premises. Lessor may, at any
time and at its option, elect in writing to Lessee to be the owner of all or any
specified part of the Lessee Owned Alterations and Utility Installations. Unless
otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned
Alterations and Utility Installations shall, at the expiration or earlier
termination of this Lease, become the property of Lessor and remain upon and be
surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end
of the last day of the Lease term or any earlier termination date, with all of
the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear and tear
excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the
Insuring Party, Lessee shall pay for all insurance required under this Paragraph
8 except to the extent of the cost attributable to liability insurance carried
by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods
commencing prior to or extending beyond the Lease term shall be prorated to
correspond to the Lease term. Payment shall be made by Lessee to Lessor within
ten (10) days following receipt of an invoice for any amount due.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term
of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
the single limit coverage in an amount not less than $1,000,000 per occurrence
with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES" Endorsement and
contain the "AMENDMENT of the POLLUTION EXCLUSION" for damage caused by heat,
smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease as carried by Lessee shall not,
however limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee, shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor
shall also maintain liability insurance described in Paragraph 8.2(a), above in
addition to and not in lieu of, the insurance required to be maintained by
Lessee. Lessee shall not be named as an additional insured therein.
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8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to the holders of any mortgages, deeds of trust
or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by Lenders, but in no event more than the commercially reasonable and
available insurable value thereof if, by reason of the unique nature or age of
the improvements involved, such latter amount is less than full replacement
cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and
Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than
by Lessor. If the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks of direct physical loss or
damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for an additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and Lender(s), insuring the loss of the full rental
and other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.
(c) ADJACENT PREMISE. If the Premises are part of a larger building, or if the
Premises are part of a group of buildings owned by Lessor which are adjacent to
the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor
shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease. If Lessee is the Insuring Party, the policy
carried by the Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5,
Lessee at its cost shall either by separate policy or, at Lessor's option, by
endorsement to a policy already carried, maintain insurance coverage on all of
Lessee's personal property, Lessee Owned Alterations and Utility Installations
in, on, or about the Premises similar in coverage to that carried by the
insuring party under Paragraph 8.3. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per occurrence. The
proceeds from any such insurance shall be used by Lessee for the replacement of
personal property or the restoration of Lessee Owned Alterations and Utility
Installations. Lessee shall be the Insuring Party with respect to the insurance
required by this Paragraph 8.4 and shall provide Lessor with written evidence
that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B +, V, or such other rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall invalidate
the insurance policies referred to in this Paragraph 8. If Lessee is the
Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with the insureds and loss payable clauses as required by this
Lease. No such policy shall be cancelable or subject to modification except
after thirty (30) days prior written notice to Lessor. Lessee shall at least
thirty (30) days prior to the expiration of such policies, furnish Lessor with
evidence of renewals or "insurance binders" evidencing renewal thereof, or
Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party
shall fail to procure and maintain the insurance required to be carried by the
Insuring Party under this Paragraph 8, the other Party may, but shall not be
required to, procure and maintain the same, but at Lessee's expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 INDEMNITY. Except for Lessor's gross negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury
or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alteration and Utility
Installations, the repair cost of which damage or destruction is less than 50%
of the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installation the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on the
Premises, other than Lessee Owned Alterations and Utility Installations, which
was caused by an event required to be covered by the insurance described in
Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinance or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery
of a condition involving the presence of, or a contamination by a Hazardous
Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that is an
insured loss occurs, then Lessor shall, at Lessor's expense, repair such damage
(but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the premises unless Lessee provides Lessor with the funds to
cover the same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof, within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee with ten (10) days thereafter to
make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
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9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage that is not
an Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in which event Lessee shall make the repairs at Lessee's expense and this Lease
shall continue in full force and effect, but subject to Lessor's rights under
Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as
soon as reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
damage of Lessor's desire to terminate this Lease as of the date sixty (60) days
following the giving of such notice. In the event Lessor elects to give such
notice of Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give written
notice to Lessor of Lessee's commitment to pay for the repair of such damage
totally at Lessee's expense and without reimbursement from Lessor. Lessee shall
provide Lessor with the required funds or satisfactory assurance thereof within
thirty (30) days following Lessee's said commitment. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
repairs as soon as reasonably possible and the required funds are available. If
Lessee does not give such notice and provide the funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by or
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was cause by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of
the term of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 ABATEMENT OF RENT; LESSEES REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises Is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 9 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within ninety (90)
days after such obligation shall accrue, Lessee may, at any time prior the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in full
force and effect. "Commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs,
unless Lessee is legally responsible therefor (in which case Lessee shall make
the investigation and remediation thereof required by Applicable Law and this
Lease shall continue in full force and effect, but subject to Lessor's rights
under Paragraph 13), Lessor may at Lessor's option either (i) investigate and
remediate such Hazardous Substance Condition, if required, as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in full
force and effect, or (ii) if the estimated cost to investigate and remediate
such condition exceeds twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee within thirty (30) days
after receipt by Lessor of knowledge of the occurrence of such Hazardous
Substance Condition of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the giving of such notice. In the event Lessor elects
to give such notice of Lessor's intention to terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the investigation and
remediation of such Hazardous Substance Condition totally at Lessee's expense
and without reimbursement from Lessor except to the extent of an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment. In
such event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such Investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination. If a Hazardous Substance Condition occurs for which
Lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided In Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to
this Paragraph 9, an equitable adjustment shall be made concerning advance Base
Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's Security Deposit as has not been,
or is not then required to be, used by Lessor under the terms of this Lease.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall
govern the effect of any damage to or destruction of the Premises with respect
to the termination of this Lease and hereby waive the provisions of any present
or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the term of this
Lease. Subject to Paragraph 10.1(b) all such payments shall be made at least ten
(10) days prior to the delinquency date of the applicable installment. Lessee
shall promptly furnish Lessor with satisfactory evidence that such taxes have
been paid, if any such taxes to be paid by Lessee shall cover any period of time
prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Lessee for any overpayment after such proration. If Lessee shall
fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
thereof upon demand.
(b) ADVANCE PAYMENT In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Tax increase to be paid in advance
to Lessor by Lessee, either: (I) in a lump sum amount equal to the amount due,
at least twenty (20) days prior to the applicable delinquency date, or (II)
monthly in advance with the payment of the Base Rent. If Lessor elects to
require payment monthly in advance, the monthly payment shall be that equal
monthly amount which, over the number of months remaining before the month in
which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as required to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same becomes due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligation. All moneys paid to Lessor under this Paragraph
may be intermingled with other moneys of Lessor and shall not bear interest. In
the event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the provisions
of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at
the option of Lessor, be treated as an additional Security Deposit under
Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES". As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed on the Premises by any authority having
the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against legal or equitable interest
of Lessor in the Premises or in the real property of which the Premises are a
part. Lessor's right to rent or other income therefrom, and/or Lessor's business
of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy assessment or charge, or any increase therein, imposed by reason
of event occurring, or changes in applicable law taking effect during the term
of this Lease, including but not limited to a change in the ownership of the
premises or in the improvements thereon, the execution of this Lease, or any
modification, amendment or transfer thereof, and whether or not contemplated by
the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's
liability shall be an equitable proportion of the Real Property Taxes for all of
the land and improvements included within the tax parcel assessed, such
proportion to be determined by Lessor from the respective valuations
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assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in go faith,
shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes
assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within (10) days after
receipt of a written statement setting forth the taxes applicable to Lessees
property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign, transfer,
mortgage or otherwise transfer or encumber (collectively "assignment") sublet
all or any part of Lessee's interest in this Lease or in the Premises without
Lessor's prior written consent given under and subject to the terms Paragraph
36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or series
of transactions (by way of merger, sale, acquisition, financing, refinancing,
transfer, leveraged buy-out or-otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an
amount equal to or greater than twenty-five percent (25%) of such Net Worth of
Lessee as it was represented to Lessor at the time of the execution by Lessor of
this Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or transactions
constituting such reduction, at whichever time said Net Worth of Lessee was or
is greater, shall be considered an assignment of this Lease by Lessee to which
Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes
of this Lease shall be the net worth of Lessee (excluding any guarantors)
established under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease without
Lessor's specific prior written consent shall, at Lessor's option, be a Default
curable after notice per Paragraph 13.1(c), or a noncurable Breach without the
necessity of any notice and grace period. If Lessor elects to treat such
unconsented to assignment or subletting as a noncurable Breach, Lessor shall
have the right to either: (i) terminate this Lease, or (ii) upon their (30) days
written notice ("Lessor's Notice"), increase the monthly Base Rent to fair
market rental value or one hundred ten percent (110%) of the Base Rent then in
effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall
be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting shall not:
(i) be effective without the express written assumption by such assignee or
sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of
any obligations hereunder, or (iii) alter the primary liability of Lessee for
the payment of Base Rent and other sums due Lessor hereunder or for the
performance of any other obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations from
any person other than Lessee pending approval or disapproval of an assignment.
Neither a delay in the approval or disapproval of such assignment nor the
acceptance of any rent or performance shall constitute a waiver or estoppel of
Lessor's right to exercise its remedies for the Default or Breach by Lessee of
any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lease or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignment of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or any
one else responsible for the performance of the Lessee's obligations under this
Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in
writing, accompanied by information relevant to Lessor's determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of
accepting such assignment or entering into such sublease, be deemed for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c) shall
give Lessor the right (but not the obligation) to require that the Security
Deposit be increased to an amount equal to six (6) times the then monthly Base
Rent, and Lessor may make the actual receipt by Lessor of the amount required to
establish such Security Deposit a condition to Lessor's consent to such
transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following
terms and conditions shall apply to any subletting by Lessee of all or any part
of the Premises and shall be deemed included in all subleases under this Lease
whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest
in all rentals and income arising from any sublease of all or a portion of the
Premises heretofore or hereafter made by Lessee, and Lessor may collect such
rent and income and apply same toward Lessees obligations under this Lease;
provided, however, that until a Breach (as defined in Paragraph 13.1) shall
occur in the performance of Lessee's obligations under this Lease, Lessee may,
except as otherwise provided in this Lease, receive, collect and enjoy the rents
accruing under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor, nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any at Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall rely upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee or until the Breach has been cured, against Lessor, for any such
rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted
by Lessor in connection with a Lessee Default or Breach (as hereinafter
defined), $350.00 is a reasonable minimum sum per such occurrence for legal
services and costs in the preparation and service of a notice of Default and
that Lessor may include the cost of any services and costs in said notice as
rent due and payable to cure said Default. A "DEFAULT" is defined as a failure
by the Lessee to observe, comply, and to perform any of the terms, covenants,
conditions, or rules applicable to Lessee under this Lease. A "BREACH"
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is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2
and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or
the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent or any other monetary payment required
to be made by Lessee hereunder whether to Lessor or to a third party, as and
when due, the failure by Lessee to provide Lessor with reasonable evidence of
insurance or surety bond required under this Lease, or the failure of Lessee to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days following
written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure by
Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b). (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by lessee
of any general arrangement or assignment for the benefit of creditors; (ii)
Lessee's becoming a "debtor' as defined in 11 U.S.C. ss. 101 or any successor
statute thereto (unless, in the case of a petition flied against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within thirty (30) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within thirty (30) days; provided, however, in the event that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect me validity of the
remaining provisions.
(f) The discovery by Lessor that any financial statement given to Lessor by
Lessee or any Guarantor of Lessee's obligations hereunder was materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at me time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation
of Lessee under this Lease, within ten (10) days after written notice to Lessee
(or in case of an emergency, without notice), Lessor may at its option (but
without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
award of the amount by which the unpaid rent which had been earned at the time
of termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorney's fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through me provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraph. 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as me
case may be, given to Lessee under any statute authorizing the forfeiture of
leases the unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the
laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under any
indemnity provisions of this Lease as to matters occurring or accruing during
the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free
or abated rent or other charges applicable to the Premises, or for the giving or
paying by Lessor to or for Lessee of any cash or other bonus, inducement or
consideration for Lessee's entering into this Lease, all of which concessions
are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed
conditioned upon Lessee's full and faithful performance of all of the terms,
covenants and conditions of this Lease to be performed or observed by Lessee
during the term hereof as the same may be extended. Upon the occurrence of a
Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
Inducement Provision shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated me operation of this
Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of such
acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to
Lessor of rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, me exact amount of which will be extremely difficult
to ascertain. Such costs include, but are not limited to, processing and
accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor falls within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by the holders of any ground lease, mortgage or deed of trust covering the
Premises whose name and address shall have been furnished Lessee in writing for
such purpose, of writing for such purpose, of written notice specifying wherein
such obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or a on thereof are taken under the power of
eminent domain or sold under the threat of the exercise of said power (all of
which are herein called "CONDEMNATION"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes
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title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing within ten (10) days after Lessor
shall have given Lessee written notice of such taking (or in the absence of such
notice, within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning authority takes
such possession. If Lessee does not terminate this Lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made in compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. BROKER'S FEE.
SECTIONS 15.1 THROUGH 15.4 HAVE BEEN CROSSED OUT AND DELETED.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers,
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the Indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any part
thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or, if this is
a sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (3lst) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. NOTICES.
23.1 All notices required or permitted by this Lease shall be in writing and
may be delivered in person (by hand or by messenger or courier service) or may
be sent by regular, certified or registered mail or U.S. Postal Service Express
Mail, with postage prepaid, or by facsimile transmission, and shall be deemed
sufficiently given if served in a manner specified in this Paragraph 23. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or it no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or Courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
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27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject
and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address hay been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
if any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3,
Lessee agrees to attorn to a Lender or any other party who acquires ownership of
the Premises by reason of a foreclosure of a Security Device, and that in the
event of such foreclosure, such new owner shall not: (i) be liable for any act
or omission of any prior lessor or with respect to events occurring prior to
acquisition of ownership, (ii) be subject to any offsets or defenses which
Lessee might have against any prior lessor, or (iii) be bound by prepayment of
more than one (1) month's rent.
30.3 NON-DISTURBANCES. With respect to Security Devices entered into by Lessor
after the execution of this Lease, Lessee's subordination of this Lease shall be
subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender
that Lessee's possession and this Lease, including any option to extend the term
hereof, will not be disturbed so long as Lessee is not in Breach hereof and
attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be
effective without the execution of any further documents; provided however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Part) (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall
Include, without limitation, a Party or Broker who substantially obtains or
defeats the relief sought, as the case may be. whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent Notwithstanding anything to the contrary
In this Lease, Lessor shall not be obligated to exercise any standard of
reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably Interfere with the conduct of
Lessee's business. See Addendum, Paragraph 52
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination, of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the
form of the guaranty to be executed by each such Guarantor shall be in the form
attached to this Lease as Exhibit D, and each said Guarantor shall have the same
obligations as Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information called for by
Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if any such
Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
SECTION 39.2 HAS BEEN CROSSED OUT AND DELETED.
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39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to
extend or renew this Lease, a later Option cannot be exercised unless prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding any
provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease.
(b) The period of time within which an Option may be exercised shall not be
extended or enlarged by reason of Lessee' inability to exercise an Option
because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall terminate
and be of no further force or effect, notwithstanding Lessee's due and timely
exercise of the Option, if, after such exercise and during the term of this
Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a
period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee) or (ii) if Lessee commits
a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. The Lease is
not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend the
Lease from time to time to reflect any adjustments that are made to the Base
Rent or other rent payable under this Lease. As long as they do not materially
change Lessee's obligations hereunder, Lessee agrees to make such reasonable
non-monetary modifications to this Lease as may be reasonably required by an
institutional, insurance company, or pension plan Lender in connection with the
obtaining of normal financing or refinancing of the property of which the
Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS
OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR
THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES
SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX
CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER
THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD
BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at _____________________ Executed at __________________________
on ______________________________ on ___________________________________
by LESSOR: by LESSEE:
MARK IV CAPITAL PROPERTIES, INC. TELENETICS CORPORATION,
a California corporation a California corporation
- --------------------------------- --------------------------------------
By: /s/ James Slavik By: /s/ Michael A. Armani
Name Printed: James Slavik Name Printed: MICHAEL A. ARMANI
Title: Title: PRESIDENT
By: _____________________________ By: ___________________________________
Name Printed: ___________________ Name Printed: _________________________
Title: __________________________ Title: ________________________________
Address: 100 Bayview Circle, Address: 25111 Arctic Ocean
Newport Beach, CA 92660 Lake Forest, CA 92630
Tel. No. Tel.
Fax No. Fax No.
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ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
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This Addendum ("Addendum") is attached to and made part of that certain
Standard Industrial/Commercial Single-Tenant Lease-Net ("Lease") dated March 17,
1999, by and between Mark IV Capital Properties, Inc., a California corporation
("Lessor") and Telenetics Corporation, a California corporation ("Lessee").
Unless otherwise defined herein, capitalized terms used in this Addendum shall
have the same definitions as set forth in the Lease. The provisions of this
Addendum shall supersede any inconsistent or conflicting provisions of the
Lease.
49. COMMENCEMENT DATE. The following hereby supplements Paragraph 1.3
of the Lease: Unless sooner terminated as provided herein, the Original Term of
the Lease shall commence (the "Commencement Date") on the earlier of (i)
substantial completion of the Tenant Improvements (as defined below), as
evidenced by written approval from the City of Lake Forest ("City") in
accordance with the building permits issued for the Tenant Improvements,
provided that in such event Lessor shall deliver to Lessee a certificate of
occupancy (temporary or otherwise) from the City for the Premises within five
(5) business days of such date, or (ii) the date Lessee commences occupancy of
the Premises.
50. INCREASES IN BASE RENT. The following hereby supplements Paragraph
1.5 of the Lease: During the Original Term, Lessee shall pay Lessor Base Rent at
the following rates:
LEASE YEAR MONTHLY BASE RENT
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1 $23,871.12
2 $24,587.25
3 $25,324.87
4 $26,084.62
5 $26,867.15
As set forth above, the Base Rent shall increase by three percent (3%)
annually during the Original Term of the Lease, commencing upon the date which
is one (1) year following the Lease Commencement Date.
51. HAZARDOUS SUBSTANCES. The following hereby supplements Paragraph
6.2(c) of the Lease: Lessor represents that to Lessor's actual knowledge as of
the execution of this Lease, there are no Hazardous Substances located at the
Premises. "Lessor's actual knowledge" means the actual knowledge of Pat Jones,
without the duty of investigation or inquiry. Lessor agrees to indemnify Lessee
from any actual damages or losses arising out of any material breach of the
foregoing representation.
52. SIGNAGE. The following hereby supplements Paragraph 34 of the
Lease: All signs and graphics of every kind visible in or from public view or
the exterior of the Premises shall be subject to Lessor's prior written approval
and shall be subject to any applicable governmental laws, ordinances, and
regulations, project restrictions, and in compliance with Lessor's signage
program. At Lessee's sole cost and expense, Lessee shall install such signs and
graphics and shall remove all such signs and graphics prior to the expiration or
earlier termination of the Lease. Upon the full execution of this Lease and
Lessor's receipt of Lessee's first month's Rent, Security Deposit and evidence
of Lessee's required insurance, Lessee shall have the right to install signage
on the Premises, subject to the provisions contained in this Lease.
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53. PARKING. Subject to all covenants, conditions and restrictions,
Lessee shall be entitled to the number of unreserved vehicle parking spaces on
the Premises as shown on the attached EXHIBIT "B", currently estimated at one
hundred three (103) unreserved vehicle parking spaces. Lessee shall not use more
parking spaces than such number. All parking spaces shall be used only for
parking by vehicles no larger than full size passenger automobiles or pick-up
trucks. Parking within the areas designated on the Parking Plan shall be limited
to striped parking stalls, and no parking shall be permitted in any driveways,
accessways or in any area which would prohibit or impede the free flow of
traffic. There shall be no overnight parking of any vehicles of any kind, and
vehicles which have been abandoned or parking in violation of the terms hereof
may be towed away at the vehicle owner's expense.
54. OPTION TO EXTEND.
(a) GRANT OF OPTION. Lessor hereby grants to Lessee the option
to extend the Original Term of the Lease (the "Extension Option") for
an additional consecutive term of five (5) years (the "Extension"), on
the same terms and conditions as set forth in the Lease, except the
Base Rent shall be the amount determined as set forth below. The
Extension Option shall be exercised only be written notice delivered to
Lessor at least one hundred twenty (120) days before the expiration of
the Original Term of the Lease. If Lessee fails to deliver to Lessor
written notice of the exercise of the Extension Option within the time
period prescribed above, the Extension Option shall lapse and there
shall be no further right to extend the Original Term of the Lease. The
Extension Option shall be exercisable by Lessee on the express
conditions that at the time of the exercise of the Extension Option,
and thereafter at all times prior to the commencement of the Extension,
a Default shall not have occurred under the Lease. If Lessee properly
exercises the Extension Option, "Original Term", as used herein and in
the Lease, shall be deemed to include the Extension, unless specified
otherwise herein or in the Lease.
(b) PERSONAL OPTION. The Extension Option is personal to Lessee. If
Lessee subleases or assigns or otherwise transfers any interest under
the Lease prior to the exercise of the Extension Option, the Extension
Option shall lapse. If Lessee subleases or assigns or otherwise
transfers any interest of Lessee under the Lease after the exercise of
the Extension Option but prior to the commencement of the Extension,
the Extension Option shall lapse and the Original Term of the Lease
shall expire as if the Extension Option were not exercised.
Notwithstanding the foregoing, if Lessee has obtained the prior written
consent of Lessor to an assignment of the Lease pursuant to the
provisions of the Lease, then the Extension Option may be exercised by
such assignee.
(c) CALCULATION OF BASE RENT. The Base Rent during the Extension
shall be increased, as of the commencement of the Extension (the
"Rental Adjustment Date") to the "Fair Market Value" of the Premises,
determined in the following manner: Not later than one hundred (100)
days prior to the Rental Adjustment Date, Lessor and Lessee shall meet
in an effort to negotiate, in good faith, the Fair Market Value of the
Premises as of the Rental Adjustment Date. If Lessor and Lessee have
not agreed upon the Fair Market Value of the Premises at least ninety
(90) days prior to the Rental Adjustment Date, the Fair Market Value
shall be determined by the following appraisal method:
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(i) If Lessor and Lessee are not able to agree upon the Fair
Market Value of the Premises within the time period described
above, then Lessor and Lessee shall attempt to agree in good faith
upon a single appraiser not later than seventy-five (75) days prior
to the Rental Adjustment Date. If Lessor and Lessee are unable to
agree upon a single appraiser within such time period, then Lessor
and Lessee shall each appoint one appraiser not later than
sixty-five (65) days prior to the Rental Adjustment Date, and
Lessor and Lessee shall each give written notice to the other of
such appointment at the time of such appointment. Within ten (10)
days thereafter, the two appointed appraisers shall appoint a third
appraiser. If either Lessor or Lessee fails to appoint its
appraiser and to give written notice thereof to the other party
within the prescribed time period, the single appraiser appointed
shall determine the Fair Market Value of the Premises. If both
parties fail to appoint appraisers within the prescribed time
periods, then the first appraiser thereafter selected by a party
(such selection to be by written notice thereof to such appraiser
and the other party) shall determine the Fair Market Value of the
Premises. Each party shall bear the cost of its own appraiser and
the parties shall share equally the cost of the single or third
appraiser if applicable. All appraisers shall have at least five
(5) years' experience in the appraisal of commercial/industrial
real property in the area in which the Premises are located and
shall be members of professional organizations such as MAI or its
equivalent.
(ii) For the purposes of such appraisal, the term "Fair Market
Value" shall mean the price that a ready and willing tenant would
pay, as of the Rental Adjustment Date, as monthly rent, to a ready
and willing Lessor of property comparable to the Premises if such
property were exposed for lease on the open market for a reasonable
period of time and taking into account all of the purposes for
which such property may be used. If a single appraiser is chosen,
then such appraiser shall determine the Fair Market Value of the
Premises. Otherwise, the Fair Market Value of the Premises shall be
the arithmetic average of the two (2) of the three (3) appraisals
which are closest in amount, and the third appraisal shall be
disregarded. Lessor and Lessee shall instruct the appraiser(s) to
complete their determination of the Fair Market Value not later
than thirty (30) days prior to the Rental Adjustment Date. If the
Fair Market Value is not determined prior to the Rental Adjustment
Date, then Lessee shall continue to pay to Lessor the Base Rent
applicable to the Premises immediately prior to the Rental
Adjustment Date until the Fair Market Value is determined. When the
Fair Market Value of the Premises is determined, Lessor shall
deliver notice thereof to Lessee, and Lessee shall pay to Lessor,
within ten (10) days after receipt of such notice, the difference
between the Base Rent actually paid by Lessee to Lessor for the
period after the Rental Adjustment Date and the new Base Rent
determined hereunder effective as of the Rental Adjustment Date. In
no event shall the Base Rent be reduced below the Base Rent
applicable to the Premises immediately prior to the Rental
Adjustment Date.
(d) INCREASES IN BASE RENT DURING EXTENSION. During the Extension,
Base Rent shall increase by three percent (3%) per year upon each
anniversary of the Rental Adjustment Date.
55. OPTION TO PURCHASE.
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(a) OPTION TO PURCHASE. Lessor hereby grants to Lessee an option to
purchase the Premises and the interest of Lessor under the Lease (the
"Purchase Option") at the Option Price (as defined below). Such
Purchase Option shall be exercised by delivering to Lessor (i) written
notice thereof, and (ii) a cashier's check in the amount of Fifty
Thousand Dollars ($50,000.00) (the "Deposit") at any time before the
second (2nd ) anniversary of the Lease Commencement Date (the "Option
Period").
(b) ESCROW. In the event that this Purchase Option is duly
exercised, the parties shall promptly open an escrow at the offices of
First American Title Insurance Company (the "Escrow Holder") located at
their main Orange County branch. This Paragraph 55 shall constitute
Escrow Holder's instructions. In addition, Escrow Holder shall prepare,
and the parties hereby agree to execute, such reasonable and customary
supplemental instructions and instruments, including without
limitation, a liquidated damage provision complying with the
requirements of applicable law and the provisions of this Paragraph, as
may be reasonably required by the parties and Escrow Holder in order to
clarify its duties hereunder and facilitate an orderly sale of the
Premises to Lessee. If there is any inconsistency between the terms of
this Paragraph 55 and the terms of the general provisions, the terms of
this Paragraph 55 shall prevail.
(c) TITLE. Upon the exercise of this Purchase Option, Escrow Holder
shall promptly issue and deliver to Lessor and Lessee a standard form
preliminary title report for the Premises (the "PTR"). Lessee shall
have ten (10) business days from its receipt of the following documents
to give written notice to Lessor and Escrow Holder of its approval or
disapproval (which shall specifically identify disapproved title
exceptions) of the PTR: (i) the PTR, (ii) copies of the documents
referenced in the PTR, and (iii) a map showing easements plotted by the
Escrow Holder, but only if there are newly recorded easements that were
not shown on the Prior Title Documents (hereinafter defined). If Lessee
fails to deliver such written notice within said ten (10) day period,
Lessee shall be conclusively deemed to have approved the PTR. If Lessee
gives timely written disapproval of the PTR, Lessor shall have ten (10)
business days within which to deliver written notice to Lessee and
Escrow Holder of Lessor's decision as to whether to cure each
disapproved title exception. If Lessor fails to deliver such notice
within said ten (10) day period or, having given such notice, fails to
cure any such exception on or before the fifth (5th) day prior to the
scheduled Closing Date, the escrow shall be deemed terminated and
neither party shall have any further rights or obligations hereunder,
except that each party shall bear one half of any title and escrow fees
and Lessor shall return the Deposit to Lessee. Unless Lessor
specifically elects in writing to do so, Lessor shall have no
obligation to remove any exception to title to the Premises and, if
Lessor does so elect, it shall only be obligated to use its reasonable
efforts to remove such exception. In addition to those matters shown on
the PTR, Lessee hereby acknowledges and agrees that it shall take title
to the Premises subject to any and all easements that Lessor may
require over the Premises for the benefit of Lessor's adjacent parcel,
matters that would be disclosed by an accurate survey or inspection of
the Premises, zoning ordinances and regulations and any other laws,
ordinances, and governmental regulations and restrictions regulating
the use, occupancy or enjoyment of the Premises, and all matters caused
by the actions of, or done with the consent of, Lessee. Lessee hereby
acknowledges receipt of the following (collectively, "Prior Title
Documents"): (1) that certain preliminary report prepared by Chicago
Title Company as Order No. 8300804-M07 dated October 29, 1998, as
supplemented by that certain Supplemental Report dated February 5,
1999, with respect to the Premises and adjacent property, (2) copies of
all documents referenced in such reports, and (3) that certain ALTA
survey of the Premises and adjacent property prepared by Robert Bein,
William Frost & Associates dated March 12, 1999 as JN.10-100057.
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(d) CLOSING. The Closing Date ("Closing Date") shall be the date
the grant deed is recorded in the Official Records of Orange County,
and shall be the first business day following the sixtieth (60th) day
after the date of Lessor's receipt of Lessee's written notice of
exercise of the Purchase Option. The form of the grant deed shall be
attached hereto as EXHIBIT "E". Lessee shall pay Base Rent to Lessor
through and including the Closing Date. The Option Price shall be paid
in full and in cash through escrow. Upon the Closing Date, Escrow
Holder shall issue a standard form CLTA policy of title insurance in
the full amount of the Option Price showing title vested in Lessee's
name, subject to such liens, encumbrances and other matters as may
appear on the PTR and shall have been approved or required as provided
herein. Notwithstanding Lessee's acquisition of the Premises, any and
all indemnity obligations of Lessee to Lessor in the Lease shall
survive the acquisition of the Premises by Lessee.
(e) LIQUIDATED DAMAGES.
(i) IN THE EVENT LESSEE TERMINATES THE ESCROW, DEFAULTS OR
OTHERWISE FAILS TO COMPLETE THE PURCHASE OF THE PREMISES AFTER
APPROVAL OF THE PTR FOR ANY REASON OTHER THAN LESSOR'S BREACH,
LESSOR SHALL RETAIN AS LIQUIDATED DAMAGES THE ENTIRE DEPOSIT. BY
INITIALING BELOW, LESSOR AND LESSEE AGREE THAT SUCH AMOUNT
CONSTITUTES A FAIR AND REASONABLE ESTIMATION OF THE DAMAGES WHICH
LESSOR WILL SUSTAIN IN THE EVENT THAT LESSEE DOES NOT CONCLUDE THE
PURCHASE OF THE PREMISES. SUCH LIQUIDATED DAMAGES SHALL BE IN
ADDITION TO, AND SHALL NOT LIMIT OR SUPERSEDE, ANY INDEMNITY
OBLIGATIONS OF LESSEE UNDER THE LEASE, ANY OBLIGATIONS OF LESSEE TO
PAY ESCROW HOLDER'S CANCELLATION CHARGES IN THE EVENT OF LESSEE'S
DEFAULT, THE RIGHTS OF LESSOR AS AGAINST LESSEE FOR ANY OTHER
BREACH OTHER THAN THE FAILURE OF ESCROW TO CLOSE ON OR BEFORE THE
CLOSING DATE, OR ANY RIGHTS, REMEDIES OR DAMAGES LESSOR MAY HAVE
AGAINST LESSEE WHICH ACCRUE FOLLOWING CLOSING DATE.
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(ii) IF THE CLOSING DATE DOES NOT OCCUR SOLELY BY REASON OF A
WILLFUL REFUSAL BY LESSOR TO SATISFY ITS OBLIGATIONS UNDER THIS
PARAGRAPH 55, LESSEE SHALL HAVE THE RIGHT TO PURSUE ONLY ONE OF THE
FOLLOWING REMEDIES: (1) LESSEE MAY DEMAND THE RETURN OF ITS
DEPOSIT, WHICH RETURN SHALL OPERATE TO TERMINATE THE PURCHASE
OPTION, AND RELEASE LESSOR FROM ANY AND ALL LIABILITY HEREUNDER, OR
(2) LESSEE MAY COMPEL SPECIFIC PERFORMANCE OF LESSOR'S OBLIGATION
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TO CONVEY THE PREMISES TO LESSEE IN ACCORDANCE WITH THE TERMS OF
THIS PARAGRAPH 55, IT BEING UNDERSTOOD AND AGREED THAT THE REMEDY
OF SPECIFIC PERFORMANCE SHALL NOT BE AVAILABLE TO ENFORCE ANY OTHER
OBLIGATION OF LESSOR HEREUNDER. LESSEE HEREBY EXPRESSLY WAIVES ITS
RIGHTS TO SEEK ANY OTHER FORM OF DAMAGES OR REMEDIES IN THE EVENT
OF LESSOR'S DEFAULT HEREUNDER. LESSEE SHALL BE DEEMED TO HAVE
ELECTED TO TERMINATE THIS PARAGRAPH 55 AND RECEIVE THE DEPOSIT BACK
IF LESSEE FAILS TO FILE SUIT FOR SPECIFIC PERFORMANCE AGAINST
LESSOR IN A COURT HAVING JURISDICTION IN THE COUNTY AND STATE IN
WHICH THE PREMISES IS LOCATED ON OR BEFORE TEN (10) DAYS FOLLOWING
THE ORIGINALLY SCHEDULED CLOSING DATE IN WHICH CASE ESCROW HOLDER
SHALL, WITHOUT FURTHER INSTRUCTION OR NOTIFICATION FROM LESSEE,
RECORD THE QUITCLAIM DEED UPON REFUND OF THE DEPOSIT TO LESSEE.
LESSEE AND LESSOR ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND
THE PROVISIONS OF THIS SUBPARAGRAPH AND HEREBY EVIDENCE THEIR
SPECIFIC AGREEMENT TO THE TERMS OF THIS SUBPARAGRAPH BY PLACING
THEIR INITIALS IN THE PLACE PROVIDED BELOW.
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(iii) AS A MATERIAL CONSIDERATION FOR LESSOR ENTERING
INTO THIS LEASE WITH LESSEE, (i) LESSEE HEREBY WAIVES ANY
RIGHT IT MAY HAVE AT LAW, IN EQUITY OR OTHERWISE, INCLUDING
WITHOUT LIMITATION THE PROVISIONS OF CALIFORNIA CIVIL CODE
SECTION 3387, TO COMPEL SPECIFIC PERFORMANCE OF THE SALE OF
THE PREMISES, (ii) LESSEE HEREBY WAIVES THE RIGHT TO FILE A
NOTICE OF PENDENCY OF ACTION AS PROVIDED BY CALIFORNIA CODE OF
CIVIL PROCEDURE SECTION 405 IN CONNECTION WITH ANY ACTION
FILED AGAINST LESSOR FOR BREACH OF THE LEASE, (iii) LESSEE
AGREES THAT ANY SUCH NOTICE FILED IN CONTRAVENTION OF THIS
SECTION SHALL BE NULL AND VOID, AND (iv) LESSEE HEREBY WAIVES
THE REQUIREMENT OF CALIFORNIA CODE OF CIVIL PROCEDURE SECTION
405.33 THAT A BOND OR OTHER UNDERTAKING BE GIVEN AS A
CONDITION FOR EXPUNGING SUCH NOTICE. IF LESSEE DOES NOT SEEK A
RETURN OF ITS DEPOSIT AND INSTEAD FILES AN ACTION FOR SPECIFIC
PERFORMANCE AGAINST LESSOR ON OR BEFORE THIRTY (30) DAYS FROM
THE ORIGINALLY SCHEDULED CLOSING DATE, THEN THIS SECTION SHALL
BECOME NULL AND VOID. LESSEE AND LESSOR ACKNOWLEDGE THAT THEY
HAVE READ AND UNDERSTAND THE PROVISIONS OF THIS SUBPARAGRAPH
AND HEREBY EVIDENCE THEIR SPECIFIC AGREEMENT TO THE TERMS OF
THIS SUBPARAGRAPH BY PLACING THEIR INITIALS IN THE PLACE
PROVIDED BELOW.
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(f) OPTION PRICE. The Option Price shall be Three Million One
Hundred Twenty-One Thousand Six Hundred Eight Dollars ($3,121,608.00)
(based on $119.00/per sq. ft.) if Lessee exercises the Purchase Option
during year one (1) of the Original Term of the Lease, and (ii) Three
Million Two Hundred Seventy-Seven Thousand Six Hundred Eighty-Eight and
40/100th Dollars ($3,277,688.40) (based on $124.95/per sq. ft.) if
Lessee exercises the Purchase Option during year two (2) of the
Original Term. Provided that Lessor did not use any of the Security
Deposit to compensate Lessor for losses or damages as provided in
Paragraph 5 of the Lease, the Security Deposit shall be credited toward
the Option Price upon the Closing Date.
(g) COSTS AND EXPENSES. The cost and expense of the PTR, the
portion of the policy of title insurance premium attributable to CLTA
standard coverage and the documentary transfer tax shall be paid by
Lessor. Lessee shall have the right to obtain ALTA extended coverage so
long as such coverage does not delay the Closing Date, is not a
condition to closing and Lessee pays for all costs in connection
therewith. Lessee shall pay the portion of the policy of title
insurance premium attributable to ALTA extended coverage, if obtained,
and the cost of any title insurance endorsements it may require and the
cost of recording a grant deed. Except as otherwise specifically
provided herein, the Escrow Holder's fee (including any escrow
cancellation charges in the event escrow shall be canceled for any
reason except a party's default hereunder) shall be shared equally by
Lessor and Lessee. All other costs shall be allocated between Lessee
and Lessor in accordance with customary practice in Orange county.
(h) DISCLAIMER OF REPRESENTATIONS AND WARRANTIES; AS-IS SALE.
Lessee acknowledges that, by the Closing Date, it will have had ample
opportunity to fully inspect, examine, study and analyze to its
satisfaction all aspects of the Premises including, but not limited to,
(i) the suitability or condition of the Premises for any purpose or its
fitness for any particular use, (ii) the profitability and/or
feasibility of owning, operating and/or improving the Premises, (iii)
the physical condition of the Premises, including, without limitation,
the current or former presence or absence of environmental hazards or
hazardous materials, asbestos, radon gas, underground storage tanks,
electromagnetic fields, or other substances or condition which may
affect the Premises or its current or future uses, habitability, value
or desirability, (iv) the rentals, income, costs or expenses thereof,
(v) the net or gross acreage, usable or unusable, contained therein,
(vi) the zoning of the Premises, (vii) the rentable and usable square
footage of the improvements, (viii) the condition of title, (ix) the
compliance by the Premises with applicable laws, codes, rules and
regulations, including, without limitation, zoning laws, building codes
and environmental and similar laws, governing or relating to
environmental hazards or hazardous materials, asbestos, radon gas,
underground storage tanks, electromagnetic fields, or other substances
or condition which may affect the Premises, (x) water or utility
availability or use restrictions, (xi) geologic/seismic conditions,
soil and terrain stability or drainage, (xii) sewer, septic and well
systems and components, (xiii) other neighborhood or Premises
conditions, including, without limitation, proximity and adequacy of
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law enforcement and fire protection, crime statistics, noise or odor
from any sources, landfills, proposed future developments, and (xiv)
any other past, present or future matter relating to the Premises which
may affect the Premises or its current or future use, habitability,
value or desirability. Lessee represents and warrants to Lessor that,
(i) Lessee is relying solely on Lessee's own investigation of the
Premises and review of such information and documentation in
determining whether or not to purchase the Premises, (ii) any and all
information made available to Lessee or provided or to be provided by
or on behalf of Lessor with respect to the Premises was obtained from a
variety of sources and that Lessor has not made any independent
investigation or verification of such information and makes no
representations as to the accuracy or completeness of such information.
Lessor does not make any representations or warranties of any kind
whatsoever, either express or implied, with respect to the Premises or
any related matters including, but not limited to, the matters
referenced in this Paragraph, and that the Premises is being sold to
Lessee in an "AS IS" condition.
(i) DEFAULT.
(i) EFFECT OF DEFAULT. Lessee shall have no right to exercise
this Purchase Option (A) during the time commencing from the date
Lessor gives Lessee a notice of Default and continuing until the
Default is cured, or (B) during the time commencing on the day
after a monetary obligation to Lessor is due from Lessee and unpaid
and continuing until the obligation is paid. The Option Period
shall not be extended, delayed or enlarged by reason of Lessee's
inability to exercise this Purchase Option as a result of the
provisions of this Paragraph.
(ii) TERMINATION OF PURCHASE OPTION. All rights of Lessee under
this Purchase Option shall terminate and be of no further force or
effect, notwithstanding Lessee's timely exercise thereof, if, (1)
after such exercise and during the term of the Lease, a Breach by
Lessee has occurred and Lessee fails to cure prior to the scheduled
Closing Date, (2) after such exercise, Lessee fails to timely
acquire the Premises within sixty (60) days after Lessor's receipt
of the exercise notice, and/or (3) the Purchase Option is otherwise
terminated pursuant to this Paragraph 55. Once Lessee's Purchase
Option has terminated whether by lapse of time or by reason of the
provisions of this paragraph, Lessee shall execute and deliver to
Lessor a Quitclaim Deed stating that Lessee has no Purchase Option
under the Lease in form reasonably required by Lessor, and Lessee's
failure to execute and deliver such Quitclaim Deed shall be a
material default under the Lease.
(j) LESSEE'S RELEASE OF LESSOR. From and after the Closing Date,
Lessee hereby waives, releases, remises, acquits and forever discharges
Lessor and its shareholders, directors, officers, employees, agents,
successors and assigns ("Lessor Parties") of and from any and all
actions, suits, legal or administrative orders or proceedings, demands,
actual damages, punitive damages, loss, costs, liabilities and
expenses, which concern or in any way relate to the Premises, whether
existing prior to, at or after the Closing Date, including, without
limitation, matters relating to the condition of title to the Premises,
zoning, compliance of the Premises, or the release or threatened
release of hazardous materials therefrom. It is the intention of the
parties pursuant to this release that any and all responsibilities and
obligations of Lessor Parties, and any and all rights, claims, rights
of action, causes of action, demands or legal rights of any kind of
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Lessee and its shareholders, directors, officers, employees, agents,
successors and assigns arising by virtue of the Premises, whether
existing prior to, at or after the Closing Date, are by this release
provision declared null and void and of no present or future force and
effect as to the parties. Lessee hereby waives any and all rights which
said party may have under Section 1542 of the California Civil Code
which provides as follows:
"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."
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(k) RISK OF LOSS. If any casualty or condemnation proceeding occurs
or commences after the exercise of the Purchase Option and prior to the
Closing Date, and such damage or proceeding relates to or may result in
the loss of any significant portion of the Premises, and Lessee and its
agents, invitees, employees or affiliates were not the cause of any
such casualty by reason of their gross negligence or willful
misconduct, Lessee may, at its option, elect to terminate its Purchase
Option, in which event Lessor shall return the Deposit to Lessee and
the Purchase Option shall be deemed terminated. Otherwise, Lessee may
terminate its Purchase Option but shall not receive its Deposit. If
Lessee elects to proceed with acquiring the Premises, then, upon the
Closing Date, Lessee shall be entitled to any compensation, awards or
other payments or relief resulting from such casualty or condemnation
proceeding so long as Lessee reimburses Lessor for any and all costs
and expenses incurred by Lessor in connection with such casualty or
condemnation, including, without limitation, attorneys' fees and costs.
(l) DISCLOSURES. Lessee acknowledges and agrees that certain
disclosures may need to be made by Lessor to Lessee with respect to the
Premises (wherein Lessee may or may not need to execute an
acknowledgement of such disclosure) and/or Lessee may need to assume
from Lessor certain agreements regarding the Premises, all of which
would occur on or before the Closing Date. If Lessor proposes that any
of the foregoing would occur, Lessor shall provide Lessee with written
notice of such disclosure and/or agreement, with a copy of the proposed
document, if any, to be executed by Lessee, and Lessee shall thereafter
have a period of two (2) business days to give written notice to Lessor
of Lessee's election to either (i) acquire the Premises subject to such
disclosure and/or assumption agreement, in which event, the Closing
Date shall occur as scheduled and Lessee shall deposit, if necessary,
such documents into Escrow at least one (1) business day prior to the
Closing Date, or (ii) terminate its Purchase Option, in which event the
Purchase Option shall be deemed terminated in accordance with
subparagraph (i) above and Lessor shall return the Deposit to Lessee so
long as the only reason for the Closing Date not timely occurring was
Lessee's refusal or failure to acquire the Premises subject to the
disclosure and/or to execute the proposed disclosure and/or assumption
agreement. If Lessee fails to give written notice within such two (2)
day period, then Lessee shall be deemed to have agreed to proceed with
its acquisition of the Premises and to execute and deliver, if
necessary, the proposed documentation.
56. TENANT IMPROVEMENTS. The provisions of this Paragraph 56 shall
apply to the planning and completion of leasehold improvements requested by
Lessee (the "Tenant Improvements") for the fitting out of the Premises, as more
fully set forth herein.
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(a) LESSOR AND LESSEE PRECONSTRUCTION OBLIGATIONS.
(i) PRELIMINARY PLANS. Attached to the Lease as EXHIBIT "C" are
preliminary space plans for the Tenant Improvements (the
"Preliminary Plans"), which include, without limitation, sketches
and/or drawings showing locations of doors, partitioning,
electrical fixtures, outlets and switches, plumbing fixtures, floor
loads and other requirements, and a list of all specialized
installations and improvements and upgrade specifications
determined by Lessee as required for its use of the Premises.
Lessee acknowledges that the Preliminary Plans have been prepared
by Lessor's architect (the "Architect") after consultation and
cooperation between Lessee and the Architect regarding the proposed
Tenant Improvements and Lessee's requirements and that the
Preliminary Plans are complete with respect thereto. Lessor and the
Architect shall be entitled, in all respects, to rely upon all
information supplied by Lessee regarding the Tenant Improvements.
The costs associated with preparation of the Preliminary Plans
shall be borne by Lessee and paid as set forth in Paragraphs (d)
and (e) of this Paragraph 56.
(ii) WORKING DRAWINGS. Within fifteen (15) business days
following full execution of this Lease by both Lessor and Lessee,
the Architect shall prepare working drawings (the "Working
Drawings") for the Tenant Improvements based upon the approved
Preliminary Plans. The Working Drawings shall include
architectural, mechanical and electrical construction drawings for
the Tenant Improvements based on the Preliminary Plans.
Notwithstanding the Preliminary Plans, in all cases the Working
Drawings (i) shall be subject to Lessor's final approval, which
approval shall not be unreasonably withheld, (ii) shall not be in
conflict with building codes for the City of Lake Forrest ("City")
or the County of Orange or with insurance requirements for a fire
resistive Class A building, (iii) shall comply with all applicable
building, fire, health and sanitary codes, regulations and
requirements, and (iv) shall be in a form satisfactory to
appropriate governmental authorities responsible for issuing
permits and licenses required for construction. The costs
associated with preparation of the Working Drawings shall be borne
by Lessee and paid as set forth in Paragraphs (d) and (e) of this
Paragraph 56.
(iii) APPROVAL OF WORKING DRAWINGS. Lessor or the Architect
shall submit the Working Drawings to Lessee for Lessee's review,
and Lessee shall notify Lessor and the Architect within five (5)
days after delivery thereof of any requested revisions. Within five
(5) business days after receipt of Lessee's notice, the Architect
shall make all approved revisions to the Working Drawings and
submit two (2) copies thereof to Lessee for its final review and
approval, which approval shall be given within three (3) days
thereafter. Concurrently with the above review and approval
process, Lessor may submit all plans and specifications to City and
other applicable governmental agencies in an attempt to expedite
City approval and issuance of all necessary permits and licenses to
construct the Tenant Improvements as shown on the Working Drawings.
Any changes or ancillary improvements (including without limitation
improvements outside of the Premises) which are required by City or
other governmental agencies shall be immediately submitted to
Lessor for Lessor's review and reasonable approval, and Lessor
shall promptly notify Lessee of such changes. If approved by
Lessor, such changes and/or improvements shall be added to the
Working Drawings and be deemed part of the Tenant Improvements.
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(iv) SCHEDULE OF CRITICAL DATES. Set forth below is a schedule
of certain critical dates relating to Lessor's and Lessee's
respective obligations for the design and construction of the
Tenant Improvements. Such dates and the respective obligations of
Lessor and Lessee are more fully described elsewhere in this
Paragraph 56. The purpose of the following schedule is to provide a
reference for Lessor and Lessee and to make certain the Final
Approval Date occurs as set forth herein. Following the Final
Approval Date, Lessee shall be deemed to have released Lessor to
commence construction of the Tenant Improvements as set forth in
Paragraph (c) below.
<TABLE>
<CAPTION>
REFERENCE DATE DUE RESPONSIBLE PARTY
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<S> <C> <C>
A. "Preliminary Plan Approval" The date of execution of the Lease Lessee and Lessor
B. "Working Drawings Completion" Fifteen (15) business days after full Lessor
execution of the Lease
C. "Working Drawings Review" Five (5) days after Lessor submits the Lessee
Working Drawings to Lessee
D. "Working Drawings Revision" Five (5) business days after Lessee returns Lessor
the Working Drawings to Lessor
E. "Final Approval Date" Three (3) days after Lessor submits the Lessee
revised Working Drawings to Lessee
</TABLE>
(v) CONSTRUCTION REPRESENTATIVE. Lessee shall have the right to
designate a representative of Lessee to participate in the
planning, permitting and contracting for the construction of the
Tenant Improvements. In the event Lessee designates such person,
Lessor shall use reasonable and diligent efforts to include such
person in all substantive planning, permitting and construction
discussions, conferences and meetings and shall provide copies of
all contracts for the work and submittals to the City prior to or
concurrently with entering into such contracts or submitting plans
to the City. Lessee acknowledges and agrees that such
representative shall be involved for informational purposes only
and shall not have any voting or approval rights with respect to
any such planning, permitting or construction discussions,
contracts or submittals.
(b) BUILDING PERMIT. After the Final Approval Date has occurred,
Lessor shall, if Lessor has not already done so, submit the Working
Drawings to the appropriate governmental body or bodies for final plan
checking and a building permit. Lessor, with Lessee's cooperation,
shall cause to be made any change in the Working Drawings necessary to
obtain the building permit; provided, however, after the Final Approval
Date, no changes shall be made to the Working Drawings without the
prior written approval of both Lessor and Lessee, and then only after
agreement by Lessee to pay any excess costs resulting from such
changes.
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(c) CONSTRUCTION OF TENANT IMPROVEMENTS. After the Final Approval
Date has occurred and a building permit for the work has been issued,
Lessor shall, through a guaranteed maximum cost or fixed price (at
Lessor's sole option) construction contract ("Construction Contract")
with a reputable, licensed contractor selected by Lessor
("Contractor"), cause the construction of the Tenant Improvements to be
carried out in substantial conformance with the Working Drawings in a
good and workmanlike manner using first-class materials. The Contractor
shall obtain two (2) bids from Subcontractors for each major component
of the Tenant Improvements, and Contractor and Lessor shall use their
reasonable discretion as to which bid to accept. During construction of
the Tenant Improvements, Lessor shall make reasonable efforts to keep
Lessee apprised of the status of construction. The costs associated
with the construction of the Tenant Improvements shall be paid as set
forth in Paragraphs (d) and (e) of this Paragraph 56. Lessor shall see
that the construction complies with all applicable building, fire,
health, and sanitary codes and regulations, the satisfaction of which
shall be evidenced by a certificate (or temporary certificate) of
occupancy for the Premises.
(d) TENANT IMPROVEMENT ALLOWANCE. Lessor shall provide Lessee with
a Tenant Improvement Allowance in the amount of Two Hundred
Seventy-Five Thousand Dollars ($ 275,000.00) towards the cost of the
design, purchase and construction of the Tenant Improvements,
including, without limitation, design, engineering and consulting fees
(collectively, the "Tenant Improvement Costs"). Of the Tenant
Improvement Costs, Tenant shall pay for One Hundred Seventy-Five
Thousand Dollars ($175,000.00) plus any and all amounts in excess of
Four Hundred Fifty Thousand Dollars ($450,000.00). The Tenant
Improvement Allowance shall be used for payment of the following Tenant
Improvements Costs:
(i) Preparation by the Architect of the Preliminary Plans and
the Working Drawings as provided in Paragraph (a) of this Paragraph
56, including without limitation all fees charged by City
(including without limitation fees for building permits and plan
checks) in connection with the Tenant Improvements work in the
Premises;
(ii) Construction work for completion of the Tenant
Improvements and any ancillary improvements required by any
applicable governmental agency or authority arising out of the
Tenant Improvements, as reflected in the Working Drawings and
Construction Contract; and
(iii) All contractors' charges, general conditions, performance
bond premiums, and construction fees as reflected in the
Construction Contract, and a construction management supervision
fee equal two percent (2%) of the Tenant Improvement Costs.
(e) COSTS IN EXCESS OF TENANT IMPROVEMENT ALLOWANCE AT LESSEE'S
EXPENSE.
(i) COST APPROVAL. Lessee shall pay the excess of the Tenant
Improvement Costs over the amount of the Tenant Improvement
Allowance available to defray such costs. Concurrent with the plan
checking referred to in Paragraph (b) of this Paragraph 56, Lessor
shall prepare and submit to Lessee a written estimate of the amount
of the remaining Tenant Improvement Costs and the cost of the
Tenant Improvement Allowance still available to defray such costs
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(after preparation of the Preliminary Plans and Working Drawings).
Lessee shall approve or disapprove any such estimate by written
notice to Lessor within three (3) days after receipt thereof. If
Lessee fails to notify Lessor of its disapproval within such three
(3) day period, Lessee shall be deemed to have approved such
estimate. If Lessee approves such estimate, Lessee's notice of
approval shall include payment to Lessor for an amount equal to
Fifty Thousand Dollars ($50,000.00). If Lessee disapproves such
estimate within the three (3) day period, Lessee shall be required
to direct Lessor and the Architect to amend the Working Drawings in
a manner satisfactory to Lessor so as to reduce the estimated costs
to an amount acceptable to Lessee, and any excess estimated costs
remaining after such amendment shall be paid by Lessee in the
manner described in the preceding sentence. Lessee shall
additionally pay any costs resulting from such amendment and Lessee
shall be liable for the delay in completing the Tenant Improvements
and the increased costs, if any, resulting from such delay. If
Lessee is unwilling or unable to amend the Working Drawings in a
manner acceptable to Lessor, then Lessee shall be deemed to have
approved of the estimate for the Working Drawings as prepared,
Lessee shall pay the Fifty Thousand Dollars ($50,000.00) to Lessor,
and shall pay in full the amount of any excess estimated costs
together with any costs arising from delay as a result of Lessee's
actions hereunder, in the manner hereinabove provided.
(ii) PAYMENTS DURING CONSTRUCTION. During construction of the
Tenant Improvements, Lessor shall submit invoices to Lessee for
payment of the Tenant Improvements from time to time and Lessee
shall pay such invoices within two (2) business days of receipt of
each such invoice. Lessee and Lessor shall pay construction costs
on a PARI PASSU basis (Lessor's $275,000.00; Lessee's $125,000.00)
for the second Four Hundred Thousand Dollars ($400,000.00) of
Tenant Improvement Costs (the initial $50,000 of Tenant Improvement
Costs were paid by Lessee). Any and all amounts in excess of Four
Hundred Fifty Thousand Dollars ($450,000.00) shall be paid for by
Lessee. (For example, if the first invoice from the Contractor
equals $100,000.00, the first $50,000.00 shall have been paid by
Lessee and Lessor shall pay $34,375.00 and Lessee shall pay an
additional $15,625.00 of such amount.) In no event shall Lessor pay
in excess of the Tenant Improvement Allowance, and if Lessor pays
such Tenant Improvement Allowance, then Lessee shall be responsible
for any and all excess costs.
(iii) FINAL COSTS. Within sixty (60) days after completion by
Lessor of the Tenant Improvements, Lessor shall determine the
actual final Tenant Improvements Costs and shall submit a written
statement of such amount to Lessee. If any estimate previously paid
by Lessee exceeds the amount due hereunder from Lessee for such
work, such excess shall be refunded to Lessee. If any amount is
still due from Lessee for such work, then Lessee shall pay such
amount in full within ten (10) days of receipt of Lessor's
statement.
(f) CHANGE ORDERS. Lessee may from time to time request and obtain
change orders during the course of construction provided that: (i) each
such request shall be reasonable, shall be in writing and signed by or
on behalf of Lessee, and shall not result in any structural change in
the Premises, as reasonably determined by Lessor, (ii) all additional
charges and costs, including without limitation architectural and
engineering costs, construction and material costs, processing costs of
any governmental entity, and increased construction, construction
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management and supervision fees, together with an administrative fee to
Lessor to cover its change order processing costs of $100.00 per
occurrence, shall be the sole and exclusive obligation of Lessee; and
(iii) any resulting delay in the completion of the Tenant Improvements
shall be deemed a Lessee Delay and in no event shall extend the
Commencement Date of the Lease. Upon Lessee's request for a change
order, Lessor shall as soon as reasonably possible submit to Lessee a
written estimate of the increased or decreased cost and anticipated
delay, if any, attributable to such requested change. Within three (3)
days of the date such estimated cost adjustment and delay are delivered
to Lessee, Lessee shall advise Lessor whether it wishes to proceed with
the change order, and if Lessee elects to proceed with the change
order, Lessee shall remit, concurrently with Lessee's notice to
proceed, the amount of the increased cost, if any, attributable to such
change order. Election by Lessee to not proceed with any change order
shall not relieve Lessee from its obligation to pay to Lessor its
administration processing charge of $100.00. Unless Lessee includes in
its initial change order request that the work in process at the time
such request is made be halted pending approval and execution of a
change order, Lessor shall not be obligated to stop construction of the
Tenant Improvements, whether or not the change order relates to the
work then in process or about to be started.
(g) LESSEE DELAYS. In no event shall the Commencement Date of the
Lease be extended or delayed due or attributable to delays due to the
fault of Lessee ("Lessee Delays"). Lessee Delays shall include, but are
not limited to, delays caused by or resulting from any one or more of
the following:
(i) Lessee's failure to timely review and reasonably approve
the Working Drawings or to furnish information to Lessor for the
preparation by Lessor of the Working Drawings;
(ii) Lessee's request for or use of special materials, finishes
or installations which are not readily available, provided that
Lessor shall notify Lessee in writing that the particular material,
finish, or installation is not readily available promptly upon
Lessor's discovery of same;
(iii) Change orders requested by Lessee;
(iv) Interference by Lessee or by Lessee's Agents with Lessor's
construction activities;
(v) Lessee's failure to approve any other item or perform any
other obligation in accordance with and by the dates specified
herein or in the Construction Contract;
(vi) Lessee's requested changes in the Preliminary Plans,
Working Drawings or any other plans and specifications after the
approval thereof by Lessee or submission thereof by Lessee to
Lessor;
(vii) Lessee's failure to approve written estimates of costs in
accordance with this Paragraph 56;
(viii) Lessee's failure to timely pay an invoice; and
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(ix) Lessee's obtaining or failure to obtain any necessary
governmental approvals or permits for Lessee's intended use of the
Premises.
If the Commencement Date of the Lease is delayed by any Lessee
Delays, whether or not within the control of Lessee, then the
Commencement Date of the Lease and the payment of Base Rent shall be
accelerated by the number of days of such delay. Lessor shall give
Lessee written notice within a reasonable time of any circumstance that
Lessor believes constitutes a Lessee Delay.
(h) TRADE FIXTURES AND EQUIPMENT. Lessee acknowledges and agrees
that Lessee is solely responsible for obtaining, delivering and
installing in the Premises all necessary and desired furniture, trade
fixtures, equipment and other similar items, and that Lessor shall have
no responsibility whatsoever with regard thereto. Lessee further
acknowledges and agrees that neither the Commencement Date of the Lease
nor the payment of Base Rent shall be delayed for any period of time
whatsoever due to any delay in the furnishing of the Premises with such
items.
(i) CURE PERIODS. Lessee shall have three (3) business days to cure
the Default of any of its obligations contained in this Paragraph 56,
notwithstanding any longer time periods provided in the Lease.
57. LIMITATION ON LESSOR'S LIABILITY. The obligations of Lessor do not
constitute the personal obligations of the individual partners, trustees,
members, directors, officers or shareholders of Lessor or its constituent
partners, if any. If Lessor shall fail to perform any covenant, term, or
condition of the Lease upon Lessor's part to be performed, Lessee shall be
required to deliver to Lessor written notice of the same. If, as a consequence
of such default, Lessee shall recover a money judgment against Lessor, such
judgment shall be satisfied only out of the proceeds of sale received upon
execution of such judgment and levied thereon against the right, title and
interest of Lessor in the Premise and out of Base Rent or other income from such
disposition of all or any part of Lessor's right, title or interest in the
Premises, and no action for any deficiency may be sought or obtained by Lessee.
58. JURY WAIVER. To the fullest extent permitted by law, Lessee hereby
waives the right to trial by jury in any cause of action, claim, counterclaim,
cross-complaint, action proceeding and/or hearing on any matter whatsoever
arising out of or in any way connected with the Lease, the relationship of
Lessor and Lessee, Lessee's use or occupancy of the Premises, any claim of
injury or damage, or the enforcement of any remedy under any law, statute, or
regulation, emergency or otherwise, now or hereafter in effect.
59. PROPERTY MANAGEMENT FEE. Lessee shall pay Lessor a property
management fee ("Management Fee") equal to three percent (3%) of the Base Rent
payable under the Lease as it is increased from time to time. Such Management
Fee shall be payable monthly together with each payment of Base Rent.
60. EARLY POSSESSION. Lessee and its authorized agents, contractors,
subcontractors and employees shall be granted a license by Lessor to enter upon
the Premises, at Lessee's sole risk and expense, during ordinary business hours
prior to the Commencement Date, for the sole purpose of installing Lessee's
trade fixtures and equipment in the Premises; provided, however, that (i) the
provisions of this Lease, other than with respect to the payment of Base Rent,
shall apply during such early entry, (ii) prior to any such entry, Lessee shall
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<PAGE>
pay for and provide evidence of the insurance to be provided by Lessee pursuant
to the provisions of Paragraph 8, (iii) Lessee shall pay all utility, service
and maintenance charges for the Premises attributable to Lessee's early entry
and use of the Premises as reasonably determined by Lessor, (iv) Lessee shall
not interfere, delay or hinder Lessor, its agents, contractors or subcontractors
in the construction of the Tenant Improvements in accordance with the provisions
of this Lease, and (v) Lessee shall not use the Premises for the storage of
inventory or otherwise commence the operation of business during the period of
such early entry. Upon Lessee's breach of any of the foregoing conditions,
Lessor may, in addition to exercising any of its other rights and remedies set
forth herein, revoke such license upon notice to Lessee. Early entry by Lessee
in accordance with this Paragraph 60 shall not constitute occupancy of the
Premises for purposes of establishing the Commencement Date.
61. ASSIGNMENT AND SUBLETTING. Notwithstanding the terms of the Lease,
Lessor shall consent to the assignment of this Lease or any sublease of all or
part of the Premises or an assignment of Lessee's Purchase Option to any
Affiliate, Subsidiary or Successor of Lessee (as those terms are hereinafter
defined), provided, however, that such Affiliate, Subsidiary or Successor, as
the case may be, shall have, on completion of the assignment or sublease, a net
worth at least equal to Lessee's as of the date of execution of this Lease,
evidence of which, satisfactory to Lessor, shall be presented to Lessor prior to
the assignment or sublease, and otherwise upon demand by Lessor. Any assignment
or sublease to an Affiliate, Subsidiary or Successor in violation of the net
worth requirements set forth above shall, at Lessor's option, be deemed null and
void.
For purposes of this Paragraph 61 an "Affiliate," a "Subsidiary"
and a "Successor" of Lessee are defined as follows:
(i) An "Affiliate" is any corporation or other legal entity which
directly or indirectly controls or is controlled by or is under common
control with Lessee. For this purpose, "control" shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such corporation or other
legal entity, whether through the ownership of voting securities or by
contract or otherwise.
(ii) A "Subsidiary" shall mean any corporation or other legal
entity not less than fifty percent (50%) of whose outstanding stock or
beneficial interest shall, at the time, be owned directly or indirectly
by Lessee.
(iii) A "Successor" of Lessee shall mean:
(A) A corporation or other legal entity in which or with
which Lessee is merged or consolidated, in accordance with
applicable statutory provisions for merger or consolidation, if
any, provided that by operation of law or by effective provisions
contained in the instruments of merger or consolidation, the
liabilities of the entities participating in such merger or
consolidation are assumed by the corporation or other legal entity
surviving such merger or created by such consolidation; or
(B) A corporation or other legal entity acquiring the rights
of Lessee hereunder and a substantial portion of the property and
assets of Lessee.
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