FONIX CORPORATION SERIES E 9% SECURED SUBORDINATED CONVERTIBLE DEBENTURE DUE NOVEMBER 30, 2011
NEITHER
THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE
HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.
|
No.
E-1
|
U.S.
$850,000
|
FONIX
CORPORATION
SERIES
E 9% SECURED SUBORDINATED CONVERTIBLE DEBENTURE DUE NOVEMBER 30,
2011
THIS
DEBENTURE is one of a duly authorized issue of debentures of Fonix Corporation,
a Delaware corporation, having a principal place of business at ▇▇▇▇ ▇ ▇▇▇
▇,
▇▇▇▇▇ ▇▇▇, ▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇ (the ACompany@),
designated as its Series E 9% Convertible Debentures, due November 30, 2011
(the
ADebentures@),
in an
aggregate principal amount of up to $2,000,000. This Debenture is purchased
by
the initial Holder (as defined herein) pursuant to the terms of that certain
Securities Purchase Agreement dated as of the Original Issue Date (as defined
herein), between the Company and the initial Holder of Debentures, as amended,
modified or supplemented from time to time in accordance with its terms
(APurchase
Agreement@).
FOR
VALUE
RECEIVED, the Company promises to pay to Southridge Partners, LP, a Delaware
limited partnership or registered assigns (the AHolder@),
the
principal sum of Eight Hundred Fifty Thousand ($850,000), on or prior to
November
30, 2011
(the
AMaturity
Date@)
, or
such earlier date as the Debentures are required to be repaid as provided
hereunder and to pay interest to the Holder on the principal sum at the rate
of
9% per annum, payable on a quarterly basis in arrears on the first date of
each
month of each year during the term hereof (each an "Interest
Payment Date")
and on
each Conversion Date (as defined herein) for such principal amount. Interest
shall accrue daily commencing on the Original Issue Date (as defined in Section
6) until payment in full of the principal sum, together with all accrued and
unpaid interest and other amounts which may become due hereunder, has been
made.
Interest shall be calculated on the basis of a 360-day year and for the actual
number of days elapsed. Interest hereunder will be paid to the person in whose
name this Debenture (or one or more predecessor Debentures) is registered on
the
records of the Company regarding registration and transfers of the Debentures
(the ADebenture
Register@).
The
principal of, and interest on, this Debenture are payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address of the Holder
last appearing on the Debenture Register.
The
Company may, at its option, issue shares of the Common Stock in payment of
interest on the principal amount. Notwithstanding anything to the contrary
contained herein, however, the Company may not issue shares of the Common Stock
in payment of interest on the principal amount if: (i) the number of shares
of
Common Stock at the time authorized, unissued and unreserved for all purposes,
or held as treasury stock, is insufficient to pay interest hereunder in shares
of Common Stock; (ii) such shares (x) are not registered for resale pursuant
to
an effective Underlying Shares Registration Statement (as defined in Section
6)
and (y) may not be sold without volume restrictions pursuant to Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities
Act"),
as
determined by counsel to the Company pursuant to a written opinion letter,
addressed to the Company=s
Transfer Agent, in form and substance acceptable to the Holders and such
transfer agent; (iii) such shares are not listed on the OTC Bulletin Board
(AOTCBB@)
and any
other exchange on which the Common Stock is then listed for trading; (iv) the
Company has failed to satisfy its conversion obligations hereunder, or (v)
the
issuance of such shares would result in a violation of Section
4(a)(ii).
This
Debenture is subject to the following additional provisions:
Section 1. The
Debentures are issuable in denominations of Two Hundred Thousand Dollars
($200,000) or additional increments thereof. The Debentures are exchangeable
for
an equal aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same but shall not
be
issuable in denominations of less than integral multiples of Two Hundred
Thousand Dollars ($200,000) unless such amount represents the full principal
balance of Debentures outstanding to such Holder. No service charge will be
made
for such registration of transfer or exchange.
Section 2. This
Debenture has been issued subject to certain investment representations of
the
original Holder set forth in the Purchase Agreement and may be transferred
or
exchanged only in compliance with the Purchase Agreement. Prior to due
presentment to the Company for transfer of this Debenture, the Company and
any
agent of the Company may treat the person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or
not
this Debenture is overdue, and neither the Company nor any such agent shall
be
affected by notice to the contrary.
Section 3. Events
of Default.
(a) "Event
of Default"
wherever used herein, means any one of the following events (whatever the reason
and whether it shall be voluntary or involuntary or effected by operation of
law
or pursuant to any judgment, decree or order of any court, or any order, rule
or
regulation of any administrative or governmental body):
(i) any
default in the payment of the principal of, interest on or liquidated damages
in
respect of, this Debenture, free of any claim of subordination, as and when
the
same shall become due and payable, (whether on an Interest Payment Date,
Conversion Date or the Maturity Date or by acceleration or
otherwise);
2
(ii) the
Company shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach of, this Debenture, the
Purchase Agreement or the Registration Rights Agreement (as defined in Section
6), and such failure or breach shall not have been remedied within 10 days
after
the date on which notice of such failure or breach shall have been
given;
(iii)
the
Company shall commence a voluntary case under the United States Bankruptcy
Code
or insolvency laws as now or hereafter in effect or any successor thereto (the
"Bankruptcy
Code");
or an
involuntary case is commenced against the Company under the Bankruptcy Code
and
the petition is not controverted within 30 days, or is not dismissed within
60
days, after commencement of such involuntary case; or a "custodian" (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any
jurisdiction whether now or hereafter in effect relating to the Company or
there
is commenced against the Company any such proceeding which remains undismissed
for a period of 60 days; or the Company is adjudicated insolvent or bankrupt;
or
any order of relief or other order approving any such case or proceeding is
entered; or the Company suffers any appointment of any custodian or the like
for
it or any substantial part of its property which continues undischarged or
unstayed for a period of 60 days; or the Company makes a general assignment
for
the benefit of creditors; or the Company shall fail to pay, or shall state
that
it is unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company shall call a meeting of its creditors with a view
to
arranging a composition or adjustment of its debts; or the Company shall by
any
act or failure to act indicate its consent to, approval of or acquiescence
in
any of the foregoing; or any corporate or other action is taken by the Company
for the purpose of effecting any of the foregoing;
(iv)
the
Company shall default in any of its obligations under any mortgage, credit
agreement or other facility, indenture agreement or other instrument under
which
there may be issued, or by which there may be secured or evidenced any
indebtedness of the Company in an amount exceeding two hundred thousand dollars
($200,000), whether such indebtedness now exists or shall hereafter be created
and such default shall result in such indebtedness becoming or being declared
due and payable prior to the date on which it would otherwise become due and
payable;
(v) the
Common Stock shall fail to be listed on the OTCBB or any other national
securities exchange or market on which such Common Stock is then listed for
trading or suspended from trading thereon without being relisted or having
such
suspension lifted, as the case may be, within 3 Trading Days;
3
(vi)
the
Company shall be a party to any Change of Control Transaction (as defined in
Section 6), shall agree to sell or dispose of all or in excess of 40% of its
assets in one or more transactions (whether or not such sale would constitute
a
Change of Control Transaction), or shall redeem more than a de minimis number
of
shares of Common Stock or other equity securities of the Company (other than
redemptions of Underlying Shares);
(vii)
an
Underlying Shares Registration Statement shall not have been declared effective
by the Securities and Exchange Commission (the ACommission@)
on or
prior to the Effectiveness Date;
(viii)
an
Event
(as hereinafter defined) shall not have been cured to the satisfaction of the
Holder prior to the expiration of thirty (30) days from the Event Date (as
hereinafter defined) relating thereto (other than an Event resulting from a
failure of an Underlying Shares Registration Statement to be declared effective
by the Commission on or prior to the Effective Date (as defined in the
Registration Rights Agreement));
(ix)
the
Company shall fail for any reason to deliver certificates to a Holder prior
to
the twelfth (12th)
day
after a Conversion Date pursuant to Section 4(b) or the Company shall provide
notice to the Holder, including by way of public announcement, at any time,
of
its intention not to comply with requests for conversions of any Debentures
in
accordance with the terms hereof; or
(x) the
Company shall fail for any reason to deliver the payment in cash pursuant to
a
Buy-In (as defined below) within ten (10) days after notice is deemed delivered
hereunder.
(b) If
any
Event of Default occurs pursuant to Section 3(a)(i) above, the Company shall
have fifteen (15) days to cure the default by making the payment of the
principal of, interest on or liquidated damages in respect of, this Debenture.
If any Event of Default occurs pursuant to Sections 3(a)(ii) through 3(a)(x)
above and is continuing, the full principal amount of this Debenture (and,
at
the Holder's option, all other Debentures then held by such Holder), together
with interest and other amounts owing in respect thereof, to the date of
acceleration shall become, immediately due and payable in cash. The Company
shall have a thirty (30) day cure period to make payment in cash of the
outstanding balance of the Debenture (the ACure
Payment@).
In the
event that the default is not cured within the applicable cure period following
the occurrence of an Event of Default, the Company shall owe to the Buyer a
one-time default penalty (the ADefault
Penalty@)
equal
to twelve percent (12%) of the then-outstanding balance (principal and interest)
of the Debenture, which shall be immediately due and payable in cash;
and
(c) The
Holder need not provide and the Company hereby waives any presentment, demand,
protest or other notice of any kind, and the Holder may immediately and without
expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such
declaration may be rescinded and annulled by ▇▇▇▇▇▇ at any time prior to payment
hereunder. No such rescission or annulment shall affect any subsequent Event
of
Default or impair any right consequent thereon.
4
Section
4. Conversion.
(a) (i) This
Debenture
shall be convertible into shares of Common Stock (subject to the limitation
set
forth in Section 4(a)(ii)) at the option of the Holder in whole or in part
at
any time and from time to time after the Original Issue Date and prior to the
close of business on the Maturity Date. The number of shares of Common Stock
issuable upon a conversion hereunder shall be determined by dividing the
outstanding principal amount of this Debenture to be converted, plus all accrued
but unpaid interest thereon, by the Conversion Price, each as subject to
adjustment as provided hereunder. The Holder shall effect conversions by
tendering the form of conversion notice attached hereto as Exhibit
A
(the
"Conversion
Notice")
to the
Company. Each Conversion Notice shall specify the amount of principal and
interest of the Debentures to be converted and the date on which such conversion
is to be effected, which date may not be prior to the date of such Conversion
Notice is deemed to have been delivered pursuant to Section 4(h) (the
"Conversion
Date").
If no
Conversion Date is specified in a Conversion Notice, the Conversion Date shall
be the date that the Conversion Notice is deemed delivered pursuant to Section
4(h). Subject to Section 4(b) hereof, each Conversion Notice, once given, shall
be irrevocable. Upon the conversion of the remaining principal and interest
on
the Debenture, the Holder shall surrender the Debenture to the Company along
with the Conversion Notice.
(ii) Certain
Conversion Restrictions.
(A)
The
Holder agrees not to convert Debentures to the extent such conversion would
result in the Holder beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act and the rules thereunder) in excess of 4.999%
of the then issued and outstanding shares of Common Stock, including shares
issuable upon conversion of the Debentures held by such Holder after application
of this Section, except in the case of a merger by the Company or other organic
change. The Holder shall have the sole authority and obligation to determine
whether the restriction contained in this Section applies and to the extent
the
Holder determines that the restriction contained in this Section applies, the
determination of which portion of the principal amount of such Debentures is
convertible shall be in the sole discretion of the Holder. The provisions of
this Section may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company. Other
Holders shall be unaffected by any such waiver.
(B) [Reserved.]
5
(b)
(i) Not
later
than three (3) Trading Days after the Conversion Date, the Company will deliver
to the Holder (i) a certificate or certificates which shall be free of
restrictive legends and trading restrictions (other than those required by
Section 4(g)(ii) of the Purchase Agreement) representing the number of shares
of
the Common Stock being acquired upon the conversion of Debentures, (ii) plus
either (a) a bank check in the amount of all accrued and unpaid interest (if
the
Company has elected to pay accrued interest in cash), together with all other
amounts then due and payable in accordance with the terms hereof, in respect
of
Debentures tendered for conversion, or (b) if the Company has elected and is
permitted to pay accrued interest in shares of the Common Stock, certificates,
which shall be free of restrictive legends (other than those required by Section
4(g) of the Purchase Agreement), representing such number of shares of the
Common Stock as equals such interest divided by the Conversion Price on the
applicable Conversion Date; provided,
however,
that
the Company shall not be obligated to issue certificates evidencing the shares
of the Common Stock issuable upon conversion of the principal amount of
Debentures until the Holder has delivered a Conversion Notice to the Company.
The Company shall, upon request of the Holder, use its best efforts to deliver
any certificate or certificates required to be delivered by the Company under
this Section electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in the case
of
any Conversion Notice such certificate or certificates, including for purposes
hereof, any shares of the Common Stock to be issued on a Conversion Date on
account of accrued but unpaid interest hereunder, are not delivered to or as
directed by the applicable Holder by the third Trading Day after a Conversion
Date, the Holder shall be entitled by written notice to the Company at any
time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return
any
Debentures tendered for conversion.
(ii) If
the
Company fails to deliver to the Holder such certificate or certificates pursuant
to this Section, including for purposes hereof, any shares of the Common Stock
to be issued on a Conversion Date on account of accrued but unpaid interest
hereunder, prior to the fifth (5th) Trading Day after a Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as
a
penalty, $2,500 for each day after such fifth (5th) Trading Day until such
certificates are delivered. Such amount shall be also be due for each Trading
Day after the date that the Holder may rescind such conversion until such date
as the Holder shall have received the return of the principal amount of
Debentures relating to such rescission.
(iii)
In
addition to any other rights available to the Holder, if the Company fails
to
deliver to the Holder such certificate or certificates pursuant to Section
4(b)(i), including for purposes hereof, any shares of Common Stock to be issued
on the Conversion Date on account of accrued but unpaid interest hereunder,
by
the third (3rd)
Trading
Day after the Conversion Date, and if after such third (3rd)
Trading
Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by such Holder of the Underlying
Shares which the Holder was entitled to receive upon such conversion (a
"Buy-In"),
then
the Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder's
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder was entitled to receive from the conversion
at
issue multiplied by (2) the market price of the Common Stock at the time of
the
sale giving rise to such purchase obligation and (B) at the option of the
Holder, either return the aggregate principal amount of Debentures for which
such conversion was not honored or deliver to such Holder the number of shares
of Common Stock that would have been issued had the Company timely complied
with
its conversion and delivery obligations under Section 4(b)(i). For example,
if
the Holder purchases Common Stock having a total purchase price of $11,000
to
cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
principal amount of Debentures, under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In. Notwithstanding anything contained herein
to
the contrary, if a Holder requires the Company to make payment in respect of
a
Buy-In for the failure to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be required to pay
such
Holder liquidated damages under Section 4(b)(ii) in respect of the certificates
resulting in such Buy-In.
6
(c)
(i) The
conversion price (the "Conversion
Price")
in
effect on any Conversion Date shall be the average of the two lowest Per Share
Market Values for the twenty (20) Trading Days immediately preceding the
Conversion Date multiplied by the Applicable Percentage (as defined in Section
6, below); provided,
however,
that
such twenty (20) Trading Day period shall be extended for the number of Trading
Days during such period in which (A) trading in the Common Stock was suspended
on the OTCBB or on such Subsequent Market on which the Common Stock is then
listed or traded, or (B) after the date declared effective by the Commission,
the Underlying Shares Registration Statement is not effective, or (C) after
the
date declared effective by the Commission, the Prospectus included in the
Underlying Shares Registration Statement may not be used by the Holder for
the
resale of Underlying Shares; provided that,
(a) if
the registration statement registering the resale of the shares of Common Stock
issuable upon conversion of the Debentures and payment of interest thereunder
and naming the Holder as a Selling Stockholder thereunder (the "Underlying
Shares Registration Statement")
is not
filed on or prior to the 30th
day
after the Original Issue Date, or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2 promulgated
under the Securities Exchange Act of 1934, as amended, within five (5) days
of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that an Underlying Shares Registration Statement
will
not be "reviewed" or is not subject to further review or comment by the
Commission, or (c) Underlying Shares Registration Statement is not declared
effective by the Commission on or prior to the 90th day after the filing, or
(d)
if such Underlying Shares Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as such term is defined in the Registration Rights
Agreement) at any time prior to the expiration of the "Effectiveness Period"
(as
such term as defined in the Registration Rights Agreement), without being
succeeded by an amendment to such Underlying Shares Registration Statement
or a
subsequent Underlying Shares Registration Statement filed with the Commission
within ten (10) days, or (e) if trading in the Common Stock shall be suspended
for any reason subsequent to any permitted Blackout Period as defined in the
Registration Rights Agreement for more than 3 Trading Days, or (f) if the
conversion rights of the Holders of Debentures hereunder are suspended for
any
reason or (g) an amendment to the Underlying Securities Registration Statement
is not filed by the Company with the Commission within ten (10) days of the
Commission's notifying the Company that such amendment is required in order
for
the Underlying Shares Registration Statement to be declared effective (any
such
failure being referred to as an "Event,"
and
for purposes of clauses (a), (c) and (f) the date on which such Event occurs,
or
for purposes of clause (b) the date on which such five (5) days period is
exceeded, or for purposes of clauses (d) and (g) the date which such 10-day
period is exceeded, or for purposes of clause (e) the date on which such 3
Trading Day period is exceeded, being referred to as "Event
Date"),
the
Applicable Percentage shall be decreased by 2.5% on the Event Date and on each
monthly anniversary thereof until the applicable Event is cured (i.e., the
Applicable Percentage will be reduced to 67.5% on the Event Date and 65% on
the
first monthly anniversary thereof). Any decrease in the Applicable Percentage
pursuant to this Section shall remain in effect notwithstanding the fact that
the Event causing such decrease has been subsequently cured and further monthly
decreases have ceased. The provisions of this Section are not exclusive and
shall in no way limit the Company's obligations under the Registration Rights
Agreement.
7
(ii) If
the
Company, at any time while any Debentures are outstanding, (a) shall pay a
stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of the Common Stock, (b) subdivide outstanding shares of the Common
Stock
into a larger number of shares, (c) combine outstanding shares of the Common
Stock into a smaller number of shares, or (d) issue by reclassification of
shares of the Common Stock any shares of capital stock of the Company, the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of the Common Stock (excluding treasury shares, if
any)
outstanding before such event and of which the denominator shall be the number
of shares of the Common Stock outstanding after such event. Any adjustment
made
pursuant to this Section 4(c)(ii) shall become effective immediately after
the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or
re-classification.
(iii) If
the
Company, at any time while any Debentures are outstanding, shall issue rights
or
warrants to all holders of the Common Stock (and not to Holders of Debentures)
entitling them to subscribe for or purchase shares of the Common Stock at a
price per share less than the Per Share Market Value of the Common Stock at
the
record date mentioned below, the Conversion Price shall be multiplied by a
fraction, of which the denominator shall be the number of shares of the Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance
of
such rights or warrants plus the number of additional shares of the Common
Stock
offered for subscription or purchase, and of which the numerator shall be the
number of shares of the Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares
so
offered would purchase at such Per Share Market Value. Such adjustment shall
be
made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such rights or warrants. However, upon the expiration of any right
or
warrant to purchase shares of the Common Stock the issuance of which resulted
in
an adjustment in the Conversion Price pursuant to this Section 4(c)(iii), if
any
such right or warrant shall expire and shall not have been exercised, the
Conversion Price shall immediately upon such expiration be recomputed and
effective immediately upon such expiration be increased to the price which
it
would have been (but reflecting any other adjustments in the Conversion Price
made pursuant to the provisions of this Section 4 after the issuance of such
rights or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights or warrants been made on the basis of offering for
subscription or purchase only that number of shares of the Common Stock actually
purchased upon the exercise of such rights or warrants actually
exercised.
8
(iv)
If
the
Company or any subsidiary thereof, as applicable with respect to Common Stock
Equivalents (as defined below), at any time while Debentures are outstanding,
shall issue shares of Common Stock or rights, warrants, options or other
securities or debt that is convertible into or exchangeable for shares of Common
Stock (ACommon
Stock Equivalents@)
entitling any Person to acquire shares of Common Stock at discount to market
greater than the Applicable Percentage, then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to the issuance of shares of
Common Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock or Common
Stock Equivalents would purchase at the Conversion Price, and the denominator
of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
so
issued or issuable, provided, that for purposes hereof, all shares of Common
Stock that are issuable upon exercise or exchange of Common Stock Equivalents
shall be deemed outstanding immediately after the issuance of such Common Stock
Equivalents. Such recalculation shall be made whenever such shares of Common
Stock or Common Stock Equivalents are issued.
(v) If
the
Company, at any time while Debentures are outstanding, shall distribute to
all
holders of the Common Stock (and not to Holders of Debentures) evidences of
its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price at which Debentures shall
thereafter be convertible shall be determined by multiplying the Conversion
Price in effect immediately prior to the record date fixed for determination
of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the Per Share Market Value of the Common Stock determined
as of the record date mentioned above, and of which the numerator shall be
such
Per Share Market Value of the Common Stock on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith; provided,
however,
that in
the event of a distribution exceeding ten percent (10%) of the net assets of
the
Company, such fair market value shall be determined by a nationally recognized
or major regional investment banking firm or firm of independent certified
public accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) (an "Appraiser")
selected in good faith by the holders of a majority in interest of Debentures
then outstanding; and provided,
further,
that
the Company, after receipt of the determination by such Appraiser shall have
the
right to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each such
Appraiser. In either case the adjustments shall be described in a statement
provided to the holders of Debentures of the portion of assets or evidences
of
indebtedness so distributed or such subscription rights applicable to one share
of the Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
9
(vi)
All
calculations under this Section 4 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.
(vii)
Whenever
the Conversion Price is adjusted pursuant to Section 4(c)(i) B
(v), the
Company shall promptly mail to each Holder of Debentures, a notice setting
forth
the Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii)
In
case
of any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is converted into other securities, cash
or
property, the Holder of this Debenture shall have the right thereafter to,
at
its option, (A) convert the then outstanding principal amount, together with
all
accrued but unpaid interest and any other amounts then owing hereunder in
respect of this Debenture only into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of the Common
Stock following such reclassification or share exchange, and the Holders of
the
Debentures shall be entitled upon such event to receive such amount of
securities, cash or property as the shares of the Common Stock of the Company
into which the then outstanding principal amount, together with all accrued
but
unpaid interest and any other amounts then owing hereunder in respect of this
Debenture could have been converted immediately prior to such reclassification
or share exchange would have been entitled or (B) require the Company to prepay,
from funds legally available therefor at the time of such prepayment, all of
its
Debentures at a price determined in accordance with Section 3(b). The entire
redemption price shall be paid in cash, and the terms of payment of such
redemption price shall be subject to the provisions set forth in Section 5(b).
The terms of any such reclassification or share exchange shall include such
terms so as to continue to give to the Holder the right to receive the
securities, cash or property set forth in this Section 4(c)(viii) upon any
conversion following such event. This provision shall similarly apply to
successive reclassifications or share exchanges.
|
(ix)
|
If:
|
|
A.
|
the
Company shall declare a dividend (or any other distribution) on its
Common
Stock; or
|
|
B.
|
the
Company shall declare a special nonrecurring cash dividend on or
a
redemption of its Common Stock; or
|
|
C.
|
the
Company shall authorize the granting to all holders of the Common
Stock
rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights;
or
|
|
D.
|
the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any
sale or
transfer of all or substantially all of the assets of the Company,
of any
compulsory share of exchange whereby the Common Stock is converted
into
other securities, cash or property;
or
|
10
|
E.
|
the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the
Company;
|
then
the
Company shall cause to be filed at each office or agency maintained for the
purpose of conversion of the Debentures, and shall cause to be mailed to the
Holders of Debentures at their last addresses as they shall appear upon the
stock books of the Company, at least 30 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the date
on
which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date
as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined
or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record
shall
be entitled to exchange their shares of the Common Stock for securities, cash
or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided,
however,
that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 30-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(d) If
at any
time conditions shall arise by reason of action taken by the Company which
in
the opinion of the Board of Directors are not adequately covered by the other
provisions hereof and which might materially and adversely affect the rights
of
the Holders (different than or distinguished from the effect generally on rights
of holders of any class of the Company's capital stock) or if at any time any
such conditions are expected to arise by reason of any action contemplated
by
the Company, the Company shall mail a written notice briefly describing the
action contemplated and the material adverse effects of such action on the
rights of the Holders at least 30 calendar days prior to the effective date
of
such action, and an Appraiser selected by the Holders of majority in interest
of
the Debentures shall give its opinion as to the adjustment, if any (not
inconsistent with the standards established in this Section 4), of the
Conversion Price (including, if necessary, any adjustment as to the securities
into which Debentures may thereafter be convertible) and any distribution which
is or would be required to preserve without diluting the rights of the Holders;
provided,
however,
that
the Company, after receipt of the determination by such Appraiser, shall have
the right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by
each
such Appraiser. The Board of Directors shall make the adjustment recommended
forthwith upon the receipt of such opinion or opinions or the taking of any
such
action contemplated, as the case may be; provided,
however,
that no
such adjustment of the Conversion Price shall be made which in the opinion
of
the Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.
11
(e) The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued shares of the Common Stock solely for the purpose
of
issuance upon conversion of the Debentures and payment of interest on the
Debentures, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holders, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 4(c)) upon the conversion of the
outstanding principal amount of the Debentures and payment of interest
hereunder. The Company covenants that all shares of the Common Stock that shall
be so issuable shall, upon issue, be duly and validly authorized, issued and
fully paid, nonassessable and, if the Underlying Shares Registration Statement
has been declared effective under the Securities Act, freely
tradeable.
(f) Upon
a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may
if
otherwise permitted, make a cash payment in respect of any final fraction of
a
share based on the Per Share Market Value at such time. If the Company elects
not, or is unable, to make such a cash payment, the holder shall be entitled
to
receive, in lieu of the final fraction of a share, one whole share of Common
Stock.
(g) The
issuance of certificates for shares of the Common Stock on conversion of the
Debentures shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such Debentures so converted and the Company shall
not be required to issue or deliver such certificates unless or 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.
(h) Any
and
all notices or other communications or deliveries to be provided by the Holders
of the Debentures hereunder, including, without limitation, any Conversion
Notice, shall be in writing and delivered personally, by facsimile, sent by
a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to the Company, at ▇▇▇▇ ▇ ▇▇▇ ▇,
▇▇▇▇▇ ▇▇▇, ▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇ (facsimile number (▇▇▇) ▇▇▇-▇▇▇▇),
attention Chief Financial Officer, or such other address or facsimile number
as
the Company may specify for such purposes by notice to the Holders delivered
in
accordance with this Section. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each Holder of the Debentures at the facsimile telephone number
or
address of such Holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date
of
transmission, if such notice or communication is delivered via facsimile at
the
facsimile telephone number specified in this Section prior to 5:00 p.m. (Salt
Lake City time), (ii) the date after the date of transmission, if such notice
or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake City time) on any
date
and earlier than 11:59 p.m. (Salt Lake City time) on such date, (iii) four
days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service,
or
(v) upon actual receipt by the party to whom such notice is required to be
given.
12
|
Section
5.
|
Optional
Prepayment.
|
(a) The
Company shall have the right to prepay, exercisable at any time upon not less
than ten (10) and not more than twenty (20) days’ prior written notice to the
Holders of the Debentures to be prepaid (the "Optional
Prepayment Notice"),
from
funds legally available therefor at the time of such prepayment, all or any
portion of the outstanding principal amount of the Debentures which have not
previously been repaid or for which Conversion Notices have not previously
been
delivered hereunder, at a price equal to the Optional Prepayment Price (as
defined below). Any such prepayment by the Company shall be in cash and shall
be
free of any claim of subordination. The Holders shall have the right to tender,
and the Company shall honor, Conversion Notices delivered prior to the
expiration of the twentieth (20th) Trading Day after receipt by the Holders
of
an Optional Prepayment Notice for such Debentures (such date, the "Optional
Prepayment Date").
(b) If
any
portion of the Optional Prepayment Price shall not be paid by the Company by
the
Optional Prepayment Date, the Company shall not be allowed to submit another
Optional Prepayment Notice until fifteen (15) days after the original Optional
Prepayment Date. If the Company fails to pay a second time any portion of the
Optional Prepayment Price following an initial failure to pay any portion of
the
Optional Prepayment Price, the Company shall forfeit its right to prepay the
Debentures.
(c) The
"Optional
Prepayment Price"
for any
Debentures shall be determined by when the Company delivers the Optional
Prepayment Notice. If such notice is given during the first 60 days of the
term
of the Debenture, the Optional Prepayment Price shall equal 108% of the
principal amount of Debentures to be prepaid, plus all accrued and unpaid
interest thereon. If the Optional Prepayment Notice is given between the 61st
day of the term of the Debenture and the Maturity Date, the Optional Prepayment
Price shall equal 110% of the principal amount of Debentures to be prepaid,
plus
all accrued and unpaid interest thereon.
Section
6. Definitions.
For the
purposes hereof, the following terms shall have the following
meanings:
"Applicable
Percentage"
means
70%.
13
"Business
Day"
means
any day except Saturday, Sunday and any day which shall be a legal holiday
or a
day on which banking institutions in the State of Delaware are authorized or
required by law or other government action to close.
"Change
of Control Transaction"
means
the occurrence of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of in excess of 40% of the voting securities
of the Company, (ii) a replacement of more than one-half of the members of
the
Company's board of directors which is not approved by those individuals who
are
members of the board of directors on the date hereof in one or a series of
related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of
the
Company in one or a series of related transactions, unless following such
transaction, the holders of the Company's securities continue to hold at least
40% of such securities following such transaction or (iv) the execution by
the
Company of an agreement to which the Company is a party or by which it is bound,
providing for any of the events set forth above in (i), (ii) or
(iii).
"Common
Stock"
means
the Company's common stock, $.0001 par value per share, of the Company and
stock
of any other class into which such shares may hereafter have been reclassified
or changed.
"Original
Issue Date"
shall
mean the date of the first issuance of any Debentures regardless of the number
of transfers of any Debenture and regardless of the number of instruments which
may be issued to evidence such Debenture.
"Per
Share Market Value"
means
on any particular date (a) the closing bid price per share of the Common Stock
on such date on the OTCBB or other stock exchange or quotation system on which
the Common Stock is then listed or quoted or if there is no such price on such
date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed
then
on the OTCBB or any stock exchange or quotation system, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by
the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding
to
its functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value
of
a share of Common Stock as determined by an appraiser selected in good faith
by
the Holders of a majority in interest of the Debentures.
"Person"
means a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
"Registration
Rights Agreement"
means
the Registration Rights Agreement, dated as of December 1, 2006, between the
Company and the initial Holder of the Debentures.
14
"Trading
Day"
means
(a) a day on which the Common Stock is traded in the over-the-counter market,
as
reported by the OTC Bulletin Board, or (b) if the Common Stock is not quoted
on
the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions
of
reporting prices); provided,
however,
that in
the event that the Common Stock is not listed or quoted as set forth in (a)
and
(b) hereof, then Trading Day shall mean any day except Saturday, Sunday and
any
day which shall be a legal holiday or a day on which banking institutions in
the
State of New York are authorized or required by law or other government action
to close.
"Underlying
Shares Registration Statement"
means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a "selling stockholder" thereunder.
"Underlying
Shares"
means
the number of shares of Common Stock into which the Debentures are convertible
and any shares of Common Stock issuable in payment of interest as provided
under
and in accordance with the terms hereof and the Purchase Agreement.
Section
7. Except
as
expressly provided herein, no provision of this Debenture shall alter or impair
the obligation of the Company, which is absolute and unconditional, to pay
the
principal of, interest and liquidated damages (if any) on, this Debenture at
the
time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks junior
to
that note issued to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Trustee, dated June 10, 2002 (as amended),
and pari passu
with all
other Debentures now or hereafter issued under the terms set forth herein.
The
Company may only voluntarily prepay the outstanding principal amount on the
Debentures in accordance with Section 5 hereof.
Section
8. This
Debenture shall not entitle the Holder to any of the rights of a stockholder
of
the Company, including without limitation, the right to vote, to receive
dividends and other distributions, or to receive any notice of, or to attend,
meetings of stockholders or any other proceedings of the Company, unless and
to
the extent converted into shares of Common Stock in accordance with the terms
hereof. As long as there are Debentures outstanding, the Company shall not
and
shall cause it subsidiaries not to, without the consent of the Holders, (i)
amend its certificate of incorporation, bylaws or other charter documents so
as
to adversely affect any rights of the Holders; (ii) repay, repurchase or offer
to repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents (as defined in the Purchase
Agreement); or (iii) enter into any agreement with respect to any of the
foregoing.
Section
9. If
this
Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation
of a
mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
destroyed debenture, a new Debenture for the principal amount of this Debenture
so mutilated, lost, stolen or destroyed but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership hereof,
and indemnity, if requested, all reasonably satisfactory to the
Company.
15
Section
10. This
Debenture shall be governed by and construed in accordance with the laws of
the
State of Delaware, without giving effect to conflicts of laws thereof, and
the
parties hereby consent to the jurisdiction of the courts of such state in the
city of Wilmington.
Section
11. Any
waiver by the Company or the Holder of a breach of any provision of this
Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not
be
considered a waiver or deprive that party of the right thereafter to insist
upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
Section
12. If
any
provision of this Debenture is invalid, illegal or unenforceable, the balance
of
this Debenture shall remain in effect, and if any provision is inapplicable
to
any person or circumstance, it shall nevertheless remain applicable to all
other
persons and circumstances.
Section
13. Whenever
any payment or other obligation hereunder shall be due on a day other than
a
Business Day, such payment shall be made on the next succeeding Business Day
(or, if such next succeeding Business Day falls in the next calendar month,
the
preceding Business Day in the appropriate calendar month).
IN
WITNESS WHEREOF, the Company has caused this instrument to be duly executed
by
an officer duly authorized for such purpose, as of the date first above
indicated.
|
FONIX
CORPORATION
|
|
|
By:
/s/
▇▇▇▇▇ ▇. ▇▇▇▇▇▇
|
|
|
Name:
▇▇▇▇▇
▇.
▇▇▇▇▇▇
|
|
|
Title:
Exec
VP &
CFO
|
Attest:
By:
/s/
▇▇▇▇▇▇▇
▇’▇▇▇▇▇
Name:
/s/
▇▇▇▇▇▇▇ ▇’ ▇▇▇▇▇
Title:
VP
Finance
16
EXHIBIT
A
NOTICE
OF CONVERSION
(To
be
Executed by the Registered Holder
in
order
to Convert the Debenture)
The
undersigned hereby elects to convert Debenture No. E-1 into shares of Common
Stock, par value $.0001 per share (the "Common
Stock"),
of
Fonix Corporation (the "Company")
according to the conditions hereof, as of the date written below. If shares
are
to be issued in the name of a person other than undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates and opinions as reasonably requested by the Company
in accordance therewith. No fee will be charged to the holder for any
conversion, except for such transfer taxes, if any.
|
Conversion
calculations:
|
____________________________________________________________ |
|
(Please
provide:
|
Date
to Effect Conversion
|
|
Trading
Dates Used
|
|
|
Closing
Bid Prices
|
|
|
Report
Showing Price History)
|
____________________________________________________________ |
|
Principal
Amount of Debentures to be Converted
|
|
| ____________________________________________________________ | |
|
Accrued
Interest to be Converted
|
|
| ____________________________________________________________ | |
|
Number
of shares of Common Stock to be Issued
|
|
| ____________________________________________________________ | |
|
Applicable
Conversion Price
|
|
| ____________________________________________________________ | |
|
Signature
|
|
| ____________________________________________________________ | |
|
Name
|
|
| ____________________________________________________________ | |
|
Address
|
17