-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q8TQjZzTdQZRrYnlB/rd7NXgUAQfQRyElgl0o51LHTUZwqvXMxgEVed5jO5QIcEH JSW3/hbkZ2M6/u8SQCiefw== 0000930661-00-000060.txt : 20000202 0000930661-00-000060.hdr.sgml : 20000202 ACCESSION NUMBER: 0000930661-00-000060 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20000118 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: TELENETICS CORP CENTRAL INDEX KEY: 0000810018 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 330061894 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-39904 FILM NUMBER: 508788 BUSINESS ADDRESS: STREET 1: 26772 VISTA TERRACE DR CITY: LAKE FOREST STATE: CA ZIP: 92630 BUSINESS PHONE: 9494554000 MAIL ADDRESS: STREET 1: 26772 VISTA TERRACE DR CITY: LAKE FOREST STATE: CA ZIP: 92630 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PARKER TERRY S CENTRAL INDEX KEY: 0001103362 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 437 TAMARIND DRIVE CITY: HALLANDALE STATE: FL ZIP: 330009 BUSINESS PHONE: 9544571924 MAIL ADDRESS: STREET 1: 437 TAMARIND DRIVE CITY: HALLANDALE STATE: FL ZIP: 33009 SC 13D 1 SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Telenetics Corporation -------------------------------------------------------- (Name of Issuer) Common Stock -------------------------------------------------------- (Title of Class of Securities) 87943P408 -------------------------------------------------------- (CUSIP Number) Terry S. Parker c/o Saunders & Parker, Inc. 5735 Prestwick Lane Dallas, TX 75252 (972)732-0712 With a copy to: Sally A. Schreiber, Esq. Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, TX 75202 (214) 855-7500 -------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) January 7, 2000 -------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of (S) (S) 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [ ]. NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 240.13d-7 for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which could alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). (Continued on following page(s)) Page 2 of 6 Pages CUSIP No. 87943P408 Schedule 13D - ------------------------------------------------------------------------------- (1) Names of reporting person. I.R.S. Identification Nos. of Above Person Terry S. Parker - ------------------------------------------------------------------------------- (2) Check the Appropriate Box if a Member (a) [ ] (b) [X] - ------------------------------------------------------------------------------- (3) SEC Use Only ___________________ - ------------------------------------------------------------------------------- (4) Source of Funds PF - ------------------------------------------------------------------------------- (5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- (6) Citizenship or Place of Organization United States of America - ------------------------------------------------------------------------------- Number of Shares (7) Sole Voting Beneficially Owned Power by Each Reporting 1,416,179/1/ Person With -------------------------------------------------- (8) Shared Voting Power 1,100,000/2/ -------------------------------------------------- (9) Sole Dispositive Power 1,416,179/1/ -------------------------------------------------- (10) Shared Dispositive Power 1,100,000/2/ - ------------------------------------------------------------------------------- (11) Aggregate Amount Beneficially Owned by Each Reporting Person 2,516,179/3/ - ------------------------------------------------------------------------------- (12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares [ ] - ------------------------------------------------------------------------------- (13) Percent of Class Represented by Amount in Row (11) 19.6% - ------------------------------------------------------------------------------- (14) Type of Reporting Person IN - ------------------------------------------------------------------------------- - ------------------------- /1/ Of these shares, 168,750 are actually owned by the Reporting Person and 1,247,129 are not currently owned but may be acquired if certain conditions are met. /2/ These shares are shares that Saunders & Parker, Inc., a Texas corporation ("S&P"), of which the Reporting Person is an executive officer, director, and 50% shareholder, does not currently own but may acquire. Of these shares, 600,000 are subject to an exercisable option held by S&P and 500,000 are pledged to S&P. /3/ See notes 1 and 2 above. Page 3 of 6 Pages ITEM 1. SECURITY AND ISSUER Common stock, no par value, of Telenetics Corporation, a California corporation ("Common Stock") whose principal executive offices are at 251 11 Arctic Ocean, Lake Forest, CA 92630 ("Telenetics") ITEM 2. IDENTITY AND BACKGROUND (a) The name of the Reporting Person (herein so called) is Terry S. Parker. (b) The Reporting Person's business address is c/o Saunders & Parker, Inc., 5735 Prestwick Lane, Dallas, TX 75252. (c) The Reporting Person's present principal occupation is as Co- President of S&P, which has its principal business and office address at 5735 Prestwick Lane, Dallas, TX 75252. The principal business of S&P is consulting and investment. (d) In the past five years, the Reporting Person has not been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) In the past five years, the Reporting Person has not been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction where as a result of such proceeding the Reporting Person was or is subject to a judgment, decree, or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) The Reporting Person is a citizen of the United States of America. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION The Reporting Person acquired 168,750 shares of Common Stock and the potential to receive up to an additional 1,247,429 shares of Common Stock as consideration for the sale of 2,250 shares of common stock of eflex Wireless, Inc., a Delaware corporation ("eflex"), owned by the Reporting Person pursuant to the terms of that certain Stock Purchase Agreement dated January 7, 2000 (the "Stock Purchase Agreement"), executed by Telenetics, the Reporting Person, and others, a copy of which is filed as an exhibit to this Schedule 13D. The Reporting Person is a Co-President, director, and 50% shareholder of S&P. As a result, the Reporting Person may also be deemed to be the beneficial owner of the 1,100,000 shares of Common Stock that are deemed to be beneficially owned by S&P. Of those 1,100,000 shares, six hundred thousand are subject to options (the "Options") held by S&P that are presently exercisable at $1.75 per share and the remaining five hundred thousand shares (the "Pledged Shares") are held by S&P as security for payment of a note, all as discussed in more detail below. S&P beneficially owns the Options pursuant to that certain Non- Qualified Stock Option Agreement dated January 7, 2000, executed by Telenetics("Non-Qualified Stock Option Agreement"), a copy of which is filed as an exhibit to this Schedule 13D. The Options were granted by Telenetics as partial consideration for the services to be provided by S&P under that certain Consulting Agreement, dated January 7, 2000, Page 4 of 6 Pages ("Consulting Agreement"), executed by Telenetics and S&P. A copy of the Consulting Agreement is filed as an exhibit to this Schedule 13D. The Pledged Shares were pledged to S&P pursuant to that certain Pledge Agreement dated January 7, 2000 ("Stock Pledge Agreement"), executed personally by Michael A. Armani, the President and a director of Telenetics, which was executed in connection with that certain Guaranty dated January 7, 2000 (the "Guaranty"), executed by Michael A. Armani, which, in turn, was executed in connection with that certain Promissory Note dated January 7, 2000 (the "Note"), executed by Telenetics and payable to the order of S&P. The Note evidences certain liabilities assumed by Telenetics in connection with the Stock Purchase Agreement. ITEM 4. PURPOSE OF TRANSACTION The Reporting Person, among others, owned shares of the common stock of eflex. Telenetics desired to purchase all of the outstanding shares of eflex. After negotiations between the individual shareholders of eflex and Telenetics, each share of common stock of eflex was purchased by Telenetics for 75 shares of Common Stock of Telenetics and the right to receive up to an additional 554.4 shares of Common Stock through an earn-out provision in the Stock Purchase Agreement./4/ The Reporting Person acquired beneficial ownership of the shares of Common Stock under the Stock Purchase Agreement for investment purposes. Pursuant to the Stock Purchase Agreement, Telenetics will use its best efforts to elect either the Reporting Person or William C. Saunders ("Saunders"), the other Co-President of S&P, to the board of directors of Telenetics. If the Reporting Person is not elected to the board of directors, he will be an adviser to the board of directors of Telenetics. Each of the Reporting Person and Saunders became an adviser to the Telenetics board of directors on January 7, 2000. For information concerning the purpose for the acquisition of beneficial ownership of Common Stock by S&P that the Reporting Person may be deemed to beneficially own, please see Item 4 of the Schedule 13D executed by S&P on January 18, 2000, with respect to Telenetics, a copy of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. Except as set forth above, the Reporting Person does not currently have any plans or proposals with respect to any of the matters described in (a) through (j) of Item 4 of Schedule 13D. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) Number of shares of Common Stock deemed to be beneficially owned by Reporting Person: 2,516,179 Percentage of class of securities deemed to be beneficially owned by Reporting Person: 19.6% (b) Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to vote: 1,416,179 - ------------------------- /4/ If the conditions for the earn-out shares are met, an aggregate of 5,544,129 additional shares of Common Stock of Telenetics will be issued to the former shareholders of eflex but, in accordance with SEC regulations, only the additional shares to be issued to the Reporting Person are used in calculating the percentage of shares beneficially owned by the Reporting Person. Page 5 of 6 Pages Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to vote: 1,100,000 Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to dispose: 1,416,179 Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to dispose: 1,100,000 The power to vote and dispose of the 600,000 shares subject to the Options and the 500,000 Pledged Shares would be held by S&P if the Options were exercised and/or an event of default under the Stock Pledge Agreement exists, respectively. Saunders, a Co-President, director and 50% Shareholder of S&P, and the Reporting Person, who is also a Co-President, director, and 50% shareholder of S&P, would share the right to vote or to direct the vote and the power to dispose or influence the disposition of such shares as a result of such positions. For information on Saunders and S&P, please see Item 2 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. (c) The Reporting Person has not had any transactions in Telenetics Common Stock, except as described herein. The transactions described herein occurred on January 7, 2000. (d) Except as described in Item 5(b), no other person is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities listed in Item 5(a). (e) Not Applicable ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Reference is made to the Stock Purchase Agreement, the Non-Qualified Stock Option Agreement, the Consulting Agreement, the Stock Pledge Agreement, the Guaranty, and the Note. A copy of each of the aforementioned is filed as an Exhibit to this Schedule 13D filing. For information on Saunders and S&P, as required in Instruction C, please see Item 6 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS The following agreement is filed as an exhibit to this Schedule 13D; (1) Stock Purchase Agreement (2) Non-Qualified Stock Option Agreement (3) Consulting Agreement (4) Stock Pledge Agreement (5) Guaranty (6) Note (7) Schedule 13D of S&P with respect to Telenetics dated January 18, 2000 (8) Schedule 13D of Saunders with respect to Telenetics dated January 18, 2000 Page 6 of 6 Pages SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. January 18, 2000 ---------------------------------------- (Date) /s/ TERRY S. PARKER ---------------------------------------- (Signature) Terry S. Parker EX-1 2 STOCK PURCHASE AGREEMENT EXHIBIT 1 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of --------- January 7, 2000, by and among Telenetics Corporation, a California corporation ("Telenetics"), and Edward L. Didion ("Didion"), John D. McLean ("McLean"), ---------- ------ ------ William C. Saunders ("Saunders") and Terry S. Parker ("Parker"), each an -------- ------ individual (individually, each a "Seller," and collectively, the "Sellers." ------ ------- R E C I T A L S A. Sellers own, in the aggregate, all of the issued and outstanding shares (the "Shares") of capital stock of eflex Wireless, Inc., a Delaware ------ corporation (the "Company"). ------- B. Telenetics desires to purchase from Sellers, and Sellers desire to sell to Telenetics, the Shares on the terms and conditions set forth in this Agreement. A G R E E M E N T NOW, THEREFORE, the parties to this Agreement agree as follows: 1. Purchase and Sale of Shares. --------------------------- 1.1 Purchase and Sale. Subject to the terms and conditions set forth ----------------- herein, at the Closing (as defined in Section 6.1 below), Sellers shall ----------- transfer, convey, assign and deliver the Shares to Telenetics, and Telenetics shall acquire, purchase and accept the Shares from Sellers. 1.2 Consideration. The aggregate consideration (the "Consideration") to ------------- ------------- be paid in connection with the acquisition of the Shares shall equal the Base Purchase Price plus the Earn-Out Purchase Price, which terms are defined as follows: (a) The "Base Purchase Price" shall consist of an aggregate of 750,000 ------------------- shares (the "Base Stock") of common stock, no par value per share, of ---------- Telenetics ("Telenetics Common Stock"); and ----------------------- (b) The "Earn-Out Purchase Price" shall consist of an aggregate of ----------------------- 5,544,129 shares of Telenetics Common Stock (the "Additional Stock"). ---------------- (c) Payment of Consideration. At the Closing, by virtue of the ------------------------ acquisition by Telenetics of the Shares, each of the Shares shall be exchanged for a number of shares of Telenetics Common Stock equal to the number of shares of Base Stock divided by the total number of Shares, and (ii) the right to receive a number of shares of Telenetics Common Stock equal to the number of shares of Additional Stock divided by the total number of Shares, subject to the conditions contained in Section 1.3 below. ----------- 1.3 Earn-Out Conditions. ------------------- (a) For purposes of this Section 1.3, the "Earn-Out Period" shall mean ----------- --------------- the period commencing on the Closing Date and ending on the earlier of December 31, 2004 or the date upon which all shares of Additional Stock have become issuable pursuant to this Section 1.3. The Earn-Out Purchase Price shall become ----------- payable, if at all, in the following increments based upon the successful implementation by Telenetics or the Company of the Company's overhead telemetry-based technology, as described in Exhibit A attached hereto and --------- incorporated herein by reference (the "Technology") and the successful ---------- completion during the Earn-Out Period of the installation of the following numbers of units equipped with the Technology: After the Following Telenetics Shall Issue the Following Number Aggregate Number of of Shares of Telenetics Common Stock Installations is Completed: Comprising the Additional Stock -------------------------- -------------------------------------------: 100,000 881,811 shares 200,000 959,889 shares 300,000 1,079,876 shares 345,000 232,378 shares 390,000 238,336 shares 435,000 244,527 shares 480,000 250,962 shares 525,000 257,655 shares 570,000 264,618 shares 615,000 271,867 shares 660,000 279,420 shares 705,000 287,291 shares 750,000 295,499 shares (b) If and when earned, the shares of Telenetics Common Stock to be issued pursuant to this Section 1.3 as the Earn-Out Purchase Price shall be ----------- allocated and issued to Sellers pro rata in proportion to their ownership of the Shares immediately prior to the Closing. In no case shall the aggregate number of shares of Telenetics Common Stock issuable pursuant to this Section 1.3 exceed the aggregate number of shares of Additional Stock, ----------- as the same may be adjusted in accordance with this Agreement. (c) Notwithstanding anything to the contrary contained in Section ------- 1.3(a), if prior to the expiration of the Earn-Out Period the Company or ------ Telenetics undertakes to (i) sell, lease, exchange or otherwise dispose of the Technology or (ii) merge into or consolidate with any other entity (other than Telenetics or a wholly-owned subsidiary of Telenetics), or effect any transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of Telenetics is disposed of, then immediately prior to such event Telenetics shall issue the remaining shares of Additional Stock not yet issued pursuant to Section 1.3(a), regardless of the number of -------------- installations completed prior to such date. (d) Notwithstanding anything to the contrary contained in Section ------- 1.3(a), if upon the expiration of the Earn-Out Period the Company has bona ------ fide fully executed contracts in place pursuant to which the Company is obligated to perform installations that would have resulted in the issuance of Additional Stock if the Earn-Out Period had 2 not yet expired, then Telenetics shall issue upon the expiration of the Earn-Out Period that number of shares of Additional Stock that would have been issuable pursuant to Section 1.3(a) if the installations had been -------------- completed prior to the expiration of the Earn-Out Period. (e) Telenetics shall not be required to issue fractions of shares of Telenetics Common Stock pursuant to this Agreement, and all such fractions of shares of Telenetics Common Stock to which a Seller would otherwise be entitled pursuant to this Agreement shall be aggregated, and in lieu of such remaining fractional shares there shall be paid to the Seller at the time the shares are issued an amount in cash equal to the stated fraction of the fair market value of a share of Telenetics Common Stock, as determined in good faith by the Board of Directors of Telenetics. 2. Representations and Warranties of the Company and Sellers. --------------------------------------------------------- Except as set forth in a schedule dated the date of this Agreement and delivered by Sellers to Telenetics concurrently herewith (the "Disclosure ---------- Schedule") specifically identifying the Section of this Agreement requiring the - -------- delivery of such disclosure, each Seller severally and not jointly makes the representations and warranties to Telenetics as set forth below; provided, however, that with respect to the representations and warranties contained in Sections 2.13, 2.14 and 2.24, each of Saunders and Parker makes such - ---------------------------- representations and warranties to the best of his knowledge. 2.1 Organization; Good Standing; Qualification and Power. The Company is ---------------------------------------------------- a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes qualification necessary, other than in jurisdictions where the failure to qualify would not have a Material Adverse Effect. In this Agreement, any reference to any event, change or effect being "material" with respect to any entity or group of entities means any material event, change or effect related to the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of such entity or group of entities taken as a whole. In this Agreement, the term "Material Adverse Effect" used in connection with a party means any event, ----------------------- change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of that party, taken separately or as a whole; provided, however, that a Material Adverse Effect shall not include any adverse effect resulting from general economic conditions or conditions affecting the overhead telemetry- based technology market. The Company does not have any subsidiaries. The Company has provided to Telenetics or its counsel complete and correct copies of the certificate of incorporation and bylaws of the Company, as amended to the date of this Agreement, and copies of all minutes of meetings and actions by written consent of stockholders, directors and board committees of the Company. 3 2.2 Capital Structure. ----------------- 2.2.1 Stock and Options. The authorized capital stock of the Company ----------------- consists of 100,000 shares of common stock, $.01 par value per share (the "Common Stock"), and no shares of preferred stock. The Shares are the only ------------ shares of Common Stock that are issued and outstanding. All of the Shares are validly issued, fully paid and nonassessable and not subject to preemptive rights. Each Seller represents that the Shares owned by such Seller are owned by such Seller free and clear of any liens, security interests, pledges, agreement, claims, charges or encumbrances, and that such Seller has done nothing, and has not caused the Company to do anything, that would form the basis upon which any person (other than a Seller as set forth below in this Section 2.2.1) may claim ------------- to be in any way the record or beneficial owner of, or to be entitled to acquire (of record or beneficially), any shares of the capital stock or other equity securities of the Company, including without limitation, the Shares. The Shares are owned by the Sellers in the following proportions: Name of Seller Number of Shares Owned -------------- ---------------------- Didion 4,500 McLean 1,000 Saunders 2,250 Parker 2,250 2.2.2 No Other Commitments. There are no options, warrants, calls, rights, -------------------- commitments, conversion rights or agreements of any character to which the Company is a party or by which the Company is bound obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or obligating the Company to grant, extend or enter into any option, warrant, call, right, commitment, conversion right or agreement. There are no voting trusts or other agreements or understandings to which the Company or any Seller is a party with respect to the voting of the capital stock of the Company. In addition, the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. 2.3 Authority. --------- 2.3.1 Corporate Action. The Company has all requisite corporate power and ---------------- authority to enter into this Agreement and the other agreements contemplated to be entered into by the Company as described in Section 6.2 (collectively, the ----------- "Company Transaction Agreements"), and to perform its obligations under and to ------------------------------ consummate the transactions contemplated by the Company Transaction Agreements. The execution and delivery of the Company Transaction Agreements by the Company and the consummation by the Company of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of the Company. The Company Transaction Agreements have been duly executed and delivered by the Company and 4 constitute the valid and binding obligation of the Company, enforceable against the Company in accordance with their terms, except that enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent transfer or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. 2.3.2 Sellers' Authority. Each Seller represents that such Seller has full ------------------ power and capacity to enter into this Agreement and the other agreements contemplated to be entered into by such Seller as described in Section 6.2 (the ------------ "Seller Transaction Agreements"), and that the Seller Transaction Agreements ----------------------------- have been duly executed and delivered by such Seller and constitute the valid and binding obligation of such Seller, enforceable against such Seller in accordance with their terms, except that enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent transfer or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. 2.3.3 No Conflict. Neither the execution, delivery and performance of the ----------- Company Transaction Agreements, nor the consummation of the transactions contemplated thereby nor compliance with the provisions thereof will conflict with, or result in any violations of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation contained in, or the loss of any material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the material properties or assets of the Company under, any term, condition or provision of (x) the certificate of incorporation or bylaws of the Company or (y) any loan or credit agreement, note, bond, mortgage, indenture, lease or other material agreement, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or its properties or assets, other than any such conflicts, violations, defaults, losses, liens, security interests, charges, or encumbrances which, individually or in the aggregate, would not have a Material Adverse Effect. 2.3.4 Governmental Consents. Each Seller represents that no consent, --------------------- approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (each a "Governmental ------------ Entity"), is required to be obtained by the Company or such Seller in connection - ------ with the execution and delivery of the Company Transaction Agreements or the Seller Transaction Agreements or the consummation of the transactions contemplated thereby. 2.4 Financial Statements. The Company has furnished to Telenetics copies -------------------- of the compiled statements of assets, liabilities and equity and the related statements of revenues and expenses and schedules of retained earnings for the months of August, September, October and November 1999 and the respective one, two, three and four month periods then ended. All financial statements referred to in this Section 2.4 (the "Financial Statements") have been prepared on an ----------- -------------------- income tax basis, applied on a consistent basis during the respective periods, and fairly present the financial condition of the Company as at the respective dates thereof and the results of operation of the Company for the respective periods covered by the statements of 5 income contained in therein. The Company does not have any material obligations or liabilities, contingent or otherwise, of the type required to be disclosed on financial statements that are not fully disclosed by the Financial Statements. 2.5 Compliance with Applicable Laws. The business of the Company is not ------------------------------- being conducted in violation of any law, ordinance, regulation, rule or order of any Governmental Entity where the violation would have a Material Adverse Effect. Each Seller represents that neither the Company nor such Seller has been notified by any Governmental Entity that any investigation or review with respect to the Company is pending or threatened, nor has any Governmental Entity notified the Company or such Seller of its intention to conduct an investigation or review. The Company has all permits, licenses and franchises from Governmental Entities required to conduct its business as now being conducted. 2.6 Insurance. The Company does not maintain and has never applied for --------- fire, casualty, general liability or errors and omissions insurance, and no events have occurred that would have caused the Company to make a claim under any such policy. 2.7 Litigation. There is no suit, action, arbitration, demand, claim or ---------- proceeding pending or, to the best knowledge of such Seller, threatened against the Company, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The Company has delivered to Telenetics or its counsel correct and complete copies of all correspondence prepared by its counsel for the Company's accountants in connection with each compilation of the Company's financial statements and any correspondence since the date of the last compilation. 2.8 Labor and Employment. -------------------- 2.8.1 ERISA. The Company does not maintain, nor has it ever ----- maintained, any employee benefit plan or arrangement including, but not limited to deferred compensation, stock option, stock purchase, bonus, incentive and severance plans and employee benefit plans as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ----- 2.8.2 COBRA. The Company has complied with all of the requirements of ----- Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), and Part 6 of Title 1 of ERISA ("COBRA"), with respect to each ---- ----- employee welfare benefit plan, as defined in Section 3(1) of ERISA, it maintains or has ever maintained. The Company has provided, or will have provided prior to the Closing, to all individuals entitled thereto, all required notices and coverage pursuant to COBRA with respect to any "qualifying event" as defined in COBRA occurring prior to and including the Closing Date, and no material tax payable on account of COBRA has been incurred with respect to any current or former employees (or their beneficiaries) of the Company. 2.8.3 Other Compliance. The Company is in compliance in all material ---------------- respects with all applicable laws, agreements and contracts relating to employment, employment 6 practices, wages, hours, and terms and conditions of employment, including, but not limited to, employee compensation matters, but not including ERISA. 2.9 Absence of Undisclosed Liabilities. Except as disclosed on the ---------------------------------- Disclosure Schedule, at November 30, 1999 (the "Balance Sheet Date"), (i) the ------------------ Company did not have any liabilities or obligations of any nature (matured or unmatured, fixed or contingent) which were material to the Company, taken as a whole, and were not provided for in the balance sheet of the Company at the Balance Sheet Date, a copy of which has been delivered to Telenetics (the "Balance Sheet"); and (ii) all reserves established by the Company and set forth ------------- in the Balance Sheet were reasonably adequate. 2.10 Absence of Certain Changes or Events. Since the Balance Sheet Date ------------------------------------ there has not occurred: (a) any change in the condition (financial or otherwise), properties, assets, liabilities, businesses, operations or results of operations of the Company, taken separately or as a whole, that could reasonably constitute a Material Adverse Effect; (b) any amendments or changes in the certificate of incorporation or bylaws of the Company; (c) any damage, destruction or loss, whether covered by insurance or not, that could reasonably constitute a Material Adverse Effect; (d) any redemption, repurchase or other acquisition of shares of the Common Stock by the Company, or any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the Common Stock; (e) any material increase in or modification of the compensation or benefits payable or to become payable by the Company to any of its directors or employees, except in the ordinary course of business consistent with past practice; (f) any material increase in or modification of any bonus, pension, insurance or other benefit (including, but not limited to, the granting of stock options, restricted stock awards or stock appreciation rights) made to, for or with any of its employees or consultants, other than in the ordinary course of business consistent with past practice; (g) any acquisition or sale of a material amount of property or assets of the Company, other than in the ordinary course of business consistent with past practices; (h) any alteration in any term of any outstanding security of the Company; (i) any (A) incurrence, assumption or guarantee by the Company of any debt for borrowed money; (B) issuance or sale of any securities convertible into or exchangeable for debt securities of the Company; or (C) issuance or sale of options or other rights to acquire from the Company, directly or indirectly, debt securities of the Company or any securities convertible into or exchangeable for any such debt securities; 7 (j) any creation or assumption by the Company of any mortgage, pledge, security interest or lien or other encumbrance on any asset; (k) any making of any loan, advance or capital contribution to or investment in any person other than (i) travel loans or advances made in the ordinary course of business of the Company, (ii) other loans and advances in an aggregate amount which does not exceed $25,000 outstanding at any time and (iii) purchases on the open market of liquid, publicly traded securities; (l) any entering into, amendment of, relinquishment, termination or non-renewal by the Company of any contract, lease transaction, commitment or other right or obligation other than in the ordinary course of business, except as expressly contemplated in this Agreement or any other agreement to be executed in connection herewith; (m) any transfer or grant of a right under the IP Rights (as defined in Section 2.14), other than those transferred or granted in the ordinary ------------ course of business; (n) any labor dispute or charge of unfair labor practice (other than routine individual grievances), any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any campaign being conducted to solicit authorization from employees to be represented by the labor union; or (o) any agreement or arrangement made by the Company to take any action which, if taken prior to the date hereof, would have made any representation or warranty set forth in this Agreement untrue or incorrect unless otherwise disclosed. 2.11 No Defaults. The Company is not in default under, and there exists no ----------- event, condition or occurrence which, after notice or lapse of time, or both, would constitute a default by the Company under, any contract or agreement to which the Company is a party and which would, if terminated or modified, have a Material Adverse Effect. 2.12 Certain Agreements. Neither the execution and delivery of the Company ------------------ Transaction Agreements or the Seller Transaction Agreements nor the consummation of the transactions contemplated thereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director, officer or employee of the Company from the Company, (ii) materially increase any benefits otherwise payable or (iii) result in the acceleration of the time of payment or vesting of any benefits. 2.13 Taxes. ----- (a) For purposes of this Agreement, "Tax" or collectively "Taxes" --- ----- means any and all federal, state, local, and foreign taxes, assessments, and other governmental charges, duties, impositions, and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, estimated, excise and property taxes, together with all interest, penalties, and additions imposed with respect to those amounts and any obligations under any agreements or arrangements with any other 8 person with respect to those amounts and including any liability for taxes of a predecessor entity. (b) As of the Closing, the Company will have prepared and filed all required federal, state, local, and foreign returns, estimates, information statements, and reports relating to any and all Taxes ("Returns") ------- concerning or attributable to the Company that are required to be filed by or with respect to the Company on or prior to the Closing, and each of the Returns shall be true, correct, and complete in all material respects and shall have been completed in accordance with applicable law; (c) As of the Closing, the Company: (A) will have paid or accrued in accordance with generally accepted accounting principles all Taxes concerning or attributable to the Company relating to periods ending on or before the Closing regardless of whether reflected on Returns and (B) will have withheld with respect to their employees all federal and state income taxes, FICA, FUTA, and other Taxes required to be withheld; (d) The Company has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against the Company, nor has the Company executed any waiver of the statute of limitations on or extending the period for the assessment or collection of any Taxes; (e) No audit or other examination of any Return of the Company is presently in progress, nor has the Company been notified of any request for an audit or examination; (f) The Company does not have any liabilities for unpaid federal, state, local and foreign Taxes which have not been accrued or reserved in accordance with generally accepted accounting principles on the Balance Sheet, and such Seller does not have knowledge of any reasonable basis for the assertion of any liability attributable to the Company, or any of its assets and operations; (g) The Company has delivered to Telenetics and its counsel copies of all federal and state income and all state sales and use Tax Returns for all periods since its incorporation; (h) There are (and as of immediately following the Closing there will be) no liens, pledges, charges, claims, security interests, or other encumbrances of any sort (the "Liens") on the assets of the Company ----- relating or attributable to Taxes other than liens for sales and payroll taxes not yet due and payable; (i) Such Seller does not have knowledge of any reasonable basis for the assertion of any claim relating or attributable to Taxes which, if adversely determined, would result in any Lien on the assets of the Company; (j) None of the assets of the Company is property that is required to be treated as owned by any other person pursuant to the "safe harbor lease" provisions of former 9 Code Section 168(f)(8), and none of the assets is treated as "tax-exempt use property" within the meaning of Code Section 168(h); (k) The Company has not filed any consent agreement under Code Section 341(f) or agreed to have Code Section 341(f) apply to any disposition of a "subsection (f) asset" (as defined in Code Section 341(f)(4)) owned by the Company; (l) The Company has not been included in any "consolidated," "unitary," or "combined" Return provided for under the law of the United States or any state or locality with respect to Taxes for any taxable period; (m) The Company is not a party to a tax sharing, allocation, indemnification or similar agreement or arrangement, nor does the Company owe any amount under any agreement or arrangement; (n) No Return of the Company contains a disclosure statement under Code Section 6662 (or predecessor provision) or any similar provision of state, local, or foreign law; (o) The Company is not nor has it been at any time a "United States real property holding corporation" within the meaning of Code Section 897(c)(2); (p) No indebtedness of the Company consists of "corporate acquisition indebtedness" within the meaning of Code Section 279; (q) The Company has not taken any action not in accordance with past practice that would have the effect of deferring any Tax liability of the Company from any period ending on before the Closing Date to any taxable period ending after the Closing Date; (r) The Company was not acquired in a "qualified stock purchase" under Code Section 338(d)(3), and no elections under Code Section 338(g), protective carryover basis elections, or offset prohibition elections are applicable to the Company or any predecessor corporations; and (s) The tax bases of the assets of the Company for purposes of determining future amortization, depreciation, and other federal income tax deductions are accurately reflected on the tax books and records of the Company. 2.14 Intellectual Property. --------------------- (a) The Company owns or has acquired all material Intellectual Property Rights (as defined below), including rights to make, use and sell goods and services, as necessary or required for the conduct of its business as presently conducted (the Intellectual Property Rights being referred to as the "IP Rights"), and these rights are reasonably sufficient -------- for the conduct of its business; 10 (b) The execution, delivery and performance of the Company Transaction Agreements or the Seller Transaction Agreements and the consummation of the transactions contemplated thereby will not constitute a material breach of any instrument or agreement governing any IP Rights ("IP Rights --------- Agreements"), will not cause the forfeiture or termination or give rise to ---------- a right of forfeiture or termination of any IP Right or materially impair the right of the Company or Telenetics to use, sell or license any IP Right or portion thereof (except where the breach, forfeiture or termination would not have a Material Adverse Effect); (c) Neither the manufacture, marketing, license, sale or intended use of any product currently licensed or sold by the Company or currently under development by the Company violates any license or agreement between the Company and any third party or, to the best knowledge of such Seller, infringes any Intellectual Property Right of any other party; and there is no pending or, to the best knowledge of such Seller, threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any IP Right nor, to the best knowledge of such Seller, is there any basis for any claim, nor has such Seller received any written notice asserting that any IP Right or the proposed use, sale, license or disposition thereof conflicts or will conflict with the rights of any other party, nor, to the best knowledge of such Seller, is there any basis for any assertion, and (d) The Company has taken reasonable and practicable steps designed to safeguard and maintain its proprietary rights in all material IP Rights. All officers, employees and consultants of the Company have executed and delivered to the Company an agreement regarding the protection of proprietary information and the assignment to the Company of all Intellectual Property Rights arising from the services performed for the Company by those persons. No current or prior officer, employee or consultant of the Company claims an ownership interest in any IP Rights as a result of having been involved in the development of that property while employed by or consulting to the Company, or otherwise. The term "Intellectual Property Rights" shall mean all worldwide ---------------------------- industrial and intellectual property rights, including, without limitation, patents, patent applications, patent rights, trademarks, trademark registrations, trademark registration applications, trade names, service marks, service mark registrations, service mark registration applications, copyrights, copyright registrations, copyright registration applications, franchises, licenses, inventories, know-how, trade secrets, customer lists, proprietary processes and formulae, all source and object codes, algorithms, architecture, structure, display screens, layouts, inventions, development tools and all documentation and media constituting, describing or relating to the above, including, without limitation, manuals, memoranda and records. 2.15 Fees and Expenses. The Company has not paid or become obligated to ----------------- pay any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. 11 2.16 Environmental Matters. --------------------- (a) None of the properties or facilities of the Company is in violation of any federal, state or local law, ordinance, regulation or order relating to industrial hygiene or to the environmental conditions on, under or about the properties or facilities, including, but not limited to, soil and ground water condition, except where the violations would not constitute a Material Adverse Effect. During the time that the Company has owned or leased its properties and facilities, to the best knowledge of such Seller, no third party has released, used, generated, manufactured or stored on, under or about the properties or facilities or transported to or from the properties or facilities any hazardous materials. (b) During the time that the Company has owned or leased its properties and facilities, there has been no litigation brought or threatened against the Company by, or any settlement reached by the Company with, any party or parties alleging the presence, disposal, release or threatened release of any hazardous materials on, from or under any of the properties or facilities. 2.17 Interested Party Transactions. Except as disclosed in the Disclosure ----------------------------- Schedule, no officer or director of the Company or any "affiliate" or "associate" (as those terms are defined in Rule 405 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), of any such person -------------- has had, either directly or indirectly, a material interest in: (i) any person or entity which purchases from or sells, licenses or furnishes to the Company any material amount of goods, property, technology or intellectual or other property rights or services; or (ii) any material contract or agreement to which the Company is a party or by which it may be bound or affected. 2.18 Disclosure. No representation or warranty made by the Company or ---------- Sellers in this Agreement, nor any document, written information, written statement, financial statement, certificate or exhibit prepared and furnished or to be prepared and furnished by the Company or its representatives or Sellers pursuant hereto or in connection with the transactions contemplated hereby, when taken together, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. 2.19 Restrictions on Business Activities. There is no material agreement, ----------------------------------- judgment, injunction, order or decree binding upon the Company that has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of the Company, any acquisition of property by the Company or the conduct of business by the Company as currently conducted. 2.20 Intentionally Omitted. --------------------- 2.21 Personal Property. The Company has good title, free and clear of all ----------------- title defects, objections and liens, including without limitation, leases, chattel mortgages, conditional sales contracts, collateral security arrangements and other title or interest-retaining arrangements, to all of its machinery, equipment, furniture, inventory and other personal property. All personal property used in the business of the Company is in good operating condition. All of the leases to 12 personal property utilized in the business of the Company are valid and enforceable against the Company and are not in default by the Company, or to the knowledge of such Seller, are any of the other parties thereto in default thereof. 2.22 Real Property. The Company does not own any real property. The ------------- Disclosure Schedule contains a list of all leases for real property to which the Company is a party, the square footage leased with respect to each lease and the expiration date of each lease. These leases are valid and enforceable and are not in default. To the best knowledge of such Seller, the real property leased or occupied by the Company, the improvements located thereon, and the furniture, fixtures and equipment relating thereto (including plumbing, heating, air conditioning and electrical systems), conform to any and all applicable health, fire, safety, zoning, land use and building laws, ordinances and regulations. There are no outstanding contracts made by the Company for any improvements made to the real property leased or occupied by the Company that have not been paid for. 2.23 Warranties. Neither the Company nor Sellers have made any warranties ---------- or guarantees relating to the Company's products other than as implied or required by law. The Disclosure Schedule contains a list of all warranty and indemnification obligations of the Company relating to patents and other proprietary rights. 2.24 Contracts. The Disclosure Schedule lists all oral or written --------- agreements, notes, instruments, or contracts to which the Company is a party or by which its assets or properties may be bound which involve the payment or receipt of more than $25,000 (on an annual basis), or which have a term of more than one year, or which involve intellectual property, or which are employment or consulting agreements, or to which the Company and one or more Sellers or entities owned or operated by one or more Sellers is a party (the "Contracts"). --------- The Company is not in default in performance of its obligations under any material provisions of the Contracts. Such Seller has no knowledge of any violation of any Contract by any other party thereto and such Seller has no knowledge of any intent by any other party to a Contract not to perform its obligations under any Contract. 2.25 Intentionally Omitted. --------------------- 2.26 Development Tools. The Disclosure Schedule contains a complete list of ----------------- all material software development tools used or currently intended to be used by the Company in the development of any of the Company Products, except for any tools that are generally available and are used in their generally available form (such as standard compilers) ("Company Development Tools"). The Disclosure ------------------------- Schedule also sets forth, for each Company Development Tool: (a) for any Company Development Tool not entirely developed internally by the employees of the Company, the identity of the independent contractors and consultants involved in a material way in such development and a list of the material agreements with such independent contractors and consultants with respect to the Company Development Tools; (b) a list of any third parties with any rights to receive material royalties or other payments with respect to such Company Development Tools, and a schedule of all such royalties payable; (c) a list of any material restrictions on the Company's unrestricted right to use and distribute the Company Development Tools; and (d) a list of all agreements with third parties for the use by the third party of the Company Development Tools. 13 2.27 Investment Representation. ------------------------- (a) Each Seller acknowledges that, upon issuance, the Base Stock, the options to be issued at the Closing (the "Options"), the shares of common ------- stock underlying the Options (the "Underlying Stock"), and the Additional ---------------- Stock, if any, will not have been "registered" and will therefore be "restricted securities" as these terms are used under the Securities Act and the rules and regulations thereunder. By their execution of this Agreement, each Seller agrees, represents and warrants that (i) his acquisition of the Base Stock, Options, Underlying Stock and Additional Stock, is for investment only, for his own account and not with a view to "distribution" as that term is used under the Securities Act, (ii) he is an "accredited investor" as that term is used in Regulation D under the Securities Act, and (iii) copies of Telenetics' Form 10-KSB for the nine months ended December 31, 1998, and Forms 10-QSB for the quarters ended March 31, June 30 and September 30, 1999 have been made available to him. Each Seller agrees that he shall not at any time make any sale, pledge, hypothecation, gift or other transfer of Base Stock, Options, Underlying Stock or Additional Stock except pursuant to an effective registration statement under the Securities Act or pursuant to the provisions of Rule 144 under the Securities Act or another exemption from the registration requirements of the Securities Act, and in accordance with the provisions of this Section 2.27 and any applicable state "blue sky" or other ------------ securities laws, and that prior to making any sale or other disposition of Base Stock, Options, Underlying Stock or Additional Stock pursuant to any such exemption, he shall, if requested by Telenetics, obtain an opinion of counsel, satisfactory to Telenetics' counsel, that such sale complies with applicable federal and state securities laws. (b) Each Seller agrees that he has been informed that the Base Stock, Options, Underlying Stock and Additional Stock must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available, and he understands that any sale of the Base Stock, Options, Underlying Stock or Additional Stock made in reliance upon Rule 144, or any other like rule, can be made only in limited amounts in accordance with the terms and conditions of those rules and, if those rules are not applicable, any resale may require compliance with another available exemption under the Securities Act or, in the alternative, may require registration of the Base Stock, Options, Underlying Stock or Additional Stock. Sellers acknowledge that Telenetics makes no representation or covenant that it shall conduct its affairs so as to permit sales under Rule 144, and except as set forth in the registration rights agreements that are being entered into by and between Telenetics and each Seller concurrently with the execution of this Agreement relating to the Underlying Stock (the "Registration Rights Agreements"), Telenetics is ------------------------------ under no obligation to register or repurchase the Base Stock, the Options, the Underlying Stock or the Additional Stock. (c) In furtherance of the foregoing, Telenetics and its transfer agent are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Section 2.27. ------------ Sellers acknowledge that Telenetics shall cause appropriate legends to be placed on the certificates representing the Base Stock, the Additional Stock and the Underlying Stock to reflect the foregoing. 14 3. Representations and Warranties of Telenetics. -------------------------------------------- Telenetics hereby represents and warrants to Sellers that: 3.1 Organization; Good Standing; Qualification and Power. Telenetics is a ---------------------------------------------------- corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes qualification necessary, other than in jurisdictions where the failure to qualify would not have a Material Adverse Effect. Telenetics has made available to the Company and the Sellers or their respective counsel complete and correct copies of the articles of incorporation and bylaws of Telenetics as amended to the date of this Agreement. 3.2 Capital Structure. The authorized capital stock of Telenetics ----------------- consists of 25,000,000 shares of common stock, no par value per share ("Telenetics Common Stock"), 1,500,000 shares of Series A 7.0% Convertible ----------------------- Redeemable Preferred Stock, no par value per share (the "Series A Preferred ------------------ Stock"), 128,571 shares of Series B Convertible Preferred Stock, no par value - ----- per share (the "Series B Preferred Stock"), 400,000 shares of Series C 7.0% ------------------------ Convertible Preferred Stock, no par value per share (the "Series C Preferred ------------------ Stock"), and 2,971,429 shares of undesignated preferred stock, no par value per - ----- share (the "Undesignated Preferred Stock"). As of the date hereof, 10,196,754 ---------------------------- shares of Telenetics Common Stock are issued and outstanding (which amount does not include the Base Stock issuable hereunder), 11,183,677 shares of Telenetics Common Stock are reserved for issuance upon the exercise of outstanding options and warrants to purchase Telenetics Common Stock (which amount includes the shares underlying the Options and the Additional Stock) and upon conversion of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, 756,884 shares of Series A Preferred Stock are issued and outstanding, 128,571 shares of Series B Preferred Stock are issued and outstanding, 400,000 shares of Series C Preferred Stock are issued and outstanding, and no shares of Undesignated Preferred Stock are issued and outstanding. Except for the options, warrants and convertible securities for which shares of Telenetics Common Stock are reserved for issuance as described in this Section 3.2, and except as ----------- provided in the Telenetics Transaction Agreements, there are no options, warrants, calls, rights, commitments, conversion rights or agreements of any character to which Telenetics is a party or by which Telenetics is bound obligating Telenetics to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock of Telenetics or securities convertible into or exchangeable for shares of capital stock of Telenetics, or obligating Telenetics to grant, extend or enter into any option, warrant, call, right, commitment, conversion right or other agreement. None of the outstanding shares of Telenetics Common Stock, Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock are subject to preemptive rights. 3.3 Authority. --------- 3.3.1 Corporate Action. Telenetics has all requisite corporate power ---------------- and authority to enter into this Agreement and the other agreements contemplated to be entered into by Telenetics as described in Section 6.3 ----------- (collectively, the "Telenetics ---------- 15 Transaction Agreements"), and to perform its obligations under and to ---------------------- consummate the transactions contemplated by the Telenetics Transaction Agreements. The execution and delivery of the Telenetics Transaction Agreements by Telenetics and the consummation by Telenetics of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of Telenetics. The Telenetics Transaction Agreements have been duly executed and delivered by Telenetics and constitute the valid and binding obligation of Telenetics, enforceable against Telenetics in accordance with their terms, except that enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance, fraudulent transfer or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. 3.3.2 No Conflict. Neither the execution, delivery and performance of ----------- the Telenetics Transaction Agreements, nor the consummation of the transactions contemplated thereby nor compliance with the provisions hereof will conflict with, or result in any violations of, or cause a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, amendment, cancellation or acceleration of any obligation contained in, or the loss of any material benefit under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the material properties or assets of Telenetics under, any term, condition or provision of (x) the articles of incorporation or bylaws of Telenetics or (y) any loan or credit agreement, note, bond, mortgage, indenture, lease or other material agreement, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Telenetics or its properties or assets, other than any such conflicts, violations, defaults, losses, liens, security interests, charges or encumbrances which, individually or in the aggregate, would not have a Material Adverse Effect. 3.3.3 Governmental Consents. No consent, approval, order or --------------------- authorization of, or registration, declaration or filing with, any Governmental Entity is required to be obtained by Telenetics in connection with the execution and delivery of the Telenetics Transaction Agreements or the consummation of the transactions contemplated thereby, except for securities law filings to be made in connection with the issuance of the Base Stock, the Additional Stock, the Options and the Underlying Stock. 3.4 SEC Documents. ------------- 3.4.1 SEC Reports. Telenetics has made available to the Company or its ----------- counsel correct and complete copies of each report, schedule, registration statement and definitive proxy statement filed by Telenetics with the Securities and Exchange Commission (the "SEC") on or after July 14, 1998 --- (the "Telenetics SEC Documents"), which are all the documents (other than ------------------------ preliminary material) that Telenetics was required to file with the SEC on or after that date. As of their respective dates or, in the case of registration statements, their effective dates (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), none of the Telenetics SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and 16 the Telenetics SEC Documents complied when filed in all material respects with the then applicable requirements of the Securities Act, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated by the SEC thereunder. 3.4.2 Financial Statements. The financial statements of Telenetics -------------------- included in the Telenetics SEC Documents complied as to form in all material respects with the then applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may have been indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Form 10-QSB promulgated by the SEC) and fairly present the financial position of Telenetics as at the respective dates thereof and the results of its operations and cash flows for the respective periods then ended. 3.5 Litigation. There is no suit, action, arbitration, demand, claim or ---------- proceeding pending or, to the knowledge of Telenetics, threatened against Telenetics in connection with or relating to the transactions contemplated by this Agreement or of any action taken or to be taken in connection herewith or the consummation of the transactions contemplated hereby. 3.6 Fees and Expenses. Telenetics has not paid or become obligated to pay ----------------- any fee or commission to any broker, finder or intermediary in connection with the transactions contemplated by this Agreement. 3.7 Disclosure. No representation or warranty made by Telenetics in this ---------- Agreement, nor any document, written information, written statement, financial statement, certificate or exhibits prepared and furnished or to be prepared and furnished by Telenetics or its representatives pursuant hereto or in connection with the transactions contemplated hereby, when taken together, contains any untrue statement of a material fact, or omits to state a material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. 3.8 Investment Representation. Telenetics agrees, represents and warrants ------------------------- that its acquisition of the Shares is for investment only, for its own account and not with a view to "distribution" as that term is used under the Securities Act. 4. Additional Agreements. --------------------- 4.1 Employee Matters. Following the Closing, all employees of the Company ---------------- will either (i) continue to be employees of the Company or (ii) be offered comparable employment by Telenetics. Notwithstanding the foregoing, Telenetics makes no representation, warranty or promise as to the length of time that any such employee will remain in the employ of the Company or Telenetics following the Closing (except with respect to those employees who become parties to Employment Agreements pursuant to Section 4.2). ----------- 4.2 Employment Agreements. Concurrently with the Closing, Telenetics and --------------------- each of McLean and T. Keith Odom shall enter into employment agreements (the "Employment ---------- 17 Agreements") upon such terms and conditions as are mutually acceptable to - ---------- Telenetics and each of such persons, to the extent each is a party thereto. 4.3 Consulting Agreements. Concurrently with the Closing, Telenetics and --------------------- each of Didion and Saunders & Parker, Inc., a Texas corporation ("S & P") shall ----- enter into consulting agreements (the "Consulting Agreements") upon such terms --------------------- and conditions as are mutually acceptable to Telenetics and each of Didion and S & P, to the extent each is a party thereto. 4.4 Membership on the Telenetics Board of Directors. At the next annual ----------------------------------------------- meeting of the shareholders of Telenetics, and at each annual meeting of the shareholders of Telenetics occurring prior to the expiration of the Earn-Out Period, Telenetics shall propose and recommend, at the request of S & P, either Parker or Saunders on Telenetics' management slate of directors for election by the shareholders of Telenetics. Whichever of Parker or Saunders is not requested to be proposed and recommended for election pursuant to the preceding sentence shall be appointed to serve as an advisor to the Telenetics Board of Directors, shall be given all notices that are provided to directors of Telenetics, at the same time and in the same manner that such notices are provided to such directors, and shall be permitted to attend all meetings of the Board of Directors of Telenetics. Saunders and Parker shall both serve as advisors to the Board of Directors of Telenetics until either is appointed to the Board of Directors of Telenetics pursuant to this Section 4.4. ----------- 4.5 Certain Tax Matters. ------------------- 4.5.1 Tax Returns. Sellers shall prepare or cause to be prepared and ----------- file or cause to be filed all Returns (including any amended Return) for the Company for all periods ending on or prior to the Closing Date that are required to be filed after the Closing ("Pre-Closing Returns"). Telenetics ------------------- shall cause an authorized officer of the Company to sign and file or cause to be filed the Pre-Closing Returns. 4.5.2 Audits. Sellers shall have the right, at Sellers' own expense, ------ to control any audit and to contest, resolve and defend against any assessment, notice of deficiency or other adjustment or proposed adjustment of Taxes with respect to any taxable period ending on or before the Closing Date; provided, however, that Sellers shall not have the right to agree to any assessment, deficiency, settlement or other adjustment or proposed adjustment of Taxes with respect to any taxable period ending after the Closing Date without Telenetics' prior written consent. 4.5.3 Cooperation on Tax Matters. Telenetics and Sellers shall -------------------------- cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and, upon the other party's request, the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. 4.6 Trade Payables. Following the Closing, Telenetics shall cause the -------------- Company to pay the trade payables and attorneys' fees disclosed by the Company to Telenetics prior to the 18 Closing, plus reasonable attorneys' fees and costs of MHK&H (as hereinafter defined) incurred by Saunders, Parker and/or the Company in connection with the negotiation, preparation and execution of this Agreement and the other documents executed in connection with this Agreement. 5. Indemnification of the Parties. ------------------------------ 5.1 Indemnification by Sellers. Each Seller shall, severally and not -------------------------- jointly (i.e., in proportion to each such Seller's ownership in the Shares), indemnify, defend, protect and hold harmless Telenetics, each of its successors and assigns and each of its directors, officers, employees, agents, subsidiaries and affiliates (each an "Telenetics Indemnified Party"), at all times from and ---------------------------- after the date of this Agreement against all losses, claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses ("Losses") (including specifically, but without limitation, reasonable ------ attorneys' fees and expenses of investigation ("Legal Expenses")) based upon, -------------- resulting from or arising out of (i) any inaccuracy or breach of any representation, or warranty of such Seller contained in or made in connection with this Agreement, and (ii) the breach by such Seller of, or the failure by such Seller to observe, any of his respective covenants or other agreements contained in or made in connection with this Agreement. 5.2 Indemnification by Telenetics. Telenetics shall indemnify, defend, ----------------------------- protect and hold harmless each Seller and such Seller's respective heirs, successors and assigns (each a "Seller Indemnified Party"), at all times from ------------------------ and after the date of this Agreement against all Losses based upon, resulting from or arising out of (i) any inaccuracy or breach of any representation, or warranty of Telenetics contained in or made in connection with this Agreement, and (ii) the breach by Telenetics of, or the failure by Telenetics to observe, any of its covenants or other agreements contained in or made in connection with this Agreement. 5.3 Adjustments to Indemnification Payments. Any payment made to any --------------------------------------- Telenetics Indemnified Party or any Seller Indemnified Party (each, an "indemnified party") pursuant to this Section 5 in respect of any claim will be ----------------- --------- net of any insurance proceeds realized by and paid to the indemnified party in respect of any such claim. The indemnified party will use its reasonable efforts to make insurance claims relating to any claim for which it is seeking indemnification pursuant to this Section 5; provided, however, that the --------- indemnified party will not be obligated to make such an insurance claim if the indemnified party in its reasonable judgment believes the cost of pursuing such an insurance claim, together with any corresponding increase in insurance premiums or other chargebacks to the indemnified party, would exceed the value of the claim for which the indemnified party is seeking indemnification. 5.4 Indemnification Procedures. -------------------------- (a) Promptly after receipt by an indemnified party of notice of the commencement of any action, suit or proceeding by a person not a party to this Agreement in respect of which the indemnified party will seek indemnification hereunder (a "Third Party Action"), the indemnified party ------------------ shall notify the party required to provide indemnification (the "indemnifying party") in writing, but any failure to so notify the ------------------- indemnifying party shall not relieve it from any liability that it may have to the 19 indemnified party under Section 5.1 or 5.2, except to the extent that the ------------------ indemnifying party is prejudiced by the failure to give such notice. The indemnifying party shall be entitled to participate in the defense of such Third Party Action and to assume control of such defense (including settlement of such Third Party Action) with counsel reasonably satisfactory to such indemnified party; provided, however, that: (i) the indemnified party shall be entitled to participate in the defense of such Third Party Action and to employ counsel at its own expense (which shall not constitute Legal Expenses for purposes of this Agreement) to assist in the handling of such Third Party Action; (ii) the indemnifying party shall obtain the prior written approval of the indemnified party before entering into any settlement of such Third Party Action or ceasing to defend against such Third Party Action, if pursuant to or as a result of such settlement or cessation, injunctive or other equitable relief would be imposed against the indemnified party or the indemnified party would be adversely affected thereby (it being understood and agreed that monetary payments agreed to and paid by the indemnifying party shall not be deemed to adversely affect the indemnified party); (iii) no indemnifying party shall consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by each claimant or plaintiff to each indemnified party of a release from all liability in respect of such Third Party Action; and (iv) the indemnifying party shall not be entitled to control the defense of any Third Party Action unless the indemnifying party confirms in writing its assumption of such defense and continues to pursue the defense reasonably and in good faith. After written notice by the indemnifying party to the indemnified party of its election to assume control of the defense of any such Third Party Action in accordance with the foregoing, (i) the indemnifying party shall not be liable to such indemnified party hereunder for any Legal Expenses subsequently incurred by such indemnified party attributable to defending against such Third Party Action, and (ii) as long as the indemnifying party is reasonably contesting such Third Party Action in good faith, the indemnified party shall not admit any liability with respect to, or settle, compromise or discharge the claim underlying, such Third Party Action without the indemnifying party's prior written consent. If the indemnifying party does not assume control of the defense of such Third Party Action in accordance with this Section ------- 5.4, the indemnified party shall have the right to defend and/or --- settle such Third Party Action in such manner as it may deem appropriate at the cost and expense of the indemnifying party, and the indemnifying party will promptly reimburse the indemnified party therefor in accordance with this Section 5.4. The reimbursement of ----------- fees, costs and expenses required by this Section 5.4 shall be made by ----------- periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred. 20 (b) If an indemnified party has actual knowledge of any facts or circumstances other than the commencement of a Third Party Action which cause in good faith it to believe that it is entitled to indemnification under this Section 5, then such indemnified party shall promptly give the --------- indemnifying party notice thereof in writing, but any failure to so notify the indemnifying party shall not relieve it from any liability that it may have to the indemnified party under Section 5.1 or 5.2, except to the ------------------ extent that the indemnifying party is prejudiced by the failure to give such notice. 5.5 Manner of Indemnification. All indemnification by a Seller under this ------------------------- Section 5 shall be effected by the payment of cash, the delivery of a bank - ---------- cashier's check, the delivery of shares of Base Stock or Additional Stock free and clear of any liens, security interests, pledges, agreements, claims, charges or other encumbrances (other than those arising under securities laws and those created by or at the request of Telenetics), or in Telenetics' sole discretion, may be accomplished by the set off of any amounts otherwise payable by Telenetics to Sellers pursuant to the Telenetics Transaction Agreements or by a combination of the foregoing. For purposes of this Section 5.5, the value of a ----------- share of Base Stock or Additional Stock shall be equal to the closing sale price of a share of Telenetics Common Stock on the date immediately preceding the delivery of such shares pursuant to this Section 5.5. Indemnification by ----------- Telenetics under this Section 5 may be effected by the payment of cash or --------- delivery of a check, or by a combination of the foregoing, and neither the exercise of nor the failure to exercise such right of set off will constitute an election of remedies or limit Telenetics in any manner in the enforcement of any other remedies that may be available to it. The exercise of such right of set off by Telenetics in good faith, whether or not ultimately determined to be justified, will not constitute an event of default under any of the Telenetics Transaction Agreements. 5.6 Survival. The representations, warranties, covenants and agreements -------- of the parties made in this Agreement shall survive (and not be affected in any respect by) the Closing and any examination or investigation conducted by or on behalf of the parties hereto and any information that any party may receive pursuant to the Disclosure Schedule or otherwise. Notwithstanding the foregoing, the rights to indemnification provided for in this Section 5 with respect to --------- each representation and warranty contained in this Agreement shall terminate on the date (the "Survival Date") occurring on the third anniversary of the Closing ------------- Date; provided, however, that (i) the right to indemnification concerning the matters set forth in Sections 2.8, 2.13 and 2.16 shall survive until their --------------------------- applicable statutes of limitation, (ii) the right to indemnification concerning the matters set forth in Section 2.2 shall continue forever and (ii) the right ----------- to indemnification with respect to such representations and warranties, and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such indemnifying party has been given written notice prior to the Survival Date. 5.7 Limitation on Amount. Notwithstanding anything to the contrary -------------------- contained in this Agreement, the aggregate amount to be paid by any Seller to Telenetics with respect to any Loss based upon, resulting from or arising out of any inaccuracy or breach of any representation or warranty of such Seller contained in this Agreement, and the aggregate amount to be paid by Telenetics to any Seller with respect to any Loss based upon, resulting from or arising out of any inaccuracy or breach of any representation or warranty of Telenetics contained in this Agreement, shall not exceed the value of the Base Purchase Price paid to such Seller, as 21 calculated based upon the closing sale price of a share of Telenetics Common Stock on the Closing Date (which is $4.062), plus in the case of Saunders, one- half of the aggregate amount paid by Telenetics to S & P at the Closing and pursuant to the Telenetics Note (as defined below), plus in the case of Parker, one-half of the aggregate amount paid by Telenetics to S & P at the Closing pursuant to the Telenetics Note. 5.8 Basket. Notwithstanding anything to the contrary contained in this ------ Agreement, Sellers shall not be liable to Telenetics with respect to any single Loss based upon, resulting from or arising out of any inaccuracy or breach of any representation or warranty of Sellers contained in this Agreement that does not exceed $50,000; provided, however, that when the aggregate amount of all such Losses reaches $50,000, Sellers shall, subject to the above limitation of their maximum aggregate liability, thereafter be liable to Telenetics in full for all such Losses. 6. Closing. ------- 6.1 Closing Date. The closing of the transactions contemplated by this ------------ Agreement ("Closing") will take place at a location mutually agreed upon by the ------- parties on the date hereof ("Closing Date"). ------------ 6.2 Deliveries by Sellers at the Closing. At the Closing, Sellers shall ------------------------------------ deliver to Telenetics: (a) Certificates representing all of the Shares, free of liens or encumbrances (other than encumbrances imposed by applicable securities laws), accompanied by duly executed stock powers by each Seller in favor of Telenetics with all necessary transfer stamps affixed thereto or other evidence of payment of applicable stock transfer taxes, if any; (b) The resignations of each of the officers and directors of the Company; (c) This Agreement duly executed by each of the Sellers, accompanied by the consent of each Seller's spouse, as set forth on the signature pages hereof; (d) The Employment Agreements duly executed by each of the individuals who are parties thereto, together with evidence of the termination of the existing employment relationships between the Company and each of the individuals who are parties to the Employment Agreements; (e) The Consulting Agreements duly executed by each of the individuals or entities who are parties thereto, together with evidence of the termination of any existing consulting or employment relationships between the Company and S & P and/or Didion; (f) The Registration Rights Agreements, duly executed by each of the individuals or entities that are parties thereto; (g) Certificates dated as of a date no longer than ten days prior to the Closing Date, duly issued by the secretaries of state and/or other appropriate officials in the 22 Company's state of incorporation and in each jurisdiction where the Company is qualified to do business as a foreign corporation, showing that the Company is in good standing and authorized to do business in each such state and, where such information is generally made available by the appropriate authorities, that all state franchise and/or income tax returns have been filed and taxes paid for the Company for all periods prior to the Closing; (h) Required consents of third parties, if any; (i) The opinion of Munsch Hardt Kopf & Harr, P.C., counsel to the Company, Saunders, Parker and S & P ("MHK&H"); and ----- (j) Evidence satisfactory to Telenetics and its counsel that the contracts or agreements listed on the Disclosure Schedule to be terminated concurrently with the Closing have been terminated. 6.3 Deliveries by Telenetics at the Closing. At the Closing, Telenetics --------------------------------------- shall deliver to Sellers: (a) Certificates representing the Base Stock, with facsimile signatures of appropriate Telenetics officers and endorsement by Telenetics' transfer agent; (b) Option agreements representing the Options; (c) The Employment Agreements; (d) The Consulting Agreements; (e) The Registration Rights Agreements; (f) Check made payable to S & P in the amount of one-half of the principal and interest due as of the Closing from the Company to S & P pursuant to the Promissory Note dated August 27, 1999 made by the Company in favor of S & P (the "S & P Note"); ---------- (g) Promissory note made by Telenetics in favor of S & P in the principal amount of one-half of the principal and interest due as of the Closing from the Company to S & P pursuant to the S & P Note (the "Telenetics Note"); --------------- (h) Promissory note made by Telenetics in favor of McLean in the principal amount of $107,500, as referenced in the Disclosure Schedule; (i) Evidence of the appointment of Saunders and Parker as advisors to the Telenetics Board of Directors; (j) Required consents of third parties, if any; and (k) The opinion of Rutan & Tucker, LLP, counsel to Telenetics. 23 6.4 Deliveries by Third Parties at the Closing. At the Closing, the ------------------------------------------ following additional deliveries shall be made: (a) Sellers shall cause S & P to deliver to Telenetics for cancellation that certain Promissory Note dated May 10, 1999 in the principal amount of $30,000 made by the Company in favor of S & P and the S S & P Note. (b) Sellers shall cause S & P and the Company to provide to Telenetics evidence satisfactory to Telenetics and its counsel that the contracts or agreements listed on the Disclosure Schedule to be terminated concurrently with the Closing have been terminated. (c) Sellers shall cause S & P to deliver duly executed UCC termination statements terminating S & P's security interest in the assets of the Company; (d) Armani shall execute and deliver to S & P a guaranty and a stock pledge agreement pledging as security for Telenetics' repayment of the Telenetics Note 500,000 of the shares of Telenetics Common Stock owned by Armani immediately prior to the Closing. 7. Non-Competition. --------------- 7.1 Definitions. For purposes of this Section 7, the following terms ----------- --------- shall have the following meanings: (a) "Business" shall mean the development, production, manufacture, -------- sale, lease or distribution of the Technology and/or products and services relating to the Technology, as developed, in development or conducted by the Company as of, or immediately preceding the date of this Agreement, or conducted, developed or in development by the Company or by Telenetics or their respective affiliates, successors or assigns during the Non- Competition Period, the Employee Non-Solicitation Period or the Customer Non-Solicitation Period; (b) "Business Territory" shall mean the world, including all countries ------------------ and political subdivisions thereof. (c) "Compete" shall mean, with respect to the Business: (i) managing, ------- supervising or otherwise participating in a management or sales capacity; or (ii) otherwise managing, operating, controlling, participating in the ownership, management or control of, or being connected with or having any interest in, as a stockholder, agent, partner, lender, consultant, advisor or otherwise, any business or person that provides goods, products or services competitive with those provided by the Business; provided, however, that nothing contained herein will prohibit a Seller from owning less than one percent of any class of securities listed on a national securities exchange or traded publicly in the over-the-counter market or from performing his duties in accordance with the terms of the Employment Agreement or Consulting Agreement to which he or an entity by which he is employed is a party; 24 (d) "Customer Non-Solicitation Period" shall mean, with respect to -------------------------------- each Seller, the later of: (i) the period commencing on the Closing Date and continuing for a period of two years after the expiration of the Earn- Out Period; and (ii) two years after the termination of such Seller's employment or consulting relationship with the Company, Telenetics or any of their respective successors, assigns, subsidiaries or affiliates; provided, however, that the Customer Non-Solicitation Period with respect to each Seller shall be extended by the number of days in which such Seller is or was engaged in activities constituting a breach of Section 7.4. ----------- (e) The term "Customers" shall mean, with respect to each Seller, any --------- person that, as of or immediately preceding the date of this Agreement, or during the Non-Competition Period, the Employee Non-Solicitation Period or the Customer Non-Solicitation Period is or was a client or customer of the Company, Telenetics or any of their respective subsidiaries or affiliates. (f) The words "directly or indirectly," as they modify the word ---------------------- "Compete" or "Competing," shall mean: (i) acting as an agent, representative, consultant, officer, director, member, independent contractor or employee of any person that is Competing with the Business; (ii) participating in any such Competing person or enterprise as an owner, partner, limited partner, joint venturer, member, creditor or shareholder (except as expressly permitted herein); or (iii) communicating to any such Competing person or enterprise the names or addresses or any other information concerning any Customer or any other confidential information of the Business. (g) "Employees" shall mean: (i) any employee of the Company, --------- Telenetics or any of their respective subsidiaries or affiliates as of, or immediately prior to the date of this Agreement or during the Non- Competition Period, the Employee Non-Solicitation Period or the Customer Non-Solicitation Period; or (ii) any former employee of the Company, Telenetics or any of their respective subsidiaries or affiliates whose employment with the Company, Telenetics, or any of their respective successors, assigns, subsidiaries or affiliates ceased less than one year before the date of co-venturing, solicitation, inducement or recruitment. (h) "Employee Non-Solicitation Period" shall mean, with respect to -------------------------------- each Seller, the later of: (i) the period commencing on the Closing Date and continuing for a period of two years after the expiration of the Earn- Out Period; and (ii) two years after the termination of such Seller's employment or consulting relationship with the Company, Telenetics or any of their respective successors, assigns, subsidiaries or affiliates; provided, however, that the Employee Non-Solicitation Period with respect to each Seller shall be extended by the number of days in which such Seller is or was engaged in activities constituting a breach of Section 7.3. ----------- (i) "Non-Competition Period" shall mean, with respect to each Seller, ---------------------- the later of: (i) the period commencing on the Closing Date and continuing for a period of two years after the expiration of the Earn-Out Period; and (ii) two years after the termination of such Seller's employment or consulting relationship with the Company, Telenetics or any of their respective successors, assigns, subsidiaries or affiliates; 25 provided, however, that the Non-Competition Period with respect to each Seller shall be extended by the number of days in which such Seller is or was engaged in activities constituting a breach of Section 7.2. ----------- (j) The term "person" shall mean any natural person, firm, ------ partnership, association, corporation, company, limited liability company, limited partnership, trust, business trust, Governmental Entity or other entity. (k) The term "Prospective Customer" shall mean any person that -------------------- Telenetics, the Company, or any of their respective subsidiaries or affiliates has contacted, or has developed a strategy or plan to contact, for the purpose of acquiring such person as a customer or client during the period from January 1, 1999 through the expiration of the Customer Non- Solicitation Period. 7.2 Non-Competition. During the Non-Competition Period, no Seller shall, --------------- and no Seller shall permit any of such Seller's affiliates to, directly or indirectly Compete with the Business in the Business Territory. Set forth in the Company Disclosure Schedule is a complete and accurate listing of all states within the United States and all foreign countries and territories in which the Company or its predecessor has sold or marketed its products or services or conducted its business prior to the date of this Agreement. 7.3 Non-Solicitation of Employees. Sellers recognize that the Employees ----------------------------- are a valuable resource of Telenetics and the Company. Accordingly, during the Employee Non-Solicitation Period, no Seller shall, either alone or in conjunction with any other person or entity, directly or indirectly go into business with any Employee or solicit, induce or recruit any Employee to leave the employ of Telenetics, the Company, or any of their respective successors, assigns, subsidiaries or affiliates. 7.4 Non-Solicitation of Customers. Sellers recognize that the Customers ----------------------------- and Prospective Customers are a valuable resource of Telenetics and the Company. Accordingly, during the Customer Non-Solicitation Period, no Seller shall, either alone or in conjunction with any other person or entity, directly or indirectly call on, solicit, take away, accept as a client, customer or prospective client or customer, or attempt to call on, solicit, take away, accept as a client, customer or prospective client or customer a Customer or Prospective Customer for the purpose of Competing with the Business. 7.5 Additional Agreements. Each Seller hereby expressly agrees and --------------------- acknowledges that: (a) Telenetics and the Company have protectable business interests throughout the Business Territory, and that competition with and against such business interests would be harmful to Telenetics or the Company, as the case may be; (b) the covenants contained in this Section 7 are reasonable as to --------- time and geographical area and do not place any unreasonable burden upon each Seller's ability to earn a livelihood; 26 (c) the public will not be harmed as a result of enforcement of the covenants contained in this Section 7; --------- (d) the personal legal counsel for each of Saunders and Parker has reviewed the covenants contained in this Section 7; --------- (e) the personal legal counsel for each of McLean and Didion has reviewed the covenants contained in this Section 7, and/or each of McLean --------- and Didion has had ample opportunity but has knowingly and willingly declined to take advantage of such opportunity for his personal legal counsel to review the covenants contained in this Section 7; --------- (f) the parties have entered into the covenants contained herein in connection with and as a condition precedent to the consummation of the Agreement, pursuant to which Telenetics shall acquire the Company; the agreements, actions, covenants, and promises contained herein are intended to protect and ensure the value of Business, including its goodwill, which actions, covenants, and promises are a material consideration to Telenetics in connection with the Agreement; and, to the extent that the laws of any jurisdiction in which this Agreement shall be interpreted, construed, and/or enforced distinguish between covenants given in connection with the sale of a business and its goodwill and covenants given in connection with employment, this covenant will be given the broader interpretation customarily given to covenants in connection with the sale of a business and the transfer of goodwill to Telenetics, notwithstanding any employment or engagement as a consultant of each Seller by Telenetics or the Company following the Closing; (g) Telenetics and each Seller agree that the provisions of this Section 7 shall survive the Closing; and --------- (h) each Seller understands and agrees to each and every term and condition contained in this Section 7. --------- 7.6 Remedies; Enforceability. Each Seller recognizes and acknowledges that ------------------------ irreparable damage will result to Telenetics in the event of a breach by that Seller or any of that Seller's affiliates of the provisions of this Section 7, --------- and, accordingly, in the event of such a breach, Telenetics will be entitled, in addition to any other legal or equitable damages and remedies to which it may be entitled or which may be available, to an injunction to restrain the violation thereof. If any provision of this Section 7 shall be adjudicated by a court of ---------- competent jurisdiction to be invalid or unenforceable because of the scope, duration, area of its applicability, or any other reason, the court making such determination will have the power to modify such scope, duration, or area, or all of them, or to strike an invalid or unenforceable provision, in whole or in part, to the extent necessary to make such scope, duration, area, or provision valid and enforceable. 8. Miscellaneous. - -- ------------- 27 8.1 Governing Law. The internal laws of the State of California ------------- (irrespective of its choice of law principles) will govern the validity of this Agreement, the construction of its terms and the interpretation and enforcement of the rights and duties of the parties hereto. 8.2 Assignment; Binding Upon Successors and Assigns. No party hereto may ----------------------------------------------- assign any of its rights or obligations hereunder without the prior written consent of the other parties hereto. Subject to the preceding sentence, this Agreement will be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Nothing expressed or referred to in this Agreement will be construed to give any person or entity other than the parties to this Agreement any legal or equitable right, remedy or claim with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their respective heirs, successors and permitted assigns. 8.3 Severability. If any provision of this Agreement, or the application --- ------------ thereof, will for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the interest of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purpose of the void unenforceable provision. 8.4 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which will be deemed an original as regards any party whose signature appears thereon and all of which together will constitute one and the same instrument. This Agreement will become binding when one or more counterparts hereof, individually or taken together, will bear the signatures of all the parties reflected hereon as signatories. 8.5 Other Remedies. Except as otherwise provided herein, any and all -------------- remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby or by law on such party, and the exercise of any one remedy will not preclude the exercise of any other. 8.6 Amendment and Waivers. Any term or provision of this Agreement may be --------------------- amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof or default in the performance hereof will not be deemed to constitute a waiver of any other default or any succeeding breach or default. 8.7 Expenses. Except as set forth in Section 4.6, Telenetics, on the one -------- ----------- hand, and Sellers, on the other, will each bear their own expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby. 8.8 Attorneys' Fees. Should suit be brought to enforce or interpret any --------------- part of this Agreement, the prevailing party will be entitled to recover, as an element of the costs of suit and 28 not as damages, reasonable attorneys' fees to be fixed by the court (including, without limitation, costs, expenses and fees on any appeal). 8.9 Notices. All notices and other communications pursuant to this ------- Agreement shall be in writing and deemed to be sufficient if contained in a written instrument and shall be deemed given if delivered personally, telecopied, sent by nationally-recognized overnight courier or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following address (at such other address for a party as shall be specified by like notice): If to the Company to: eflex Wireless, Inc. 138 North Moon Avenue Brandon, Florida 33510-4400 Attention: President Telecopier: (813) 681-2119 With a copy to: Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, Texas 75202 Attention: Sally A. Schreiber, Esq. Telecopier: (214) 978-4323 If to Telenetics to: Telenetics Corporation 25111 Arctic Ocean Lake Forest, California 92630 Attention: Chief Executive Officer Telecopier: (949) 455-9324 With a copy to: Rutan & Tucker, LLP 611 Anton Boulevard, Suite 1400 Costa Mesa, California 92626 Attention: Larry A. Cerutti, Esq. Telecopier: (714) 546-9035 If to Saunders: William C. Saunders 5735 Prestwick Lane Dallas, Texas 75252 If to Parker: Terry S. Parker 8463 North 1175 West Monticello, Indiana 47960 If to Saunders or Parker, 29 then with a copy to: Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, Texas 75202 Attention: Sally A. Schreiber, Esq. Telecopier: (214) 978-4323 If to Didion: Edward L. Didion 9828 Gallagher Road Dover, Florida 33527 If to McLean: John D. McLean 400 Thornwyck Trail Roswell, Georgia 30076 Telecopier: (770) 643-7816 All notices and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of delivery, (b) in the case of a telecopy, when the party receiving the copy shall have confirmed receipt of the communication (including by means of a machine-generated confirmation), (c) in the case of delivery by nationally-recognized overnight courier, on the business day following dispatch, and (d) in the case of mailing, on the third business day following such mailing. 8.10 Construction of Agreement. This Agreement has been negotiated by the ------------------------- respective parties hereto and their attorneys and the language hereof will not be construed for or against either party. A reference to a Section or an Exhibit will mean a Section in, or Exhibit to, this Agreement unless otherwise explicitly set forth. The titles and headings herein are for reference purposes only and will not in any manner limit the construction of this Agreement which will be considered as a whole. This Agreement has been negotiated between unrelated parties who are sophisticated and knowledgeable in the matters contained in this Agreement and who have acted in their own self interest. In addition, each party affirms that it has been afforded the opportunity to receive independent advice from its respective legal counsel as to the advisability of entering into this Agreement and to consult and discuss the provisions of this Agreement with its respective legal counsel and fully understands the legal effect of each provision. Accordingly, any rule of law, including Section 1654 of the California Civil Code, as well as any other statute, law, ordinance or common law principles or other authority of any jurisdiction of similar effect, or legal decision that would require interpretation of any ambiguities in this Agreement against the party who has drafted it is not applicable and is hereby waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purpose of the parties, and this Agreement shall not be interpreted or construed against any party to this Agreement because that party or any attorney or representative for that party drafted this Agreement or participated in the drafting of this Agreement. FURTHER, THE LIMITATION OF LIABILITIES AND REMEDIES AND THE EXCLUSION OF DAMAGES AND WARRANTIES CONTAINED HEREIN REFLECT A BARGAINED FOR ALLOCATION OF RISKS BASED ON NEGOTIATIONS AND CONSIDERATION EXCHANGED BETWEEN THE PARTIES. 30 8.11 No Joint Venture. Nothing contained in this Agreement will be deemed ---------------- or construed as creating a joint venture or partnership between any of the parties hereto. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of any other party. No party will have the power to control the activities and operations of any other. The status of the parties hereto is, and at all times will continue to be, that of independent contractors with respect to each other. No party will have any power or authority to bind or commit any other. No party will hold itself out as having any authority or relationship in contravention of this Section. 8.12 Further Assurances. Each party agrees to cooperate fully with the ------------------ other parties and to execute such further instruments, documents and agreements and to give such further written assurances as may be reasonably requested by any other party to evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement. 8.13 Absence of Third Party Rights. No provisions of this Agreement are ----------------------------- intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder or partner of any party hereto or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof will be personal solely between the parties to this Agreement. 8.14 Entire Agreement. This Agreement and the schedules and exhibits hereto ---------------- constitute the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto. The express terms hereof control and supersede any course of performance or usage of trade inconsistent with any of the terms hereof. 8.15 Change in Telenetics Common Stock. If the outstanding shares of --------------------------------- Telenetics Common Stock are changed, reclassified, split, combined, or converted into or exchanged for another class of securities or securities of another issuer, whether by amendment to the articles of incorporation of Telenetics or by consolidation, merger or otherwise, appropriate adjustment shall be made to the terms of this Agreement to give effect to such change, reclassification, split, combination, conversion or exchange. [remainder of page intentionally left blank] 31 IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed by their duly authorized respective officers as of the date first above written. TELENETICS CORPORATION, a California corporation By: ----------------------------------------------- Michael A. Armani, President SELLERS: , ------------------------------------------------- Edward L. Didion, an individual , ------------------------------------------------- John D. McLean, an individual , ------------------------------------------------- William C. Saunders, an individual , ------------------------------------------------- Terry S. Parker, an unmarried man 32 Each of the undersigned spouses has executed this Agreement for purposes of confirming and acknowledging that they (i) are familiar with this Agreement and its contents, (ii) consent to the conveyance to Telenetics of their community property or other interest, if any, in shares of capital stock of the Company pursuant to this Agreement, (iii) acknowledge that the shares of Telenetics Common Stock and Options to be delivered to their spouse pursuant to this Agreement will be issued in the name of their spouse only, and that such issuance and their spouse's ownership and transfer of such securities is subject to the terms and conditions of this Agreement. ------------------------------------------------- Teralyn Didion, spouse of Edward L. Didion ------------------------------------------------- Kathleen M. McLean, spouse of John D. McLean ------------------------------------------------- Paula Saunders, spouse of William C. Saunders 33 EXHIBIT A TO EFLEX STOCK PURCHASE AGREEMENT Description of the Technology ----------------------------- 1. See attached Power Point Presentation, which is incorporated herein by reference. 2. See attached copy of the Company's website, which is incorporated herein by reference. 3. See attached Description of Methods/Devices for Registering and Controlling Remote Cellular Modules, which is incorporated herein by reference. FINAL Disclosure Schedule for Stock Purchase Agreement dated January 7, 2000 by and among Telenetics Corporation ("Telenetics") and Edward L. Didion, John D. McLean, William C. Saunders and Terry S. Parker ("Sellers") relating to the purchase and sale of the outstanding shares of capital stock of eflex Wireless, Inc. (the "Company") The following section numbers refer to the appropriate sections of the above-referenced Stock Purchase Agreement and are followed by descriptions of disclosures being made by Sellers. 2.4 Financial Statements -------------------- The only items that may be of significance and are not reflected, accrued for or shown in footnotes to the Financial Statements are as follows: a) John McLean's deferred Base Salary of $87,500 as described in Section 3 of his Employment and Noncompetition Agreement dated as of June 1, 1999 between Mr. McLean and the Company, as successor to Residential Utility Meter Service's, Inc. ("RUMS") and his $20,000 "Completion of Funding" bonus as described in Section 4 of such agreement. These amounts are being paid by Telenetics through a note being issued in connection with the closing. b) T. Keith Odom's annual $10,000 bonus, which was due after December 31, 1999 and is being paid by Telenetics as a signing bonus provided for in the employment agreement being entered into at the closing between Telenetics and Mr. Odom. 2.9 Absence of Undisclosed Liabilities ---------------------------------- The November 30, 1999 Financial Statements show an outstanding Accounts Payable of $40,797.22. As of that time, $18,573.80 was due to GTE Telecommunications Services Incorporated ("GTE TSI") and $23,195 was due to Munsch, Hardt, Kopf and Harr, P.C. If a contract amendment is completed with GTE TSI, GTE TSI has agreed to reduce the past due amounts to $5,537. If no such contract amendment is reached with GTE TSI, the Company would be liable to reimburse GTE TSI for the above payable plus any development or testing costs that GTE TSI has incurred on behalf of the Company pursuant to the Information and Network Products and Services Agreement dated January 16, 1999 between the Company and GTE TSI (the "Existing GTE Contract"). GTE TSI has provided significant testing and development support over the last several months, but they have not provided the Company with any estimated costs, because they believe the contract will be completed soon and their support to the Company is not billable to the Company if the contract is signed. Sellers believe that if billable, the costs will be less than $100,000. Page 1 of 6 1/7/2000 Sections 2.4, 2.21 and 2.22 of this disclosure schedule are incorporated herein by reference. The Company has received an invoice from Saunders & Parker, Inc. in the amount of $2,051 for legal fees incurred in connection with the formation of the Company. Also, the Company has paid a $10,000 retainer to Wayne Porter at Trenam, Kemper for patent work that is projected to total about $45,000. Finally, the Company has been making monthly payments under a lease/service agreement on a copy machine that is leased by PCS under an agreement that expires in April 2000; the Company has been paying GMAC Financial Services approximately $260 for vehicle leased by PCS for Ed Didion; and the Company has been reimbursing John McLean for an apartment leased by Mr. McLean in Brandon, Florida. In connection with the Stock Purchase Agreement, the Company has agreed to continue to make payments due on the copy machine through April 2000. In addition, the Company and Sellers have agreed that following the closing of the Stock Purchase Agreement, the Company will no longer be responsible for payments on the leased vehicle and the apartment. 2.10 Absence of Certain Changes or Events ------------------------------------ 2.10 (a) - Since the November 30, 1999 Financial Statements, the Company borrowed another $40,000 from Saunders & Parker, Inc. Thus, the 'Note Payable to S&P' in the Financial Statements has increased from $227,000 to $267,000. 2.12 Certain Agreements ------------------ Section 2.4 above is incorporated herein by reference. Also, repayment of the note from the Company to Saunders & Parker, Inc. is triggered by this transaction. 2.14 Intellectual Property --------------------- 2.14 (a) - The Company owns key intellectual property needed to provide its goods and services, but does not own all intellectual property rights it --- requires to conduct its business. To access remote devices using the 'Static TLDN' technology which the Company is in the process of patenting, the service requires the licensing of a couple of patents of GTE TSI. In the contract amendment that is under negotiation, GTE TSI will be granting the Company the right to operate under its patents. To access remote devices, the device may be 'paged' with one or more numbers. If more than one number is used (as the service currently is configured), this 'practices' a "Multi-NAM" patent held by another telecommunications company (possibly Nokia). If the Company continues to purchase its cellular transceivers from companies licensed to sell products incorporating the "Multi-NAM" patent (such as Ericcson and Standard), then the Page 2 of 6 1/7/2000 Company is effectively paying a royalty to use the "Multi-NAM" patent through the price it pays for the transceivers. There may be many other patents required to conduct the Company's business (e.g. cellular technologies, etc.), but the company intends to buy products from licensees so the Company does not need to know about these patents. If the Company chooses to not buy products from existing licensees (e.g. in order to further cost reduce the product), then the Company would be required to obtain licenses from and pay royalties to the companies holding the patents. There is a HighwayMaster patent on "data messaging using a feature request" (Patent #5,771,455), for which Sellers believe GTE TSI shares licensing rights. This patent appears to cover use of "feature requests" to send data to a host, which is what the Company uses and thus may become an issue. The Company asked GTE TSI why they had not included it in their list of patents in the contract amendment that is under negotiation, and their intellectual property attorney indicated that he did not think it applied to our service (only an opinion, not a full analysis of the issue). The Company's Chief Technical Officer feels the HighwayMaster patent would not hold up in a court test, because it is trying to patent "feature requests" that were defined in the public domain well over a year before the patent application was filed (i.e. it tries to patent the public IS41 Standard). The Sellers feel that the patent does not apply to the majority of the Company's services, as they are stationary, not mobile as claimed in the patent or they pass through GTE TSI, a licensee. But if the patent does apply to services of the Company, then the Company faces payment of royalties to HighwayMaster (or some arrangement), sublicensing through GTE TSI or others, or contesting the patent in court. The Company has considered having its patent attorney research and opine on the validity of the patent, but has not yet initiated that costly undertaking. 2.14 (c) - See Section 2.14 (a) above for patents that may be infringed by the Company's services. 2.21 Personal Property ----------------- The Company has purchased portable computers, desktop computers, printers, some documents, telephones, supplies and certain software (such as Office 2000, Visual Basic 6.0, Windows 98, etc.). The receipts for all these purchases are contained in the Company's expense reports submitted by its three employees. The remainder of the tangible personal property in the office is owned by Progressive Computer Software, Inc., which is a corporation wholly-owned by Ed Didion ("PCS"). Pursuant to the Bill of Sale, Assignment, Assumption, and Option Agreement dated August 27, 1999 between PCS and the Company (the "PCS Bill of Sale"), the Company purchased, among other things, all assets needed for the Company's telemetry/meter reading service system, all hardware and software developed by Ed Didion since January 1, 1998 and all assets acquired since May 10, 1999. The PCS Bill of Sale also gives the Company the unlimited right to use on a rent-free, cost-free basis any and all of PCS's furniture, fixtures, equipment and supplies that were not transferred pursuant to the PCS Page 3 of 6 1/7/2000 Bill of Sale, together with an option to acquire any or all of such items for their fair market value on or before April 30, 2000. 2.22 Real Property ------------- The building the Company occupies is leased from One Stop Financial Center, Inc. by PCS pursuant to a Lease Agreement dated November 17, 1998. Pursuant to the PCS Bill of Sale, PCS assigned to the Company PCS's rights under the lease agreement. the Company pays the monthly lease fees of about $1,076 to One Stop Financial Center, Inc. 2.24 Contracts --------- The Existing GTE Contract described in Section 2.9 above, as amended by that certain Agreement to Consent of Assignment and Termination dated effective September 1, 1999 between GTE TSI, RUMS and the Company, and the confidentiality and nondisclosure agreements listed below are the only existing contracts or agreements between the Company and persons or entities other than the Sellers and/or entities owned or controlled by one or more of the Sellers: James Gunn - 11/3/99 Telenetics - 10/15/99 HighwayMaster - 9/20/99 Bell South - 6/1/99 Paradigm Manufacturing - 3/4/99 Bob Bozman - 3/4/99 GTE TSI - 10/12/98 The Company is a party to only the following contracts or agreements with one or more of the Sellers and/or entities owned or controlled by one or more of the Sellers: a) Loan Agreement dated August 27, 1999 between the Company and Saunders & Parker, Inc. - to be terminated at the closing of the Stock Purchase Agreement b) Promissory Note dated August 27, 1999 in the principal amount of $305,000 made by the Company in favor of Saunders & Parker, Inc., which note supersedes the Promissory Note dated May 10, 1999 in the principal amount of $30,000, made by RUMS in favor of Saunders & Parker, Inc. - to be terminated at the closing of the Stock Purchase Agreement c) Security Agreement dated August 27, 1999 between the Company and Saunders & Parker, Inc. - to be terminated at the closing of the Stock Purchase Agreement d) Shareholders' Agreement dated August 27, 1999 between the Company and each of the Sellers - to be terminated at the closing of the Stock Purchase Agreement Page 4 of 6 1/7/2000 e) Voting Agreement dated August 27, 1999 between the Company and each of the Sellers - to be terminated at the closing of the Stock Purchase Agreement f) Push/Pull Agreement dated August 27, 1999 between the Company, William C. Saunders and Terry S. Parker - to be terminated at the closing of the Stock Purchase Agreement g) 5% Option Agreement dated August 27, 1999 between the Company and each of the Sellers - to be terminated at the closing of the Stock Purchase Agreement h) Option Agreement dated August 27, 1999 between the Company, William C. Saunders and Terry S. Parker - to be terminated at the closing of the Stock Purchase Agreement i) Consulting Agreement dated June 1, 1999 between Saunders & Parker, Inc. and the Company, as successor to RUMS - to be terminated at the closing of the Stock Purchase Agreement j) Employment and Noncompetition Agreement dated June 1, 1999 between John D. McLean and the Company, as successor to RUMS - to be terminated at the closing of the Stock Purchase Agreement k) Employment and Noncompetition Agreement dated June 1, 1999 between Edward L. Didion and the Company, as successor to RUMS - to be terminated at the closing of the Stock Purchase Agreement l) Memorandum of Agreement dated May 10, 1999 between Saunders & Parker, Inc., William C. Saunders, Terry S. Parker, Ed Didion and the Company, as successor to RUMS - to be terminated at the closing of the Stock Purchase Agreement m) Bill of Sale and Assignment Agreement dated August 27, 1999 between Edward L. Didion and the Company n) Bill of Sale, Assignment, Assumption and Option Agreement dated August 27, 1999 between Progressive Computer Software, Inc. and the Company o) Bill of Sale, Assignment and Assumption Agreement dated August 27, 1999 between RUMS and the Company The actual hardware design of the electronic card that is the basis of the Company's remote devices has been subcontracted through Paradigm Manufacturing. Paradigm has developed the card and owns the hardware design. Paradigm now wants to enter into a formal manufacturing contract with the Company before they provide the Company with the latest prototypes. The Company has not entered into any binding arrangements with Paradigm or any other parties (other than with GTE TSI, as described above) and is not Page 5 of 6 1/7/2000 and will not be responsible for any of Paradigm's costs unless and until a formal arrangement is executed. 2.26 Development Tools ----------------- The Company mainly uses generally available software development tools such as Visual Basic and Windows NT. It has not formally developed and documented tools of its own, other than macros and databases to assist in the development process. Page 6 of 6 1/7/2000 EX-2 3 NON-QUALIFIED STOCK OPTION AGREEMENT EXHIBIT 2 NON-QUALIFIED STOCK OPTION THIS OPTION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE TRANSFERRED OR OTHERWISE -------------- DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. January 7, 2000 TELENETICS CORPORATION WHEREAS, in connection with the services to be rendered to Telenetics Corporation, a California corporation (the "Company"), by Saunders & Parker, ------- Inc., a Texas corporation ("Holder"), pursuant to that certain Consulting ------ Agreement of even date herewith by and between the Company and Holder (the "Service Agreement"), the Company desires to grant to Holder a non-qualified - ------------------ stock option to purchase shares of the Company's common stock, no par value per share ("Common Stock"). ------------ NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING, the Company hereby grants to Holder an option to purchase (this "Option") up to Six Hundred ------ Thousand (600,000) shares (such shares as adjusted from time to time are referred to herein individually, each as an "Option Share," and collectively, as ------------ the "Option Shares") of Common Stock of the Company at the Exercise Price (as ------------- defined below). This Option may be exercised in accordance with the terms of this Option by surrendering this Option, with (i) the form of Election to Purchase set forth hereon duly executed by Holder and (ii) the form of Restricted Stock Letter attached hereto duly executed by Holder (unless the sale of the Option Shares is registered under the Securities Act), at the Company's principal executive office ("Office"), and by paying in full the Exercise Price, ------ plus transfer taxes, if any, in United States currency by cash, check or money order payable to the order of the Company. 1. Duration, Vesting and Exercise of Option. ---------------------------------------- (a) This Option shall vest and become exercisable in full on the date hereof. (b) This Option (to the extent not earlier exercised) shall expire on January 6, 2005 (such date being referred to herein as the "Expiration ---------- Date"). If this Option is not surrendered to the Company for exercise in ---- accordance with Section 1(c) prior to the close of business on the ------------ Expiration Date it shall be void. (c) This Option may be exercised, to the extent not previously exercised, in whole or in part, prior to the Expiration Date at the per Option Share Exercise Price determined in accordance with Sections 2 and 4. ---------------- In order to exercise such right, Holder shall surrender this Option to the Company at the Office with the form of Election to Purchase and the Restricted Stock Letter (unless the sale of the Option Shares is registered under the Securities Act) attached hereto duly completed and signed, and shall tender payment in full of the Exercise Price to the Company for the Company's account, together with such taxes as are specified in Section 8, --------- for each Option Share with respect to which this Option is being exercised. If this Option is exercised as to less than all of the Option Shares purchasable, one or more new option(s) shall be issued to Holder for the remaining number of Option Shares evidenced by this Option. 2. Exercise Price. Subject to adjustment pursuant to Section 4, the -------------- --------- price per share at which Option Shares shall be purchasable upon exercise of this Option (the "Exercise Price") shall be $1.75. -------------- 3. Issuance of Option Share Certificates. ------------------------------------- (a) Upon surrender of this Option, delivery of an Election to Purchase and delivery of a Restricted Stock Letter (if the sale of the Option Shares is not registered under the Securities Act) in the forms attached hereto and payment of the Exercise Price and transfer taxes, the Company shall issue and deliver certificates representing shares of Common Stock ("Certificates") in the manner set forth in the Election to Purchase ------------ delivered by Holder to the Company. (b) If the shares of Common Stock deliverable upon exercise of this Option are not registered under the Securities Act, the Certificates shall bear a legend in substantially the following form: "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE 'ACT'), --- AND MAY NOT BE RESOLD, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT REGISTRATION UNDER SAID ACT IS NOT REQUIRED." 4. Adjustment of Exercise Price and Number of Option Shares Purchasable. The -------------------------------------------------------------------- Exercise Price and the number and kind of Option Shares purchasable upon the exercise of this Option are subject to adjustment from time to time upon the occurrence of the events specified in this Section 4. If, by reason of any --------- merger, consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-off, spin-off, combination of shares, exchange of shares, or other similar changes in the capital structure of the Company (each, a "Reorganization"), the outstanding securities of the -------------- same class as the Option Shares (the "Option Share Class of Securities") are -------------------------------- substituted or exchanged for, combined or changed into any cash, property or other securities or into a greater or lesser number of shares, the number and/or kind of shares and/or interests subject to this Option and the Exercise Price shall be appropriately adjusted to prevent dilution or enlargement of the rights of Holder so that, thereafter, this Option shall be exercisable for the securities, cash and/or other property that would have been received in respect of the Option Shares if this Option had been exercised in 2 full immediately prior to such event. Such adjustments shall be made successively whenever any event described in the foregoing sentence occurs. 5. Fractional Option Shares. The Company shall not be required to issue ------------------------ fractions of Option Shares upon exercise of this Option or to distribute certificates that evidence fractional Option Shares. All fractions of Option Shares to which Holder would otherwise be entitled shall be aggregated and in lieu of such remaining fractional Option Share, there shall be paid to Holder at the time this Option is exercised as herein provided an amount in cash equal to the stated fraction of the fair market value of an Option Share as determined in good faith by the Board of Directors of the Company. 6. Reservation and Issuance of Option Shares. The Company represents and ----------------------------------------- warrants that (a) there have been reserved, and the Company shall at all times keep reserved, out of its authorized Common Stock a number of shares of Common Stock sufficient to provide for the exercise of the rights of purchase represented by this Option, and (b) there are no restrictions in the Company's articles of incorporation or bylaws that prevent the Company from issuing shares of its Common Stock for the purpose of enabling it to satisfy any obligation to issue Option Shares upon exercise of this Option in accordance with its terms. The Company covenants and agrees that it will not amend its articles of incorporation or bylaws in any manner, or take any other action, that could adversely affect the Company's ability to issue Option Shares upon exercise of this Option. The Company further represents and warrants that all shares of its Common Stock issued upon exercise of this Option will, upon issuance in accordance with the terms of this Option, (a) be legally issued and free from all taxes, liens, charges, encumbrances and security interests created by the Company with respect to the issuance thereof and (b) be duly and validly issued, fully paid and nonassessable Common Stock as to which no holder shall have any liability other than Holder's payment of the Exercise Price. 7. Mutilated or Missing Option Certificates. If this Option is mutilated, ---------------------------------------- lost, stolen or destroyed, the Company shall issue and deliver, in exchange and substitution for and upon cancellation of the mutilated Option, or in lieu of and substitution for the lost, stolen or destroyed Option, a new option in substantially the same form as this Option and representing an option to purchase an equivalent number of Option Shares, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of this Option and an indemnity or bond, if requested, satisfactory to the Company. Holder shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. 8. Payment of Taxes. The Company will pay all documentary stamp taxes ---------------- attributable to the issuance of Option Shares issuable upon the exercise of this Option; provided, however, that the Company shall not be required to pay any tax -------- ------- or taxes that may be payable in respect of any transfer involved in the issuance of any options or any Option Share certificates in a name other than that of Holder, and the Company shall not be required to issue or deliver such Option Share certificates unless and until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 3 9. Certain Notices to Holder. Upon any adjustment to the number of Option ------------------------- Shares issuable pursuant to exercise of this Option or to the Exercise Price pursuant to Section 4, the Company, within fifteen (15) calendar days --------- thereafter, shall cause to be given to Holder, at his address appearing on the Company's records, written notice of such adjustments in accordance with this Section 9. Where appropriate such notice may be given in advance and included as - --------- part of the notice required to be mailed under the other provisions of this Section 9. If: - --------- (a) The Company authorizes the issuance or distribution of securities or assets to holders of its shares of Common Stock or makes any distribution (other than cash dividends) to the holders of its shares of Common Stock; (b) The Company becomes a party to any consolidation or merger for which approval of any shareholder of the Company is required, conveys or transfers all or substantially all of its properties, assets, or business, shall engage in any reorganization or recapitalization or makes any tender or exchange offer for shares of its Common Stock; (c) The Company becomes subject to voluntary or involuntary dissolution, liquidation or winding up; or (d) The Company proposes to take any other action that would require an adjustment of the Exercise Price pursuant to Section 4; --------- then the Company shall cause to be given to Holder at his address appearing on the Company's records, at least fifteen (15) calendar days prior to the applicable record date hereinafter specified, a written notice in accordance with this Section 9 stating (i) the date as of which the holders of record of --------- Common Stock to be entitled to receive any such securities or assets or distribution are to be determined, (ii) the initial expiration date set forth in any tender or exchange offer made by the Company for shares of its Common Stock, (iii) the date on which any such consolidation or merger, conveyance, transfer, reorganization or recapitalization, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange such Common Stock for securities or other property that may be deliverable upon such consolidation or merger, conveyance, transfer, reorganization or recapitalization, dissolution, liquidation or winding up, or (iv) the date on which any other action that would require an adjustment of the Exercise Price pursuant to Section 4 is expected to become effective or be consummated and any --------- relevant record date for holders of Common Stock related thereto. The failure to give the notice required by this Section 9 or any defect therein shall not --------- affect the legality or validity of any distribution, right, option, consolidation, conveyance, transfer, reorganization, dissolution, liquidation or winding up or the vote upon any action. Nothing contained in this Option shall be construed as conferring upon Holder the right to vote or to consent or to receive notice as a shareholder in respect of any rights or other matter whatsoever as a shareholder of the Company, or any other rights or liabilities as a shareholder of the Company. 4 10. Nontransferability of Option. This Option is not transferable by Holder ---------------------------- voluntarily, involuntarily or by operation of law, except that this Option may be transferred in whole or in part by Holder to William C. Saunders and/or Terry S. Parker, and if such transfer occurs, this Option may be further transferred by Mr. Saunders or Mr. Parker only by will, the laws of descent and distribution or a qualified domestic relations order. 11. Notices. Any notice or demand authorized by this Option to be given or made ------- by Holder to or on the Company shall be sufficiently given or made if personally delivered or sent by first class United States mail, by overnight courier guaranteeing next-day delivery, or by facsimile confirmed by letter, addressed (until another address is given in writing by the Company) to the Office. Any notice pursuant to this Option to be given by the Company to Holder shall be sufficiently given if personally delivered or sent by first class United States mail, by overnight courier guaranteeing next-day delivery, or by facsimile confirmed by letter, addressed (until another address is filed in writing by Holder with the Company) to the address specified in the Company's records. 12. Supplements and Amendments. The Company may from time to time supplement or -------------------------- amend this Option without the consent or concurrence of Holder in order to cure any ambiguity, manifest error or other mistake in this Option. 13. Intentionally Omitted. --------------------- [remainder of page intentionally left blank] 5 14. Successors. All the representations, warranties, agreements, covenants and ---------- provisions of this Option by or for the benefit of the Company or Holder shall bind and inure to the benefit of their respective permitted heirs, successors and assigns hereunder. 15. Governing Law. This Option shall be deemed to be a contract made under the ------------- laws of the State of California and for all purposes shall be construed in accordance with the internal laws of the State of California without regard to conflicts of laws principles. 16. Benefits of This Agreement. Nothing in this Option shall be construed to -------------------------- give to any person or entity other than the Company and Holder any legal or equitable right, remedy or claim under this Option, and this Option shall be for the sole and exclusive benefit of the Company and Holder, except as otherwise provided in Section 14. ---------- 17. Invalidity of Provisions. If any provision of this Option is or becomes ------------------------ invalid, illegal or unenforceable in any respect, such provision shall be deemed amended to the extent necessary to cause it to express the intent of the parties to the maximum possible extent and be valid legal and enforceable. The invalidity or deemed amendment of such provision shall not affect the validity, legality or enforceability of any other provision hereof. 18. No Impairment. The Company will not, by amendment of its articles of ------------- incorporation or through any reorganization, recapitalization transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Option and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of Holder against impairment. 19. Section Headings. The section headings contained in this Option are for ---------------- convenience only and shall be without substantive meaning or content. The Company has caused this Option to be duly executed as of the day and year first above written. TELENETICS CORPORATION By: --------------------------------------- Michael A. Armani, President 6 TELENETICS CORPORATION NON-QUALIFIED STOCK OPTION ELECTION TO PURCHASE The undersigned hereby irrevocably elects to purchase ____________ Option Shares issuable upon the exercise of the Non-Qualified Stock Option dated January 7, 2000 ("Option"), and requests that certificates for such Option ------ Shares be issued and delivered as follows: ISSUE TO: ------------------------------------------------------------ (Name) ------------------------------------------------------------ (Address, including Zip Code) ------------------------------------------------------------ (Social Security or Tax Identification Number) DELIVER TO: ------------------------------------------------------------ (Name) at --------------------------------------------------------- (Address, including Zip Code) If the number of Option Shares hereby exercised is less than all the Option Shares represented by the Option, the undersigned requests that a new option representing the number of Option Shares not exercised be issued and delivered as set forth above or otherwise as the undersigned shall direct in writing. In full payment of the purchase price of the Option Shares being issued upon exercise of the Option and transfer taxes, if any, the undersigned hereby tenders payment of $_____________ by cash, check or money order payable in United States currency to the order of Telenetics Corporation. Dated: ---------------------- ----------------------------------------- (Signature) (Signature must conform in all respects to name of holder as specified on the face of the Option.) PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER OF HOLDER EXHIBIT A --------- FORM OF RESTRICTED STOCK LETTER THE UNDERSIGNED (hereinafter referred to as "Purchaser") is exercising the --------- Non-Qualified Stock Option tendered with this Restricted Stock Letter, and in connection with such exercise, makes the following representations and warranties to Telenetics Corporation (the "Company") with the knowledge and ------- intent that the Company shall be entitled to rely thereon in delivering shares of the Company's Common Stock ("Shares") to Purchaser upon exercise of the Non- ------ Qualified Stock Option: 1. Purchaser is acquiring the Shares for investment for Purchaser's own account, and not with a view to or for sale in connection with any distribution thereof. Purchaser understands that the Shares to be purchased have not been registered pursuant to the Securities Act of 1933, as amended (the "Act"), and --- the offer and sale of the Shares is intended to be exempt from registration under the Act, which exemption depends upon, among other things, the bona fide nature of the investment intent and the accuracy of Purchaser's representations as expressed herein. 2. Purchaser is an "accredited investor" as defined in the rules and regulations of the Act and Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of Purchaser's investment in the Shares, and Purchaser is capable of bearing the economic risks of such investment, including the risk of loss of Purchaser's entire investment in the Shares. 3. Purchaser acknowledges that the Company has made available to Purchaser or Purchaser's agents all documents and information relating to an investment in the Shares requested by or on behalf of Purchaser. 4. All Shares issued on delivery of this Restricted Stock Letter shall bear the legend set forth in Section 3 of the annexed Non-Qualified Stock Option --------- and the Shares received on delivery of this Restricted Stock Letter shall be subject to the restrictions set forth therein. Executed ---------------------- Purchaser: --------------------------------------- Signature: --------------------------------------- 2 EX-3 4 CONSULTING AGREEMENT EXHIBIT 3 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement") is made and entered into as of --------- this 7th day of January, 2000 (the "Effective Date"), by and between TELENETICS -------------- CORPORATION, a California corporation with offices at 25111 Arctic Ocean, Lake Forest, California 92630 (the "Company"), and SAUNDERS & PARKER, INC., a Texas ------- corporation with offices at the address set forth on the signature page hereof ("Consultant"), who may be collectively referred to as the "Parties." ---------- ------- R E C I T A L S - - - - - - - - A. The Company, William C. Saunders and Terry S. Parker, who are the principals of Consultant (the "Principals"), and certain other individuals have ---------- entered into a Stock Purchase Agreement of even date herewith (the "Stock ----- Purchase Agreement") pursuant to which the Company is purchasing all of the - ------------------ outstanding capital stock of eflex Wireless, Inc., a Delaware corporation ("eflex"). ----- B. The parties acknowledge that Consultant currently acts as a consultant to eflex and has abilities and expertise that are unique and valuable to the Company and, in connection with the Stock Purchase Agreement, the Company desires to retain Consultant to provide certain consulting services for the Company, and Consultant is willing to provide the consulting services requested by the Company. C. The Company and Consultant have determined that such engagement of Consultant is mutually beneficial and should be subject to a mutually acceptable written agreement, and that the retention by eflex of the Consultant as a consultant is being terminated concurrently with the effectiveness of this Agreement. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing premises, the following mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the Parties hereto, the Parties hereto agree, intending to be legally bound, as follows: 1. Services To Be Performed By Consultant. -------------------------------------- 1.1 Scope and Nature of Services. Commencing on the Effective Date, the ---------------------------- Company agrees to engage Consultant, and Consultant agrees to offer Consultant's services to the Company, as a consultant. Consultant agrees to render Consultant's best business expertise, advice and services to the directors, executive officers, managers or employees of the Company as the Company may reasonably request concerning the business of the Company including, without limitation, the business of eflex. Consultant shall render such services at such locations as the Company, within its sole discretion, deems appropriate. This Agreement shall not be construed as obligating the Company to request any amount (or any specific amount) of consulting services from Consultant. 1.2 Method of Performing Services. Consultant shall provide the consulting ----------------------------- services to the Company promptly upon request by the Company during the term of this Agreement, and it shall be the duty of Consultant in providing these consulting services to make periodic reports to the Company, from time to time, as the Company may deem appropriate. 1.3 Place of Work. The consulting services described herein will be ------------- carried out at such reasonable locations as may be agreed upon by the Company and Consultant from time to time; provided, however, that no Principal shall be required by the Company to relocate his home in order to perform services hereunder. If the Company determines that it is in the best interest of the Company for the consulting services described herein to be carried out at the facilities of the Company, such services shall be performed at the facilities of the Company and the Company shall provide Consultant with such entry and access to the facilities of the Company (during normal business hours, unless otherwise authorized by the Company) to the extent necessary to allow Consultant to perform Consultant's obligations under this Agreement. Except as provided above, it will be the responsibility of the Consultant to obtain adequate work and administrative space at Consultant's expense. 2. Term and Termination. -------------------- 2.1 Term. The term of this Agreement (the "Term") shall commence on the ---- ---- Effective Date and shall continue for a period of five years unless terminated earlier pursuant to the terms of this Agreement. This Agreement may be terminated by the Company for Good Cause (as defined below) effective upon delivery of written notice to Consultant given at any time. "Good Cause" shall ---------- exist if: (a) A Principal is convicted of a felony, or a misdemeanor constituting moral turpitude; (b) A Principal in bad faith commits any act (including, but not limited to, any act that would constitute fraud, misappropriation, dishonesty, or embezzlement) or in bad faith omits to take any action to the material detriment of the Company or any of its affiliates; (c) A Principal intentionally commits during the Term of this Agreement any act of material misconduct (including, but not limited to, sexual harassment, racial vilification, or unlawful discrimination); (d) Consultant fails or refuses to perform consulting duties assigned to Consultant by the Company and fails to correct such breach within five days after notice is given to Consultant by the Company of such breach; (e) Consultant becomes unable fully to discharge its duties hereunder for a period of more than 30 consecutive days or more than 45 days within any two-month period; 2 (f) In the opinion of a medical doctor retained by the Company, after a physical examination and reasonable diagnostic procedures, a Principal is found to be addicted to any drug, including alcohol; (g) Consultant breaches any term of this Agreement and fails to correct such breach within five days after notice is given to Consultant by the Company of such breach; or (h) Consultant attempts to resign in anticipation of discharge for any reason mentioned in Section 2.1(a) through Section 2.1(g), or the Company -------------- -------------- accepts Consultant's resignation in lieu of making a termination for any reason mentioned in Section 2.1(a) through Section 2.1(g). -------------- -------------- 2.2 Effect of Termination. Consultant agrees that in connection with the --------------------- termination of this Agreement for any reason, except as set forth in Section ------- 2.3, Consultant shall only be entitled to receive the pro rata share of the - --- consulting fee earned prior to the termination in accordance with Section 3.1, ----------- plus reimbursement in accordance with Sections 3.3 and 3.4 for materials and -------------------- travel expenses incurred prior to the termination. Such payments described in this Section 2.2 and in Section 2.3, if applicable, shall be the exclusive and ----------- ----------- sole remedy of Consultant for any termination of this Agreement, and Consultant covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of this Agreement. 2.3 Early Termination. Consultant may terminate this Agreement by delivery ----------------- of written notice to the Company if the Company breaches any term of this Agreement and fails to correct such breach within thirty days after notice of such breach is received by the Company from Consultant. In the event of such termination, the Company shall pay to Consultant as liquidated damages the consulting fee for the period commencing on the day following the date of termination and ending on the date the Term otherwise would have expired pursuant to Section 2.1, at such intervals and otherwise in such manner as such ----------- consulting fee would have been paid if Consultant would have remained in the active service of the Company. 3. Consideration and Payments. -------------------------- In consideration of the consulting services to be provided by Consultant pursuant to this Agreement: 3.1 Consulting Fee. The Company shall pay Consultant a consulting fee of -------------- $4,166.67 per month, which consulting fee shall be increased to $8,333.33 per month for each month of the Term following the month in which the Company receives at least $2,500,000 in gross proceeds from the sale of equity securities of the Company for the account of the Company. The consulting fee shall be payable in advance in monthly installments commencing on January 15, 2000 and shall be prorated for any partial month occurring during the Term of this Agreement. 3.2 Options. Concurrently with the execution of this Agreement, Consultant ------- shall receive an option to purchase shares of Common Stock of the Company, a copy of which options shall be attached hereto as Exhibit A and incorporated --------- herein by reference. 3 3.3 Cost of Materials. If Consultant shall reasonably determine that ----------------- Consultant will be unable to perform the consulting services under this Agreement without procuring certain materials with an aggregate cost exceeding $100, Consultant shall promptly notify the Company in writing of its need to procure such materials and the date by which such materials must be received by Consultant. Upon receipt of such notice from Consultant, the Company shall thereafter have the option to either procure the materials itself or, in the alternative, authorize Consultant to procure the materials directly. If the Company should elect to authorize Consultant to procure the materials directly, it shall notify Consultant of such election, and the Company agrees to reimburse Consultant within 10 business days of its receipt of a separate invoice from Consultant for Consultant' actual cost of the materials as authorized by the Company. 3.4 Travel Expenses. Upon submission of a separate monthly invoice, the --------------- Company shall also reimburse Consultant for all travel-related expenses reasonably incurred by Consultant in connection with this Agreement, including without limitation, air fare, hotel and rental car expenditures. The Company agrees to pay the amounts due under this Section 3.4 on or before the 30th day ----------- of the month following the month of submission of such invoice. 4. Nondisclosure and Confidentiality. --------------------------------- In the course of Consultant providing the consulting services under this Agreement, Consultant will have access to the Company's trade secrets, proprietary information and confidential information, the use, application or disclosure of any of which will cause substantial and possible irreparable damage to the business and asset value of the Company. Accordingly, Consultant accepts and agrees to be bound by the following provisions: 4.1 Definitions. For the purposes of this Agreement, the following ----------- definitions apply: (a) "Trade Secrets" shall specifically include, but are not limited ------------- to, the Company's plans, customer lists, compilations, program devices, formulas, designs, ideas, concepts, prototypes, drawings, methods, techniques, systems, processes, procedures, computer software, programs or codes, whether tangible or intangible, and whether or how stored, compiled or memorialized physically, electronically, graphically, photographically or in writing (including, without limitation, source and object codes, flow charts, algorithms, coding sheets, doctrines, subroutines, compilers, assemblers, design concepts and related documentation and manuals), discoveries, hardware, machines and devices whether patentable or not, including, without limitation, the nature and results of technical and nontechnical research and development activities, "know-how," schematics, parts lists and specifications. Trade Secrets also includes any information described above which the Company treats as proprietary or designates as a Trade Secret, whether or not owned or developed by the Company or Consultant. Trade Secrets also include any information described in this paragraph (a) which the Company obtains from another party which the Company treats as proprietary or designates as Trade Secrets, whether or not owned or developed by the Company. (b) "Confidential Information" shall mean any data, materials or ------------------------ information, other than Trade Secrets, that is of value to the Company and is not generally known to competitors of the Company. Confidential Information shall include, but not be limited 4 to, the identity of various suppliers, information about the Company's executives and employees, financial information, business and marketing plans, marketing techniques, price lists, pricing policies and the Company's business methods. Confidential Information also includes any information described above which the Company obtains from a third party and which the Company treats as proprietary or designates as Confidential Information, whether or not owned by or developed by the Company. Anything in this Agreement to the contrary notwithstanding, Trade Secrets and Confidential Information shall not include information which is (i) lawfully disclosed to Consultant by a third party unrelated to the Company, (ii) generally known in the telemetry services industry other than by the unauthorized actions of Consultant, or (iii) in the public domain other than by the unauthorized actions of Consultant. 4.2 Proprietary Information. Consultant hereby acknowledges that all Trade ----------------------- Secrets and Confidential Information are the exclusive property of the Company. Specifically, Consultant acknowledges and agrees that all Trade Secrets and Confidential Information which Consultant has developed, or in which Consultant has participated in the development, while engaged by the Company or, which Consultant participates in the development in the future during the term of its engagement by the Company shall be the exclusive property of the Company and Consultant shall have no ownership interest therein. Consultant further agrees that it will not, directly or indirectly, incorporate any Trade Secrets or Confidential Information, or any part thereof, into any system, product, service or other item later designed or prepared by Consultant for any party or parties other than the Company. 4.3 Prohibition on Use of Trade Secrets. Consultant shall not, directly or ----------------------------------- indirectly, in any manner or form use, disclose, provide or otherwise make available in any manner in whole or in part any Trade Secrets during the period Consultant has access to the Trade Secrets and thereafter, other than to the Company's employees in the scope of their employment, or to other consultants performing services for the Company in connection with the consulting services performed by Consultant hereunder. 4.4 Prohibition on Use of Confidential Information. Consultant shall not, ---------------------------------------------- directly or indirectly, in any manner or form use, disclose, provide or otherwise make available in any manner in whole or in part any Confidential Information during the period Consultant has access to the Confidential Information and thereafter, other than to the Company's employees in the scope of their employment, or to other consultants performing services for the Company in connection with the consulting services performed by Consultant hereunder. 4.5 Noncompetition and Nonsolicitation. Consultant expressly promises and ---------------------------------- agrees that Consultant will fully comply with the covenants and provisions contained in Section 7 of the Stock Purchase Agreement, which provisions are --------- incorporated herein by reference, as if such provisions were set forth in full herein. 4.6 Prohibition on Reproduction. Consultant shall have no right to print --------------------------- or copy, directly or indirectly, in whole or in part, any Trade Secrets or Confidential Information or any documentation pertaining thereto, except as required to perform Consultant's responsibilities hereunder. 5 4.7 Protective Measures. Consultant shall take all necessary and ------------------- appropriate action, whether by instruction, agreement or otherwise to ensure the protection, confidentiality and security of the Trade Secrets and Confidential Information and to satisfy Consultant's obligations under this Agreement. The standard of care which Consultant shall employ shall conform at least to industry standards and shall be adequate to ensure the protection, confidentiality and security of the Trade Secrets and Confidential Information. Consultant agrees that Consultant's obligations with respect to the confidentiality and security of all materials disclosed to Consultant under the terms of this Agreement shall survive the termination of this or any agreement or relationship between the Company and Consultant or the performance of consulting services by Consultant on behalf of the Company. 4.8 Return of Materials. All notes, data, reference materials, sketches, ------------------- disks, memoranda, tapes, manuals, files, documentation and records contained in any medium (written document, electronic or otherwise) in any way relating to any of the Trade Secrets or Confidential Information or the Company's business shall belong exclusively to the Company and Consultant agrees to turn over to the Company all copies of such materials in its possession at the request of the Company or, in the absence of such a request, upon the termination of Consultant's consulting services for the Company within three business days of such termination. Consultant further agrees, upon request by the Company, to promptly remove from Consultant's possession and dominion and return to the Company or positively destroy any software programs or data entered into Consultant's computer or libraries pertaining to the Trade Secrets and Confidential Information. 5. Intentionally Omitted. --------------------- 6. Employees and Agents of Consultant. ---------------------------------- Except as otherwise approved by the Company in writing, Consultant shall provide the Company with ten days' advance notice prior to employing or retaining any employee, subcontractor, or agent (other than the Principals) to assist with or contribute to Consultant's duties, obligation or performance hereunder. The Company reserves the right to approve or reject any such employee, contractor or agent, such approval not to be unreasonably withheld. Consultant agrees that it shall have and maintain, for so long as this Agreement is in effect, written agreements with all employees, subcontractors or agents engaged by Consultant who assist with or contribute to Consultant's duties, obligations or performance hereunder. Such written agreements shall contain provisions sufficient to establish the rights and benefits contemplated by, and to assure compliance with this Agreement, including, but not limited to, the provisions of Sections 4 and 5, above. Consultant shall furnish the Company with ---------------- copies of such written agreements and shall cause such subcontractors, employees and agents to execute and deliver such further certificates, acknowledgments, waivers and assignments as may be appropriate to give effect to the foregoing. 7. Applicability to Prior Dealings. ------------------------------- Consultant hereby acknowledges that Consultant and Consultant's employees and agents may have had access to Trade Secrets and Confidential Information prior to the effective date of 6 this Agreement. Consultant hereby agrees that any Trade Secrets and Confidential Information Consultant and Consultant's employees and agents may have acquired prior to the effective date of this Agreement shall be subject to the terms and conditions of Sections 4 and 5 above, and that Consultant shall cause each of ---------------- Consultant's employees and agents to treat such Trade Secrets and Confidential Information accordingly. 8. Survival of Obligations Beyond Termination. ------------------------------------------ The obligations of Consultant under Sections 4 through 7 and the warranties -------------------- and remedies under Sections 9 through 12 shall not terminate upon the --------------------- termination of this Agreement, but, rather, shall continue in effect thereafter. 9. Injunctive Relief. ----------------- Consultant hereby acknowledges and agrees that any violations of Sections -------- 4, 5, 6 and 7 will cause damage to the Company in an amount or amounts difficult - ------------- to ascertain and any remedies at law for such damages will be inadequate. Accordingly, in addition to any other relief to which the Company may be entitled at law or in equity, the Company shall be entitled to temporary and/or permanent injunctive or other equitable relief from any such breach or threatened breach by Consultant without proof of actual damages that have been or may be caused to the Company by such breach or threatened breach. 10. Warranty. -------- 10.1 Express Warranties. As of the date hereof and as of all dates prior to ------------------ the expiration of this Agreement, Consultant warrants and represents to the Company the following: 10.1.1 Disclosure by Consultant. Consultant hereby acknowledges that ------------------------ the Company does not wish to receive from Consultant any information not owned by the Company which may be considered confidential or proprietary to Consultant or to any third party. Any information or materials disclosed or to be disclosed by Consultant to the Company is not confidential or proprietary to Consultant or to any third party. Accordingly, no obligation of any kind is assumed by or to be implied against the Company by virtue of this Agreement or the relationship between the Parties hereunder or with respect to any information received (in whatever form or whenever received) from Consultant relating to the subject matter hereof, and the Company will be free to reproduce and to use and disclose to others such information without limitation. Neither this Agreement nor the relationship between the Parties, will impair the right of the Company to develop, make, use, procure, or market products or services now or in the future which may be competitive with those offered by Consultant, nor require the Company to disclose any planning or other information to Consultant. Consultant covenants and agrees not to incorporate into any work performed or created hereunder any material owned or copyrighted or confidential to any third party. 10.1.2 Authority. Consultant has the authority to enter into this --------- Agreement. The execution of this Agreement by Consultant and the performance of the services 7 contemplated hereunder do not (and will not) violate any other agreement, policy or order to which Consultant is subject. 10.2 Breach of Warranty. If Consultant is in breach of any warranty or ------------------ representation under this Agreement, the Company shall have all rights and remedies available to it in law and in equity. 11. Status As Independent Contractor. -------------------------------- The Parties are entering into this Agreement as independent contractors and no employment relationship, partnership, joint venture or other association shall be deemed created by this Agreement. 11.1 Taxes. The Company shall pay Consultant directly, without payroll ----- deductions of any kind whatsoever, all monies which may become due and payable hereunder, as, when, and to the extent those payments become payable. Consultant shall have the entire responsibility to discharge all the obligations under federal, state or local laws, regulations or orders now or hereafter in effect, relating to taxes, unemployment compensation or insurance (including, but not limited to, the Unemployment Insurance Code of the State of California), social security, worker's compensation, disability pensions and tax withholdings (collectively, "Tax Obligations"). Consultant shall fully indemnify the Company --------------- from and against all liabilities, obligations, damages, assessments, penalties, interest, costs (including, without limitation, any attorneys' fees) and other expenses incurred by the Company resulting from Consultant's failure to properly discharge its Tax Obligations or otherwise arising out of or related to the engagement of Consultant by the Company pursuant to this Agreement. 11.2 Authority. Consultant is not authorized to bind the Company or to --------- incur any obligation or liability on behalf of the Company except as expressly authorized by the Company in writing. 11.3 Benefits. Consultant acknowledges that the Company shall not be -------- providing health insurance, retirement plan contributions, workers' compensation or other benefits to Consultant and/or Consultant's employees, if any, and Consultant shall be solely responsible for obtaining and/or providing such benefits. 11.4 Methods. Except as otherwise provided herein, Consultant shall be free ------- to pursue whatever means Consultant chooses in performing the services described herein. The Company recognizes that this is not an exclusive agreement and the Consultant may perform services for other parties. 11.5 Training. Consultant shall be responsible for providing, at -------- Consultant's expense, any training or continuing education required by Consultant and/or Consultant's employees, if any, unless such training or continuing education is specifically requested by the Company. If the Company requests Consultant and/or Consultant's employees to obtain specific training or continuing education, the Company shall be responsible for the expense of such training and/or continuing education. 8 12. General Provisions. ------------------ 12.1 Attorneys' Fees and Costs. In any suit, action or proceeding ------------------------- (including arbitration) arising out of or related to the Agreement or the transactions contemplated hereby, including any appeals (an "Action"), the non- ------ prevailing party in that Action shall pay to the prevailing party a reasonable sum for ordinary and necessary attorneys', paralegals', accountants' and experts' fees and costs incurred in connection with prosecuting or defending the Action and/or enforcing any judgment, order, ruling, or award (collectively, a "Decision") granted therein, in addition to any damages and costs which the -------- prevailing party otherwise would be entitled. Any Decision entered in the Action shall contain a specific provision providing for the recovery of reasonable attorneys', paralegals', accountants' and experts' fees and costs incurred in enforcing the Decision. The court or arbitrator may fix the amount of reasonable attorneys', paralegals', accountants' and experts' fees and costs on the request of either party. For the purposes of this Section 12.1, all attorneys', ------------ paralegals', accountants' and experts' fees and costs shall include, but not be limited to, fees and costs incurred in the following: (i) postjudgment motions and collection actions; (ii) contempt proceedings; (iii) garnishment, levy, and debtor and third party examinations; (iv) discovery; and (v) bankruptcy. 12.2 Notices. All notices, demands or other communications which are ------- required or are permitted to be given in this Agreement shall be in writing and shall be deemed to have been sufficiently given (i) upon personal delivery, (ii) the third business day following due deposit in the United States mail, postage prepaid, and sent certified mail, return receipt requested, correctly addressed or (iii) when receipt is acknowledged if sent via facsimile transmission as follows: If to the Company, to the address set forth in the introductory paragraph of this Agreement. If to Consultant, to the address set forth below Consultant's signature at the end of this Agreement. If notice is sent to the Company, a copy shall be sent to: Larry A. Cerutti, Esq. Rutan & Tucker, LLP 611 Anton Boulevard, 14th Floor Costa Mesa, California 92626 Telephone: (714) 641-5100 Facsimile: (714) 546-9035 If notice is sent to Consultant, a copy shall be sent to: Sally A. Schreiber, Esq. Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, Texas 75202 Telephone: (214) 855-7598 Facsimile: (214) 978-4323 Either party may give written notice of a change of address by certified mail, return receipt requested, and after notice of such change has been received, any notice shall be given to such party in the manner above described at such new address. 9 12.3 Execution in Counterparts. This Agreement may be executed in any ------------------------- number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 12.4 Waiver and Amendment. This Agreement may be amended, supplemented, -------------------- modified and/or rescinded only through an express written instrument signed by both Parties or their respective successors and assigns. Either party may specifically and expressly waive in writing any portion of this Agreement or any breach hereof, but no such waiver shall constitute a further or continuing waiver of any preceding or succeeding breach of the same or any other provision. The consent by one party to any act for which such consent was required shall not be deemed to imply consent or waiver of the necessity of obtaining such consent for the same or similar acts in the future. 12.5 Severability. Each provision of this Agreement is intended to be ------------ severable. If any covenant, condition or other provision contained in this Agreement is held to be invalid, void or illegal by any court of competent jurisdiction, such provision shall be deemed severable from the remainder of this Agreement and shall in no way affect, impair or invalidate any other covenant, condition or other provision contained in this Agreement. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such covenant, condition or other provision shall be deemed valid to the extent of the scope or breadth permitted by law. 12.6 Governing Law. All matters relating to or arising out of this ------------- Agreement, whether in contract, tort or otherwise, shall be governed by and interpreted in accordance with the laws of the State of California, including all matters of construction, validity, performance and enforcement, without giving effect to principles of conflict of laws. The Parties hereby consent, in any dispute, action, litigation, arbitration or other proceeding concerning this Agreement, to the jurisdiction of the state or federal courts of California, with the County of Orange being the sole venue for the bringing of the action or proceeding. 12.7 Assignability. Because the Company has agreed to retain the services ------------- of Consultant based on an investigation of Consultant's capabilities, the importance of Consultant's services to the ongoing business of the Company and the personal relationship that has evolved between the Parties, neither this Agreement nor any interest herein shall be assignable (voluntarily, involuntarily, by judicial process or otherwise), in whole or in part, by Consultant without the prior written consent of the Company. Any attempt at such an assignment without such consent shall be void and, at the option of the Company, shall be an incurable breach of this Agreement resulting in the immediate termination of this Agreement. 12.8 Interpretation. The language in all parts of this Agreement shall be -------------- in all cases construed simply according to its fair meaning and not strictly for or against any party. Whenever the context requires, all words used in the singular will be construed to have been used in the plural, and vice versa, and each gender will include any other gender. The captions of the Sections and Subsections of this Agreement are for convenience only and shall not affect the construction or interpretation of any of the provisions of this Agreement. 10 12.9 Integration. This Agreement, together with the exhibits and schedules ----------- hereto, incorporate the entire understanding of the parties with respect to the subject matter hereof and supersede all previous oral and written and all contemporaneous oral negotiations, commitments, writings, and understandings. In addition, the parties expressly agree that this Agreement supersedes and replaces the Consulting Agreement dated as of June 1, 1999 between Consultant and eflex, as successor to Residential Utility Meter Service's, Inc., a Florida corporation (the "eflex Consulting Agreement"), and that the eflex Consulting -------------------------- Agreement is of no further force or effect. 12.10 Survivability. All covenants, agreements, representations and ------------- warranties made by the Consultant shall survive the termination of this Agreement. 12.11 Further Assurances. In addition to the documents and instruments to ------------------ be delivered as provided in this Agreement, each of the Parties shall, from time to time at the request of the other party, execute and deliver to the other party such other documents and shall take such other action as may be necessary or proper to more effectively carry out the terms of this Agreement. [remainder of page intentionally left blank] 11 IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the date first set forth above. TELENETICS CORPORATION, a California corporation By: ----------------------------------------- Michael A. Armani, President SAUNDERS & PARKER, INC., a Texas corporation By: ----------------------------------------- William C. Saunders Its: ------------------------------------- By: ----------------------------------------- Terry S. Parker Its: ------------------------------------- ----------------------------------------- Street Address ----------------------------------------- City, State, Zip Code ----------------------------------------- Business Telephone Number ----------------------------------------- Business Facsimile Number ----------------------------------------- Social Security or Federal Tax Identification Number 12 EXHIBIT A --------- Copy of Stock Option Agreement 13 EX-4 5 STOCK PLEDGE AGREEMENT EXHIBIT 4 STOCK PLEDGE AGREEMENT (Third Party) This Stock Pledge Agreement ("Agreement"), dated as of January 7, 2000, is entered into by and between Michael A. Armani (the "Pledgor"), and Saunders & Parker, Inc., a Texas corporation ("S&P" or the "Secured Party"). R E C I T A L S --------------- Section A. Telenetics Corporation (the "Company") has executed that certain promissory note dated the date of this Agreement in the original principal amount of $136,444.90 and payable to the order of S&P (as amended, modified, extended, or renewed from time to time, the "Note"). Section B. The Pledgor has guaranteed the obligations of the Company under the Note pursuant to that certain Guaranty dated the date of this Agreement (as amended, modified, extended, or renewed from time to time, the "Guaranty"). Section C. The Pledgor is the owner of 500,000 shares of the issued and outstanding common stock of the Company (the "Shares"). Section D. The Note contemplates that the Shares will be pledged and delivered by the Pledgor to S&P, with duly endorsed instruments of transfer or assignments in blank on or before January 17, 2000. Section E. The Pledgor acknowledges that it will receive substantial benefits as a result of the financial accommodations provided by S&P to the Company and will receive valuable consideration in connection with its pledge of stock hereunder. Section F. S&P has been induced to cancel certain indebtedness owed to it by eflex Wireless, Inc. and the security therefor in reliance on this Agreement. A G R E E M E N T ----------------- Therefore, in consideration of the foregoing and in order to induce S&P to accept the Note from the Company and cancel certain indebtedness owed to it by eflex Wireless, Inc. and the security therefor, and for other good and valuable consideration, the parties hereto agree as follows: Section 1. Definitions. Capitalized terms used herein without ----------- definition that are defined in, or by reference in, the Note shall have the meaning specified therein. Section 2. Pledge. The Pledgor hereby pledges and assigns, with duly ------ endorsed instruments of transfer, to the Secured Party, and hereby grants to the Secured Party a security interest (the "Security Interest") in, the following (the "Collateral"): (i) all the Shares and the certificates representing such Shares and all dividends, cash, securities, instruments, and other property from time to time paid, payable, or otherwise distributed in respect of or in exchange for any or all of such Shares; (ii) all securities issued by any issuer of such Shares, or any successor thereto, from time to time acquired by the Pledgor in substitution for or in addition to any of the foregoing, all certificates and instruments representing such securities, together with the interest coupons (if any) attached thereto, and all dividends, cash, securities, instruments, and other property from time to time paid, payable, or otherwise distributed in respect of or in exchange for any or all of such securities; and (iii) all proceeds of the foregoing. Section 3. Secured Obligations. The Security Interest shall secure the ------------------- due and punctual payment and performance of the following: (i) liabilities, obligations, loans, advances, and indebtedness of the Company to S&P under the Note; (ii) all liabilities and obligations of the Pledgor under the Guaranty; (iii) all interest, fees, commissions, charges, expenses, and other liabilities relating to any of the foregoing, including all advances, charges, costs, and expenses (including attorneys' fees and legal expenses) incurred in connection with the exercise of any right, power, or remedy conferred by this Agreement or by law (including attorneys' fees and legal expenses incurred by the Secured Party in the collection of instruments deposited with the Secured Party and amounts incurred in connection with the operation, maintenance, or foreclosure of any and all of the Collateral); (iv) all indebtedness, obligations, and liabilities of the Pledgor now or hereafter existing under this Agreement, including all amounts that may be advanced by the Secured Party to satisfy amounts required to be paid by the Pledgor under this Agreement, the Note, or the Guaranty or any other agreement, document, or instrument executed by Pledgor as a guaranty of or security for Indebtedness (collectively, the "Armani Note Documents") or any amount secured hereby or to pay any taxes, insurance premiums, liens, claims, and charges against the Collateral, together with interest thereon to the extent provided herein or therein; and (v) all amounts advanced or expended by the Secured Party for the maintenance or preservation of the Collateral or the creation, perfection, continuation and protection of the Collateral and security interests therein; in each case, whether direct or indirect, joint or several, absolute or contingent, liquidated or unliquidated, now or hereafter existing, renewed or restructured, whether or not from time to time decreased or extinguished and later increased, created, or incurred, and including all indebtedness, obligations, and liabilities of the Company and/or the Pledgor under any instrument now or hereafter evidencing or securing any of the foregoing (all indebtedness, obligations, and liabilities of the Pledgor and of the Company described in this Section 3 are collectively referred to hereinafter as the --------- "Indebtedness"). Section 4. Delivery of Collateral. All certificates or instruments ---------------------- representing or evidencing the Collateral shall be delivered to the Secured Party on or before January 17, 2000, STOCK PLEDGE AGREEMENT - Page 2 and held by the Secured Party pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Secured Party. Upon the occurrence and during the continuance of an Event of Default, the Secured Party shall have the right, at any time in its discretion and without notice to the Pledgor, to transfer to or to register in the name of the Secured Party or any of its nominees any or all of the Collateral. Section 5. Representations and Warranties. The Pledgor represents and ------------------------------ warrants as follows: (i) The Pledgor is the owner, beneficially and of record, of the Collateral. (ii) All legal proceedings have been taken that are necessary for the execution, delivery, and performance of this Agreement and the Guaranty by the Pledgor. (iii) No authorization, approval, or other action by, and no notice to or filing with, any governmental authority is required for the exercise by the Secured Party of the voting or other rights provided for in this Agreement or the remedies in respect of the Collateral pursuant to this Agreement (except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally). (iv) The Security Interest constitutes a valid and, upon delivery of the certificates evidencing the Shares, first perfected security interest in all of the Collateral for payment and performance of the Indebtedness. (v) The Collateral is owned by the Pledgor free and clear of all liens and encumbrances, except for the Security Interest and restrictions on transfer arising under applicable securities laws. All representations and warranties of the Pledgor contained herein shall survive the execution, delivery, and performance of this Agreement until termination of this Agreement under Section 18. ---------- Section 6. Further Assurances. The Pledgor agrees that at any time and ------------------ from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that the Secured Party may reasonably request in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Section 7. Voting Rights: Dividends; etc. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing, the Pledgor shall be entitled to exercise any and all voting rights, if any, and to receive and retain all dividends and other property from time to time paid, payable or otherwise distributed in respect of the Collateral. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of the Pledgor to vote the Collateral and receive any distributions, which it would otherwise be authorized to receive and retain pursuant to Section 7(a), shall cease, and all rights to vote and to ------------ STOCK PLEDGE AGREEMENT - Page 3 receive such distributions and other property shall thereupon be vested in the Secured Party, who shall thereupon have the sole right to receive and hold as Collateral such distributions and other property. All dividends and other property that are received by the Pledgor contrary to the provisions of this Section 7(b) shall be received in trust for the benefit of the Secured Party, - ------------ shall be segregated from other property or funds of the Pledgor, and shall be forthwith delivered to the Secured Party as Collateral in the same form as so received (with any necessary endorsement). (c) The Secured Party agrees to release promptly to the Pledgor any dividends, cash, securities, instruments, and other property paid, payable, or otherwise distributed in respect of the Collateral that it may receive under Section 7(b) if, prior to the occurrence of an Acceleration (as defined in - ------------ Section 11 hereof), all Events of Default and events that, with notice and/or - ---------- lapse of time, could become Events of Default have been waived or are no longer continuing. Section 8. Secured Party Appointed Attorney-in-Fact. The Pledgor hereby ---------------------------------------- irrevocably appoints the Secured Party the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in its name or otherwise, upon the occurrence of an Event of Default, to take action and to execute any instrument that the Secured Party may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including to receive, endorse, and collect all instruments made payable to the Pledgor representing any dividend, interest payment, or other distribution in respect to the Collateral or any part thereof and to give full discharge for the same, when and to the extent permitted by this Agreement. Section 9. Secured Party May Perform. Upon the occurrence and during ------------------------- the continuance of an Event of Default (including an Event of Default resulting from a failure to perform any agreement contained herein), if the Pledgor fails to perform any agreement contained herein, the Secured Party may itself perform, or cause performance of, such agreement, and the expenses of the Secured Party incurred in connection therewith shall be payable by the Pledgor under Section ------- 12. - -- Section 10. Reasonable Care. The Secured Party shall have an obligation --------------- to exercise reasonable care with respect to Collateral in its possession; provided that the Secured Party shall be deemed to have exercised reasonable care if the Collateral is accorded treatment substantially comparable to that which the Secured Party accords its own property or treatment substantially in accordance with actions requested by the Pledgor in writing (although the Secured Party shall not be obligated to comply with any such requests and no failure to do so shall be deemed to be a failure to exercise reasonable care). It is agreed and understood that the Secured Party shall not have responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders, or other matters relative to any Collateral, whether or not the Secured Party has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against any parties with respect to any Collateral. Section 11. Events of Defaults; Remedies Upon Default. An "Event of ----------------------------------------- Default" hereunder occurs if, prior to the payment and performance in full of all the Indebtedness there occurs an Event of Default (as defined in the Note) or if any representation or warranty contained in this Agreement or the Guaranty is false in any respect or if Pledgor breaches or fails to perform any covenant or obligation contained in this Agreement or in any other Armani Note Document. If (a) upon or after the occurrence of any Event of Default, the Secured Party elects to exercise remedies under this Agreement or (b) there occurs an Event of Default that would entitle STOCK PLEDGE AGREEMENT - Page 4 the Secured Party to accelerate payment of any Indebtedness (the occurrence of any such event shall be referred to as an "Acceleration"), then, whether or not all Indebtedness shall have become immediately due and payable: (a) The Secured Party may exercise (in compliance with all applicable securities laws) in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party after default under the Uniform Commercial Code in effect in the State of Texas at that time, and the Secured Party may also, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, over the counter or at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Secured Party may deem commercially reasonable or otherwise in such manner as necessary to comply with applicable federal and state securities laws. Upon consummation of any such sale, the Secured Party shall have the right to assign, transfer, and deliver to the purchaser or purchasers at any such sale and such purchasers shall hold the property sold absolutely, free from any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule or law or statute now existing or hereafter enacted. To the extent notice of sale shall be required by law, the Secured Party shall give the Pledgor at least ten days' (or such longer period as shall be specified by applicable laws) notice of the time and place of any public sale or the time after which any private sale is to be made, which the Pledgor agrees shall constitute commercially reasonable notification. At any such sale, the Secured Party, to the extent permitted by law, may bid (which bid may be, in whole or in part, in the form of cancellation of Indebtedness) for and purchase for the account of the Secured Party the whole or any part of the Collateral. The Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. If sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by the Secured Party until the sale price is paid by the purchaser or purchasers thereof, but the Secured Party shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. The Pledgor agrees that any sale of the Collateral conducted by the Secured Party in accordance with the foregoing provisions of this Section 11(a) shall be deemed to be a commercially reasonable sale under ------------- Section 9.504 of the Texas Business and Commerce Code, as amended. - ------------- Because of the Securities Act of 1933, as amended, and, possibly, other laws and regulations, there may be legal restrictions or limitations affecting Lender in any attempts to dispose of certain portions of the Collateral in the enforcement of its rights and remedies hereunder. For these reasons Secured Party is hereby authorized by Pledgor, but not obligated, in the event of any Event of Default hereunder giving rise to Secured Party's rights to sell or otherwise dispose of the Collateral, to sell all or any part of the Collateral at private sale, subject to investment letter or in any other manner that will not require the Collateral, or any part thereof, to be registered in accordance with the Securities Act of 1933, as amended, or the rules and regulations promulgated thereunder, or any other law or regulation, at the best price reasonably obtainable by Secured Party at any such private sale or other disposition in the manner mentioned STOCK PLEDGE AGREEMENT - Page 5 above. Secured Party is also hereby authorized by Pledgor, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Secured Party may deem required or appropriate in the event of a sale or disposition of any of the Collateral. Pledgor clearly understands that Secured Party may in its discretion approach a restricted number of potential purchasers and that a sale under such circumstances may yield a lower price for the Collateral, or any part or parts thereof, than would otherwise be obtainable if same were registered and sold in the open market. Pledgor agrees that in the event Secured Party shall, upon any Event of Default hereunder, sell the Collateral, or any portion thereof, at such private sale or sales, Secured Party shall have the right to rely upon the advice and opinion of any member firm of a national securities exchange as to the best price reasonably obtainable upon such private sale thereof and that such reliance shall be conclusive evidence that Secured Party handled such matter in a commercially reasonable manner under the Code. As an alternative to exercising the power of sale herein conferred upon it, the Secured Party may proceed by a suit or suits at law or in equity to foreclose the security interest granted under this Agreement and to sell the Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. (b) Any cash held by the Secured Party as Collateral and all cash proceeds received by the Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral (i) prior to the occurrence of an Acceleration shall be held by the Secured Party as collateral for the Indebtedness and (ii) following the occurrence of an Acceleration may be held by the Secured Party as Collateral and/or then or at any time thereafter applied as follows: (x) first, to the payment to the Secured Party of the costs and expenses of retaking, holding, and preparing for sale of the Collateral and any other fees, expenses, claims, demands, losses, judgments, damages, and liabilities arising out of or related to the Note or the Guaranty that are payable to the Secured Party pursuant to Section 12, and (y) second, to ---------- the Secured Party for application against or on account of all or any part of the Indebtedness. (c) Any surplus of such cash or cash proceeds held by the Secured Party and remaining after payment in full of all the Indebtedness shall be reassigned and redelivered as provided in Section 18 hereof. ---------- Section 12. Expenses. The Pledgor will upon demand pay to the Secured -------- Party the amount of any and all reasonable expenses, including the fees and expenses of its counsel and of any experts and agents that the Secured Party may incur in connection with (a) the administration of this Agreement, (b) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of the Secured Party hereunder, or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. Any amounts payable under this Section 12 shall be payable, with interest, on demand, at 10% per annum and ---------- shall be additional Indebtedness secured by the Collateral. Section 13. Security Interest Absolute. All rights of the Secured Party -------------------------- hereunder, the Security Interest, and all obligations of the Pledgor hereunder, shall be absolute and unconditional irrespective of: STOCK PLEDGE AGREEMENT - Page 6 (i) any lack of validity or enforceability of the Note or any other document, agreement, or instrument relating to any or all of the Indebtedness, or any Armani Note Document or any other document, agreement, or instrument given as a guaranty of or security for the Note (the "Note Documents"); (ii) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Indebtedness or any renewal or extension of all or any of the Indebtedness or any other amendment or waiver of or any consent to any departure from this Agreement or any other Note Document; or (iii) any sale, exchange, release, or nonperfection of any other collateral, or any release of any guarantor or any Person liable in any manner for the collection of any or all of the Indebtedness, or any amendment or waiver of or consent to or departure from any guaranty, for all or any of the Indebtedness. Section 14. Waiver and Consent. ------------------ (a) The Pledgor acknowledges that the Security Interest created or granted herein will secure the Indebtedness of Persons other than the Pledgor and, in full recognition of that fact, the Pledgor consents and agrees that the Secured Party may in its absolute and sole discretion, at any time and from time to time, without notice or demand, and without affecting the enforceability or security hereof. (i) modify, amend, extend, renew, accelerate, or otherwise change the Indebtedness or any of its terms; (ii) decrease or increase the Indebtedness; (iii) supplement, modify, amend, or waive any provision of, or enter into or give any agreement, approval or consent with respect to, any Note Document; (iv) accept new or additional instruments, documents, or agreements in exchange for or relative to any of the Note Documents or the Indebtedness or any part thereof; (v) accept payments on the Indebtedness; (vi) receive and hold additional security or guaranties for the Indebtedness or any part thereof; (vii) release, reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange, substitute, transfer, or enforce any security or guaranties and apply any security and direct the order or manner of sale thereof, (viii) release any Person from any personal liability with respect to the Indebtedness or any part thereof, and (ix) settle, release on terms satisfactory to the Secured Party or by operation of applicable laws, or otherwise liquidate or enforce any Indebtedness and any security or guaranty in any manner, and consent to the transfer of any security. (b) Upon the occurrence and during the continuance of an Event of Default, the Secured Party may enforce this Agreement independently from any other Note Document and independently of any other remedy, security, or guaranty the Secured Party at any time may have or hold in connection with the Indebtedness, and it shall not be necessary for the Secured Party to marshal assets in favor of the Pledgor or any other Person or to proceed upon or against and/or exhaust any other security or remedy before proceeding to enforce this Agreement. The Pledgor expressly agrees that the Secured Party may proceed against any or all of the Collateral or guaranties for the Indebtedness in such order and in such manner as it shall determine in its sole and absolute discretion. The Secured Party's rights hereunder shall be reinstated and revived, and the enforceability of this Agreement shall continue, with respect to any amount at any time paid on account of the Indebtedness that thereafter shall be required to be restored or returned by the Secured Party upon bankruptcy, insolvency, or reorganization of the Pledgor or the Company or otherwise, all as though such amount had not been paid. The Security Interest created or granted herein and the enforceability of this Agreement at all times shall remain effective to secure the full STOCK PLEDGE AGREEMENT - Page 7 amount of all the Indebtedness even though the Indebtedness, or any part thereof or any other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against the Company or any guarantor and whether or not the Pledgor or other guarantor shall have any personal liability with respect thereto. (c) The Pledgor expressly waives any and all defenses now or hereafter arising or asserted by reason of (i) any disability or other defense of any guarantor or of the Company with respect to the Indebtedness, (ii) the failure of priority of any security for the Indebtedness, (iii) the cessation from any cause whatsoever of the liability of any guarantor or of the Company (other than by reason of the full payment and performance of all Indebtedness, (iv) any failure of the Secured Party to give notice of sale or other disposition of any property securing the Indebtedness to the Pledgor or any other Person or any defect in any notice that may be given in connection with any sale or disposition of any property securing the Indebtedness; (v) any failure of the Secured Party to comply with applicable laws in connection with the sale or other disposition of any property securing the Indebtedness, including any failure of the Secured Party to conduct a commercially reasonable sale or other disposition of any property securing the Indebtedness, (vi) any act or omission of the Secured Party or others that directly or indirectly results in or aids the discharge or release of any guarantor, the Company, or the Indebtedness or any other security or guaranty therefor by operation of law or otherwise, (vii) any law that provides that the obligation of a surety or guarantor musts neither be larger in amount nor in other respects more burdensome than that of the principal or that reduces a surety's or guarantor's obligation in proportion to the principal's obligation, (viii) any failure of the Secured Party to file or enforce a claim in any bankruptcy or other proceeding with respect to any Person, (ix) the election by the Secured Party, in any bankruptcy proceeding of any Person, of the application or nonapplication of Section 1111 (b)(2) of the United States Bankruptcy Code, (x) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code, (xi) any use of cash collateral under Section 363 of the United States Bankruptcy Code, (xii) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any Person, (xiii) the avoidance of any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation, or dissolution proceeding commenced by or against any Person, including any discharge of, or bar or stay against collecting, all or any of the Indebtedness in or as a result of any such proceeding, or (xiv) any action taken by the Secured Party that is authorized by this section or any other provision of any Note Document. (d) Pledgor hereby agrees not to seek enforcement of any of its rights of subrogation, contribution, reimbursement, or indemnity and any and all similar rights Pledgor may otherwise have against the Company at any time under any state or federal statute, at law or in equity, until the Indebtedness shall have been paid and performed in full. (e) The Pledgor expressly waives all presentments, demands for payment or performance, notices of nonpayment or nonperformance, protests, notices of protest, notices of dishonor, and all other notices or demands of any kind or nature whatsoever with respect to the Indebtedness, and all notices of acceptance of this Agreement or of the existence, creation, or incurring of new or additional Indebtedness. (f) The Pledgor warrants and agrees that each of the waivers set forth in this Agreement are made with full knowledge of their significance and consequences and that, under the circumstances, the waivers are reasonable. If any of such waivers are determined to be STOCK PLEDGE AGREEMENT - Page 8 contrary to any applicable law or public policy, such waivers shall be effective to the maximum extent permitted by law. Should any one or more provisions of this Agreement be determined to be illegal or unenforceable, all other provisions thereof shall nevertheless remain effective. Section 15. Amendments. No amendment or waiver of any provision of this ---------- Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Secured Party, and then such waiver or consent shall be effective only for the specific purpose for which given. Section 16. Waivers. Any party may waive any condition, covenant, term, ------- or provision of this Agreement, but any such waiver shall be effective only (a) if in writing and signed by the party sought to be bound by such waiver, (b) with respect to the specific condition, covenant, term, or provision expressly made the subject to such waiver (and no other condition, covenant, term, or provision), and (c) for the specific instance(s) expressly set forth in such waiver (and no earlier or subsequent instances). Without limiting the foregoing sentence, none of the following will be constitute a waiver of the rights of a party to this Agreement to demand exact compliance with the conditions, covenants, terms, and provisions of this Agreement: (a) a failure of such party to exercise any power reserved to it in this Agreement; (b) a failure of such party to insist upon compliance by any other party to this Agreement with any condition, covenant, term, or provision in this Agreement; (c) a delay, forbearance, or omission of such party to exercise any power; or (d) any custom or practice of the parties at variance with the terms of this Agreement. The consent or approval of any party to this Agreement with respect to the act of any other party to this Agreement shall not be deemed to waive or render unnecessary consent to or approval of any subsequent similar act. Subsequent acceptance by a party to this Agreement of any performance or payment due to it hereunder or any ancillary agreement will not be deemed to be a waiver by such first party of any preceding breach by any other party of any terms, provisions, covenants, or conditions of this Agreement. Section 17. Time is of the Essence; Cumulative Remedies. Time and ------------------------------------------- exactitude of each of the terms, obligations, covenants, and conditions of this Agreement are hereby declared to be of the essence. Except as otherwise expressly set forth in this Agreement, each party's rights under this Agreement are cumulative and neither the existence of, nor the exercise or enforcement by a party of, any right or remedy under this Agreement shall preclude the exercise or enforcement by such party of any other right or remedy under this Agreement, any other Note Document, any other agreement, or law. Section 18. Termination. This Agreement shall terminate when all the ----------- Indebtedness has been fully paid and performed and the Note has been canceled. Upon such termination, the Secured Party shall reassign and redeliver (or cause to be reassigned and redelivered) to the Pledgor, or to such Person or Persons as the Pledgor shall designate in writing or to whomever may be lawfully entitled to receive such surplus pursuant to judicial order, against receipt, such of the Collateral (if any) as shall not have been sold or otherwise applied by the Secured Party pursuant to the terms hereof and shall still be held by it hereunder, together with appropriate instruments of reassignment and release. Any such reassignment shall be without recourse upon or warranty by the Secured Party and at the expense of the Pledgor. Section 19. Addresses for Notices. All notices, requests, demands, and --------------------- other communications hereunder shall be in writing and shall be personally delivered, delivered by facsimile or courier service, or mailed, certified with first class postage prepaid, to the address set STOCK PLEDGE AGREEMENT - Page 9 forth below. Each such notice, request, demand, or other communication shall be deemed to have been given (whether actually received or not) on the date of actual delivery of such notice, request, demand, or other communication, if personally delivered or delivered by facsimile transmission (if receipt is confirmed at the time of such transmission by telephone or facsimile-machine- generated confirmation), or on the third day following the date of mailing, if mailed in accordance with this Paragraph, or on the day specified for delivery to the courier service (if such day is one on which the courier service will give normal assurances that such specified delivery will be made). Any notice, request, demand, or other communication given otherwise than in accordance with this Section shall be deemed to have been given on the date actually received. Any party may change its address for purposes of this Section by giving written notice of such change to all other parties in the manner hereinabove provided. Whenever any notice is required to be given by law or by this Agreement, a written waiver of such notice, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of that notice. Pledgor: Michael A. Armani 25111 Arctic Ocean Lake Forest, California 92630 with a copy to: Larry A. Cerutti, Esq. Rutan & Tucker, LLP 611 Anton Boulevard, 14th Floor Costa Mesa, California 92626 Secured Party: Saunders & Parker, Inc. 5735 Prestwick Lane Dallas, Texas 75252 Attention: William C. Saunders with a copy to: Sally A. Schreiber Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, Texas 75202 Section 20. Continuing Security Interest; Assignments. This Agreement ----------------------------------------- shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until termination as provided in Section 18, (b) ---------- be binding upon the Pledgor, the Secured Party, and their respective heirs, successors, and assigns, and (c) inure, together with the rights, powers, and remedies of the Pledgor and the Secured Party hereunder, to the benefit of the Pledgor, the Secured Party, and their respective heirs, successors, transferees, and assigns, as the case may be. Notwithstanding the foregoing clause (b), the Pledgor shall not, except as otherwise provided in this Agreement, be permitted to assign this Agreement or any interest herein. Without limiting the generality of the foregoing clause (c), the Secured Party may assign or otherwise transfer all or any portion of its respective rights, benefits, and obligations under the Indebtedness or any Note STOCK PLEDGE AGREEMENT - Page 10 Document to any other Person if such Person agrees in writing with the Pledgor to be bound by the terms of this Agreement, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Secured Party herein or otherwise. Unless the context of this Agreement otherwise requires, references to "Secured Party" herein includes any subsequent holder of any Indebtedness previously outstanding to a Secured Party. Section 21. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS ------------- OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS TO BE PERFORMED WHOLLY WITHIN SUCH STATE. Section 22. Severability. Wherever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement; the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable. If any lien, security interest, or other right of the Secured Party hereunder shall be held to be invalid, illegal, or unenforceable under applicable law, such invalidity, illegality, or unenforceability shall not affect any other provision herein or any lien, security interest, or other right granted hereby. Section 23. Construction. Unless the context of this Agreement otherwise ------------ clearly requires, references to the plural include the singular and the singular the plural, and "or" has the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The term "including" and variations of the term mean including without limitation. The term "Person" means any individual, partnership, limited partnership, joint venture, corporation, limited liability company, trust, estate, custodian, trustee, executor, administrator, nominee, representative, unincorporated organization, sole proprietorship, trust, employee benefit plan, tribunal, governmental entity, department, or agency, or other entity. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, Subsection, Exhibit, and Schedule references are to this Agreement unless otherwise specified. Section 24. NO ORAL AGREEMENTS. THIS AGREEMENT, TOGETHER WITH THE OTHER ------------------ NOTE DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN THE SECURED PARTY AND THE PLEDGOR AND MAY NOT BE CONTRADICTED BY EVIDENCE OR PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE SECURED PARTY AND THE PLEDGOR WITH RESPECT TO THE SUBJECT MATTER OF THIS AGREEMENT. STOCK PLEDGE AGREEMENT - Page 11 Section 25. No Strict Construction. This Agreement is the result of ---------------------- substantial negotiations among the parties and their counsel and has been prepared by their joint efforts. Accordingly, the fact that counsel to one party or another may have drafted this Agreement or any portion of this Agreement is immaterial and this Agreement will not be strictly construed against any party. Section 26. Counterparts. This Agreement may be executed in any number ------------ of counterparts and shall be effective when each party to this Agreement has executed at least one counterpart, with the same effect as if all signing parties had signed the same document. All counterparts will be construed together and evidence only one agreement, which, notwithstanding the actual date of execution of any counterpart, shall be deemed to be dated the day and year first written above. In making proof of this Agreement, it shall not be necessary to account for a counterpart executed by any party other than the party against whom enforcement is sought or to account for more than one counterpart executed by the party against whom enforcement is sought. Section 27. Execution by Facsimile. The manual signature of any party to ---------------------- this Agreement that is transmitted to any other party or counsel to any other party by facsimile shall be deemed for all purposes to be an original signature. [THIS SPACE LEFT BLANK INTENTIONALLY.] STOCK PLEDGE AGREEMENT - Page 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, as of the date first above written. SECURED PARTY: ------------- SAUNDERS & PARKER, INC. By: ------------------------------------ William C. Saunders, Co-President PLEDGOR: ------- ----------------------------------- Michael A. Armani STOCK PLEDGE AGREEMENT - Page 13 EX-5 6 GUARANTY EXHIBIT 5 GUARANTY WHEREAS, eflex Wireless, Inc., a Delaware corporation ("eflex"), is indebted to Saunders & Parker, Inc., a Texas corporation (the "Lender"); WHEREAS, Telenetics Corporation, a California corporation (the "Company"), desires to acquire all of the outstanding stock of eflex and, as a condition to such purchase, all of such obligations of eflex to Lender have been canceled and the Company has agreed to repay such obligations to the Lender; WHEREAS, the Company has, simultaneously with the delivery of this Guaranty, repaid one-half of such obligations and delivered that certain Promissory Note dated of even date herewith in the original principal amount of $136,444.90 (as amended, modified, extended, or renewed from time to time, the "Note"), which is the other one-half of such obligations; and WHEREAS, the Lender has conditioned cancellation of such obligations from eflex and the acceptance of the Note upon the execution and delivery of this Guaranty by Michael A. Armani ("Guarantor"); NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged and confessed, Guarantor hereby irrevocably and unconditionally guarantees to the Lender the prompt payment and performance of the Guaranteed Indebtedness (hereinafter defined), upon the following terms: 1. The term "Guaranteed Indebtedness" means all of the amounts due the Lender that are evidenced by or that arise under the Note and include any and all post-petition interest and expenses (including reasonable attorneys' fees) whether or not allowed under any bankruptcy, insolvency, or other similar law. 2. This instrument shall be an absolute, continuing, irrevocable, and unconditional guaranty of payment and performance, and not a guaranty of collection, and Guarantor shall remain liable on its obligations hereunder until the payment and performance in full of the Guaranteed Indebtedness. 3. If Guarantor becomes liable for any indebtedness owing by the Company to the Lender by endorsement or otherwise, other than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of the Lender hereunder shall be cumulative of any and all other rights that the Lender may ever have against Guarantor. The exercise by the Lender of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy. 4. In the event of default by the Company in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such Guaranteed Indebtedness becomes due, whether by its terms, by acceleration, or otherwise, Guarantor shall promptly pay the amount due thereon to the Lender without notice or demand (except as specifically set forth in the Note), in lawful currency of the United States, and it shall not be necessary for the Lender, in order to Guaranty, Page 1 enforce such payment by Guarantor, first to institute suit or exhaust its remedies against the Company or others liable on such Guaranteed Indebtedness, or to enforce any rights against any collateral that shall ever have been given to secure such Guaranteed Indebtedness. In no event shall Guarantor be subrogated to the rights of the Lender with respect to the Guaranteed Indebtedness, even to the extent to which the Guaranteed Indebtedness was discharged by Guarantor. Furthermore, upon payment by Guarantor of any sums to the Lender hereunder, all rights of Guarantor against the Company, whether arising as a result therefrom by way of right of subrogation (which rights are expressly waived by Guarantor), reimbursement, or otherwise, shall in all respects be subordinate and junior in right of payment to the prior indefeasible payment in full of the Guaranteed Indebtedness. 5. Guarantor hereby agrees that its obligations under this Guaranty shall not be released, diminished, impaired, reduced, or affected by the occurrence of any reason or event, including, without limitation, one or more of the following events, whether or not with notice to or the consent of Guarantor: (a) the taking or accepting of collateral as security for any or all of the Guaranteed Indebtedness or the release, surrender, exchange, or subordination of any collateral now or hereafter securing any or all of the Guaranteed Indebtedness; (b) any partial release of the liability of Guarantor hereunder, or the release of any other guarantor from liability for any or all of the Guaranteed Indebtedness; (c) any dissolution, insolvency, or bankruptcy of the Company, Guarantor, or any party at any time liable for the payment of any or all of the Guaranteed Indebtedness; (d) any renewal, extension, modification, waiver, amendment, or rearrangement of any or all of the Guaranteed Indebtedness or any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (e) any adjustment, indulgence, forbearance, waiver, or compromise that may be granted or given by the Lender to the Company, Guarantor, or any other party ever liable for any or all of the Guaranteed Indebtedness; (f) any neglect, delay, omission, failure, or refusal of the Lender to take or prosecute any action for the collection of any of the Guaranteed Indebtedness or to foreclose or take or prosecute any action in connection with any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (g) the unenforceability or invalidity of any or all of the Guaranteed Indebtedness or any instrument, document, or agreement evidencing, securing, or otherwise relating to any or all of the Guaranteed Indebtedness; (h) any payment by the Company or Guarantor to the Lender is held to constitute a preference under the bankruptcy laws or if for any other reason the Lender is required to refund such payment or pay the amount thereof to someone else; (i) the settlement or compromise of any of the Guaranteed Indebtedness; (j) the failure of the Lender to perfect or continue any security interest or lien securing any or all of the Guaranteed Indebtedness; (k) the failure of the Lender to preserve, protect, maintain, or insure any collateral securing any or all of the Guaranteed Indebtedness; (l) the failure of the Lender to sell any collateral securing any or all of the Guaranteed Indebtedness in a commercially reasonable manner or as otherwise required by law; or (m) any other circumstance that might otherwise constitute a defense available to, or discharge of, the Company or Guarantor. 6. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by the other Guaranty, Page 2 Note Documents (as defined in the Note) or by law. 7. This Guaranty is for the benefit of the Lender and its successors and assigns, and in the event of an assignment of the Guaranteed Indebtedness, or any part thereof, the rights and benefits hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness. This Guaranty is binding on Guarantor and Guarantor's heirs, successors, and assigns. 8. Any acknowledgment or new promise, whether by payment of principal or interest or otherwise and whether by the Company or others (including Guarantor), with respect to any of the Guaranteed Indebtedness shall, when the statute of limitations in favor of Guarantor against the Lender shall commence to run, toll the running of such statute of limitations and, if the period of such statute of limitations shall have expired, prevent the operation of such statute of limitations. 9. Guarantor recognizes that the Lender is relying upon this Guaranty and the undertakings of Guarantor hereunder in making an extension of credit to the Company under the Note and further recognizes that the execution and delivery of this Guaranty is a material inducement to the Lender's cancellation of obligations from eflex and acceptance of the Note. No condition to the full effectiveness of this Guaranty exists. 10. This Guaranty shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. 11. Guarantor hereby waives promptness, diligence, demand of payment, notice of acceptance of this Guaranty, presentment, notice of protest, notice of dishonor, notice of the incurring by the Company of additional indebtedness, and all other notices and demands with respect to the Guaranteed Indebtedness and this Guaranty except as specifically set forth in the Note. 12. Guarantor agrees that the Lender may exercise any and all rights granted to it under the Note and the other Note Documents (as defined in the Note) without affecting the validity or enforceability of this Guaranty. 13. Guarantor hereby represents and warrants to the Lender that Guarantor has adequate means to obtain from the Company on a continuing basis information concerning the financial condition of the Company and that Guarantor is not relying upon the Lender to provide (and the Lender shall have a duty to provide) any such information to Guarantor either now or in the future. 14. This Guaranty embodies the final, entire agreement of the Guarantor with respect to the guaranty of the Guaranteed Indebtedness and supersedes any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof. This Guaranty is intended by Guarantor as a final and complete expression of the terms of the Guaranty. No course of dealing between Guarantor and the Lender, no usage of trade, and no parol or extrinsic evidence of any nature shall be used to supplement or modify any term hereof. Guaranty, Page 3 [THIS SPACE LEFT BLANK INTENTIONALLY.] Guaranty, Page 4 EXECUTED on January __, 2000, be effective as of January 7, 2000. GUARANTOR: ---------- ------------------------------------ Michael A. Armani EX-6 7 PROMISSORY NOTE EXHIBIT 6 PROMISSORY NOTE --------------- $136,444.90 Dallas, Texas January 7, 2000 FOR VALUE RECEIVED, the undersigned, Telenetics Corporation, a California corporation ("Maker"), hereby unconditionally promises to pay to the order of Saunders & Parker, Inc., a Texas corporation ("Lender"), or other holder of this Note (Lender or such holder being called "Payee"), at 5735 Prestwick Lane, Dallas, Texas 75252, or at such other address given by Payee to Maker, the principal sum of One Hundred Thirty Six Thousand Four Hundred Forty-Four and 90/100 Dollars ($136,444.90), together with interest thereon at the rate of 10% per annum. All payments of interest shall be computed on the per annum basis of a 360-day year composed of twelve 30-day months. 1. Post-Maturity Interest. The entire unpaid principal balance of this ---------------------- Note from day to day outstanding shall, from and after maturity, bear interest at the highest lawful rate. 2. Payment Terms. The principal of and interest on this Note shall be ------------- paid as follows: (a) Principal of and interest on this Note shall be due and payable in full on February 15, 2000. (b) Maker shall have the right to prepay all or any part of this Note, without premium or penalty, prior to the date of maturity. 3. Application of Payments. All payments and prepayments on this Note ----------------------- shall be applied first to accrued but unpaid interest and then to unpaid principal in inverse order of maturity. 4. Security. Payment of this Note is secured as set forth in that -------- certain Stock Pledge Agreement (herein so called) and that certain Guaranty (herein so called), each dated the date of this Note and executed by Michael A. Armani ("Armani"). 5. Costs of Collection. If this Note is placed in the hands of an ------------------- attorney for collection, Maker agrees to pay the reasonable attorneys' fees and costs of collection of the holder hereof. 6. Events of Default and Remedies. The entire unpaid principal balance ------------------------------ of, and all accrued and unpaid interest on, this Note shall immediately become due and payable at the option of Payee upon the occurrence of one or more of the following events of default (individually and collectively, hereinafter called a "Default"): (a) The failure or refusal of Maker to pay all or any part of the principal of or accrued interest on this Note as and when the same becomes due and payable in accordance with the terms hereof, and the continuation of such failure or refusal for a period of ten days after notice thereof to Maker from Payee; or (b) Maker shall (i) voluntarily seek, consent to, or acquiesce in the benefit or benefits of the Bankruptcy Code of the United States of America or any other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, or similar debtor relief law from time -------- Page 1 Initials to time in effect affecting the rights of creditors generally ("Debtor Relief Laws") or dissolve or liquidate, or (ii) be made the subject of any proceeding provided for by any Debtor Relief Law that could suspend or otherwise affect any of the rights of the holder hereof; provided, however, if such proceeding described in this clause (ii) is withdrawn or dismissed within 60 days from the date of the institution of such proceeding, then such event shall no longer be deemed a Default hereunder; or (c) The failure of Armani to deliver the Collateral (as defined in the Stock Pledge Agreement) pursuant to and as required by the Stock Pledge Agreement by the close of business on January 17, 2000, or the failure of any of the representations or warranties made by Armani in the Stock Pledge Agreement to be true and correct when made; or (d) The failure or refusal by Maker to perform any of its obligations under this Note (other than those described in (a) immediately above) if such failure or refusal continues for a period of 30 days after notice thereof to Maker from Payee; or (e) The occurrence of a default under the Stock Pledge Agreement or the Guaranty or any other document, instrument, or agreement executed to provide a guaranty of or security for this Note (each, a "Note Document"). In the event a Default shall have occurred and be continuing, Payee may proceed to protect and enforce its rights hereunder and under the Note Documents either by suit in equity and/or by action at law, or by other appropriate proceedings, whether for the specific performance of any covenant or agreement contained herein or in any of the Note Documents or in aid of the exercise of any power or right granted by this Note or any of the Note Documents or to enforce any other legal or equitable right of Payee. -------- Page 2 Initials 7. Usury Savings Clause. Regardless of any provision contained in this -------------------- Note or any of the other Note Documents, (a) Payee shall never be deemed to have contracted for or be entitled to receive, collect, or apply as interest on this Note any amount in excess of the maximum rate of non-usurious interest permitted by applicable law; (b) in no event shall Maker be obligated to pay interest exceeding such maximum legal rate; and (c) all agreements, conditions, or stipulations, if any, that may in any event or contingency whatsoever operate to bind, obligate, or compel Maker to pay a rate of interest exceeding the maximum legal rate shall be without binding force or effect, at law or in equity, to the extent only of the excess of interest over such maximum legal rate. If any interest is charged in excess of the maximum legal rate (hereinafter referred to as "Excess"), Maker acknowledges and stipulates that any such charge shall be the result of an accidental and bona fide error, and such Excess shall be first applied to reduce the principal then unpaid hereunder; second, applied to any other obligation of Maker to Payee, and third, returned to Maker, it being the intention of the parties hereto not to enter at any time into an usurious or other illegal relationship. Maker recognizes that such an unintentional result could inadvertently occur. By the execution of this Note, Maker covenants that (a) the credit or return of any Excess shall constitute the acceptance by Maker of such Excess and (b) Maker shall not seek or pursue any other remedy, legal or equitable, against Payee or any holder hereof based, in whole or in part, upon the charging or receiving of any interest in excess of the maximum legal rate. For the purpose of determining whether or not any Excess has been contracted for, charged, or received by Payee, Payee and Maker shall, to the maximum, extent permitted by applicable law, (a) characterize any non-principal payment (other than payments that are expressly designated as interest payments under this Note) as an expense, fee, or premium and not as interest; (b) exclude the effects of voluntary prepayments; and (c) spread, amortize, prorate, and allocate all interest at any time contracted for, charged, or received by Payee in equal parts during the entire term of this Note. 8. Waivers. Maker and each surety, endorser, guarantor, and other party ------- liable for the payment of any sums of money payable on this Note severally waive presentment and demand for payment, protest, and notice of protest and nonpayment and agree that their liability on this Note shall not be affected by any renewal or extension in the time of payment hereof or by any release or change in any security for the payment of this Note, regardless of the number of such renewals, extensions, releases, or changes. 9. Business Days. In any case where a payment of principal or interest ------------- hereon is due on a day which is not a Business Day, Maker shall be entitled to delay such payment until the next succeeding Business Day, but interest shall continue to accrue until the payment is, in fact, made. As used herein, "Business Day" means every day other than a Saturday, Sunday, or other day on which national banks in the State of Texas are not required to be open for business. Maker: TELENETICS CORPORATION By: --------------------------------------------- Its: --------------------------------------------- Page 3 EX-7 8 SCHEDULE 13D OF SAUNDERS & PARKER, INC. EXHIBIT 7 SCHEDULE 13D SAUNDERS & PARKER INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Telenetics Corporation -------------------------------------------------------- (Name of Issuer) Common Stock -------------------------------------------------------- (Title of Class of Securities) 87943P408 -------------------------------------------------------- (CUSIP Number) Saunders & Parker, Inc. 5735 Prestwick Lane Dallas, TX 75252 (972)732-0712 With a copy to: Sally A. Schreiber, Esq. Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, TX 75202 (214) 855-7500 -------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) January 7, 2000 -------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of (S) (S) 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [ ]. NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 240.13d-7 for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). (Continued on following page(s)) Page 2 of 7 Pages CUSIP No. 87943P408 Schedule 13D - ------------------------------------------------------------------------------- (1) Names of reporting person. I.R.S. Identification Nos. of Above Person Saunders & Parker, Inc. - ------------------------------------------------------------------------------- (2) Check the Appropriate Box if a Member (a) [ ] of a Group (b) [X] - ------------------------------------------------------------------------------- (3) SEC Use Only ___________________ - ------------------------------------------------------------------------------- (4) Source of Funds OO - ------------------------------------------------------------------------------- (5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- (6) Citizenship or Place of Organization Texas, U.S.A. - ------------------------------------------------------------------------------- Number of Shares (7) Sole Voting Beneficially Owned Power by Each Reporting 1,100,000/1/ Person With -------------------------------------------------- (8) Shared Voting Power 0 -------------------------------------------------- (9) Sole Dispositive Power 1,100,000/1/ -------------------------------------------------- (10) Shared Dispositive Power 0 - ------------------------------------------------------------------------------- (11) Aggregate Amount Beneficially Owned by Each Reporting Person 1,100,000/1/ - ------------------------------------------------------------------------------- (12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares [ ] - ------------------------------------------------------------------------------- (13) Percent of Class Represented by Amount in Row (11) 9.5% - ------------------------------------------------------------------------------- (14) Type of Reporting Person CO - ------------------------------------------------------------------------------- /1/ Of these shares, 600,000 are deemed to be beneficially owned as a result of the ownership of an exercisable option and 500,000 are deemed to be beneficially owned as a result of the pledge of such shares. Page 3 of 7 Pages ITEM 1. SECURITY AND ISSUER Common stock, no par value ("Common Stock"), of Telenetics Corporation, a California corporation ("Telenetics") whose principal executive offices are at 25111 Arctic Ocean, Lake Forest, CA 92630. ITEM 2. IDENTITY AND BACKGROUND (a) Saunders & Parker, Inc. is a Texas corporation (the "Reporting Person"). William C. Saunders ("Saunders") and Terry S. Parker ("Parker") are the only executive officers, directors and shareholders of the Reporting Person. Each of Saunders and Parker is a Co-President, director and 50% shareholder of the Reporting Person. (b) The address of the Reporting Person's principal office and principal business is 5735 Prestwick Lane, Dallas, TX 75252. Saunders' business address is the same as the Reporting Person's. Parker's business address is the same as the Reporting Person's. (c) The principal business of the Reporting Person is consulting and investment. Saunders' principal employment is with the Reporting Person. Parker's principal employment is with the Reporting Person. See Item 2(b) of this Schedule 13D for the address of the Reporting Person. (d) In the past five years, neither the Reporting Person, Saunders nor Parker has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) In the past five years, neither the Reporting Person, Saunders nor Parker has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction that resulted in it or him being subject to a judgment, decree, or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) Both Saunders and Parker are citizens of the United States of America. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION Of the shares reported on, none are actually owned by the Reporting Person at the date of this Schedule 13D. Six hundred thousand shares are subject to options (the "Options") that are presently exercisable at $1.75 per share and the remaining five hundred thousand shares (the "Pledged Shares") are held as security for payment of a note, all as discussed in more detail below. The Options were granted to the Reporting Person pursuant to that certain Non-Qualified Stock Option Agreement dated January 7, 2000, executed by Telenetics ("Non-Qualified Stock Option Agreement"), a copy of which is filed as an exhibit to this Schedule 13D, as partial consideration for the services to be performed by the Reporting Person under that certain Consulting Agreement dated January 7, 2000 ("Consulting Agreement"), executed by Telenetics and the Reporting Person, a copy of which is filed as an exhibit to this Schedule 13D. The Pledged Shares were pledged to the Reporting Person pursuant to that certain Pledge Agreement dated January 7, 2000 ("Stock Pledge Page 4 of 7 Pages Agreement"), executed by Michael A. Armani, the President and a director of Telenetics, in connection with that certain Guaranty dated January 7, 2000 (the "Guaranty"), executed by Michael A. Armani, which, in turn, was executed in connection with that certain Promissory Note dated January 7, 2000 (the "Note"), executed by Telenetics and payable to the order of the Reporting Person. The Note evidences certain liabilities assumed by Telenetics in connection with its acquisition of stock of eflex Wireless, Inc., a Delaware corporation ("eflex"), pursuant to that certain Stock Purchase Agreement dated January 7, 2000 ("Stock Purchase Agreement"), executed by Telenetics and the shareholders of eflex. For information on Parker and Saunders, as required in Instruction C, please see Item 3 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. ITEM 4. PURPOSE OF TRANSACTION The Reporting Person acquired the Options as partial consideration for the services to be performed under the Consulting Agreement, and the Reporting Person took a pledge of the Pledged Shares to secure payment of the Note. The Reporting Person acquired the shares of Common Stock reported on hereunder for investment purposes and currently has no plans or proposals with respect to any of the matters described in (a) through (j) of Item 4 of Schedule 13D. For information on Parker and Saunders, as required in Instruction C, please see Item 4 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) Number of shares of Common Stock deemed to be beneficially owned by Reporting Person: 1,100,000, including the 1,000,000 deemed to be beneficially owned by the Reporting Person. Number of shares of Common Stock deemed to be beneficially owned by Parker: 2,516,179, including the 1,100,000 deemed to be beneficially owned by the Reporting Person. Number of shares of Common Stock deemed to be beneficially owned by Saunders: 2,516,179, including the 1,100,000 deemed to be beneficially owned by the Reporting Person. Percentage of class of securities deemed to be beneficially owned by Reporting Person: 9.5%. Percentage of class of securities deemed to be beneficially owned by Parker: 19.6%, including the 9.5% deemed to be beneficially owned by the Reporting Person as described in this Schedule 13D. Percentage of class of securities deemed to be beneficially owned by Saunders: 19.6%, including the 9.5% deemed to be beneficially owned by the Reporting Person as described in this Schedule 13D. Page 5 of 7 Pages (b) Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to vote: 1,100,000/2/ Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to vote: 0 Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to dispose: 1,100,000/2/ Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to dispose: 0 For information on Parker and Saunders, as required in Instruction C, please see Item 5(b) of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. (c) The Reporting Person has not had any transactions in Common Stock, except as described herein. The transactions described herein occurred on January 7, 2000. For information on Parker and Saunders, as required in Instruction C, please see Item 5(c) of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. (d) Each of Saunders and Parker, as a result of being a 50% shareholder, director, and Co-President of the Reporting Person, will be able to influence the power to direct the receipt of dividends from, or the proceeds from the disposition of, the shares of Common Stock subject to the Options and the Pledged Shares. For information on Parker and Saunders, as required in Instruction C, please see Item 5(d) of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. (e) Not Applicable to Reporting Person, Saunders or Parker. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Reference is made to the Stock Purchase Agreement, the Non-Qualified Stock Option Agreement, the Consulting Agreement, the Stock Pledge Agreement, the Guaranty, and the Note. A copy of each of the aforementioned documents is filed as an exhibit to this Schedule 13D. For information on Parker and Saunders, as required in Instruction C, please see Item 6 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. - ------------------------- /2/ Assumes exercise of Options and the existence of an Event of Default under the Stock Pledge Agreement. For more information, please see Item 3 of this Schedule 13D. Page 6 of 7 Pages ITEM 7. MATERIAL TO BE FILED AS EXHIBITS The following are filed as exhibits to this Schedule 13D: (1) Stock Purchase Agreement (2) Non-Qualified Stock Option Agreement (3) Consulting Agreement (4) Stock Pledge Agreement (5) Guaranty (6) Note (7) Schedule 13D of Terry S. Parker with respect to Telenetics dated January 18, 2000 (8) Schedule 13D of William C. Saunders with respect to Telenetics dated January 18, 2000 EX-8 9 SCHEDULE 13D OF WILLIAM C. SAUNDERS EXHIBIT 8 SCHEDULE 13D WILLIAM C. SAUNDERS SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 Telenetics Corporation -------------------------------------------------------- (Name of Issuer) Common Stock -------------------------------------------------------- (Title of Class of Securities) 87943P408 -------------------------------------------------------- (CUSIP Number) William C. Saunders 5735 Prestwick Lane Dallas, TX 75252 (972)732-0712 With a copy to: Sally A. Schreiber, Esq. Munsch Hardt Kopf & Harr, P.C. 4000 Fountain Place 1445 Ross Avenue Dallas, TX 75202 (214) 855-7500 -------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) January 7, 2000 -------------------------------------------------------- (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of (S) (S) 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box [ ]. NOTE: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 240.13d-7 for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which could alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). (Continued on following page(s)) Page 2 of 6 Pages CUSIP No. 87943P408 Schedule 13D - ------------------------------------------------------------------------------- (1) Names of reporting person. I.R.S. Identification Nos. of Above Person William C. Saunders - ------------------------------------------------------------------------------- (2) Check the Appropriate Box if a Member (a) [ ] (b) [X] - ------------------------------------------------------------------------------- (3) SEC Use Only ___________________ - ------------------------------------------------------------------------------- (4) Source of Funds PF - ------------------------------------------------------------------------------- (5) Check if Disclosure of Legal Proceedings is Required Pursuant to Items 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- (6) Citizenship or Place of Organization United States of America - ------------------------------------------------------------------------------- Number of Shares (7) Sole Voting Beneficially Owned Power by Each Reporting 1,416,179/1/ Person With -------------------------------------------------- (8) Shared Voting Power 1,100,000/2/ -------------------------------------------------- (9) Sole Dispositive Power 1,416,179/1/ -------------------------------------------------- (10) Shared Dispositive Power 1,100,000/2/ - ------------------------------------------------------------------------------- (11) Aggregate Amount Beneficially Owned by Each Reporting Person 2,516,179/3/ - ------------------------------------------------------------------------------- (12) Check if the Aggregate Amount in Row (11) Excludes Certain Shares [ ] - ------------------------------------------------------------------------------- (13) Percent of Class Represented by Amount in Row (11) 19.6% - ------------------------------------------------------------------------------- (14) Type of Reporting Person IN - ------------------------------------------------------------------------------- - ------------------------- /1/ Of these shares, 168,750 are actually owned by the Reporting Person and 1,247,129 are not currently owned but may be acquired if certain conditions are met. /2/ These shares are shares that Saunders & Parker, Inc., a Texas corporation ("S&P"), of which the Reporting Person is an executive officer, director, and 50% shareholder, does not currently own but may acquire. Of these shares, 600,000 are subject to an exercisable option held by S&P and 500,000 are pledged to S&P. /3/ See notes 1 and 2 above. Page 3 of 6 Pages ITEM 1. SECURITY AND ISSUER Common stock, no par value, of Telenetics Corporation, a California corporation ("Common Stock") whose principal executive offices are at 25111 Arctic Ocean, Lake Forest, CA 92630 ("Telenetics") ITEM 2. IDENTITY AND BACKGROUND (a) The name of the Reporting Person (herein so called) is William C. Saunders. (b) The Reporting Person's business address is c/o Saunders & Parker, Inc., 5735 Prestwick Lane, Dallas, TX 75252. (c) The Reporting Person's present principal occupation is as Co- President of S&P, which has its principal business and office address at 5735 Prestwick Lane, Dallas, TX 75252. The principal business of S&P is consulting and investment. (d) In the past five years, the Reporting Person has not been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) In the past five years, the Reporting Person has not been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction where as a result of such proceeding the Reporting Person was or is subject to a judgment, decree, or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) The Reporting Person is a citizen of the United States of America. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION The Reporting Person acquired 168,750 shares of Common Stock and the potential to receive up to an additional 1,247,429 shares of Common Stock as consideration for the sale of 2,250 shares of common stock of eflex Wireless, Inc., a Delaware corporation ("eflex"), owned by the Reporting Person pursuant to the terms of that certain Stock Purchase Agreement dated January 7, 2000 (the "Stock Purchase Agreement"), executed by Telenetics, the Reporting Person, and others, a copy of which is filed as an exhibit to this Schedule 13D. The Reporting Person is a Co-President, director, and 50% shareholder of S&P. As a result, the Reporting Person may also be deemed to be the beneficial owner of the 1,100,000 shares of Common Stock that are deemed to be beneficially owned by S&P. Of those 1,100,000 shares, six hundred thousand are subject to options (the "Options") held by S&P that are presently exercisable at $1.75 per share and the remaining five hundred thousand shares (the "Pledged Shares") are held by S&P as security for payment of a note, all as discussed in more detail below. S&P beneficially owns the Options pursuant to that certain Non- Qualified Stock Option Agreement dated January 7, 2000, executed by Telenetics("Non-Qualified Stock Option Agreement"), a copy of which is filed as an exhibit to this Schedule 13D. The Options were granted by Telenetics as partial consideration for the services to be provided by S&P under that certain Consulting Agreement, dated January 7, 2000 Page 4 of 6 Pages ("Consulting Agreement"), executed by Telenetics and S&P. A copy of the Consulting Agreement is filed as an exhibit to this Schedule 13D. The Pledged Shares were pledged to S&P pursuant to that certain Pledge Agreement dated January 7, 2000 ("Stock Pledge Agreement"), executed personally by Michael A. Armani, the President and a director of Telenetics, which was executed in connection with that certain Guaranty dated January 7, 2000 (the "Guaranty"), executed by Michael A. Armani, which, in turn, was executed in connection with that certain Promissory Note dated January 7, 2000 (the "Note"), executed by Telenetics and payable to the order of S&P. The Note evidences certain liabilities assumed by Telenetics in connection with the Stock Purchase Agreement. ITEM 4. PURPOSE OF TRANSACTION The Reporting Person, among others, owned shares of the common stock of eflex. Telenetics desired to purchase all of the outstanding shares of eflex. After negotiations between the individual shareholders of eflex and Telenetics, each share of common stock of eflex was purchased by Telenetics for 75 shares of Common Stock of Telenetics and the right to receive up to an additional 554.4 shares of Common Stock through an earn-out provision in the Stock Purchase Agreement./4/ The Reporting Person acquired beneficial ownership of the shares of Common Stock under the Stock Purchase Agreement for investment purposes. Pursuant to the Stock Purchase Agreement, Telenetics will use its best efforts to elect either the Reporting Person or Terry S. Parker ("Parker"), the other Co-President of S&P, to the board of directors of Telenetics. If the Reporting Person is not elected to the board of directors, he will be an adviser to the board of directors of Telenetics. Each of the Reporting Person and Parker became an adviser to the Telenetics board of directors on January 7, 2000. For information concerning the purpose for the acquisition of beneficial ownership of Common Stock by S&P that the Reporting Person may be deemed to beneficially own, please see Item 4 of the Schedule 13D executed by S&P on January 18, 2000, with respect to Telenetics, a copy of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. Except as set forth above, the Reporting Person does not currently have any plans or proposals with respect to any of the matters described in (a) through (j) of Item 4 of Schedule 13D. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) Number of shares of Common Stock deemed to be beneficially owned by Reporting Person: 2,516,179 Percentage of class of securities deemed to be beneficially owned by Reporting Person: 19.6% (b) Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to vote: 1,416,179 - ------------------------- /4/ If the conditions for the earn-out shares are met, an aggregate of 5,544,129 additional shares of Common Stock of Telenetics will be issued to the former shareholders of eflex but, in accordance with SEC regulations, only the additional shares to be issued to the Reporting Person are used in calculating the percentage of shares beneficially owned by the Reporting Person. Page 5 of 6 Pages Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to vote: 1,100,000 Number of shares deemed to be beneficially owned by Reporting Person as to which it has the sole power to dispose: 1,416,179 Number of shares deemed to be beneficially owned by Reporting Person as to which it has the shared power to dispose: 1,100,000 The power to vote and dispose of the 600,000 shares subject to the Options and the 500,000 Pledged Shares would be held by S&P if the Options were exercised and/or an event of default under the Stock Pledge Agreement exists, respectively. Parker, a Co-President, director and 50% Shareholder of S&P, and the Reporting Person, who is also a Co-President, director, and 50% shareholder of S&P, would share the right to vote or to direct the vote and the power to dispose or influence the disposition of such shares as a result of such positions. For information on Parker and S&P, please see Item 2 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. (c) The Reporting Person has not had any transactions in Telenetics Common Stock, except as described herein. The transactions described herein occurred on January 7, 2000. (d) Except as described in Item 5(b), no other person is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the securities listed in Item 5(a). (e) Not Applicable ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER. Reference is made to the Stock Purchase Agreement, the Non-Qualified Stock Option Agreement, the Consulting Agreement, the Stock Pledge Agreement, the Guaranty, and the Note. A copy of each of the aforementioned is filed as an Exhibit to this Schedule 13D filing. For information on Parker and S&P, as required in Instruction C, please see Item 6 of the Schedule 13D executed by each of them on January 18, 2000, with respect to Telenetics, a copy of each of which is filed as an exhibit to this Schedule 13D, which information is incorporated herein by reference. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS The following agreement is filed as an exhibit to this Schedule 13D; (1) Stock Purchase Agreement (2) Non-Qualified Stock Option Agreement (3) Consulting Agreement (4) Stock Pledge Agreement (5) Guaranty (6) Note (7) Schedule 13D of S&P with respect to Telenetics dated January 18, 2000 (8) Schedule 13D of Parker with respect to Telenetics dated January 18, 2000 Page 6 of 6 Pages SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. January 18, 2000 ---------------------------------------- (Date) /s/ William C. Saunders ---------------------------------------- (Signature) William C. Saunders -----END PRIVACY-ENHANCED MESSAGE-----