<PAGE>
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ______________ to ______________
Commission File Number 0-16580
------------------------------
TELENETICS CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 33-0061894
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25111 ARCTIC OCEAN
LAKE FOREST, CALIFORNIA 92630
(Address of principal executive offices)
(949) 455-4000
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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 [X] No [ ]
As of November 13, 2000, there were 16,418,611 shares of the Company's
common stock outstanding.
================================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
(UNAUDITED)
ASSETS
<CAPTION>
September 30,
2000
-------------
<S> <C>
Current Assets:
Cash $ 33,769
Accounts receivable, net 2,415,218
Receivable from related parties 217,957
Inventories 3,088,737
Prepaid expenses and other current assets 189,690
-------------
Total current assets 5,945,371
Property, plant and equipment, net 1,035,933
Goodwill, net 321,111
Investments in technology and other intangible assets, net 3,092,778
Other assets 76,603
-------------
$ 10,471,796
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 372,554
Revolving line of credit 575,736
Subordinated promissory notes 1,477,262
Note Payable 325,000
Related party debt 440,000
Current portion of obligations under capital leases 23,348
Accounts payable 2,672,636
Accrued expenses 1,651,367
Advance payments from customers 50,470
-------------
Total current liabilities 7,588,373
Obligations under capital leases, less current portion 53,175
-------------
Total liabilities 7,641,548
-------------
Shareholders' equity:
Preferred stock, no par value. Authorized 5,000,000 shares;
no shares issued and outstanding --
Common stock, no par value. Authorized 25,000,000 shares;
issued and outstanding 16,123,623 shares 24,996,113
Equity line costs (1,302,328)
Subscriptions receivable (111,250)
Unearned compensation (638,906)
Accumulated deficit (20,113,381)
-------------
Total shareholders' equity 2,830,248
-------------
$ 10,471,796
=============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-1
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 2,310,837 $ 2,690,313 $ 6,584,620 $ 10,316,338
Cost of sales 1,715,348 1,549,382 4,537,880 7,147,024
------------- ------------- ------------- -------------
Gross profit 595,489 1,140,931 2,046,740 3,169,314
Selling, general and administrative expenses 1,448,520 1,000,790 4,195,716 2,092,350
Engineering and product development expenses 893,027 229,464 2,145,103 540,229
Severance costs 190,500 -- 190,500 --
Legal and accounting 391,410 81,654 1,100,588 314,476
------------- ------------- ------------- -------------
Income (loss) from operations (2,327,968) (170,977) (5,585,167) 222,259
Interest expense (115,880) (97,678) (350,988) (254,938)
Litigation Settlements (908,665) -- (1,356,878) --
Other income -- 239 -- 36,573
------------- ------------- ------------- -------------
Income (loss) before income taxes (3,352,513) (268,416) (7,293,033) 3,894
Income taxes -- -- 1,600 829
------------- ------------- ------------- -------------
Net income (loss) $ (3,352,513) $ (268,416) $ (7,294,633) $ 3,065
============= ============= ============= =============
Earnings (loss) per common share:
Basic $ (.22) $ (.03) $ (.51) $ --
============= ============= ============= =============
Diluted $ (.22) $ (.03) $ (.51) $ --
============= ============= ============= =============
Common shares used in computing earnings (loss)
per common share:
Basic 15,551,388 9,825,754 14,232,247 9,644,125
============= ============= ============= =============
Diluted 15,551,388 9,825,754 14,232,247 9,644,125
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(7,294,633) $ 3,065
Adjustments to reconcile net income (loss) to net cash
used in operations:
Depreciation and amortization 390,510 164,576
Stock issued for services 63,406 25,000
Compensation for non-employee stock options 516,529 --
Amortization of unearned compensation for employee
stock and options 211,894 --
Stock, warrants and debt issued in connection
with the settlement of litigation 1,356,878 --
Warrants issued in connection with debt to
equity conversion -- 19,522
Provision for doubtful accounts 138,500 --
Benefits from debt relief 9,874 (36,160)
Changes in operating assets and liabilities:
Accounts receivable (978,087) 142,616
Inventories (893,028) 1,811,052
Prepaid and other assets (100,929) (5,012)
Accounts payable 1,060,242 (1,258,796)
Accrued expenses 477,713 200,257
Advance payment from customers (39,389) (1,395,641)
------------ ------------
Net cash used in operating activities (5,080,520) (329,521)
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment (136,350) (603,857)
Payments for business acquisitions (184,395) (676,004)
Other assets (59,342) (30,094)
Amounts collected from (advanced to) related parties (59,335) (49,297)
------------ ------------
Net cash used in investing activities: (439,422) (1,359,252)
------------ ------------
Cash flows from financing activities:
Bank overdraft 53,967 48,969
Proceeds from (repayment on) obligation under
factoring agreement -- (289,627)
Net proceeds from (repayment of) revolving line
of credit (222,066) 940,501
Repayments of long-term debt (211,451) (8,754)
Net proceeds from (repayments of) related party debt 80,000 (40,553)
Proceeds from subscription receivable -- 224,959
Proceeds from subordinated notes payable 1,131,000 --
Proceeds from exercise of warrants and options 2,841,567 61,420
Proceeds of Common Stock offerings 1,986,374 --
Proceeds of Series A 7.0% Convertible Redeemable
Preferred Stock offering -- 835,893
Debt issuance costs -- (61,149)
Dividends on Preferred Stock (12,095) (18,013)
Offering costs (94,230) --
------------ ------------
Net cash provided by financing activities 5,553,066 1,693,646
------------ ------------
Net increase in cash 33,124 4,873
Cash, beginning of period 645 --
------------ ------------
Cash, end of period $ 33,769 $ 4,873
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
<TABLE>
TELENETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 219,206 $ 209,426
============= =============
Income taxes -- --
============= =============
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of common stock upon conversion of
preferred stock:
Class "A" $ 775,976 --
Class "B" 249,106 --
Class "C" 550,000 --
------------- -------------
1,575,082 --
============= =============
Common stock and warrants issued in connection
with the settlement of litigation 905,278 --
============= =============
Issuance of common stock upon conversion of debt 990,833 64,836
============= =============
Issuance of common stock and options for services 701,291 100,200
============= =============
Issuance of common stock upon exercise of warrants
pursuant to subscription agreements 159,875 --
============= =============
Warrants issued in connection with issuance of
subordinated promissory notes 24,412 --
============= =============
Subordinated promissory note issued in exchange for
related party note payable 62,500 --
============= =============
Issuance of common stock in connection with acquisitions 2,070,000 190,000
============= =============
Subordinated promissory note issued in connection
with acquisition 325,000 --
============= =============
Common stock and warrants issued in connection
with common stock offering 1,208,098 --
============= =============
Issuance of Series A 7.0% Convertible Redeemable
Preferred Stock upon conversion of debt -- 224,550
============= =============
Issuance of preferred stock upon business acquisitions:
Series B Convertible Preferred Stock (Greenland) -- 249,106
============= =============
Series C 7.0% Convertible Preferred Stock
(Sunnyvale General Devices and Instruments) -- 550,000
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
TELENETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. Basis of Presentation and Business
----------------------------------
The accompanying condensed consolidated financial statements have been
prepared by Telenetics Corporation (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures included herein are adequate to make the
information presented not misleading. The unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary to
fairly state the financial position as of September 30, 2000 and the results of
operations and cash flows for the related interim periods ended September 30,
2000 and 1999. The results of operations for the three months and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000 or any other period.
The accounting policies followed by the Company and other information are
contained in the notes to the Company's financial statements filed on April 14,
2000 as part of the Company's annual report on Form 10-KSB. This quarterly
report should be read in conjunction with such annual report.
Certain reclassifications have been made to the prior quarters' financial
statements to be consistent with the current quarter presentation.
2. Liquidity
---------
During the three and nine months ended September 30, 2000, the Company
experienced a net loss totaling $3.4 million and $7.3 million, respectively, and
had negative cash flows from operations for the nine months ended September 30,
2000 totaling $5.1 million. In addition, the Company had a working capital
deficit totaling $1.6 million and an accumulated deficit of $20.1 million at
September 30, 2000. The Company will require additional sources of liquidity
through debt or equity financing. However, there can be no assurance that any
additional financing will be available to the Company on a timely basis or on
acceptable terms or at all. The inability to obtain such financing could have a
material adverse effect on the Company's business, financial condition and
results of operations.
3. Inventories
-----------
Inventories consist of the following:
September 30,
2000
-------------
Raw materials $ 1,988,807
Work-in-process 665,670
Finished goods 434,260
-------------
$ 3,088,737
=============
4. Litigation
----------
The Company is subject to certain legal proceedings, claims and litigation
arising in the ordinary course of business. While the amounts claimed may be
substantial, the ultimate liability cannot presently be determined because of
considerable uncertainties that exist. Therefore, it is possible that the
outcome of such legal proceedings, claims and litigation could have a material
effect on quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management believes
such matters will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
F-5
<PAGE>
On October 18, 1999, the Company initiated an action in the Orange County
Superior Court, Central (Case No. 815922) by filing a complaint against Bibicoff
& Associates and Harvey A. Bibicoff, its primary shareholder and chief executive
officer, alleging, among other things, breach of contract, rescission based upon
fraud, breach of fiduciary duty and declaratory relief arising out of a
consulting agreement entered into between defendants and the Company. The
complaint seeks damages according to proof at trial, rescission of the
consulting agreement and restitution of all consideration received by defendants
and a judicial declaration of the rights and liabilities of the parties. On
December 6, 1999, defendants filed an answer to the complaint denying all
material allegations contained therein. Defendants, together with five of the
Company's subordinated promissory note holders and shareholders affiliated with
defendants, concurrently filed a cross-complaint against the Company and Michael
Armani, who is a director of the Company and was, at all times relevant to the
action, a director and the President and Chief Executive Officer of the Company,
for damages and rescission based upon alleged misrepresentations, false promises
and non-disclosures by the Company and Mr. Armani in connection with the
cross-complainants' purchase of their interests in the Company. The
cross-complaint also contains breach of contract claims arising out of the
consulting agreement between the Company and certain of the defendants and
purported oral contracts between the Company and certain of the
cross-complainants. On August 14, 2000, the Company and Mr. Armani filed an
answer to the cross-complaint denying all material allegations contained
therein, and, based on information elicited during the discovery process, the
Company filed a cross-complaint against Mr. Bibicoff for insider trading
activities. The Company determined it lacked the financial resources required to
vigorously prosecute its claims or defend the cross-complaint in this action.
Solely for that reason, on August 24, 2000, the Company entered in to a letter
of intent to settle this matter, which, with certain modifications, was
finalized in November 2000. The settlement is payable with cash in the amount of
$300,000 as well as 200,000 shares of the Company's common stock, with a fair
market value of $350,000, and three-year warrants to purchase up to an aggregate
of 150,000 shares of common stock at $1.92 per share, which were valued at
$68,764. The impact of the resolution of this matter was fully recorded
effective as of September 30, 2000.
On January 28, 2000, Aeris Communications, Inc., a California corporation,
initiated an action in the United States District Court for the Northern
District of California (Case No. C00-00328) against the Company alleging, among
other things, patent infringement of two United States patents held by Aeris.
The alleged patent infringement related to certain technology the Company
acquired in connection with its acquisition of eflex Wireless, Inc. (see Note
6.) The court dismissed this action on June 28, 2000. However, on October 10,
2000 Aeris filed a second action based on the same allegations (Case No.
C00-3727). The Company intends to vigorously defend this second action. At this
point, the Company cannot determine what impact, if any, the ultimate resolution
of this matter would have on its financial position or results of operations.
On June 27, 2000, Racon, Inc., a Washington corporation, and Daniel A.
Blattman initiated an action in the King County Superior Court in the State of
Washington (Case No. 00-2-17912-OSEA) against the Company alleging, among other
things, breach of contract and default on a promissory note arising out of the
Asset Purchase Agreement dated April 21, 2000 between the Company and Racon. The
complaint seeks damages according to proof at trial in an amount not less than
$50,000 with respect to Racon, and not less than $325,0000 with respect to Mr.
Blattman, plus an award of prejudgment and/or default interest and attorneys'
fees. The Company has recorded the liability for the $375,000 due under the
Asset Purchase Agreement, but intends to vigorously defend this action based on
Racon's failure to deliver all of the assets acquired thereunder. At this point,
the Company cannot determine what impact, if any, the ultimate resolution of
this matter would have on its financial position or results of operations.
5. Earnings (Loss) Per Common Share
--------------------------------
Basic earnings (loss) per share are computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding during the periods. Diluted earnings per share reflect per share
amounts that would have resulted from the dilutive potential effect of common
stock instruments. The net loss for the nine months ended September 30, 2000 has
been adjusted by $12,095 for dividends during such period on the Company's
preferred stock to arrive at the basic loss per share of common stock.
6. Acquisition of eflex Wireless, Inc.
-----------------------------------
On January 7, 2000, the Company issued 750,000 shares of common stock, with
a fair market value of $2,070,000, in exchange for all the outstanding common
stock of eflex Wireless, Inc. ("eflex"). The agreement includes a provision for
the issuance up to an additional 6,000,558 shares of common stock, contingent
upon the successful implementation of the acquired technology and installation
of a specified number units ending on the earlier of December 31, 2004 or the
date upon which all shares of additional common stock have become issuable. In
connection with the acquisition, the Company entered into certain employment and
consulting agreements for periods up to five years with the principals of eflex,
which include the granting of 1,150,000 options at $1.75 per share, which is at
a discount to market.
F-6
<PAGE>
7. Conversion of Preferred Stock
-----------------------------
During the nine months ended September 30, 2000, all shares of each class
of preferred stock were converted to common stock pursuant to various formula
provisions set forth in the Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of each respective class of preferred stock, which
provisions were all based on the public trading price of the Company's common
stock. The provisions relating to the Series A Preferred Stock were met in
January 2000 and those relating to the Series C Preferred Stock in March 2000.
The conversion of the Series B Preferred Stock was commenced in February 2000
and adjusted in October 2000. In connection with the conversion of preferred
stock, the Company issued an aggregate of 1,579,021 shares of common stock.
8. Subordinated Promissory Note Offerings and Exercise of Warrants
---------------------------------------------------------------
In January 2000, the Company completed its offering of $1,250,000 of 10%
Subordinated Unsecured Promissory Notes due 2001. Included with the sale of the
notes were warrants to purchase one share of common stock of the Company for
each dollar amount of the notes purchased, an aggregate of 1,250,000 shares. The
warrants had an exercise price of $1.75 per share. In February 2000, conditions
enabling the Company to call the warrants issued in connection with this
offering were met. All of the warrants were exercised for cash in the amount of
$1,590,625, reduction in the subordinated promissory notes of $512,500,
subscriptions receivable of $84,375. After the exercise of warrants and
repayments of $50,000, the aggregate amount of notes remaining outstanding
amounted to $687,500, before unamortized warrant valuation.
In September 2000, the Company issued $260,000 of 8% Convertible
Subordinated Unsecured Promissory Notes due 2001. At the election of the holder,
the notes may be converted into shares of the Company's common stock at a
conversion price of $1.625 per share. Included with the sale of the notes were
warrants to purchase one share of common stock of the Company for each $5.00
amount of the notes purchased, with an exercise price of $2.75 per share. The
aggregate amount of notes remaining outstanding as of September 30, 2000 was
$245,600, less unamortized warrant valuation of $14,399.
9. Acquisition of Assets of Racon
------------------------------
In April 2000, the Company entered into an agreement with Racon, Inc.
("Racon") to purchase certain assets related to its microwave business, as well
as to assume certain liabilities in exchange for $50,000 in cash and a $325,000
convertible promissory note. At September 30, 2000, the cash payment had not yet
been paid and the matter was subject to litigation (see Note 4.). The
convertible promissory note accrues interest at 7.5% and is payable in monthly
installments of interest only through maturity on April 28, 2001, at which time
all unpaid principal and interest are due. The note is convertible at the option
of the holder into common stock at a price of $7.00 per share. The Company can
mandate the conversion at $7.00 per share when the average closing price of the
Company's common stock is at least $9.00 per share for ten consecutive trading
days. Racon was a competitor of Sierra Digital Communications, Inc., an entity
whose assets were acquired by the Company in July 1999.
10. Revolving Line of Credit
------------------------
In April 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% (12.6% at September
30, 2000) or 10.75% per annum, is collateralized by substantially all of the
assets of the Company and expires on November 28, 2000. The borrowing base under
the line of credit is 80% of eligible accounts receivable up to a maximum
borrowing of $3.0 million. As of September 30, 2000, the Company had borrowings
of approximately $576,000 under the line of credit, and collateral availability
of $316,000.
11. Related Party Debt
------------------
During the three and nine months ended September 30, 2000 the Company
received net proceeds of short term loans from related parties in the amount of
$190,000 and $80,000, respectively. The loans are due and payable on demand and
the Company reimburses the related party for any actual out-of-pocket interest
and related costs they may incur in connection with such loans.
F-7
<PAGE>
12. Equity Draw Down Facility
-------------------------
In June 2000, the Company and an investor entered into an equity draw down
facility pursuant to which the investor committed to purchase up to $50,000,000
of the Company's common stock over an 18-month period. The Company must register
the shares for resale prior to their issuance to the investor. The Company
periodically may request a draw of an amount between $250,000 and $3,000,000 of
the commitment. On a weekly basis during the 22-day trading period designated in
the draw down request, the amount of money that the investor will provide to the
Company and the number of shares the Company will issue to the investor in
return for that money will be settled based on the formula contained in the
stock purchase agreement that established the equity draw down facility. The
investor will receive a 10% discount to the market price for the 22-day period,
which discount may be increased under certain circumstances, and the Company
will receive the settled amount of the draw down less a $1,500 escrow fee and a
6% placement fee payable to a placement agent that introduced the Company to the
investor.
In lieu of providing the investor with a minimum draw down commitment, the
Company issued to the investor at the closing a five-year warrant to purchase up
to 308,627 shares of common stock at an exercise price of $4.8602, which was
120% of the average stock price on the trading day immediately prior to the
closing of the agreement. At each draw down settlement, if any, after
$25,000,000 has been drawn down pursuant to the stock purchase agreement, the
Company must issue to the investor a warrant to purchase up to a number of
shares of common stock equal to 5% of the purchase price of such draw down
divided by the average stock price on the trading day immediately prior to the
date of settlement of the draw down, with such warrant having an exercise price
equal to the lower of $4.8602 or 120% of the average stock price on the trading
day immediately prior to the settlement date.
Pursuant to the placement agent agreement, the Company issued to the
placement agent at the closing of the stock purchase agreement a five-year
warrant to purchase up to 308,627 shares of common stock at an exercise price of
$4.8602 and agreed to issue additional warrants to the placement agent at the
same times and on the same terms that additional warrants may be issued to the
investor as described above.
The Company has ascribed an estimated value of the warrants issued in
connection with this equity line and outstanding as of September 30, 2000 of an
aggregate of $801,898. The Company has also issued 100,000 shares of common
stock to a finder in connection with this line, which was valued at $406,200.
13. Private Equity Offerings
------------------------
During the nine months ended September 30, 2000, the Company completed
private equity offerings for the sale of 40,000 shares of common stock at $5.00
per share, and for the sale of 616,912 shares of common stock at $3.25 per
share. After costs of $106,376, the Company realized net cash proceeds of
$1,986,375 from these offerings as well as the satisfaction of debt in the
amount of $112,213. In connection with the second offering, the Company issued
warrants to purchase up to an aggregate of 81,200 shares of common stock to a
finder in connection with the offering. Such warrants are exercisable at prices
ranging from $3.812 to $4.18.
14. Subsequent Event
----------------
Subsequent to September 30, 2000, the Company completed a private equity
offering of an aggregate of 287,572 shares of common stock at $1.75 per share
realizing $503,250. The Company also completed a private equity offering of 102
shares of Series A Convertible Preferred Stock at $10,000 per share realizing
$1,020,000. The cost of these offerings approximated $151,094. The Company
intends to use the proceeds of these offerings for working capital and other
corporate purposes.
F-8
<PAGE>
ITEM 2. 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 condensed consolidated financial statements and notes thereto
included elsewhere in this quarterly report on Form 10-QSB. 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 quarterly report on Form 10-QSB should be
read as being applicable to all related forward-looking statements wherever they
appear herein. See "Special Note Regarding Forward-Looking Statements." The
Company's actual results may differ materially from the results discussed in the
forward-looking statements.
OVERVIEW
Telenetics Corporation designs and manufactures wireless and landline
remote monitoring products and systems that collect data from industrial devices
such as meters, remote terminal units, traffic controllers, industrial controls,
remote sensors and data loggers. The collected data is sent through wireless
cellular and radio frequency networks or telephone lines to a host site, direct
or via the Internet. The Company is an innovator of proprietary wireless
data-communications solutions for utility, transportation, oil and gas and other
industrial automation 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, data and wireless communications industries, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months ended September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales ........................................ 100.0% 100.0%
Cost of sales .................................... 74.2 57.6
-------- --------
Gross profit ..................................... 25.8 42.4
Selling, general and administrative .............. 62.7 37.2
Engineering and product development .............. 38.7 8.5
Severance costs .................................. 8.2 --
Legal and accounting ............................. 17.0 3.0
-------- --------
Operating income (loss) .......................... (100.8) (6.3)
Interest expense ................................. (5.0) (3.6)
Debt termination costs ........................... -- (0.1)
Litigation Settlements ........................... (39.3) --
-------- --------
Net loss ......................................... (145.1)% (10.0)%
======== ========
</TABLE>
<PAGE>
NET SALES. Net sales for the three months ended September 30, 2000 were
$2.3 million as compared to $2.7 million for the three months ended September
30, 1999, a decrease of $0.4 million or approximately 14.1%. The decrease in net
sales was primarily a result of decreased sales of the Company's products to
Duquesne Light Company, through its subcontractor Sargent Electric Company, and
engineering and production delays in the Company's new products, which included
delays in the completion of designs, design changes, delays in the completion of
testing and unexpectedly long lead times for certain components. Net sales also
decreased at the GDI traffic management division during the quarter. To address
these issues, the Company has named a chief operating officer and is working on
improving its engineering and manufacturing systems.
GROSS PROFIT. Gross profit decreased as a percentage of net sales by 47.8%
to 25.8% for the three months ended September 30, 2000 as compared to 42.4% for
the same period in 1999. This decrease was primarily the result of lower
revenues by the Company's GDI traffic management division, which typically
carries higher gross margins. The Company acquired GDI in June 1999. The cost of
sales increased by $166,000 or approximately 10.7% to approximately $1.7 million
during the three months ended September 30, 2000 from $1.5 million during the
three months ended September 30, 1999. The decrease in gross profit resulted
primarily from the underutilization of capacity as well as the product mix of
the GDI traffic management division.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $0.4 million, or
approximately 44.7%, to $1.4 million during the three months ended September 30,
2000 from $1.0 million during the three months ended September 30, 1999, and
increased as a percentage of net sales from approximately 37.2% during the three
months ended September 30, 1999 to approximately 62.7% during the three months
ended September 30, 2000. The increase in expenses resulted primarily from the
following: (1) an increase in amortization expense; and (2) an increase in
salary expense associated with the Company's rapid internal growth and the
addition of personnel. Amortization expense amounted to $131,000 during the
three months ended September 30, 2000 as compared to $22,000 during the same
period in 1999. Amortization expense during the three months ended September 30,
2000 includes $83,000 in connection with deferred compensation arrangements, and
$22,000 in amortization of goodwill.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expense increased by $664,000 or approximately 289.2%, to $893,000
during the three months ended September 30, 2000 from $229,000 during the three
months ended September 30, 1999, and increased as a percentage of sales from
approximately 8.5% during the three months ended September 30, 1999 to
approximately 38.7% during the three months ended September 30, 2000. This
increase in engineering and product development expense was primarily
attributable to the creation and support of a research and development operation
associated with the Company's acquisition of the eflex Wireless technology in
January 2000. Engineering and product development expense during the three
months ended September 30, 2000 includes $157,000 in amortization for deferred
compensation arrangements in connection with the eflex acquisition, and $26,000
in amortization of investments in technology.
SEVERANCE COSTS. There was no amount for severance costs during the three
months ended September 30, 1999 as compared to severance costs of $191,000 for
the same period in 2000. These costs were primarily attributable to the
termination of Michael Armani in the amount of $168,000.
LEGAL AND ACCOUNTING. Legal and accounting expenses during the nine months
ended September 30, 2000 increased by $310,000 or approximately 379.4%, to
$391,000, or 17.0% of net sales from $82,000 or approximately 3.0% of net sales
during the same period for 1999. This increase in legal and accounting expense
was primarily attributable to costs of litigation matters.
<PAGE>
INTEREST EXPENSE. Interest expense during the three months ended September
30, 2000 increased by $18,000 or approximately 18.6%, to $116,000, or 5.0% of
net sales from $98,000 or approximately 3.6% of net sales during the same period
for 1999. This increase in interest expense was primarily attributable to
interest on the Company's 10% Subordinated Unsecured Notes due 2001, of which
$1,250,000 were issued between November 1999 and January 2000.
LITIGATION SETTLEMENTS. There was no amount for litigation settlement
expense during the three months ended September 30, 1999 as compared to
litigation settlement expenses of $909,000 for the same period in 2000, which
was attributable primarily to the Bibicoff settlement, which amounted to
$719,000.
OTHER INCOME. There was no amount for other income during the three months
ended September 30, 2000, as compared to $239 during the three months ended
September 30, 1999.
NET LOSS. Net loss for the three months ended September 30, 2000 was
approximately $3.4 million or approximately 145.1% of net sales as compared to
net loss of $268,000 or 10.0% of net sales for the three months ended September
30, 1999. The increase in net loss was primarily due to increased operating
expenses, including legal fees, severance costs and cost of litigation
settlements, and to the decrease in net sales and change of product mix.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
Nine Months ended September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales ............................................ 100.0% 100.0%
Cost of sales ........................................ 68.9 69.3
--------- ---------
Gross profit ......................................... 31.1 30.7
Selling, general and administrative expenses ......... 63.7 20.3
Engineering and product development expenses ......... 32.6 5.2
Severance Costs ...................................... 2.9 --
Legal and accounting ................................. 16.7 3.0
--------- ---------
Operating income (loss) .............................. (84.8) 2.2
Interest expense ..................................... (5.4) (2.5)
Litigation Settlements ............................... (20.6) --
Other income ......................................... -- 0.3
--------- ---------
Net income (loss) .................................... (110.8)% 0.0%
========= =========
</TABLE>
<PAGE>
NET SALES. Net sales for the nine months ended September 30, 2000 were $6.6
million as compared to $10.3 million for the nine months ended September 30,
1999, a decrease of $3.7 million or approximately 36.2%. The decrease in net
sales was primarily a result of decreased sales of the Company's products to
Duquesne Light Company, through its subcontractor Sargent Electric Company, and
engineering and production delays in the Company's new products, which included
delays in the completion of designs, design changes, delays in the completion of
testing and unexpectedly long lead times for certain components. To address
these issues, the Company has named a chief operating officer and is working on
improving its engineering and manufacturing systems.
GROSS PROFIT. Gross profit increased as a percentage of net sales by 0.4%
as 31.1% for the nine months ended September 30, 2000 as compared to 30.7% for
the same period in 1999. The gross profit decreased by $1.1 million or
approximately 35.4% to approximately $2.0 million during the nine months ended
September 30, 2000 from $3.1 million during the nine months ended September 30,
1999. The decrease in gross profit resulted primarily from decrease in sales and
the resulting underutilization of capacity.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $2.1 million, or
approximately 100.5%, to $4.2 million during the nine months ended September 30,
2000 from $2.1 million during the nine months ended September 30, 1999, and
increased as a percentage of net sales from approximately 20.3% during the nine
months ended September 30, 1999 to approximately 63.7% during the nine months
ended September 30, 2000. The increase in expenses resulted primarily from the
following: (1) the existence of selling, general and administrative expenses for
the Company's GDI traffic management division which was acquired in September
1999; (2) the existence of selling, general and administrative expenses for the
Company's GDI traffic management division which was acquired in June 1999; and
(3) an increase in salary expense associated with the Company's rapid internal
growth and the addition of personnel. Amortization expense amounted to $398,000
during the nine months ended September 30, 2000 as compared to $29,000 during
the same period in 1999. Amortization expense during the nine months ended
September 30, 2000 includes $253,000 in connection with deferred compensation
arrangements, and $66,000 in amortization of goodwill.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expense increased by $1.6 million or approximately 297.1%, to $2.1
million during the nine months ended September 30, 2000 from $0.5 million during
the nine months ended September 30, 1999, and increased as a percentage of sales
from approximately 5.2% during the nine months ended September 30, 1999 to
approximately 32.6% during the nine months ended September 30, 2000. This
increase in engineering and product development expense was primarily
attributable to the creation and support of a research and development operation
associated with the Company's acquisition of the eflex Wireless technology in
January 2000. Engineering and product development expense during the nine months
ended September 30, 2000 includes $472,000 in amortization for deferred
compensation arrangements in connection with the eflex acquisition, and $79,000
in amortization of investments in technology.
SEVERANCE COSTS. There was no amount for severance costs during the nine
months ended September 30, 1999 as compared to severance costs of $191,000 for
the same period in 2000. These costs were primarily attributable to the
termination of Michael Armani in the amount of $168,000.
LEGAL AND ACCOUNTING. Legal and accounting expenses during the nine months
ended September 30, 2000 increased by $0.7 million or approximately 250.0%, to
$1.1 million, or 16.7% of net sales from $0.3 million or approximately 3.0% of
net sales during the same period for 1999. This increase in legal and accounting
expense was primarily attributable to costs of litigation matters.
INTEREST EXPENSE. Interest expense during the nine months ended September
30, 2000 increased by $96,000 or approximately 37.7%, to $351,000, or 5.3% of
net sales from $255,000 or approximately 2.5% of net sales during the same
period for 1999. This increase in interest expense was primarily attributable to
interest on the Company's 10% Subordinated Unsecured Notes due 2001, of which
$1,250,000 were issued between November 1999 and January 2000 and the Celtic
Corporation revolving line of credit.
LITIGATION SETTLEMENTS. There was no amount for litigation settlement
expense during the nine months ended September 30, 1999 as compared to
litigation settlement expenses of $1.4 million for the same period in 2000,
which was attributable primarily to the Bibicoff settlement, which amounted to
$719,000; and to the Drake & Drummond settlement, which amounted to $448,000.
OTHER INCOME. There was no amount for other income during the nine months
ended September 30, 2000, as compared to $36,000 during the nine months ended
September 30, 1999.
NET LOSS. Net loss for the nine months ended September 30, 2000 was
approximately $7.3 million or approximately 110.8% of net sales as compared to
net income of $3,000 or 0.0% of net sales for the nine months ended September
30, 1999. The increase in net loss was primarily due to increased operating
expenses, including legal fees, severance costs and cost of litigation
settlements, and to the decrease in net sales.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company financed its
operations and capital expenditures primarily through proceeds from private
placements of stock as explained below and proceeds under the Company's
revolving line of credit. As of September 30, 2000, the Company had
approximately $8.5 million in backlog orders for its products.
As of September 30, 2000, the Company had a working capital deficiency of
approximately $1.6 million and an accumulated deficit of approximately $20.1
million. As of that date, the Company had a net bank overdraft of $373,000 and
$2.4 million in accounts receivable. The Company also had promissory notes
outstanding in the aggregate amount of approximately $2.2 million (net of
$17,500 of unamortized discount) as of September 30, 2000, of which $440,000 was
due to related parties.
In April 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% (12.6% at September
30, 2000) or 10.75% per annum, is collateralized by substantially all of the
assets of the Company and expires on November 28, 2000. The borrowing base under
the line of credit is 80% of eligible accounts receivable up to a maximum
borrowing of $3.0 million. As of September 30, 2000, the Company had borrowings
of approximately $576,000 under the line of credit, and collateral availability
of $316,000.
Between November 1999 and January 2000, the Company issued $1,250,000 of
10% Subordinated Unsecured Promissory Notes due 2001. Included with the sale of
the notes were warrants to purchase one share of common stock of the Company for
each dollar amount of the notes purchased, an aggregate of 1,250,000 shares. The
warrants had an exercise price of $1.75 per share. In February 2000, conditions
enabling the Company to call the warrants issued in connection with this
offering were met. All of the warrants were exercised for cash in the amount of
$1,590,625, reduction in the subordinated promissory notes of $512,500,
subscriptions receivable of $84,375. After the exercise of warrants and
repayments of $50,000, the aggregate amount of notes remaining outstanding as of
September 30, 2000 was $687,500, less unamortized warrant valuation of $3,101.
In April 2000, the Company completed a private equity offering of 40,000
shares of common stock at a price of $5.00 per share, with gross proceeds of
$200,000. In September 2000, the Company closed another private equity offering
of an aggregate of 616,912 shares of its common stock at $3.25 per share, with
gross proceeds aggregating $2 million.
In September 2000, the Company issued $260,000 of 8% Convertible
Subordinated Unsecured Promissory Notes due 2001. At the election of the holder,
the notes may be converted into shares of the Company's common stock at a
conversion price of $1.625 per share. Included with the sale of the notes were
warrants to purchase one share of common stock of the Company for each $5.00
amount of the notes purchased, with an exercise price of $2.75 per share. The
aggregate amount of notes remaining outstanding as of September 30, 2000 was
$245,600, less unamortized warrant valuation of $14,399.
Subsequent to September 30, 2000, the Company completed a private equity
offering of an aggregate of 287,572 shares of common stock at $1.75 per share
realizing $503,250. The Company also completed a private equity offering of 102
shares of Series A Convertible Preferred Stock at $10.00 per share realizing
$1,020,000. The cost of these offerings approximated $151,094. The Company
intends to use the proceeds of these private offerings for working capital and
other corporate purposes.
<PAGE>
The cash proceeds from the above offerings, together with current and
anticipated borrowings under the Company's line of credit with Celtic Capital
Corporation, have been, and will continue to be, used as working capital to fund
research and development costs associated with the Company's products, costs
associated with manufacturing and marketing such products and costs associated
with the Company's continued growth and expansion.
The Company does not believe that cash flow from operations and its
revolving line of credit with Celtic Capital Corporation will be adequate to
fund its continuing operations over the next twelve months, including the
Company's plans to exploit the technology obtained in connection with the
Company's acquisition of eflex. The Company will require additional sources of
liquidity through debt and/or equity financing, which sources the Company
believes it has identified, including the Company's equity line of credit with
Helenville Holdings Limited, the terms of which have been finalized but which
does not become available until the shares to be issued to, and the shares
underlying warrants to be issued to, such investor are registered under the
Securities Act of 1933, as amended. However, there can be no assurance that any
additional financing will be available to the Company on a timely basis or on
acceptable terms, or at all. The inability to obtain such financing could have a
material adverse effect on the Company's business, financial condition and
results of operations. 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. In addition, any debt financing
or other financing of securities senior to common stock will likely include
financial and other covenants that will restrict the Company's flexibility. At a
minimum, the Company expects these covenants to include restrictions on the
Company's ability to pay dividends on its common stock. Any failure to comply
with these covenants would have a material adverse effect on the Company's
business, prospects, financial condition, results of operations and cash flows.
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 contribute 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements. These
forward-looking statements generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance. The forward-looking statements and associated risks
may include, relate to or be qualified by other important factors, including,
without limitation:
o market growth;
o new competition;
o competitive pricing;
o new technologies;
o the Company's ability to successfully implement its future business
plans; o statements about the Company's business strategy and its
expansion strategy; o the Company's ability to attract strategic
partners and alliances;
o uncertainties relating to economic conditions in the markets in which
the Company currently operates and in which the Company intends to
operate in the future;
o the Company's ability to hire and retain qualified personnel;
o the Company's ability to obtain capital, if required;
o the risk that if the Company is unable to ship products in a timely
manner due to under-capitalization or other reasons, customers may
cancel all or a portion of their orders;
<PAGE>
o the Company's ability to successfully implement its brand-building
campaign;
o the risks of uncertainty of trademark and other intellectual property
protections;
o the risks associated with the Company's strategy of growth through
acquisitions, including whether the Company has the financial, human
and other resources needed to identify and pursue acquisition
opportunities and integrate acquired products and businesses into the
Company's operations;
o the Company's beliefs regarding the demand for its products and its
competitive advantages;
o the negative impact of economic slowdowns and recessions;
o the risk that if the Company's revenues or earnings fail to meet
securities analysts' expectations, there could be an immediate and
significant impact on the trading price of the Company's common stock;
o volatility of the trading price of the Company's common stock that may
be due to factors that impact the overall market and are unrelated to
the Company's performance;
o risks associated with existing and future governmental regulation to
which the Company is subject; and
o international customs, standards, approvals and political and economic
uncertainties that may adversely affect the Company's ability to ship
its products internationally in a timely and profitable manner.
Results actually achieved may differ materially from expected results
discussed in these statements. Several of these risks are discussed in greater
detail in this report under the heading "Risk Factors." Any of the factors
described above or under the heading "Risk Factors" could cause our financial
results, including our net income (loss) or growth in net income (loss), to
differ materially from prior results or from those expressed or implied by these
forward-looking statements.
RISK FACTORS
In addition to the other information contained in this quarterly report on
Form 10-QSB, the following factors should be considered carefully in evaluating
the Company's business and prospects.
THE COMPANY HAS A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY
CONTINUE IN THE FUTURE AND WHICH MAY ADVERSELY IMPACT THE COMPANY'S BUSINESS AND
THE COMPANY'S SHAREHOLDERS.
The Company has incurred net losses in each fiscal year since the Company's
inception, with the exception of the fiscal year ended March 31, 1998, in which
the Company realized nominal net income of $94,000. For the nine month
transition period ended December 31, 1998, the Company reported a net loss of
$249,000. The Company's accumulated deficit through December 31, 1999 was $12.8
million, and as of that date the Company had a total shareholders' equity of
$663,000. The Company realized a net loss of $1.1 million for the twelve months
ended December 31, 1999, as compared to incurring a net loss of $204,000 for the
twelve months ended December 31, 1998. For the nine-month period ended September
30, 2000, the Company reported a net loss of $7.3 million. The Company expects
its losses to continue during the remaining quarters of 2000 and the first
quarter of 2001. The Company also expects that its losses may continue further
into the future. There is no assurance that the Company will attain profitable
operations in the future.
<PAGE>
THE COMPANY MAY NEED AND BE UNABLE TO OBTAIN ADDITIONAL FUNDING ON SATISFACTORY
TERMS, WHICH COULD DILUTE THE COMPANY'S SHAREHOLDERS OR IMPOSE BURDENSOME
FINANCIAL RESTRICTIONS ON THE COMPANY'S BUSINESS.
Historically, the Company has relied upon cash from financing activities to
fund most of the cash requirements of its operating and investing activities.
The Company does not believe that cash flows from operations and its revolving
line of credit with Celtic Capital Corporation will be adequate to fund its
continuing operations over the next twelve months, including its plans to
exploit the technology obtained in connection with the Company's acquisition of
eflex. The Company will require additional sources of liquidity through debt
and/or equity financing, which sources the Company believes it has identified,
including the Company's equity line of credit with Helenville Holdings Limited,
the terms of which have been finalized but which does not become available until
the shares to be issued to, and the shares underlying warrants to be issued to,
such investor are registered under the Securities Act of 1933, as amended.
However, there can be no assurance that any additional financing will be
available to the Company on a timely basis or on acceptable terms, or at all.
The inability to obtain such financing could have a material adverse effect on
the Company's business and financial condition. If additional funds are raised
by issuing equity or convertible debt securities, options or warrants, further
dilution to the Company's existing shareholders may result. In addition, any
debt financing or other financing of securities senior to common stock will
likely include financial and other covenants that will restrict the Company's
flexibility. At a minimum, the Company expects these covenants to include
restrictions on the Company's ability to pay dividends on the Company's common
stock. Any failure to comply with these covenants would have a material adverse
effect on the Company's business, prospects, financial condition, results of
operations and cash flows.
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 the Company's
proprietary technology and other important assets and could also adversely
affect the Company's ability to continue its product development efforts, which
the Company believes contribute 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.
THE COMPANY'S OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO
FLUCTUATE SIGNIFICANTLY AND MAY NEGATIVELY IMPACT THE COMPANY'S STOCK PRICE.
The Company's quarterly results have varied significantly in the past and
will likely continue to do so in the future due to a variety of factors, many of
which are beyond the Company's control, including the timing and nature of
revenues from product sales that are recognized during any particular quarter,
the impact of price competition on the Company's average selling prices, the
availability and pricing of components for the Company's products, market
acceptance of new product introductions by the Company and the Company's
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 wireless communication and device products industry and economic
conditions generally. The volume and timing of orders received during a quarter
are difficult to forecast. As a result, it is likely that in some future periods
the Company's operating results will be below the expectations of securities
analysts and investors. If this happens, the trading price of the Company's
common stock would likely be materially and adversely affected.
<PAGE>
THE COMPANY'S OPERATING RESULTS ARE SIGNIFICANTLY DEPENDENT UPON THE ACCEPTANCE
BY THE UTILITY INDUSTRY OF THE COMPANY'S SYSTEM.
The Company offers automatic meter reading, or AMR, and other remote
monitoring products and services and data generated from such services to
utilities, the transportation industry and other such entities. The Company's
success is almost entirely dependent upon whether these parties accept the
Company's solution for their AMR or other data acquisition requirements and
whether they allow the Company to install wireless data networks for servicing a
substantial number of endpoint monitoring devices including utility meters. The
automation of utility meter reading and data distribution is a relatively new
and rapidly changing market. The Company believes that, as the utility industry
becomes more competitive through various deregulation and privatization
initiatives, there will be an increased need for more accurate, timely and
efficient collection of consumption and other operating data. This will
ultimately accelerate the adoption of AMR, data collection and data distribution
systems and techniques. However, this is entirely dependent upon decisions made
by utilities, other utility industry participants and utility customers over
whom the Company has no control. The Company cannot accurately predict the size
of this market or the Company's potential growth. The Company's system is one
possible solution for AMR and data distribution. It has not been adopted as an
industry standard and it may not be adopted on a broad scale. Competing systems
have been and likely will continue to be selected by utilities and other
potential clients. In the event utilities, other utility industry participants
and utility customers do not adopt the Company's technology or do so less
rapidly than expected by the Company, the Company's future financial results,
including the Company's ability to service its indebtedness and achieve positive
cash flows or profitability, will be materially and adversely affected.
Participants in the utility industry have historically been cautious and
deliberate in making decisions concerning the adoption of new technology. This
process, which can take up to several years to complete, may include the
formation of evaluation committees, a review of different technical options,
technology trials, equipment testing and certification, performance and cost
justifications, regulatory review, one or more requests for vendor quotes and
proposals, budgetary approvals and other steps. Although deregulation and
privatization initiatives may ultimately accelerate the adoption of the
Company's technology, the timing and extent of such adoption cannot be
predicted. Only a limited number of utilities have made a commitment to purchase
the Company's products and services to date. If the Company does not enter into
additional product and/or service contracts or enter into contracts on terms
favorable to the Company, the Company's business, operating results, financial
condition, cash flows and its ability to service its indebtedness will be
materially and adversely affected.
THE COMPANY'S BUSINESS COULD SUFFER IF THE COMPANY IS UNABLE TO OBTAIN
COMPONENTS OF ITS PRODUCTS FROM OUTSIDE SUPPLIERS.
The major components of the Company's products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, certain components used in the
Company's products are currently obtained from single or limited sources.
Certain modem chipsets used in the Company's data communications products have
been in short supply and are frequently on allocation by semiconductor
manufacturers. Similar to others in the modem industry, the Company has, from
time to time, experienced difficulty in obtaining certain components. In
addition, the Company is currently experiencing unusually long lead times in
sourcing certain components that are in short supply. The Company does not have
guaranteed supply arrangements with any of its suppliers, and there can be no
assurance that these suppliers will continue to meet the Company's requirements.
In addition, the Company is currently experiencing problems in finding new
suppliers to help satisfy its requirements. The failure to find new suppliers
and shortages of components could not only limit the Company's production
capacity but also could result in higher costs due to the higher costs of
components in short supply or the need to utilize higher cost substitute
<PAGE>
components. An extended interruption in the supply of any of these components or
a reduction in their quality or reliability would have a material adverse effect
on the Company's financial condition and results of operations. While the
Company believes that with respect to the Company's single source components the
Company could obtain similar components from other sources, the Company could be
required to alter product designs to use alternative components. There can be no
assurance that severe shortages of components will not occur in the future that
could increase the cost or delay the shipment of the Company's products and have
a material adverse effect on the Company's financial condition and results of
operations. Significant increases in the prices of these components could also
have a material adverse effect on the Company's results of operations because
the Company may not be able to adjust product pricing to reflect the increases
in component costs.
THE COMPANY'S LACK OF DIVERSIFICATION MAY AFFECT THE COMPANY'S BUSINESS IF
DEMAND IS REDUCED.
A substantial portion of the Company's business is centered on the sale of
modems and similar data communication devices, which typically accounts for over
90% of the Company's total revenues. Although the Company's customers typically
standardize the unique or special components that are manufactured for them by
or through the Company to be incorporated in the customers' end product, in most
cases the Company does not have long-term contracts with the Company's
customers. Accordingly, the Company is highly dependent on the successful sales
of these types of products. A significant reduction in sales of these products
resulting from changes in the industry, including the entry of new competitors
into the market, from the introduction of new or improved technology or an
unanticipated shift in the needs of the Company's customers, or for other
reasons, would have a material adverse effect on the Company's business,
prospects, financial condition, results of operations and cash flows.
THE COMPANY RELIES ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF
ANY SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S
BUSINESS AND FINANCIAL CONDITION.
The Company derives a significant portion of its revenues from a relatively
limited number of customers. The Company anticipates that its five or six
largest customers will continue to account for the majority of the Company's
revenues for the foreseeable future. The loss of any one or more of these major
customers would likely have a material adverse effect on the Company's business,
prospects, financial condition and results of operations.
THE INABILITY TO SHIP ORDERS ON A TIMELY BASIS COULD MATERIALLY AND ADVERSELY
IMPACT THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.
The Company has previously experienced and is currently experiencing
problems associated with under-capitalization and engineering and production
delays, including the inability to ship products in a timely manner, which in
some cases has caused customers to cancel a portion or all of their orders. The
cancellation of orders may damage the Company's reputation and could cause it to
lose existing customers or prevent it from obtaining new customers. The failure
to deliver products on time could have a material adverse affect on the
Company's business and results of operations.
THE COMPANY RELIES UPON THE SUCCESSFUL DEVELOPMENT AND PERFORMANCE OF ITS
TECHNOLOGIES AND PRODUCTS.
The Company has made and expects to continue to make substantial
investments in technology development. The Company's success depends, in part,
on its ability to continue to design and manufacture new competitive products
and to enhance its existing products. This product development requires
continued investment in order to maintain the Company's market position. There
can be no assurance that unforeseen problems will not occur with respect to the
development and performance of the Company's technologies or products.
Development schedules for technology products are subject to uncertainty, and
there can be no assurance that the Company will meet its product development
schedules. The Company has previously experienced significant delays and cost
overruns in the design and manufacture of new products and is currently
experiencing delays on certain new product production. There can be no assurance
that delays or cost overruns will not be experienced in the future. Delays can
<PAGE>
be caused by a number of factors, including changes in product design or
definition during the development stage, changes in customer requirements,
unexpected behavior of products under certain conditions, failure of third-party
components to meet specifications or lack of availability of such components,
and other factors. Delays in the availability of new products, or the inability
to successfully develop products that meet customer needs, could result in
increased competition, the loss of revenue or increased costs, any of which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
THE COMPANY RELIES HEAVILY ON ITS KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES
COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S BUSINESS.
The Company's success is highly dependent upon the continued services of
key members of the Company's management, including the Company's Chief Executive
Officer, Terry Parker, Chief Operating Officer, John McLean, and Chief Financial
Officer, David Stone. The loss of Mr. Parker, Mr. McLean or Mr. Stone or one or
more other key members of management could have a material adverse effect on the
Company. The Company has entered into an employment agreement with Mr. McLean in
his capacity as president of the Company's telemetry division, but has not
entered into an employment agreement with any other executive officer of the
Company other than a written employment offer with Mr. Stone. The Company does
not maintain key-man life insurance policies on any member of management.
THE MARKETS IN WHICH THE COMPANY COMPETES ARE HIGHLY COMPETITIVE, AND THE
COMPANY'S GROWTH PROSPECTS COULD BE MATERIALLY AND ADVERSELY AFFECTED IF THE
COMPANY IS UNSUCCESSFUL IN ITS EFFORTS TO COMPETE.
Electronics, communications and utility product companies are beginning to
develop various wireless network meter reading systems as a result of the
deregulation of the electric utility industry and the potential market for other
applications once a common infrastructure is in place. A number of these systems
currently compete, and others may in the future compete, with the Company's
system. Deregulation will likely cause competition to increase. The Company
believes that at this time the Company's most significant direct competitor in
the marketplace is Itron, an established manufacturer and seller of hand-held
and drive-by AMR equipment for utilities. Itron is currently providing to
customers its Genesis(TM) system, a wireless radio network marketed as similar
to the Company's for meter reading purposes. There are other potential
alternative solutions to the Company's network meter reading services, including
traditional wireless solutions. Many of the Company's present and potential
future competitors may have substantially greater financial, marketing,
technical and manufacturing resources, name recognition and experience than the
Company. The Company's competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the development, promotion and sale of their products and services
than the Company. While the Company believes its technology, including
AirWave(TM), is widely regarded as competitive at the present time, the
Company's competitors may successfully develop products, technologies or
software that are better or more cost effective. In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that increase their ability
to address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors may
emerge and rapidly gain significant market share. In addition, if the Company
achieves significant success it could draw additional competitors into the
market. Providers of wireless services may in the future choose to enter the
Company's markets. Such existing and future competition could materially and
adversely affect the pricing for the Company's products and services and the
Company's ability to sign new services contracts and maintain existing
agreements. Competition for services relating to non-utility applications may be
more intense than competition for network meter reading services, and additional
competitors may emerge as the Company continues to develop non-utility
applications. The Company may be unable to compete successfully against current
and future competitors, and any failure to do so would have a material adverse
effect on its business, operating results, financial condition and cash flows.
<PAGE>
THE COMPANY'S INABILITY TO SUCCESSFULLY DEVELOP AND EXPAND ITS SYSTEM COULD
MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS.
The Company's initial target market is the monitoring, control and
automation of utilities' electric, gas and water meters and distribution
networks. Unforeseen problems may occur with respect to the Company's
technology, products or services, and the Company may not successfully complete
the development and commercial implementation of the Company's technology on a
wide scale. The Company must continue to expand and upgrade its ability to
implement successfully the Company's wireless networks. The Company may not be
able to develop successfully a full range of endpoint devices. The Company's
future success will also depend, in part, on the Company's ability to enhance
the Company's existing hardware, software and wireless communications
technology. Significant technological advances occur rapidly and frequently in
the telecommunications industry. The advent of computer-linked electronic
networks, fiber optic transmission, advanced data digitization technology,
cellular and satellite communications capabilities, specialized mobile radio
services and other commercial mobile radio services have radically expanded
communications capabilities and market opportunities. Future advances may render
the Company's technology obsolete or less cost effective than competitive
systems or erode the Company's market position. Competitors may be capable of
offering significant cost savings or other benefits to the Company's customers.
Consequently, the Company may be unable to offer competitive services or obtain
appropriate new technologies on a timely basis or on satisfactory terms. The
Company's future performance will also depend significantly on the Company's
ability to respond to future regulatory changes. The Company must make continued
substantial investments to develop its technology. The Company has encountered
product development delays in the past affecting both software and hardware
components of the Company's system and the Company expects to incur such delays
in the future. Delays can be caused by a number of factors, including changes in
product design or definition during the development stage, changes in customer
requirements, unexpected behavior of products under certain conditions, failure
of third-party components to meet specifications or lack of availability of such
components, and other factors. Delays in the availability of new products, or
the inability to successfully develop products that meet customer needs, could
result in increased competition, the loss of revenue or increased costs, any of
which would have a material adverse effect on the Company's business, prospects,
financial condition, results of operations and cash flows.
BECAUSE THE COMPANY BELIEVES THAT PROPRIETARY RIGHTS ARE MATERIAL TO ITS
SUCCESS, MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL
ACTIONS RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT THE COMPANY'S
FINANCIAL CONDITION.
The Company does not hold any patents. The Company currently relies on a
combination of contractual rights, copyrights, trademarks and trade secrets to
protect its proprietary rights. Historically, the Company's management believed
that because of the rapid pace of technological change in the modem and wireless
communication and device products industry, the legal intellectual property
protection for the Company's products was a less significant factor in the
Company's success than the knowledge, abilities and experience of the Company's
employees, the frequency of the Company's product enhancements, the
effectiveness of the Company's marketing activities and the timeliness and
quality of the Company's support services. However, the Company now believes
that several of the Company's current products and some products in development
could benefit from patent protection. Accordingly, the Company has retained the
services of a patent and trademark law firm to file patent applications for
those products with the United States Patent and Trademark Office and has
several patents pending. Although the Company relies to a great extent on trade
secret protection for much of its technology, there can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to the Company's
proprietary technology.
<PAGE>
The Company owns, licenses or has otherwise obtained the right to use
certain technologies incorporated in its products, including certain technology
the Company acquired through its acquisition of eflex. In addition, the Company
purchases modem chipsets that incorporate sophisticated modem technology. The
Company may receive infringement claims from third parties relating to the
Company's products and technologies, such as the patent infringement action
filed against the Company by Aeris Communications, Inc. In such event, the
Company intends to investigate the validity of any such claims and, if the
Company believes the claims have merit, the Company intends to respond through
licensing or other appropriate actions. Certain of these claims may relate to
technology included in modem chipsets or other components purchased by the
Company from third-party vendors for incorporation into the Company's products.
In such event, the Company would forward these claims to the appropriate vendor.
If the Company or the Company's 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 such
technology, or incur substantial costs defending any legal action taken against
the Company, all of which could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
THERE ARE RISKS THAT THE COMPANY'S PRODUCTS MAY BE RETURNED BY THE COMPANY'S
CUSTOMERS.
The Company is exposed to the risk of product returns from the Company's
customers due to defective products or product components. Returned used
products are tested, repaired and used as warranty replacements. Products
returned to the Company due to faulty work by the Company's subcontractors are
returned to the subcontractors for credit against future purchase orders.
Historically, product returns have not had a material impact on the Company's
operations or financial condition. While the Company believes that product
returns should not be material in future periods, it is expected that a
relatively modest number of returns will continue. However, there can be no
assurance that significant levels of product returns will not occur in the
future, which may have a material adverse effect on the Company's operations.
THE COMPANY'S FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR ITS BUSINESS.
The Company's strategy envisions a period of rapid growth that may put a
strain on the Company's administrative and operational resources. While the
Company believes that it has established a significant infrastructure to support
growth, the Company's ability to effectively manage growth will require the
Company to continue to expand the capabilities of the Company's operational and
management systems and to attract, train, manage and retain qualified engineers,
technicians, salesperson and other personnel. There can be no assurance that the
Company will be able to do so. If the Company is unable to successfully manage
its growth, the Company's business, prospects, financial condition and results
of operations could be adversely affected.
THE COMPANY'S STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY WHICH COULD
RESULT IN LITIGATION AGAINST THE COMPANY.
The trading prices of the Company's common stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, material announcements of technological innovations, price
reductions, significant customer orders or establishment of strategic
partnerships by the Company or its competitors or providers of alternative
products, general conditions in the modem and data communications industry, or
other events or factors, many of which are beyond the Company's control. In
addition, the stock market as a whole and individual stocks have experienced
extreme price and volume fluctuations, which have often been unrelated to the
performance of the related corporations. The Company's operating results in
future quarters may be below the expectations of market makers, securities
analysts and investors. In any such event, the price of the Company's common
stock will likely decline, perhaps substantially. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has occurred against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to substantial liabilities.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.
On October 18, 1999, the Company initiated an action in the Orange County
Superior Court, Central (Case No. 815922) by filing a complaint against Bibicoff
& Associates and Harvey A. Bibicoff, its primary shareholder and chief executive
officer, alleging, among other things, breach of contract, rescission based upon
fraud, breach of fiduciary duty and declaratory relief arising out of a
consulting agreement entered into between defendants and the Company. The
complaint seeks damages according to proof at trial, rescission of the
consulting agreement and restitution of all consideration received by defendants
and a judicial declaration of the rights and liabilities of the parties. On
December 6, 1999, defendants filed an answer to the complaint denying all
material allegations contained therein. Defendants, together with five of the
Company's subordinated promissory note holders and shareholders affiliated with
defendants, concurrently filed a cross-complaint against the Company and Michael
Armani, who is a director of the Company and was, at all times relevant to the
action, a director and the President and Chief Executive Officer of the Company,
for damages and rescission based upon alleged misrepresentations, false promises
and non-disclosures by the Company and Mr. Armani in connection with the
cross-complainants' purchase of their interests in the Company. The
cross-complaint also contains breach of contract claims arising out of the
consulting agreement between the Company and certain of the defendants and
purported oral contracts between the Company and certain of the
cross-complainants. On August 14, 2000, the Company and Mr. Armani filed an
answer to the cross-complaint denying all material allegations contained
therein, and, based on information elicited during the discovery process, on
August 14, 2000 the Company filed a cross-complaint against Mr. Bibicoff for
insider trading activities. The Company determined it lacked the financial
resources required to vigorously prosecute its claims or defend the
cross-complaint in this action. Solely for that reason, on August 24, 2000, the
Company entered in to a letter of intent to settle this matter, which, with
certain modifications, was finalized in November 2000. The settlement is payable
with cash in the amount of $300,000 as well as 200,000 shares of the Company's
common stock, and three-year warrants to purchase up to an aggregate of 150,000
shares of common stock at $1.92 per share. The Company has recorded the impact
of the resolution of this matter as of September 30, 2000.
On January 28, 2000, Aeris Communications, Inc., a California corporation,
initiated an action in the United States District Court for the Northern
District of California (Case No. C00-00328) against the Company alleging, among
other things, patent infringement of two United States patents held by Aeris
Communications. The alleged patent infringement related to certain technology
the Company acquired in connection with its acquisition of eflex. The court
dismissed this action on June 28, 2000. However, on October 10, 2000 Aeris filed
a second action based on the same allegations (Case No. C00-3727). The Company
intends to vigorously defend this second action. At this point, the Company
cannot determine what impact, if any, the ultimate resolution of this matter
would have on its financial position or results of operations.
On June 27, 2000, Racon, Inc., a Washington corporation, and Daniel A.
Blattman initiated an action in the King County Superior Court in the State of
Washington (Case No. 00-2-17912-OSEA) against the Company alleging, among other
things, breach of contract and default on a promissory note arising out of the
Asset Purchase Agreement dated April 21, 2000 between the Company and Racon. The
complaint seeks damages according to proof at trial in an amount not less than
$50,000 with respect to Racon, and not less than $325,0000 with respect to Mr.
Blattman, plus an award of prejudgment and/or default interest and attorneys'
fees. The Company has recorded the liability for the $375,000 due under the
Asset Purchase Agreement, but intends to vigorously defend this action based on
Racon's failure to deliver all of the assets acquired thereunder. At this point,
the Company cannot determine what impact, if any, the ultimate resolution of
this matter would have on its financial position or results of operations.
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities.
---------------------------------------
In July 2000, the Company issued an aggregate of 220,000 shares of common
stock at $3.25 per share to 14 investors in a private offering pursuant to which
the Company issued an aggregate of 616,912 shares of common stock to 16
investors between May and July 2000. In addition, the Company issued warrants to
purchase up to an aggregate of 81,200 shares of common stock to a finder in
connection with the offering, which warrants are exercisable at prices ranging
from $3.812 to $4.18.
From July to September 2000, the Company issued 7,855 shares of common
stock at prices ranging from $1.875 to $3.813 per share as compensation to a
management and business consultant.
From July to September 2000, the Company issued an aggregate of 136,700
shares of common stock upon exercise of warrants to six individuals in exchange
for aggregate reductions in the balances of their 10% Unsecured Subordinated
Promissory Notes due 2000 of $146,238.
In July 2000, we issued 25,000 shares of common stock to a consultant upon
the exercise of a stock option with an exercise price of $3.00 per share.
In July 2000, we issued 6,000 shares of common stock to an employee upon
the exercise of a stock option issued under our 1998 Qualified Stock Option
Plan, which option had an exercise price of $1.25.
In August 2000, we issued an aggregate of 40,000 shares of common stock to
one current and one former non-employee director upon the exercise in full of
warrants with an exercise price of $0.05 per share.
From August to September 2000, we issued an aggregate of 26,000 shares of
common stock to two employees upon the exercise of a non-qualified stock options
with at exercise prices ranging from $1.25 to $1.90 per share.
In September 2000, we issued 100,000 shares of common stock to one employee
upon the exercise of a non-qualified stock option granted in connection with the
acquisition of eflex at an exercise price of $1.75 per share.
In September 2000, the Company issued warrants to purchase 52,000 shares of
common stock at an exercise price of $2.75 per share pursuant to the Company's
offering of 8% Convertible Subordinated Unsecured Promissory Notes due 2001.
In September 2000, the Company issued options to purchase an aggregate of
623,000 shares of common stock to sixty-seven employees and options to purchase
an aggregate of 40,000 shares to two non-employee directors under our 2000
Qualified Stock Option Plan, which have an exercise price of $2.59.
Effective as of September 30, 2000, the Company issued an aggregate of
250,000 shares of common stock at prices ranging from $0.625 to $1.75 per share
and warrants to purchase an aggregate of 150,000 shares of common stock at an
exercise price of $1.92 to settle two litigation matters.
Effective as of September 30, 2000, the Company issued an aggregate of
293,566 shares of common stock to adjust the conversion of the Series B
Preferred Stock pursuant to formula provisions based on the public trading price
of the Company's common stock as set forth in the Certificate of Determination
of Rights, Preferences, Privileges and Restrictions.
The issuances of securities of the Company 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, 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.
<PAGE>
Dividends.
Pursuant to the terms of the Company's 10% Subordinated Unsecured
Promissory Notes due 2000 and 10% Subordinated Unsecured Promissory Notes due
2001, the Company is restricted in its ability to declare and pay dividends and
redeem or repurchase any shares of its common stock. The Company was in
compliance with all covenants of these notes at September 30, 2000.
In addition, pursuant to state law, the Company may be restricted from
paying dividends to its holders of common stock as a result of its accumulated
deficit as of September 30, 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on September 27, 2000 to report
under Item 5 - Other Events a reorganization of the Company's top management
effective as of September 8, 2000 and the adoption of a non-employee director
compensation program.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TELENETICS CORPORATION
Dated: November 15, 2000 By: /s/ DAVID L. STONE
-------------------------------------
David L. Stone
Chief Financial Officer and Secretary
(principal financial and accounting
officer)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27.1 Financial Data Schedule
