CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of
October 24, 1997 (this "Agreement"), among fonix corporation, a Delaware
corporation (the "Company"), JNC Opportunity Fund Ltd., a Cayman Islands
corporation ("JNC"), and Diversified Strategies Fund, L.P., an Illinois
limited partnership ("DSF"). JNC and DSF are each a "Purchaser" and are
collectively, the "Purchasers."
WHEREAS, subject to the terms and conditions set forth herein,
the Company desires to issue and sell to the Purchasers and the Purchasers
desire to acquire shares of the Company's Series C Convertible Preferred
Stock, $.0001 par value per share (the "Preferred Stock").
IN CONSIDERATION of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms have
the meanings indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by
contract or otherwise.
"Agreement" shall have the meaning set forth in the recitals
hereto.
"Average Price" as at any date means the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a Federal legal holiday or a day on which banking
institutions in the State of Delaware are authorized or required by law or
other government actions to close.
"Certificate of Designation" shall have the meaning set forth in
Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
"Closing Date" shall have the meaning set forth in Section
2.1(b).
"Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder as in effect on the date hereof.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $.0001
per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Conversion Price" shall have the meaning set forth in the
Certificate of Designation.
"Conversion Ratio" shall have the meaning set forth in the
Certificate of Designation.
"Disclosure Materials" means, collectively, the SEC Documents and
the Schedules to this Agreement and all other information furnished by or on
behalf of the Company relating to or concerning the Company and provided to
the Purchasers or their respective agents and counsel in connection with the
transactions contemplated by this Agreement.
"DSF Warrant" shall have the meaning set forth in Section 4.15.
"Encore" means Encore Capital Management, L.L.C.
"Escrow Agent" means ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇
LLP.
"Escrow Agreement" means the escrow agreement, dated as of the
date hereof, among the Company, the Purchasers and the Escrow Agent, in the
form of Exhibit D, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Initial Reserve" shall have the meaning set forth in Section
3.1(d).
"Intellectual Property Rights" shall have the meaning set forth
in Section 3.1(q).
"JNC Warrant" shall have the meaning set forth in Section 4.15.
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"Legal Opinion" means the legal opinion letter of Durham, Evans,
▇▇▇▇▇ & ▇▇▇▇▇▇▇, P.C., outside counsel to the Company, addressed to the
Purchasers, dated the Closing Date and in form and substance acceptable to
the Purchasers.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of
any kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in
Section 3.1(a).
"Original Issue Date" shall mean the first issuance of any
Shares, regardless of the number of transfers of any particular Share and
regardless of the number of certificates which may be issued to evidence any
particular Share.
"Per Share Market Value" shall have the meaning set forth in the
Certificate of Designation.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the
recitals hereto.
"Purchaser(s)" shall have the meaning set forth in the recitals
hereto.
"Put Agreement" means the Preferred Stock Put Option Agreement,
dated as of the date hereof, between the Purchasers and SMD, L.L.C. as the
same may be amended, supplemented or otherwise modified in accordance with
its terms.
"Registration Rights Agreement" means the registration rights
agreement, dated as of the date hereof, among the Company and the
Purchasers, in the form of Exhibit B, as the same may be amended,
supplemented or otherwise modified in accordance with its terms.
"Required Approvals" shall have the meaning set forth in Section
3.1(f).
"SEC Documents" shall have the meaning set forth in Section
3.1(k).
"Securities" means, collectively, the Shares, the Warrants and
the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
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"Shares" means the shares of Preferred Stock to be purchased
pursuant to this Agreement.
"Stated Value" means $20.
"Subsequent Financing" shall have the meaning set forth in
Section 4.9.
"Subsequent Financing Notice" shall have the meaning set forth in
Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the Certificate
of Designation.
"Transaction Documents" means collectively, this Agreement, the
Registration Rights Agreement, the Warrants, the Certificate of Designation
and the Escrow Agreement.
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of the Shares and as payment of dividends thereon in
accordance with the terms of the Certificate of Designation, and upon
exercise of the Warrants in accordance with the terms thereof.
"Underlying Securities Registration Statement" means a
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights
Agreement, covering the resale of the Underlying Shares and naming the
holder or holders of such Underlying Shares as "selling stockholders"
thereunder.
"Warrants" shall have the meaning set forth in Section 4.15.
ARTICLE II
PURCHASE OF SHARES
Section 2.1 Purchase of Shares; Closing.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers severally and not jointly shall purchase the Shares and the
Warrants in such number as is set forth in Section 2.1(c) for an aggregate
purchase price of $3,750,000. The Shares shall have the respective rights,
preferences and privileges set forth in Exhibit A (the "Certificate of
Designation").
(b) The closing of the purchase and sale of the Shares and the
Warrants (the "Closing") shall take place at the offices of the Escrow
Agent, 1290 Avenue of the Americas,
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▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, in accordance with the Escrow Agreement on such
date as the parties shall agree. The date of the Closing is hereinafter
referred to as the "Closing Date."
(c) Prior to the Closing the parties shall deliver to the Escrow
Agent such items as are required to be delivered by them in accordance with
and subject to the terms and conditions of the Escrow Agreement, including,
the following: (i) the Company shall deliver or cause to be delivered (A)
stock certificates representing 37,500 Shares, registered in the name of
DSF, (B) the Warrants, (C) Legal Opinions addressed to each Purchaser and
(D) stock certificates representing 150,000 Shares, registered in the name
of JNC; (ii) JNC shall deliver or cause to be delivered $3,000,000 in United
States dollars; (iii) DSF shall deliver or cause to be delivered $750,000 in
United States dollars; and (iv) each party hereto shall deliver or cause to
be delivered all other executed instruments, agreements and certificates as
are required to be delivered by or on their behalf at the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company. The
Company hereby represents and warrants to the Purchasers as follows:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with the requisite
corporate power and authority to own and use its properties and assets and
to carry on its business as currently conducted. The Company has no
subsidiaries other than as set forth in Schedule 3.1(a) (collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. Each of the Company and the Subsidiaries
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may
be, could not, individually or in the aggregate, (x) adversely affect the
legality, validity or enforceability of the Shares, Warrants or any
Transaction Document, (y) have a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under
any Transaction Document (a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and to otherwise
carry out its obligations thereunder. The execution and
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delivery of each Transaction Document by the Company and the consummation by
it of the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company. Each Transaction Document has
been duly executed by the Company and, when delivered in accordance with the
terms hereof and of the Escrow Agreement, each Transaction Document shall
constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. Neither the Company nor
any Subsidiary is in violation of any provision of its respective
certificate of incorporation, bylaws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in
Schedule 3.1(c). No shares of Common Stock are entitled to preemptive or
similar rights. Except as specifically disclosed in Schedule 3.1(c), there
are no outstanding options, warrants, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result
of the purchase and sale of the Shares and the Warrants hereunder,
securities, rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Documents or Schedule 3.1(c), no
Person or group of Persons beneficially owns (as determined pursuant to Rule
13d-3 promulgated under the Exchange Act) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock.
(d) Issuance of Securities. The Shares and the Warrants are
duly authorized and, when issued in accordance with the terms hereof, shall
be validly issued, fully paid and nonassessable, free and clear of all
Liens. The Company has and at all times while any Shares or Warrants are
outstanding will maintain an adequate reserve of duly authorized shares of
Common Stock to enable it to perform its conversion, exercise and other
obligations under this Agreement, the Certificate of Designation and the
Warrants, which reserve shall be no less than the sum of (i) 200% of (A) the
number of shares of Common Stock as would be issuable upon conversion in
full of the Shares, were such conversion effected on the Original Issue Date
or the Filing Date (as defined in the Registration Rights Agreement),
whichever yields a lower Conversion Price, and (B) the number of shares of
Common Stock as are issuable as payment of dividends on the Shares (assuming
such dividends are to be paid in Common Stock) and (ii) the number of shares
of Common Stock as are issuable upon the exercise in full of the Warrants
(such sum, the "Initial Reserve"). If at any time the sum of the number of
shares of Common Stock issuable (a) upon conversion in full of the then
outstanding Shares, (b) as the payment of dividends on the Shares (assuming
all such dividends are to be paid in Common Stock) and (c) upon exercise in
full of the Warrants exceeds 85% of the Initial Reserve, then the Company
shall duly reserve 200% of the number of shares of Common Stock equal to
such excess to fulfill such obligations. This obligation shall similarly
apply to successive excesses. When issued in accordance with the
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Certificate of Designation and the Warrants, the Underlying Shares will be
duly authorized, validly issued, fully paid and nonassessable, and free and
clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company
of the transactions contemplated thereby do not and will not (i) conflict
with or violate any provision of its certificate of incorporation, bylaws or
other charter documents (each as amended through the date hereof),
(ii) subject to obtaining the consents referred to in Section 3.1(f),
conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument (evidencing a Company debt or otherwise)
to which the Company is a party or by which any property or asset of the
Company is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction
of any court or governmental authority to which the Company is subject
(including federal and state securities laws and regulations), or by which
any property or asset of the Company is bound or affected; except in the
case of each of clauses (ii) and (iii), as could not, individually or in the
aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or
regulation of any governmental authority, except for violations which,
individually and in the aggregate, could not have or result in a Material
Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order
of, or make any filing or registration with, any court or other federal,
state, local, foreign or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of
the Transaction Documents, other than (i) the filing of the Certificate of
Designation with the Secretary of State of Delaware, (ii) the filing of one
or more Underlying Securities Registration Statements with the Commission
and the making of applicable blue-sky filings under state securities laws
with respect to the Securities and the transactions contemplated hereby,
each as contemplated hereby and by the Registration Rights Agreement, (iii)
the application for the listing of the Underlying Shares on the Nasdaq
SmallCap Market (and on each other national securities exchange, market or
trading facility on which the Common Stock is then listed), and (iv) other
than, in all other cases, where the failure to obtain such consent, waiver,
authorization or order, or to give or make such notice or filing, could not,
individually or in the aggregate, have or result in a Material Adverse
Effect (the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed
in the Disclosure Materials, there is no action, suit, notice of violation,
proceeding or investigation pending or, to the best knowledge of the
Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) which (i) adversely affects or challenges
the legality, validity or enforceability of any Transaction Document or the
Securities or (ii) could, individually or in the aggregate, have or result
in a Material Adverse Effect.
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(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (or has received
notice of a claim that it is in default under or that it is in violation of)
any indenture, loan or credit agreement or any other agreement or instrument
to which it is a party or by which it or any of its properties is bound,
(ii) is in violation of any order of any court, arbitrator or governmental
body, or (iii) is in violation of any statute, rule or regulation of any
governmental authority, except as could not, individually or in the
aggregate, have or result in a Material Adverse Effect or, except in the
case of clause (i) above, as has not been waived pursuant to an effective
waiver.
(i) Private Offering. Assuming the accuracy of the
representations and warranties of the Purchasers contained in Sections
3.2(b)-3.2(f), the offering, issuance or sale of the Securities as
contemplated hereunder are exempt from the registration requirements of the
Securities Act.
(j) Certain Fees. Except for fees payable to Allied Capital
International, Inc. and Tuscan Finance & Trade Establishment, no fees or
commissions will be payable by the Company to any broker, financial advisor,
finder, investment banker, placement agent, or bank with respect to the
transactions contemplated hereby. The Purchasers shall have no obligation
with respect to such fees or with respect to any claims made by or on behalf
of other Persons for fees of a type contemplated in this Section that may be
due in connection with the transactions contemplated hereby. The Company
shall indemnify and hold harmless each Purchaser, its respective employees,
officers, directors, agents, and partners, and their respective Affiliates,
from and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any
such claimed or existing fees, as and when incurred.
(k) SEC Documents; Financial Statements; No Adverse Change. The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the three
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC Documents") on a timely basis or
has received a valid extension of such time of filing and has filed any such
SEC Documents prior to the expiration of any such extension. As of their
respective dates, the SEC Documents complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the
SEC Documents, when filed, 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. The financial
statements of the Company included in the SEC Documents comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto. Such financial
statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements
or the notes thereto, and fairly present in all material respects the
financial position of the Company as of and for the dates thereof and the
results of operations, retained earnings and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end
audit adjustments. Since the date of the financial
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statements included in the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, as amended to the date hereof, (a) there has
been no event, occurrence or development that has had or that could have or
result in a Material Adverse Effect, (b) there has been no material change
in the Company's accounting principals, practices or methods and (c) the
Company has conducted its business only in the ordinary course of such
business. The Company last filed audited financial statements with the
Commission on September 8, 1997, and has not received any comments from the
Commission in respect thereof.
(l) Seniority. Except for the Company's Series A Preferred
Stock, no class of equity securities of the Company is senior to the Shares
in right of payment, whether with respect to dividends or upon liquidation,
dissolution or otherwise.
(m) Form S-3 Eligibility. The Company is, and at the Closing
Date will be, eligible to register securities for resale with the Commission
under Form S-3 promulgated under the Securities Act.
(n) Investment Company. The Company is not, and is not an
"Affiliate person" of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(o) Exclusivity. The Company shall not issue or sell Preferred
Stock to any Person other than the Purchasers.
(p) Listing and Maintenance Requirements Compliance. Other than
as specifically disclosed in the Disclosure Materials, the Company has not
in the two years prior to the date hereof received written notice from any
stock exchange, market or trading facility on which the Common Stock is or
has been listed (or on which it is or has been quoted) to the effect that
the Company is not in compliance with the listing or maintenance
requirements of such exchange, market or trading facility. The Company has
provided to the Purchasers true and complete copies of all such notices
contemplated by this Section.
(q) Patents and Trademarks. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with
its business or which the failure to so have would have a Material Adverse
Effect (collectively, the "Intellectual Property Rights"). To the best
knowledge of the Company, none of the Intellectual Property Rights infringe
on any rights of any other Person, and the Company either owns or has duly
licensed or otherwise acquired all necessary rights with respect to the
Intellectual Property Rights. The Company has not received any notice from
any third party of any claim of infringement by the Company of any of the
Intellectual Property Rights, and has no reason to believe there is any
basis for any such claim. To the best knowledge of the Company, there is no
existing infringement by another Person on any of the Intellectual Property
Rights.
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(r) Disclosure. All information relating to or concerning the
Company set forth in the Transaction Documents or the Disclosure Materials
(other than the SEC Documents) is true and correct in all material respects
and does not fail to state any material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading. The Company confirms that it has not provided to
any of the Purchasers or any of their representatives, agents or counsel any
information that constitutes or might constitute material nonpublic
information. The Company understands and confirms that the Purchasers shall
be relying on the foregoing representation in effecting transactions in
securities of the Company.
Section 3.2 Representations and Warranties of the Purchasers.
Each Purchaser hereby severally and not jointly represents and warrants to
the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite power and authority to
enter into and to consummate the transactions contemplated by the
Transaction Documents and to carry out its obligations thereunder. The
acquisition of the Securities to be acquired hereunder and the payment of
the purchase price therefor by such Purchaser have been duly authorized by
all necessary action on the part of such Purchaser. Each of this Agreement,
the Registration Rights Agreement and the Escrow Agreement has been duly
executed by such Purchaser and, when delivered by such Purchaser in
accordance with the terms hereof and of the Escrow Agreement, shall
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights
generally and to general principles of equity.
(b) Investment Intent. Such Purchaser is acquiring the
Securities to be acquired hereunder by such Purchaser for its own account
for investment purposes only and not with a view to or for distributing or
reselling such Securities or any part thereof or interest therein, without
prejudice, however, to such Purchaser's right, subject to the provisions of
this Agreement and the Registration Rights Agreement, at all times to sell
or otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) Purchaser Status. At the time such Purchaser was offered
the Securities to be acquired hereunder by such Purchaser, it was, at the
date hereof, it is, and at the Closing Date, it will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.
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(e) Ability of Purchaser to Bear Risk of Investment. Such
Purchaser acknowledges that an investment in the Securities is speculative
and involves a high degree of risk. Such Purchaser is able to bear the
economic risk of an investment in the Securities to be acquired hereunder by
such Purchaser, and, at the present time, is able to afford a complete loss
of such investment.
(f) Access to Information. Such Purchaser acknowledges receipt
of the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities, and
the merits and risks of investing in the Securities, (ii) access to
information about the Company and the Company's financial condition, results
of operations, business, properties, management and prospects sufficient to
enable it to evaluate its investment and (iii) the opportunity to obtain
such additional information which the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by
or on behalf of such Purchaser or its representatives, agents or counsel
shall modify, amend or affect such Purchaser's right to rely on the truth,
accuracy and completeness of the Disclosure Materials and the Company's
representations and warranties contained in the Transaction Documents.
(g) Reliance. Such Purchaser understands and acknowledges that
(i) the Securities to be acquired by it hereunder are being offered and sold
to it without registration under the Securities Act in a private placement
that is exempt from the registration provisions of the Securities Act and
(ii) the availability of such exemption, depends in part on, and the Company
will rely upon the accuracy and truthfulness of, the foregoing
representations and such Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
Section 4.1 Transfer Restrictions. (a) The Securities may only
be disposed of pursuant to an effective registration statement under the
Securities Act, to the Company or pursuant to an available exemption from or
in a transaction not subject to the registration requirements thereof. In
connection with any transfer of any Securities other than pursuant to an
effective registration statement or to the Company, the Company may require
the transferor thereof to provide to the Company an opinion of counsel
selected by the transferor, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer
does not require registration under the Securities Act. Notwithstanding the
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foregoing, the Company hereby consents to and agrees to register (i) any
transfer of Securities by one Purchaser to another Purchaser, and agrees
that no documentation other than executed transfer documents shall be
required for any such transfer, and (ii) any transfer by any Purchaser to an
Affiliate of such Purchaser or to an Affiliate of another Purchaser, or any
transfers among any such Affiliates provided in each case of clauses (i) and
(ii) the transferee certifies to the Company that it is an "accredited
investor" as defined in Rule 501(a) under the Securities Act. Any such
Purchaser or Affiliate transferee shall have the rights of a Purchaser under
this Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this Section 4.1(b), of the following legend (or such
substantially similar legend as is acceptable to the Purchasers and their
respective counsel, the parties agreeing that any unacceptable legended
Securities shall be replaced promptly by and at the Company's cost) on the
Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] 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.
[FOR SHARES ONLY] THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS ON CONVERSION SET FORTH IN SECTION 4.8
OF THE CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF
OCTOBER 24, 1997, AMONG fonix corporation (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
Underlying Shares shall not contain the legend set forth above or
any other restrictive legend if the conversion of Shares, exercise of
Warrants or other issuances of Underlying Shares, as the case may be, occurs
at any time while an Underlying Securities Registration Statement is
effective under the Securities Act or, in the event there is not an
effective Underlying Securities Registration Statement at such time, if in
the opinion of counsel to the Company such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission).
The Company agrees that it will provide each Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from such
legend at such time as such legend is no longer required hereunder. The
Company may not make any notation on its records or give
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instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section 4.1(b).
Section 4.2 Acknowledgement of Dilution. The Company
acknowledges that the issuance of Underlying Shares upon (i) conversion of
the Shares and as payment of dividends thereon and (ii) exercise of the
Warrants may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligation to issue Underlying Shares
in accordance with the Certificate of Designation and the Warrants is
unconditional and absolute regardless of the effect of any such dilution.
Section 4.3 Furnishing of Information. As long as the
Purchasers own Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period)
all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act. If at any time
prior to the date on which the Purchasers may resell all of their Underlying
Shares without volume restrictions pursuant to Rule 144(k) promulgated under
the Securities Act (as determined by counsel to the Company pursuant to a
written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent for the benefit of and enforceable by the
Purchasers) the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c) promulgated under the Securities
Act annual and quarterly financial statements, together with a discussion
and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the Exchange Act
in the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will
take such further action as any holder of Securities may reasonably request,
all to the extent required from time to time to enable such Person to sell
Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including the legal opinion referenced above in this
Section. Upon the request of any such Person, the Company shall deliver to
such Person a written certification of a duly authorized officer as to
whether it has complied with such requirements.
Section 4.4 Use of Disclosure Materials. The Company consents
to the use of the Disclosure Materials and any information provided by or on
behalf of the Company pursuant to Section 4.3, and any amendments and
supplements thereto, by the Purchasers in connection with resales of the
Securities other than pursuant to an effective registration statement.
Section 4.5 Blue Sky Laws. In accordance with the Registration
Rights Agreement, the Company shall qualify the Underlying Shares under the
securities or Blue Sky laws of such jurisdictions as the Purchasers may
reasonably request and shall continue such qualification at all times until
the Purchasers notify the Company in writing that they no longer own
Securities; provided, however, that neither the Company nor its Subsidiaries
shall be required in connection therewith to qualify as a foreign
corporation where they are not now so qualified or
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to take any action that would subject the Company to general service of
process in any such jurisdiction where it is not then so subject.
Section 4.6 Integration. The Company shall not and shall use
its best efforts to ensure that no Affiliate shall sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the issue, offer or sale of the
Securities to the Purchasers.
Section 4.7 Increase in Authorized Shares. At such time as the
Company would be, if a notice of conversion or exercise (as the case may be)
were to be delivered on such date, precluded from (a) converting in full all
of the Shares that remain unconverted at such date (and paying any accrued
but unpaid dividends in respect thereof in shares of Common Stock) or (b)
honoring the exercise in full of the Warrants, due to the unavailability of
a sufficient number of shares of authorized but unissued or re-acquired
Common Stock, the Board of Directors of the Company shall promptly (and in
any case within 30 Business Days from such date) prepare and mail to the
shareholders of the Company proxy materials requesting authorization to
amend the Company's certificate of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least
a number of shares equal to the sum of (i) all shares of Common Stock then
outstanding, (ii) the number of shares of Common Stock issuable on account
of all outstanding warrants, options and convertible securities (other than
the Preferred Stock and the Warrants) and on account of all shares reserved
under any stock option, stock purchase, warrant or similar plan, (iii) 200%
of the number of Underlying Shares as would then be issuable upon a
conversion in full of the then outstanding Shares and as payment of all
future dividends thereon in shares of Common Stock in accordance with the
terms of this Agreement and the Certificate of Designation and (iv) such
number of Underlying Shares as would then be issuable upon the exercise in
full of the Warrants. In connection therewith, the Board of Directors
shall (x) adopt proper resolutions authorizing such increase, (y) recommend
to and otherwise use its best efforts to promptly and duly obtain
shareholder approval to carry out such resolutions (and hold a special
meeting of the shareholders no later than the 60th day after delivery of the
proxy materials relating to such meeting) and (z) within 5 Business Days of
obtaining such shareholder authorization, file an appropriate amendment to
the Company's certificate of incorporation to evidence such increase. If
the shareholders fail to approve such increase, the Company does not receive
shareholder approval for such increase or the Company fails to file an
appropriate amendment in the time provided therefor by the immediately
preceding sentence, then the provisions of Section 5(e) of the Certificate
of Designation shall apply.
Section 4.8 Purchaser Ownership of Common Stock. In no event
shall a Purchaser be permitted to use its ability to convert Shares or
exercise its Warrant to the extent such conversion or exercise would result
in such Purchaser 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 Shares held by such Purchaser after
application of this Section. To the extent that the limitation contained in
this Section applies, the determination of whether Shares are convertible
(in relation to other securities owned by a Purchaser) and of which Shares
are
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convertible shall be in the sole discretion of such Purchaser, and the
submission of Shares for conversion shall be deemed to be such Purchaser's
determination of whether such Shares are convertible (in relation to other
securities owned by a Purchaser) and of which Shares are convertible, in
each case subject to such aggregate percentage limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the
right of a Purchaser to convert Shares at such time as such conversion will
not violate the provisions of this Section. The provisions of this Section
may be waived by a Purchaser as to itself (and solely as to itself) upon not
less than 75 days prior notice to the Company, and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in
the notice of waiver).
Section 4.9 Right of First Refusal; Subsequent Registrations.
(a) the Company shall not, directly or indirectly, without the prior written
consent of Encore, offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any offer, sale, grant or any option to purchase or
other disposition) any of its or its Affiliates' equity or equity-equivalent
securities or any instrument that permits the holder thereof to acquire
Common Stock at any time over the life of the security or investment at a
price that is less than the market price of the Common Stock at the time of
issuance of such security or investment (a "Subsequent Financing") for a
period of 100 days after the Closing Date, except (i) the granting of
options or warrants to employees, officers and directors, and the issuance
of shares upon exercise of options granted, under any stock option plan
heretofore or hereinafter duly adopted by the Company, (ii) shares issued
upon exercise of any currently outstanding warrants and upon conversion of
any currently outstanding convertible preferred stock in each case disclosed
in Schedule 3.1(c), (iii) shares of Common Stock issued upon conversion of
the Shares, as payment of dividends in respect thereof, or upon exercise of
the Warrants in accordance with their respective terms, (iv) shares issued
in connection with the capitalization or creation of a joint venture with a
strategic partner (a Person whose business is primarily that of investing
and selling of securities shall not be deemed a strategic partner), (v)
shares issued to pay part or all of the purchase price for the acquisition
by the Company of a Person (which, for purposes of this clause (v), shall
not include an individual or group of individuals) and (vi) shares issued in
a bona fide public offering by the Company of its (and not of any of its
stockholders') securities, unless (A) the Company delivers to Encore a
written notice (the "Subsequent Financing Notice") of its intention effect
such Subsequent Financing, which Subsequent Financing Notice shall describe
in reasonable detail the proposed terms of such Subsequent Financing, the
amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing shall be affected, and attached to which shall be
a term sheet or similar document relating thereto and (B) Encore shall not
have notified the Company by 5:00 p.m. (Salt Lake City time) on the tenth
(10th) Trading Day after its receipt of the Subsequent Financing Notice of
its willingness to cause either or both of the Purchasers to provide (or to
cause its sole designee to provide), subject to completion of mutually
acceptable documentation, financing to the Company on substantially the
terms set forth in the Subsequent Financing Notice. If Encore shall fail to
notify the Company of its intention to enter into such negotiations within
such time period, the Company may effect the Subsequent Financing
substantially upon the terms and to the Persons (or Affiliates of such
Persons) set forth in the Subsequent Financing Notice; provided, that the
Company shall provide Encore with a second Subsequent Financing Notice, and
Encore shall again have the right of first refusal set forth above in this
paragraph (a), if the
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Subsequent Financing subject to the initial Subsequent Financing Notice
shall not have been consummated for any reason on the terms set forth in
such Subsequent Financing Notice within thirty (30) Trading Days after the
date of the initial Subsequent Financing Notice with the Person (or an
Affiliate of such Person) identified in the Subsequent Financing Notice.
The rights granted to Encore in this Section 4.9(a) are subject to the prior
right of first refusal granted to Southbrook International Investments, Ltd.
as and to the extent such rights, if any, exist on the date hereof, but not
subject to any modifications, extensions or assignments of such rights of
Southbrook International Investments, Ltd.
(b) Except Underlying Shares, and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement and except
as set forth on Schedule 6(c) to the Registration Rights Agreement (which
securities may not be registered prior to the time the Registrable
Securities are registered), the Company shall not, for a period of not less
than 90 Trading Days after the date that the Underlying Securities
Registration Statement is declared effective by the Commission, without the
prior written consent of Encore on behalf of the Purchasers, (i) issue or
sell any of its or any of its Affiliates' equity or equity-equivalent
securities pursuant to Regulation S promulgated under the Securities Act, or
(ii) register for resale any securities of the Company. Any days that a
Purchaser is not permitted to sell Underlying Shares under the Underlying
Securities Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
Section 4.10 Listing of Underlying Shares. The Company shall
(a) not later than the fifth Business Day following the Closing Date prepare
and file with the Nasdaq SmallCap Market (as well as any other national
securities exchange, market or trading facility on which the Common Stock is
then listed) an additional shares listing application covering at least the
sum of (i) two times the number of Underlying Shares as would be issuable
upon a conversion in full of (and as payment of dividends in respect of) the
Shares, assuming such conversion occurred on the Original Issue Date or the
Filing Date (whichever yields a lower Conversion Price) and (ii) the
Underlying Shares issuable upon exercise in full of the Warrants (b) take
all steps necessary to cause the such shares to be approved for listing on
the Nasdaq SmallCap Market (as well as on any other national securities
exchange, market or trading facility on which the Common Stock is then
listed) as soon as possible thereafter, and (c) provide to the Purchasers
evidence of such listing, and the Company shall maintain the listing of its
Common Stock on such exchange or market. In addition, if at any time the
number of shares of Common Stock issuable on conversion of all then
outstanding Shares, on account of accrued and unpaid dividends thereon and
upon exercise in full of the Warrants is greater than the number of shares
of Common Stock theretofore listed with the Nasdaq SmallCap Market (and any
such other national securities exchange, market or trading facility), the
Company shall promptly take such action (including the actions described in
the preceding sentence) to file an additional shares listing application
with the Nasdaq SmallCap Market (and any such other national securities
exchange, market or trading facility) covering at least a number of shares
equal to the sum of (x) 200% of (A) the number of Underlying Shares as would
then be issuable upon a conversion in full of the Shares and (B) the number
of Underlying Shares as would be issuable as payment of dividends on the
Shares and (y) the number of Underlying Shares as would be issuable upon
exercise in full of the Warrants.
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Section 4.11 Notice of Breaches. Each of the Company and each
Purchaser shall give prompt written notice to the other of any breach by it
of any representation, warranty or other agreement contained in any
Transaction Document, as well as any events or occurrences arising after the
date hereof, which would reasonably be likely to cause any representation or
warranty or other agreement of such party, as the case may be, contained in
the Transaction Document to be incorrect or breached as of such Closing
Date. However, no disclosure by either party pursuant to this Section shall
be deemed to cure any breach of any representation, warranty or other
agreement contained in any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchasers of any notice or claim (written or oral) that
it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by the Transaction Documents
violates or would violate any written agreement or understanding between
such lender and the Company, and the Company shall promptly furnish by
facsimile to the Purchasers a copy of any written statement in support of or
relating to such claim or notice.
Section 4.12 Conversion Procedures. Exhibit E sets forth all
procedures, required information and instructions that are required to be
followed in order to permit the holders of Shares to smoothly and
expeditiously exercise their rights to convert Shares and which are not
specifically set forth in the Certificate of Designation, including the form
of legal opinion, if necessary, that shall be rendered to the Company's
transfer agent to effect the delivery of Underlying Shares in compliance
with the terms hereof and of the Certificate of Designation.
Section 4.13 Conversion and Exercise Obligations of the Company.
The Company shall honor conversions of the Shares and exercises of the
Warrants and shall deliver Underlying Shares upon such conversions and
exercises in accordance with the respective terms and conditions and time
periods set forth in the Certificate of Designation and the Warrants.
Section 4.14 Use of Proceeds. The Company shall use all of the
proceeds from the sale of the Securities for working capital purposes and
not for the satisfaction of any portion of Company debt in excess of an
aggregate of $1,000,000 or to redeem any Company equity or equity-equivalent
securities. Pending application of the proceeds of this placement in the
manner permitted hereby the Company will invest such proceeds in interest
bearing accounts and/or short-term, investment grade interest bearing
securities.
Section 4.15 The Warrants. Prior to the Closing, the Company
shall deliver to the Escrow Agent for issuance and delivery at the Closing
(a) Common Stock purchase warrant, in the form of Exhibit C (the "JNC
Warrant"), in the name of JNC pursuant to which JNC shall have the right at
any time and from time to time thereafter through the third anniversary of
the date of issuance thereof, to acquire 160,000 shares of Common Stock at
an exercise price per share equal to 120% of the Average Price on the
Closing Date and (b) a Common Stock purchase warrant, in the form of Exhibit
C (the "DSF Warrant," and, collectively with the JNC Warrant, the
"Warrants"), in the name of DSF pursuant to which DSF shall have the right
at any time and from time to time thereafter through the third anniversary
of the date of issuance thereof, to acquire
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40,000 shares of Common Stock at an exercise price per share equal to 120%
of the Average Price on the Closing Date.
Section 4.16 Transfer of Intellectual Property Rights. Except
in the ordinary course of the Compnay's business consistent with past
practice or in connection with the sale of all or substantially all of the
assets of the Company, the Company shall not transfer, sell or otherwise
dispose of, any Intellectual Property Rights, or allow the Intellectual
Property Rights to become subject to any Liens, or fail to renew such
Intellectual Property Rights (if renewable and would otherwise expire).
Section 4.17 Certain Put Rights. The Purchasers shall have
certain put rights with respect to the Shares as set forth in the Put
Agreement, which the Company agrees shall be on terms no less favorable to
the Purchasers than any other such or similar understandings and benefits
granted to holders of the Company's Series B Convertible Preferred Stock.
ARTICLE V
CONDITIONS; TERMINATION
Section 5.1 Conditions Precedent.
(a) Conditions Precedent to the Obligation of the Company to
Sell the Shares and Warrants. The obligation of the Company to sell the
Shares and Warrants hereunder to a Purchaser is subject to the satisfaction
or waiver by the Company, at or before the Closing, of each of the following
conditions:
(i) Accuracy of the Purchaser's Representations and
Warranties. The representations and warranties of such Purchaser shall be
true and correct in all material respects as of the date when made and as of
the Closing Date, as though made on and as of such date;
(ii) Performance by the Purchaser. Such Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by it at or prior to the
Closing;
(iii) Required Approvals. All Required Approvals shall
have been obtained.
(b) Conditions Precedent to the Obligation of a Purchaser to
Purchase the Shares and Warrants. The obligation of a Purchaser to acquire
and pay for the Shares and the Warrant to be acquired by it hereunder is
subject to the satisfaction or waiver by such Purchaser, at or before the
Closing, of each of the following conditions:
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(i) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company set forth
herein shall be true and correct in all material respects as of the date
when made and as of the Closing Date as though made on and as of such date;
(ii) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to
the Closing;
(iii) Other Financings. Between the date hereof and the
Closing, the Company shall have completed financings aggregating not less
than $2,250,000 (exclusive of the financing contemplated by this Agreement)
and shall have booked on its balance sheet not less than $2,250,000 in
equity as a result therefrom (as set forth in a financial statement of the
Compnay filed, or to be filed at Closing, with the Commission);
(iv) No Prohibitions. The purchase of and payment for the
Shares and the Warrant to be purchased by such Purchaser (and upon
conversion thereof, the Underlying Shares) hereunder (i) shall not be
prohibited or enjoined (temporarily or permanently) by any applicable law or
governmental regulation and (ii) shall not subject such Purchaser to any
penalty, or in its judgement, other onerous condition under or pursuant to
any applicable law or governmental regulation that would materially reduce
the benefits to such Purchaser of the purchase of the Shares, such Warrant
or the Underlying Shares (provided, however, that such regulation, law or
onerous condition was not in effect in such form at the date of this
Agreement);
(v) Adverse Changes. No event or series of events which,
individually or in the aggregate, could have or result in a Material Adverse
Effect shall have occurred between the date of execution hereof and the
Closing;
(vi) No Suspensions of Trading in Common Stock. Trading
in the Common Stock shall not have been suspended from trading on the Nasdaq
SmallCap Market at any time between the date hereof and the Closing;
(vii) Listing of Common Stock. (1) The Common Stock
shall have at all times between the date hereof and the Closing Date been
listed for trading on the Nasdaq SmallCap Market and (2) such Purchaser
shall have received evidence satisfactory to it that the Common Stock will
continue to be listed for trading on the Nasdaq SmallCap Market for the
foreseeable future;
(viii) Deliveries. The Company shall have delivered or
caused to be delivered to the Escrow Agent the "Consideration" (as defined
in the Escrow Agreement) required to have been delivered by or on its behalf
pursuant to the terms and conditions of the Escrow Agreement, including an
executed Put Agreement;
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(ix) Required Approvals. All Required Approvals shall
have been obtained; and
(x) Certificate of Designation. The Certificate of
Designation shall have been duly filed with the Secretary of State of
Delaware, and the Company shall have delivered a copy thereof to the Escrow
Agreement certified as filed by the office of the Secretary of State of
Delaware.
Section 5.2 Termination.
(a) Termination by Mutual Consent. This Agreement and the
transactions contemplated hereby may be terminated at any time prior to
Closing by the mutual consent of the Company and the Purchasers.
(b) Termination by the Company or a Purchaser. This Agreement
and the transactions contemplated hereby with respect to a Purchaser hereby
may be terminated prior to Closing by either the Company or such Purchaser,
by giving written notice of such termination to the other party, if:
(i) there shall be in effect any statute, rule, law or
regulation that prohibits the consummation of the Closing or the
transaction contemplated by the Transaction Documents or if the
consummation of the Closing Documents would violate any non-appealable
final judgment, order, decree, ruling or injunction of any court of or
governmental authority having competent jurisdiction; or
(ii) there shall have been an amendment to Regulation D
promulgated under the Securities Act or an interpretive release
promulgated or issued thereunder, which, in the judgment of the
terminating party, could have or result in a Material Adverse Effect.
(c) Termination by the Company. This Agreement and the
transactions contemplated hereby may be terminated prior to Closing as to
one or more of the Purchasers by the Company, by giving written notice of
such termination to such Purchaser or Purchasers, if such Purchaser or
Purchasers have breached in any material respect any representation,
warranty, covenant or agreement contained in any Transaction Document and
such breach is not cured within one (1) Business Day following receipt by
such Purchaser or Purchasers (as the case may be) of notice of such breach.
(d) Termination by a Purchaser. This Agreement and the
transactions contemplated hereby may be terminated as to a Purchaser prior
to Closing by such Purchaser, by giving written notice of such termination
to the Company, if:
(i) the Company has breached in any material respects any
representation, warranty, covenant or agreement contained in any
Transaction Document
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and such breach is not cured within one (1) Business Day following
receipt by the Company of notice of such breach;
(ii) there has occurred an event or series of events
which, individually or in the aggregate, could have or result in a
Material Adverse Effect which is not disclosed fully in the Disclosure
Materials;
(iii) trading in the Common Stock has been suspended or
the Common Stock has failed to be listed for trading on the Nasdaq
SmallCap Market; or
(iv) the conditions to Closing set forth in Sections
5.1(b)(iii) and 5.1(b)(vii)(2) shall not have been satisfied or waived
by such Purchaser prior to October 31, 1997.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Fees and Expenses. The Company shall pay the
Purchasers at the Closing (i) $15,000 for their legal fees and disbursements
in connection with the preparation and negotiation of the Transaction
Documents and (ii) $7,000 for their due diligence expenses and disbursements
in connection with the transactions contemplated hereby. Other than the
amounts contemplated by the immediately preceding sentence, and except as
set forth in the Registration Rights Agreement, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties
levied in connection with the issuance of the Shares pursuant hereto. The
Purchasers shall be responsible for their own respective tax liability that
may arise as a result of the investment hereunder or the transactions
contemplated by this Agreement.
Section 6.2 Entire Agreement; Amendments, Exhibits and
Schedules. This Agreement, together with the Exhibits and Schedules hereto,
the Certificate of Designation, the Warrants, the Escrow Agreement, the
Registration Rights Agreement and the Put Agreement contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with
respect to such matters. The Exhibits and Schedules to this Agreement are
hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
Section 6.3 Notices. Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and 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) on a Business Day, (ii) the
Business Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number
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specified in the Purchase Agreement 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) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given. The address for
such notices and communications shall be as follows:
If to the Company: fonix corporation
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Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
With copies to: Durham, Evans, ▇▇▇▇▇ & ▇▇▇▇▇▇▇, P.C.
Suite 850 Key Bank Tower
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Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇
If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
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With copies to (for Encore Capital Management, L.L.C.
communications to ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
either Purchaser): ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
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▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ &
▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
Section 6.4 Amendments; Waivers. No provision of this Agreement
may be waived or amended except in a written instrument signed, in the case
of an amendment, by both the Company and the Purchasers, or, in the case of
a waiver, by the party against whom enforcement of any such waiver is
sought. No waiver of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver
in the future or a waiver of any other provision, condition or requirement
hereof, nor shall any delay or omission of either party to exercise any
right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
Section 6.5 Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 6.6 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors
and permitted assigns, including any Persons to whom any Purchaser transfers
Shares or Warrants. The assignment by a party of this Agreement or any
rights hereunder shall not affect the obligations of such party under this
Agreement.
Section 6.7 No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective
permitted successors and assigns and, other than with respect to permitted
assignees under Section 6.6 and with respect to Section 4.9, which is
intended for the benefit of and which may be enforced by Encore, is not for
the benefit of, nor may any provision hereof be enforced by, any other
Person. The obligations of the Purchasers under the Agreement and the other
Transaction Documents are several and not joint and no Purchaser shall be
responsible for any obligations of any other Purchaser.
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Section 6.8 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State
of Delaware without regard to the principles of conflicts of law thereof.
Section 6.9 Survival. The representations, warranties,
agreements and covenants contained in this Agreement shall survive the
Closing and the and conversion of the Shares and exercise of the Warrants.
Section 6.10 Execution. This Agreement may be executed in two
or more counterparts, all of which when taken together shall be considered
one and the same agreement, and shall become effective when counterparts
have been signed by each party and delivered to the other parties, it being
understood that all parties need not sign the same counterpart. In the
event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature page were an original thereof.
Section 6.11 Publicity. The Company and the Purchasers shall
consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and
no party shall issue any such press release or otherwise make any such
public statement without the prior written consent of the other parties,
which consent shall not be unreasonably withheld or delayed, except that no
prior consent shall be required if such disclosure is required by law, in
which such case the disclosing party shall provide the other parties with
prior notice of such public statement. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser without the
prior written consent of such Purchaser, except to the extent required by
law, in which case the Company shall provide such Purchaser with prior
written notice of such public disclosure.
Section 6.12 Severability. In case any one or more of the
provisions of this Agreement shall be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and
provisions of this Agreement shall not in any way be affected or impaired
thereby and the parties will attempt to agree upon a valid and enforceable
provision which shall be a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
Section 6.13 Remedies. Each of the parties to this Agreement
acknowledges and agrees that the other parties would be damaged irreparably
in the event any of the provisions of this Agreement are not performed in
accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties hereto agrees that the other parties shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions of this Agreement in any action instituted in any
court of the United States of America or any state thereof having
jurisdiction over the parties to this Agreement and the matter, in addition
to any other remedy to which they may be entitled, at law or in equity.
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Section 6.14 ▇▇▇▇▇. The Purchasers agree to use their
reasonable efforts to provide to the Company upon request therefor
electronic copies of this Agreement and all exhibits hereto, including any
subsequent amendments or modifications thereof to the extent such documents
are under the control of the Purchaser.
Section 6.15 Effective Date. Notwithstanding anything to the
contrary in this Agreement, Purchaser and the Company expressly agree that
the transactions contemplated by this Agreement are in furtherance of the
transactions contemplated by that certain Memorandum of Understanding by and
between Purchaser and the Company and dated as of September 30, 1997 (the
"MOU"). Furthermore, Purchaser agrees that, for purposes of financial
accounting, the Company may record the transactions contemplated by this
Agreement as if they occurred on September 30, 1997 in furtherance of the
MOU, although Purchaser's agreement in such regard shall have no effect on
the substance of this Agreement or any document or instrument executed in
connection with this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Preferred Stock Purchase Agreement to be duly executed as of the
date first indicated above.
fonix corporation
By: /S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇
------------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇
Title: Chief Financial Officer
JNC OPPORTUNITY FUND LTD.
By: /s/ ▇▇▇▇ ▇▇▇▇▇
-------------------------------------
▇▇▇▇ ▇▇▇▇▇
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: Encore Capital Management, L.L.C.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇
----------------------------------
▇▇▇▇ ▇. ▇▇▇▇
Director
SCHEDULE 3.1 (a)
Subsidiaries
1. fonix systems corporation, a Utah corporation, wholly owned by the
Company.
SCHEDULE 3.1 (c)
Capitalization
1. Authorized Common Stock - 100,000,000 shares, $.0001 per share
2. Authorized Preferred Stock - 20,000,000 shares, $.0001 per share
3. Issued Common Stock - 42,723,989 shares at October 24, 1997
4. Issued Preferred Stock -
Series A Preferred Stock, 166,667 shares authorized for
issuance, 166,667 shares issued and outstanding (certificate of
designation of rights and preferences of which is attached
hereto)
Series B Preferred Stock, 350,000 shares authorized for
issuance, 125,000 shares issued and outstanding (certificate of
designation of rights and preferences of which is attached
hereto)
5. Outstanding Options, Warrants and Similar Rights at October 24, 1997-
(a) Total Warrants-600,000 Warrants granted (1)
(b) Total Options-9,075,000 Options granted (2)
_________________________
(1) Excludes the 200,000 Warrants to be issued under the Purchase
Agreement
(2) Estimate. Actual number of warrants issued as of October 24,
1997 could be as much as 200,000 shares lower, depending on the
outcome of pending negotiations with and deliberations about
employee stock option grants.
SCHEDULE 3.1 (j)
Recent Sales of Unregistered Securities
1. Southbrook International Investments, Ltd. On June 18, 1997, the
Company entered into a Convertible Debenture Purchase Agreement with
Southbrook International Investments, Ltd. (the "Investor") pursuant to
which the Investor agreed to purchase up to an aggregate principal
amount of $10,000,000 of the Company's Series B 5% Convertible
Debentures ("Debentures") convertible into shares of the Company's common
stock. In connection with that transaction, the Company also agreed to
issue to the Investor a warrant (the "Warrant") to purchase shares of the
Company's common stock at the exercise price of $8.28 per share. On
June 18, 1997, the Investor paid $3,000,000 in return for which the
Company issued Debentures in that principal amount. On October 24,
1997, the Company and the Investor entered into a Modification and
Amendment Agreement to the June 18 purchase agreement pursuant to which
the Investor acquired 125,000 shares of the Company's Series B Preferred
Stock (the "Series B Preferred"). The Debentures, the Warrant and the
Series B Preferred issued to date to the Investor have been issued by
the Company without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance on the exemption from registration
afforded by Section 4(2) of the Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
SCHEDULE 3.1 (l)
Senior Equity Securities
Series A Preferred Stock, 166,667 shares authorized for issuance,
166,667 shares issued and outstanding (certificate of designation of
rights and preferences of which is attached to Schedule 3.1(c))
EXHIBIT A
SERIES C TERMS
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the 5% Series C Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated and
authorized shall be 187,500. Each share of Preferred Stock shall have a par
value of $.0001 per share and a stated value of $20 per share (the "Stated
Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December
31, 1997, and on each Conversion Date (as hereinafter defined), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of
the Stated Value per share) equal to 5% per annum, payable in cash or shares
of Common Stock (as defined in Section 7) at the option of the Company. The
number of shares of Common Stock issuable as payment of dividends hereunder
shall equal the aggregate dollar amount of dividends then being paid,
divided by the Conversion Price (as defined in Section 5(c)(i)) then in
effect. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing the Original Issue Date (as
defined in Section 7), and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for
any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably
among the holders of the Preferred Stock based upon the number of shares
then held by each holder. In order for the Company to exercise its right to
pay dividends in shares of Common Stock, the Company shall, no less than two
(2) Trading Days prior to the first day of the calendar quarter in which a
dividend payment date (other than a Conversion Date) occurs, provide the
holders of the Preferred Stock written notice of its intention to pay
dividends in shares of Common Stock. In order for the Company to exercise
its right to pay dividends in shares of Common Stock on any Conversion Date,
the Company must provide written notice to the holders of Preferred Stock at
least one Trading Day prior to the issuance of shares of Common Stock as
payment therefor, which notice will remain in effect for subsequent
Conversion Notices until rescinded by the Company in a written notice to
such effect that is addressed to the holders of the Preferred Stock.
Notwithstanding the foregoing, if any such holder shall deliver a Conversion
Notice (as hereinafter defined) within five (5) Trading Days after receipt
of such rescinding notice from the Company, such holder shall be entitled to
receive payment of dividends in shares of Common Stock.
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends on
the Preferred Stock (and must deliver cash in respect thereof) if: ( the
number of shares of Common Stock at the time authorized, unissued
and unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the
Company has not duly reserved for issuance in respect of such dividends a
sufficient number of shares of Common Stock, ( such shares are not
registered for resale pursuant to an effective Underlying Securities
Registration Statement (as defined in Section 7) and may not be sold without
volume restrictions pursuant to Rule 144(k) 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 and acceptable
to the Company's transfer agent or other Person performing functions similar
thereto, ( such shares are not listed for trading on the Nasdaq SmallCap
Market, Nasdaq National Market, The New York Stock Exchange ("NYSE") or the
American Stock Exchange (the "AMEX") (and any other exchange, market or
trading facility in which the Common Stock is then listed for trading), (
the issuance of such shares would result in the recipient thereof
beneficially owning, determined in accordance with Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended, more than 4.999% of
the then issued and outstanding shares of Common Stock, unless the issuance
of shares of Common Stock in excess of such amount is then permitted by
Section 3.8 of the Purchase Agreement, or (v) the Company shall have failed
to timely satisfy its obligations pursuant to any Conversion Notice.
Payment of dividends in shares of Common Stock is further subject to
the provision of Section 5(a)(ii).
(c) So long as any shares of Preferred Stock remain
outstanding, neither the Company nor any subsidiary thereof shall, without
the consent of the holders of 66 2/3% of the shares of Preferred Stock then
outstanding, redeem, repurchase or otherwise acquire directly or indirectly
any Junior Securities (as defined in Section 7), nor shall the Company
directly or indirectly pay or declare any dividend or make any distribution
(other than a dividend or distribution described in Section 5) upon, nor
shall any distribution be made in respect of, any Junior Securities, nor
shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities.
Notwithstanding the foregoing, the Company may redeem, repurchase or
otherwise acquire shares of the Company's Series B Convertible Preferred
Stock, provided that any such redemption, repurchase or acquisition is
carried out pro rata with the Preferred Stock.
Section 3. Voting Rights; Protective Provisions. Except as
otherwise provided herein and as otherwise required by law, the Preferred
Stock shall have no voting rights. However, so long as any shares of
Preferred Stock are outstanding, the Company shall not and shall cause its
subsidiaries not to, without the affirmative vote of each of the holders of
the Preferred Stock then outstanding, alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as
defined in Section 4) or otherwise senior to or pari passu with the
Preferred Stock (other than the Company's Series B Convertible Preferred
Stock, which shall rank pari passu with the Preferred Stock), (d) amend its
certificate of incorporation, bylaws or other charter documents so as to
affect adversely any rights of any holders of the Preferred Stock, (e)
increase the authorized or designated number of shares of Preferred Stock,
(f) issue any additional shares of Preferred Stock or (g) enter into any
agreement with respect to the foregoing.
-2-
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of the Preferred Stock shall be entitled to
receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid dividends per share, whether declared or
not, and all other amounts in respect thereof (including liquidated damages,
if any) then due and payable before any distribution or payment shall be
made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of Preferred Stock shall be
distributed among the holders of Preferred Stock ratably in accordance with
the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all
or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written
notice of any such Liquidation, not less than 45 days prior to the payment
date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock is convertible at the
option of the holder in whole or in part at any time after the Original
Issue Date into shares of Common Stock (subject to reduction pursuant to
Section 5(a)(ii) hereof and Section 3.8 of the Purchase Agreement) at the
Conversion Ratio (as defined in Section 7). A holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date the holder delivers
such Conversion Notice by facsimile (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 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof and Section 3.8
of the Purchase Agreement, each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all of the shares of
Preferred Stock represented by the certificate or certificates tendered by
the holder with the Conversion Notice, or if a conversion hereunder cannot
be effected in full for any reason, the Company shall promptly deliver to
such holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on any Conversion
Date (A) the Common Stock is listed for trading on the Nasdaq National
Market, Nasdaq SmallCap Market, the NYSE or the AMEX, (B) the Conversion
Price then in effect is such that the aggregate number of shares of the
Common Stock that would then be issuable upon conversion in full of all of
the shares of Preferred Stock then outstanding, together with any shares of
the Common Stock previously issued upon conversion of Preferred Stock and as
payment of dividends thereon would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date
-3-
(such maximum number of shares as would not equal or exceed such 20% limit,
the "Issuable Maximum"), and (C) the Company shall not have previously
obtained the vote of shareholders, if any, as may be required by the rules
and regulations of The Nasdaq Stock Market, the NYSE or the AMEX (as
applicable) applicable to approve the issuance of Common Stock in excess of
the Issuable Maximum in a private placement for less than the greater of
book or fair market value of the Common Stock (as applicable, the
"Shareholder Approval"), then the Company shall issue to the holder so
requesting a conversion of Preferred Stock its pro rata portion of the
Issuable Maximum in the same ratio that the number of shares of Preferred
Stock then outstanding and held by such holder bears to the aggregate number
of shares of Preferred Stock then outstanding and, with respect to the
remainder of the shares of Preferred Stock then held by such holder for
which a conversion in accordance with the Conversion Price would result in
an issuance of Common Stock in excess of such holder's pro rata portion of
the Issuable Maximum, the converting holder shall have the option to require
the Company to either (1) use its best efforts to obtain the Shareholder
Approval applicable to such issuance as soon as is possible, but in any
event not later than the 60th day after such request, or (2)(i) issue and
deliver to such holder a number of shares of Common Stock as equals (x) the
number of shares of Preferred Stock (or such portions thereof) tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of such holder's pro rata portion of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined in
Section 5(c)(i)), and (ii) cash in an amount equal to the product of (x) the
Per Share Market Value on the Conversion Date and (y) the number of shares
of Common Stock in excess of such holder's pro rata portion of the Issuable
Maximum that would have otherwise been issuable to the holder in respect of
such conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). If the Company
fails to pay the Discount Equivalent in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum to the converting holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid
in full. The entire Discount Equivalent, including interest thereon, shall
be paid in cash.
(b) Not later than three (3) Trading Days after a 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 4.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) hereof and Section 3.8 of the Purchase
Agreement), (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay accrued and unpaid dividends in cash) and (iv) if the Company has
elected and is permitted hereunder to pay accrued dividends in shares of
Common Stock, certificates, which shall be free of restrictive legends and
trading restrictions (other than those required by Section 4.1(b) of the
Purchase Agreement), representing such number of shares of Common Stock as
are issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a). Notwithstanding the foregoing, the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered
for conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the
-4-
holder of such Preferred Stock notifies the Company that such certificates
have been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith. 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 Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are
not delivered to or as directed by the applicable holder by the third
Trading Day after the 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, to rescind such conversion, in which event the
Company shall immediately return the certificates representing the shares of
Preferred Stock tendered for conversion. If the Company fails to deliver to
the holder such certificate or certificates pursuant to this Section,
including for purposes hereof, any shares of Common Stock to be issued on
the Conversion Date on account of accrued but unpaid dividends hereunder,
prior to the fifth (5th) Trading Day after the 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. If the Company fails to deliver to the holder
such certificate or certificates pursuant to this Section prior to the
twelfth (12th) day after the Conversion Date, the Company shall, at the
holder's option (i) redeem, from funds legally available therefor at the
time of such redemption, such number of shares of Preferred Stock then held
by such holder, as requested by such holder, and (ii) pay all accrued but
unpaid dividends and all other amounts then owing on account of the
Preferred Stock for which the Company shall have failed to issue Common
Stock certificates hereunder, in cash. The redemption price for the shares
of Preferred Stock to be redeemed in accordance with this Section shall be
the Redemption Price (as defined in Section 7). If the holder has requested
redemption pursuant to this Section and the Company fails for any reason to
pay the Redemption Price under this Section within seven (7) days after such
notice is given pursuant to Section 5(i), the Company will pay interest on
the unpaid portion of the Redemption Price at a rate of 18% per annum,
accruing from such seventh day until the Redemption Price and any accrued
interest thereon is paid in full. Nothing herein shall limit a holder's
right to pursue actual damages for the Company's failure to deliver
certificates representing shares of Common upon conversion within the period
specified herein (including, without limitation, damages relating to any
purchase of shares of Common Stock by such holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares of
Common Stock upon conversion, such damages to be in an amount equal to (A)
the aggregate amount paid by such holder for the shares of Common Stock so
purchased minus (B) the aggregate amount of net proceeds, if any, received
by such holder from the sale of the shares of Common Stock issued by the
Company pursuant to such conversion), and such holder shall have the right
to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive
relief).
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") on any Conversion Date shall be the lesser of (A)
the Average Price on the Original Issue Date (the "Initial Conversion
Price") and (B) the Applicable Percentage (as defined in Section 7)
multiplied by the average of the five (5) lowest Per Share Market Values
during the fifteen (15) Trading Days immediately preceding the Conversion
Date; provided that, (a) if an Underlying Securities
-5-
Registration Statement is not filed on or prior to the Filing Date (as such
term is defined in the Registration Rights Agreement), or (b) if the Company
fails to file with the Commission a request for acceleration in accordance
with Rule 461 promulgated under the Securities Act 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 Securities Registration
Statement will not be "reviewed" or is not subject to further review or
comment by the Commission, or (c) if the Underlying Securities Registration
Statement is not declared effective by the Commission on or prior to the
75th day after the Original Issue Date, or (d) if such Underlying Securities
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
a subsequent Underlying Securities Registration Statement filed with and
declared effective by the Commission within ten (10) days, or (e) if trading
in the Common Stock shall be suspended, or if the Common Stock shall be
delisted from trading, on the Nasdaq SmallCap Market or on any other
national securities market, exchange or trading facility on which the Common
Stock is then listed or quoted for trading for any reason for more than
three (3) Trading Days, or (f) if the conversion rights of any holder of
Preferred Stock are suspended for any reason or if any holder is not
permitted to resell Registrable Securities under the Underlying Securities
Registration Statement, or (g) if an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission
within ten (10) days after notification by the Commission that such
amendment is required in order for the Underlying Securities Registration
Statement to remain 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 ten (10) day period is exceeded, or for purposes of clause (e)
the date on which such three (3) Trading Day period is exceeded, being
referred to as "Event Date"), the Conversion Price shall be decreased by
2.5% each month (i.e., the Conversion Price would decrease by 2.5% as of the
Event Date and additional 2.5% as of each monthly anniversary of the Event
Date) until the earlier to occur of the second month anniversary after the
Event Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to each
holder of Preferred Stock the product of 2.5% and the aggregate of the
Stated Values for the shares of Preferred Stock then held by such holder, in
cash as liquidated damages, and not as a penalty on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing such
decrease has been subsequently cured. The provisions of this Section are
not exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution on account of or to holders of Junior Securities payable
in shares of Common Stock, (b) subdivide outstanding shares of Common Stock
into a larger number of shares, or (c) combine outstanding shares of Common
Stock into a smaller number of shares, then the Initial Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and the denominator of which shall be the
number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(c)(ii)
-6-
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 or combination.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all
holders of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, the Initial Conversion
Price shall be multiplied by a fraction, the denominator of which shall be
the number of shares of 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 Common Stock offered for subscription or
purchase, and the numerator of which shall be the number of shares of 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 Common Stock the issuance of which
resulted in an adjustment in the Initial Conversion Price pursuant to this
Section 5(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Initial 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 Initial Conversion Price made pursuant to the provisions
of this Section 5 after the issuance of such rights or warrants) had the
adjustment of the Initial 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 Common Stock actually purchased upon
the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Initial Conversion Price at which each share of Preferred
Stock shall thereafter be convertible shall be determined by multiplying the
Initial 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 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 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 the shares of Preferred Stock then outstanding; and provided, further,
that the Company, after receipt of the determination by such Appraiser shall
have the right
-7-
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 Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another Person
pursuant to which the Company will not be the surviving entity, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (collectively, a "Business
Combination"), the holders of the Preferred Stock then outstanding shall
have the right thereafter to, at their option, (A) convert such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon,
only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following
such reclassification, consolidation, merger, sale, transfer or share
exchange, and the holders of the Preferred Stock 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 such shares of Preferred
Stock, together with all accrued and unpaid dividends thereon could have
been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled, (B)
require the Company to redeem its shares of Preferred Stock then outstanding
at the Redemption Price, but only if the Business Combination was the
voluntary act of the Company (i.e. not a tender offer) or (C) to require
that the Person with whom such consolidation, merger, sale or transfer or
share exchange takes place issue and deliver to the holders of the Preferred
Stock shares of convertible preferred stock or convertible debentures of
such Person which newly issued shares or debentures (as the case may be)
shall have terms substantially similar in all material respects to the terms
of the Preferred Stock (including with respect to conversion) and shall be
entitled to all of the rights and privileges of a holder of Preferred Stock
set forth herein, in the Registration Rights Agreement and in the Purchase
Agreement (including without limitation, such rights as relates to the
acquisition, transferability, registration and listing of the stock or other
securities issuable upon conversion of such convertible preferred stock or
convertible debentures). In such case, the conversion price for such newly
issued convertible securities shall be based upon the amount of securities,
cash or property that each share of Common Stock would receive in the
transaction giving rise to the obligation to issue such securities, the
Conversion Ratio immediately prior to the effective or closing date for such
transaction and the Conversion Price stated herein. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holders of Preferred Stock the right
to receive the securities, cash or property set forth in this Section upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges. If the holder has requested redemption pursuant to this Section
and the Company fails for any reason to pay the Redemption Price under this
Section within seven (7) days after such notice is given pursuant to Section
5(i), the Company will pay interest on the unpaid portion of the Redemption
Price at a rate of 18% per annum, accruing from such seventh day until the
Redemption Price and any accrued interest thereon is paid in full.
-8-
(vi) All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly
mail to each holder of Preferred Stock, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii) 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, or any compulsory share
or exchange whereby the Common Stock is
converted into other securities, cash or
property; or
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 Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 45 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 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 Common Stock of record shall be entitled to
exchange their shares of 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
-9-
specified in such notice. Holders are entitled to convert shares of
Preferred Stock during the 30-day period commencing the date of such notice
to the effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that
it intends to enter into a Change of Control Transaction (as defined below)
or (ii) any Person or group of Persons (including the Company, but excluding
a holder or any affiliate of a holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a holder of Preferred Stock
seeks to convert shares of Preferred Stock on or following the Announcement
Date, the Conversion Price shall, effective upon the Announcement Date and
continuing through the earlier to occur of the consummation of the proposed
transaction or tender offer, exchange offer or other transaction and the
Abandonment Date (as defined below), be equal to the lower of (x) the
Conversion Price measured on the Announcement Date and (y) the Conversion
Price in effect on the Conversion Date for such Preferred Stock.
"Abandonment Date" means with respect to any proposed transaction or tender
offer, exchange offer or other transaction for which a public announcement
as contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.
(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 of Preferred Stock (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 of Preferred Stock 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 Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
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.
(e) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of
-10-
Preferred Stock and payment of dividends on Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the holders of Preferred Stock, not
less than such number of shares of 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 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder.
The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of
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 of a share of Preferred Stock 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 Common Stock on
conversion of Preferred Stock 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
shares of Preferred Stock 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) Shares of Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(i) Any and all notices or other communications or deliveries
to be provided by the holders of the Preferred Stock 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 attention of the Chief Financial Officer of the Company at the
facsimile telephone number or address of the principal place of business of
the Company as set forth in the Purchase Agreement. 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 Preferred
Stock 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
-11-
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. For purposes of Section
5(c)(i), if a Conversion Notice is delivered by facsimile prior to 5:00 p.m.
(Salt Lake City time) on any date, then the day prior to such date shall be
the last Trading Day calculated to determine the Conversion Price applicable
to such Conversion Notice, and the date of such delivery shall commence the
counting of days for purposes of Section 5(b).
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any time,
to redeem from funds legally available therefor all or any portion of the
then outstanding and unconverted shares of Preferred Stock at a price equal
to the Redemption Price. Any redemptions pursuant to this Section shall be
effected by the delivery of a notice to each holder of Preferred Stock to be
redeemed, which notice shall indicate the number of shares of Preferred
Stock of each holder to be redeemed and the date that such redemption is to
be effected, which shall be the 20th Trading Day after the date such notice
is deemed delivered pursuant to Section 5(i) (the "Optional Redemption
Date"). All redeemed shares of Preferred Stock shall cease to be
outstanding and shall have the status of authorized but undesignated stock,
but may not be reissued as Preferred Stock. The entire Redemption Price
under this Section shall be paid in cash by the Optional Redemption Date.
The holders of the Preferred Stock shall have the right to tender, and the
Company shall honor, Conversion Notices for shares of Preferred Stock,
including shares subject to the notice of redemption described in this
Section, at any time through the 19th Trading Day after receipt of such
notice of redemption.
(b) If any portion of the Redemption Price under this section
is not paid by the Company on or prior to the Optional Redemption Date,
interest shall accrue thereon at the rate of 18% per annum thereafter until
such Redemption Price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if
any portion of such Redemption Price remains unpaid for more than five (5)
calendar days after the date due, each holder of the Preferred Stock subject
to such redemption may elect, by written notice to the Company, to either
(i) demand conversion in accordance with the formula and the time frame
therefor set forth in Section 5 of all of the shares of Preferred Stock for
which such Redemption Price has not been paid in full (the "Unpaid
Redemption Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the
date such Redemption Price was originally due and the Per Share Market Price
as of the holder's written demand for conversion, or (ii) invalidate ab
initio such redemption, notwithstanding anything herein contained to the
contrary. If a holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to such
holder the shares of Common Stock issuable upon conversion of the Unpaid
Redemption Shares subject to such holder conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if such holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of the holder's notice of
such election, return to the holder all of the Unpaid Redemption Shares.
-12-
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Applicable Percentage" means (i) 91% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 90% for any
conversion honored on or after the 120th and prior to the 180th after the
Original Date and (iii) 88% for any conversion honored thereafter.
"Average Price" as at any date means the average Per Share
Market Value for the five (5) Trading Days immediately preceding such date.
"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.
"Common Stock" means the 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.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value plus accrued but unpaid dividends to the extent to
be paid in shares of Common Stock and the denominator of which is the
Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company.
"Original Issue Date" means the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"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 Nasdaq
SmallCap Market or other principal 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 Nasdaq SmallCap Market 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 Nasdaq Stock Market or in 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
shares of the Preferred Stock; provided, however, that the Company, after
receipt of the determination by such Appraiser, shall have the right
-13-
to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company
and the original holders of the Preferred Stock.
"Redemption Price" shall be equal to the sum of (a) the number
of shares of Preferred Stock to be redeemed (including for purposes of any
redemption pursuant to Section 5(b), the number of shares of Preferred Stock
tendered for conversion but for which the Company shall have failed to issue
and deliver shares of Common Stock in respect thereof), multiplied by the
product of (i) the sum of $20 plus all accrued and unpaid dividends, divided
by the Conversion Price on (x) the date the Redemption Price is demanded (in
the case of a redemption pursuant to Section 5(b)) or the date such
Redemption Price is due (in the case of a redemption pursuant to Section 6)
or (y) the date the Redemption Price is paid in full, whichever is less,
multiplied by (ii) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date that such Redemption Price
is demanded or due, as the case may be, or (y) the date the Redemption Price
is paid in full, whichever is greater, and (b) all other amounts, costs,
expenses and liquidated damages due in respect of such shares of Preferred
Stock to be redeemed.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the Original Issue Date, between the Company and the
original holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market or other stock exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) 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).
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof
and the Purchase Agreement and shares of Common Stock issuable on account of
dividends on or with respect to the Preferred Stock.
"Underlying Securities Registration Statement" shall mean a
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights
Agreement, covering the resale of the Underlying Shares and naming the
holders of the Preferred Stock as "selling stockholders" thereunder.
-14-
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, 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:
_____________________________________________
Date to effect conversion
_____________________________________________
Number of shares of Preferred Stock to be converted
______________________________________________
Number of shares of Common Stock to be issued
_____________________________________________
Applicable conversion price
_____________________________________________
Name of Holder
_____________________________________________
______________________________________________
Address of Holder
__________________________________
Authorized Signature
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of October 24, 1997, by and among fonix corporation, a
Delaware corporation (the "Company"), JNC Opportunity Fund Ltd., a Cayman
Islands corporation ("JNC"), and Diversified Strategies Fund, L.P., an
Illinois limited partnership ("DSF"). JNC and DSF are each a "Purchaser"
and are, collectively the "Purchasers."
This Agreement is made pursuant to the Convertible Stock
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms
shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control,"
when used with respect to any Person, means the possession, direct or
indirect, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "affiliated,"
"controlling" and "controlled" have meanings correlative to the foregoing.
"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 generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.0001 per share.
"Effectiveness Date" means the 75th day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a)."Exchange Act" means the Securities Exchange Act of
1934, as amended.
"Filing Date" means the 20th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Shares" means the shares of Series C Preferred Stock,
par value $.0001 per share, of the Company issued to the Purchasers on the
Closing Date.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion in full of the Preferred Shares, (b) upon
exercise in full of the Warrants and (c) as payment in full of dividends on
the Preferred Shares; provided, however that in order to account for the
fact that the number of shares of Common Stock that are issuable upon
conversion of Preferred Shares is determined in part upon the market price
of the Common Stock at the time of conversion, Registrable Securities
contemplated by clause (a) of this definition shall be deemed to include not
less than 200% of the number of shares of Common
-2-
Stock into which the Preferred Shares are convertible, assuming such
conversion occurred on the Closing Date or the Filing Date (whichever date
yields a lower Conversion Price, as such term is defined in the Certificate
of Designation for the Preferred Shares). The initial Registration
Statement shall cover at least such number of shares of Common Stock as
equals the sum of (x) 200% of the number of shares of Common Stock into
which the Preferred Shares are convertible, assuming such conversion
occurred on the Closing Date or the Filing Date (whichever date yields a
lower Conversion Price) and (y) such number of shares of Common Stock as are
contemplated by clauses (b) and (c) above in this definition. The Company
shall be required to file additional Registration Statements to the extent
the actual number of shares of Common Stock into which the Preferred Shares
are convertible (together with dividends thereon) and Warrants are
exercisable exceeds the number of shares of Common Stock initially
registered in accordance with the immediately prior sentence (the Company
shall have 20 days to file such additional Registration Statement after
notice of the requirement thereof, which the Holders may give at such time
when the number of shares of Common Stock as are issuable upon conversion of
the Preferred Shares exceeds 175% of the number of shares of Common Stock
into which the Preferred Shares are convertible, assuming such conversion
occurred on the Closing Date or the Filing Date (whichever yields a lower
Conversion Price).
"Registration Statement" means the registration statement
contemplated by Section 2(a) (covering such number of Registrable Securities
and any additional Registration Statements contemplated in the definition of
Registrable Securities), including (in each case) the Prospectus, amendments
and supplements to such registration statement or Prospectus, including pre-
and post-effective amendments, all exhibits thereto, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means the law firm acting as counsel to the
Holders, for which the Holders will be reimbursed by the Company pursuant to
Section 4.
-3-
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to
an underwriter for reoffering to the public pursuant to an effective
registration statement.
"Warrants" means the Common Stock purchase warrants issued to
the Purchasers on the Closing Date.
2. Shelf Registration
(a) On or prior to the Filing Date the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-3
promulgated under the Securities Act (or, if the Company is not permitted to
register the resale of the Registrable Securities on Form S-3, the
Registration Statement shall be on such other appropriate form in accordance
herewith as the Holders of a majority in interest of the Registrable
Securities may consent). The Company shall use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act
as promptly as possible after the filing thereof, but in any event prior to
the Effectiveness Date, and shall use its best efforts to keep such
Registration Statement continuously effective under the Securities Act until
the date which is three years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when
all Registrable Securities covered by such Registration Statement have been
sold or may be sold without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act, as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent (the "Effectiveness Period").
The Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able
to sell all of the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is required
under applicable law or the Company has filed a post-effective amendment to
the Registration Statement and the Commission has not declared it effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, the investment banker that will administer the offering will be
selected by the Holders of a majority of the Registrable Securities to be
included in such offering. In connection with any Underwritten Offering, if
the managing underwriters advise the Company and the participating Holders
in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering,
there shall be included in such Underwritten Offering the amount of such
Registrable Securities which in the opinion of such managing underwriters
can be sold, and such amount shall be allocated pro rata among the Holders
proposing to sell Registrable Securities in such Underwritten Offering. No
Holder may participate in any
-4-
Underwritten Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and
(ii) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required under the
terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement (and any additional Registration
Statements as may be required hereunder) in accordance with Section 2(a),
and cause the Registration Statement to become effective and remain
effective as provided herein; provided, however, that not less than five (5)
Business Days prior to the filing of the Registration Statement or any
related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), the Company shall (i) furnish to the Holders, their Special
Counsel and any managing underwriters, copies of all such documents proposed
to be filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders,
their Special Counsel and such managing underwriters, and (ii) cause its
officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The
Company shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto if the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to
all Registrable Securities for the Effectiveness Period and prepare and file
with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented
by any required Prospectus supplement, and as so supplemented or amended to
be filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and promptly provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration
Statement during the applicable period in accordance with the intended
methods
-5-
of disposition by the Holders thereof set forth in the Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later
than one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration
Statement is proposed to be filed; (B) whenever the Commission notifies the
Company whether there will be a "review" of such Registration Statement; (C)
whenever the Company receives (or representatives of the Compnay receive on
its behalf) any oral or written comments from the Commission in respect of a
Registration Statement (copies or, in the case of oral comments, summaries
of such comments shall be promptly furnished by the Company to the Holders);
and (D) with respect to the Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by the
Commission or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering
any or all of the Registrable Securities or the initiation of any
Proceedings for that purpose; (iv) if at any time any of the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in
all material respects; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that to the best knowledge
of the Company makes any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein
by reference untrue in any material respect or that requires any revisions
to the Registration Statement, Prospectus or other documents so that, in the
case of the Registration Statement or the Prospectus, as the case may be, it
will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. In addition, the Company shall furnish the Holders
with copies of all intended written responses to the comments contemplated
in clause (C) of this Section 3(c) not later than one (1) Business Day in
advance of the filing of such responses with the Commission so that the
Holders shall have the opportunity to comment thereon.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness
of the Registration Statement or (ii) any suspension of the qualification
(or exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority in interest of the Registrable Securities to be sold in
connection with an Underwritten
-6-
Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as
such managing underwriters and such Holders reasonably agree should be
included therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that
the Company shall not be required to take any action pursuant to this
Section 3(e) that would, in the opinion of counsel for the Company, violate
applicable law or be materially detrimental to the business prospects of the
Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested
by such Person (including those previously furnished or incorporated by
reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and
any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders and any underwriters in
connection with the offering and sale of the Registrable Securities covered
by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as any Holder or
underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; provided, however, that the Company
shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not then so subject or subject the Company to any material tax
in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement,
which certificates shall be free of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered
-7-
in such names as any such managing underwriters or Holders may request at
least three Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Registration
Statement nor such Prospectus will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq SmallCap
Market and any other securities exchange, quotation system, market or over-
the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance
as is customary in Underwritten Offerings) and take all such other actions
in connection therewith (including those reasonably requested by any
managing underwriters and the Holders of a majority of the Registrable
Securities being sold) in order to expedite or facilitate the disposition of
such Registrable Securities, and whether or not an underwriting agreement is
entered into, (i) make such representations and warranties to such Holders
and such underwriters as are customarily made by issuers to underwriters in
underwritten public offerings, and confirm the same if and when requested;
(ii) obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates
thereof addressed to each selling Holder and each such underwriter, in form,
scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement or at the time of delivery of any Registrable
Securities sold pursuant thereto (at the option of the underwriters), obtain
and deliver copies to the Holders and the managing underwriters, if any, of
"cold comfort" letters and updates thereof from the independent certified
public accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to each Person and in such form and substance as are
customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions
and procedures no less favorable to the selling Holders and the
underwriters, if any, than those set forth in Section 7 (or such other
provisions and procedures acceptable to the managing underwriters, if any,
-8-
and holders of a majority of Registrable Securities participating in such
Underwritten Offering; and (v) deliver such documents and certificates as
may be reasonably requested by the Holders of a majority of the Registrable
Securities being sold, their Special Counsel and any managing underwriters
to evidence the continued validity of the representations and warranties
made pursuant to clause 3(l)(i) above and to evidence compliance with any
customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(m) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any
disposition of Registrable Securities, and any attorney or accountant
retained by such selling Holders or underwriters, at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and properties of the Company and its
subsidiaries, and cause the officers, directors, agents and employees of the
Company and its subsidiaries to supply all information in each case
requested by any such Holder, representative, underwriter, attorney or
accountant in connection with the Registration Statement; provided, however,
that any information that is determined in good faith by the Company in
writing to be of a confidential nature at the time of delivery of such
information shall be kept confidential by such Persons, unless (i)
disclosure of such information is required by court or administrative order
or is necessary to respond to inquiries of regulatory authorities; (ii)
disclosure of such information, in the opinion of counsel to such Person, is
required by law; (iii) such information becomes generally available to the
public other than as a result of a disclosure or failure to safeguard by
such Person; or (iv) such information becomes available to such Person from
a source other than the Company and such source is not known by such Person
to be bound by a confidentiality agreement with the Company.
(n) Comply with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act
and Rule 158 not later than 45 days after the end of any 12-month period (or
90 days after the end of any 12-month period if such period is a fiscal
year) (i) commencing at the end of any fiscal quarter in which Registrable
Securities are sold to underwriters in a firm commitment or best efforts
Underwritten Offering and (ii) if not sold to underwriters in such an
offering, commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which
statement shall cover said 12-month period, or end shorter periods as is
consistent with the requirements of Rule 158.
(o) The Company may require each selling Holder to furnish to
the Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration
Statement and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such
information within a reasonable time after receiving such request.
-9-
If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (i) the inclusion therein of language, in
form and substance reasonably satisfactory to such Holder, to the effect
that the ownership by such Holder of such securities is not to be construed
as a recommendation by such Holder of the investment quality of the
Company's securities covered thereby and that such ownership does not imply
that such Holder will assist in meeting any future financial requirements of
the Company, or (ii) if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force, the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable
Securities that (i) it will not offer or sell any Registrable Securities
under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g)
and notice from the Company that such Registration Statement and any post-
effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with
sales of Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence
of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of
such Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated
by Section 3(j), or until it is advised in writing (the "Advice") by the
Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the
extent specified in Section 4(b), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be
made with The Nasdaq Stock Market, Inc. and Nasdaq SmallCap Market and each
other securities exchange or market or over-the-counter bulletin board on
which Registrable Securities are required hereunder to be listed and (B) in
compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the underwriters or
Holders in connection with Blue Sky qualifications of the
-10-
Registrable Securities and determination of the eligibility of the
Registrable Securities for investment under the laws of such jurisdictions
as the managing underwriters, if any, or the Holders of a majority of
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable
Securities and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriters, if any, or by the holders of a
majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $10,000,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated
by this Agreement. In addition, the Company shall be responsible for all of
its internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of
the Underwriters (including any underwriting commissions and discounts) and
their legal counsel and accountants, which shall be borne by the Holders and
the Underwriters. By way of illustration which is not intended to diminish
from the provisions of Section 4(a), the Holders shall not be responsible
for, and the Company shall be required to pay the fees or disbursements
incurred by the Company (including by its legal counsel and accountants) in
connection with, the preparation and filing of a Registration Statement and
related Prospectus for such offering, the maintenance of such Registration
Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and
printing expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as
to time, indemnify and hold harmless each Holder, the officers, directors,
agents (including any underwriters retained by such Holder in connection
with the offer and sale of Registrable Securities), brokers (including
brokers who offer and sell Registrable Securities as principal as a result
of a pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls
any such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses
-11-
(collectively, "Losses"), as incurred, arising out of or relating to any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto,
in light of the circumstances under which they were made) not misleading,
except to the extent, but only to the extent, that such untrue statements or
omissions are based solely upon information regarding such Holder furnished
in writing to the Company by or on behalf of such Holder expressly for use
therein, which information was reasonably relied on by the Company for use
therein or to the extent that such information relates to such Holder or
such Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the transactions
contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within
the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses (as determined by a court of competent jurisdiction
in a final judgment not subject to appeal or review) arising solely out of
or based solely upon any untrue statement of a material fact or alleged
untrue statement of material fact contained in the Registration Statement,
any Prospectus, or any form of prospectus, or arising solely out of or based
solely upon any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading
to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such
Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus
or such form of prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such
form of Prospectus. In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity
hereunder (an "Indemnified Party"), such Indemnified Party promptly shall
notify the Person from whom indemnity is sought (the "Indemnifying Party")
in writing, and the Indemnifying Party shall assume the
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defense thereof, including the employment of independent outside counsel
reasonably satisfactory to the Indemnified Party and the payment of all fees
and expenses incurred in connection with defense thereof; provided, that the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have
proximately and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed
in writing to pay such fees and expenses; or (2) the Indemnifying Party
shall have failed promptly to assume the defense of such Proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense
thereof and such counsel shall be at the expense of the Indemnifying Party).
The Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party,
unless such settlement includes an unconditional release of such Indemnified
Party from all liability on claims that are the subject matter of such
Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder; provided,
that the Indemnifying Party may require such Indemnified Party to undertake
to reimburse all such fees and expenses to the extent it is finally
judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party as
a result of
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such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue
or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed
to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided
for in this Section was available to such party in accordance with its
terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 5(d),
the Purchasers shall not be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received by
the Purchasers from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that the Purchasers have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty of
such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.
6. Other Company Registration Obligations; Piggy-Back
Registration.
(a) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its subsidiaries has, as of the date hereof, nor shall the
Company or any of its subsidiaries, on or after the date of this Agreement,
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to
any Person. Without limiting the generality of the foregoing, without the
written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right
to request the Company to register any securities of the
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Company under the Securities Act unless the rights so granted are subject in
all respects to the prior rights in full of the Holders set forth herein,
and are not otherwise in conflict or inconsistent with the provisions of
this Agreement.
(b) No Piggyback on Registrations. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its security holders (other than the Holders in such capacity
pursuant hereto) may include securities of the Company in the Registration
Statement other than the Registrable Securities, and the Company shall not
enter into any agreement providing any such right to any of its
securityholders.
(c) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall determine
to prepare and file with the Commission a registration statement relating to
an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or
Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable
in connection with stock option or other employee benefit plans, then the
Company shall send to each holder of Registrable Securities written notice
of such determination and, if within twenty (20) days after receipt of such
notice, any such holder shall so request in writing, the Company shall
include in such registration statement all or any part of the Registrable
Securities such holder requests to be registered. No right to registration
of Registrable Securities under this Section shall be construed to limit any
registration otherwise required hereunder.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would
not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect
of such breach, it shall waive the defense that a remedy at law would be
adequate.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by
the Company and the Holders of at least a majority of the then outstanding
Registrable Securities; provided, however, that, for the purposes of this
sentence, Registrable Securities that are owned, directly or indirectly, by
the
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Company, or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights
of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended, modified,
or supplemented except in accordance with the provisions of the immediately
preceding sentence.
(c) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in
writing and 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) on a Business Day, (ii) the Business Day
after the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in the Purchase
Agreement 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) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: fonix corporation
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
With copies to: Durham, Evans, ▇▇▇▇▇ & ▇▇▇▇▇▇▇, P.C.
Suite 850 Key Bank Tower
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇
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If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
With copies to (for Encore Capital Management, L.L.C.
communications to ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
either Purchaser): ▇▇▇▇▇ ▇▇▇
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
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▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ &
▇▇▇▇▇▇ LLP
▇▇▇▇ ▇▇▇▇▇▇ ▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇
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Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears
in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder. The Company
may not assign its rights or obligations hereunder without the prior written
consent of each Holder. The Purchasers may assign their respective rights
hereunder in the manner and to the Persons as permitted under the Purchase
Agreement.
(e) Assignment of Registration Rights. The rights of any
Purchaser hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this
Agreement, shall be automatically assignable by such Purchaser to any
assignee or transferee of all or a portion of the Preferred Shares held by
such Purchaser, the Warrant held by such Purchaser or Registrable Securities
without the
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consent of the Company if: (i) such Purchaser agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment,
(ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of
such transferee or assignee, and (b) the securities with respect to such
registration rights are being transferred or assigned, (iii) at or before
the time the Company receives the written notice contemplated by clause (ii)
of this Section, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions of this Agreement, and (iv)
such transfer shall have been made in accordance with the applicable
requirements of the Purchase Agreement. The rights to assignment shall
apply to the Purchasers (and to subsequent) successors and assigns.
(f) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the
original thereof.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of law.
(h) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(i) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated,
and the parties hereto shall use their reasonable efforts to find and employ
an alternative means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(j) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(k) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company
or its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be
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Affiliates solely by reason of their holdings of such Registrable
Securities) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties have executed this Registration
Rights Agreement as of the date first written above.
fonix corporation
By: /S/ ▇▇▇▇▇▇▇ ▇. ▇▇▇
___________________________
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇
Title: Chief Financial Officer
JNC OPPORTUNITY FUND LTD.
By: /s/ ▇▇▇▇ ▇▇▇▇▇
___________________________
▇▇▇▇ ▇▇▇▇▇
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: ENCORE CAPITAL MANAGEMENT, L.L.C.
By: /S/ ▇▇▇▇ ▇. ▇▇▇▇
___________________________
▇▇▇▇ ▇. ▇▇▇▇
Director
EXHIBIT C
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE 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 THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
fonix corporation
WARRANT
Warrant No. [__] Dated October 24, 1997
fonix corporation, a Delaware corporation (the "Company"), hereby
certifies that, for value received, [____________________], or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of [ ] shares of Common
Stock, $.0001 par value per share (the "Common Stock"), of the Company (each
such share, a "Warrant Share" and all such shares, the "Warrant Shares") at
an exercise price equal to $[____] (1) per share (as adjusted from time to
time as provided in Section 8, the "Exercise Price"), at any time and from
time to time from and after the date hereof and through and including
October 24, 2000 (the "Expiration Date"), and subject to the following terms
and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to
time. The Company may deem and treat the registered Holder of this Warrant
as the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, and the Company
shall not be affected by notice to the contrary.
____________________
(1) Exercise price equal to 120% of the average of the closing bid
price of the Common Stock for the five (5) trading days
immediately preceding the issue date hereof.
2. Registration of Transfers and Exchanges.
(a) The Company shall register the transfer of any
portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment attached hereto duly completed and
signed, to the Company at the office specified in or pursuant to Section
3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant evidencing
the remaining portion of this Warrant not so transferred, if any, shall be
issued to the transferring Holder. The acceptance of the New Warrant by the
transferee thereof shall be deemed the acceptance of such transferee of all
of the rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant
to Section 3(b) for one or more New Warrants, evidencing in the aggregate
the right to purchase the number of Warrant Shares which may then be
purchased hereunder. Any such New Warrant will be dated the date of such
exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., Salt Lake City time, at any
time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:30 P.M., Salt Lake City time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become
void and of no value. This Warrant may not be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its address for notice set forth in
Section 11 and upon payment of the Exercise Price multiplied by the number
of Warrant Shares that the Holder intends to purchase hereunder, in lawful
money of the United States of America, in cash or by certified or official
bank check or checks, all as specified by the Holder in the Form of Election
to Purchase, the Company shall promptly (but in no event later than 3
business days after the Date of Exercise (as defined herein)) issue or cause
to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate
for the Warrant Shares issuable upon such exercise, free of restrictive
legends other than as required by the Purchase Agreement of even date
herewith between the Holder and the Company. Any person so designated by
the Holder to receive Warrant Shares shall be deemed to have become holder
of record of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable),
with the Form of Election to Purchase attached hereto (or attached to such
New Warrant) appropriately completed and duly signed, and (ii) payment of
the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
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(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased under
this Warrant are exercised at any time, the Company shall issue or cause to
be issued, at its expense, a New Warrant evidencing the right to purchase
the remaining number of Warrant Shares for which no exercise has been
evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements of
the Company filed on Form S-8 or Form S-4, each as promulgated under the
Securities Act of 1933, as amended, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or
pursuant to a merger, acquisition or similar transaction including
supplements thereto, but not additionally filed registration statements in
respect of such securities) at any time when there is not an effective
registration statement covering the resale of the Warrant Shares and naming
the Holder as a selling stockholder thereunder, unless the Company provides
the Holder with not less than 20 days notice to each of the Holder and
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ Peace ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP, attention ▇▇▇▇ ▇. ▇▇▇▇▇,
notice of its intention to file such registration statement and provides the
Holder the option to include any or all of the applicable Warrant Shares
therein. The piggyback registration rights granted to the Holder pursuant
to this Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon the
expiration of this Warrant. The Company will pay all registration expenses
in connection therewith.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise
of this Warrant; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in
the registration of any certificates for Warrant Shares or Warrants in a
name other than that of the Holder, and the Company shall not be required to
issue or cause to be issued or deliver or cause to be delivered the
certificates for Warrant Shares 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. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Warrant
or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of
and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if reasonably satisfactory to it. Applicants for
a New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable charges
as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it
to issue Warrant Shares upon exercise of this Warrant as herein
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provided, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from preemptive
rights or any other actual contingent purchase rights of persons other than
the Holders (taking into account the adjustments and restrictions of Section
8). The Company covenants that all Warrant Shares that shall be so issuable
and deliverable shall, upon issuance and the payment of the applicable
Exercise Price in accordance with the terms hereof, be duly and validly
authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each such
adjustment of the Exercise Price pursuant to this Section 8, the Holder
shall thereafter prior to the Expiration Date be entitled to purchase, at
the Exercise Price resulting from such adjustment, the number of Warrant
Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing
the product thereof by the Exercise Price resulting from such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock (as defined below) or on any
other class of capital stock (and not the Common Stock) payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a
larger number of shares, or (iii) combine outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any
adjustment made pursuant to this Section 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 or combination, and
shall apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company in
which the consideration therefor is equity or equity equivalent securities
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities or property, then the Holder shall have the
right thereafter to exercise this Warrant only into the shares of stock and
other securities and property receivable upon or deemed to be held by
holders of Common Stock following such reclassification, consolidation,
merger, sale, transfer or share exchange, and the Holder shall be entitled
upon such event to receive such amount of securities or property of the
Company's business combination partner equal to the amount of Warrant Shares
such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger,
sale, transfer or share exchange. The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as to
continue to give to the Holder the right to receive the securities or
property set forth in this Section 8(b) upon any exercise following any such
reclassification, consolidation, merger, sale, transfer or share exchange.
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(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 8(a), (b) and (d)), then in each such case the
Exercise Price shall be determined by multiplying the Exercise 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 Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be such Exercise Price 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 Common Stock as 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") mutually selected in good faith by the holders of a majority in
interest of the Warrants then outstanding and the Company. Any
determination made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding,
the Company shall issue or cause to be issued rights or warrants to acquire
or otherwise sell or distribute shares of Common Stock to all holders of
Common Stock for a consideration per share less than the Exercise Price then
in effect, then, forthwith upon such issue or sale, the Exercise Price shall
be reduced to the price (calculated to the nearest cent) determined by
dividing (i) an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale multiplied
by the Exercise Price, and (B) the consideration, if any, received or
receivable by the Company upon such issue or sale by (ii) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them
(A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or
(B) to subscribe for or purchase Common Stock or securities convertible or
exchangeable into shares of Common Stock, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
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(g) If:
(i) the Company shall declare a dividend (or
any other distribution) on its Common
Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) 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
(iv) 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, or any compulsory share
exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the
voluntary dissolution, liquidation or
winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, 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 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 Common Stock of record shall
be entitled to exchange their shares of Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding
up; 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.
9. Payment of Exercise Price. The Holder may pay the Exercise
Price in cash or, in the event that a registration statement covering the
resale of the Warrant Shares and naming the holder thereof as a selling
stockholder thereunder is not effective for the resale of the Warrant Shares
at any time during the term of this Warrant, pursuant to a cashless
exercise, as follows:
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(a) Cash Exercise. The Holder shall deliver immediately
available funds;
(b) Cashless Exercise. The Holder shall surrender this
Warrant to the Company together with a notice of cashless exercise, in which
event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which
this Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) Trading Days immediately prior to
(but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in a
cashless exercise transaction shall be deemed to have been acquired by the
Holder, and the holding period for the Warrant Shares shall be deemed to
have been commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of
this Warrant. The number of full Warrant Shares which shall be issuable
upon the exercise of this Warrant shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of this Warrant
so presented. If any fraction of a Warrant Share would, except for the
provisions of this Section 10, be issuable on the exercise of this Warrant,
the Company shall, at its option, (i) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (ii) round the number of
Warrant Shares issuable, up to the next whole number.
11. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and 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, (ii) the business day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iii) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (1) if to the
Company, to fonix corporation, ▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, or to Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇ Attention: Chief
Financial Officer, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 11.
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12. Warrant Agent.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a party
or any corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business
shall be a successor warrant agent under this Warrant without any further
act. Any such successor warrant agent shall promptly cause notice of its
succession as warrant agent to be mailed (by first class mail, postage
prepaid) to the Holder at the Holder's last address as shown on the Warrant
Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company
and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than
the Company and the Holder any legal or equitable right, remedy or cause
under this Warrant; this Warrant shall be for the sole and exclusive benefit
of the Company and the Holder.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware
without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall
not in any way be affected or impaired thereby and the parties will attempt
in good faith to agree upon a valid and enforceable provision which shall be
a commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed by its authorized officer as of the date first indicated
above.
fonix corporation
By:_______________________________
Name:_____________________________
Title:____________________________
FORM OF ELECTION TO PURCHASE
(To be executed by the Holder to exercise the right to purchase shares of
Common Stock under the foregoing Warrant)
To fonix corporation:
In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase
[___________] shares of Common Stock ("Common Stock"), $.0001 par value per
share, of fonix corporation and encloses herewith $________ in cash or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase relates,
together with any applicable taxes payable by the undersigned pursuant to
the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
____________________________________________________________________________
(Please print name and address)
----------------------------------------------------------------------------
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is
entitled to purchase in accordance with the enclosed Warrant, the
undersigned requests that a New Warrant (as defined in the Warrant)
evidencing the right to purchase the shares of Common Stock not issuable
pursuant to the exercise evidenced hereby be issued in the name of and
delivered to:
____________________________________________________________________________
(Please print name and address)
----------------------------------------------------------------------------
____________________________________________________________________________
Dated:______________ Name of Holder:
(Print)___________________________________
(By:)_____________________________________
(Name:)
(Title:)
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
[To be completed and signed only upon transfer of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of fonix
corporation to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of fonix
corporation with full power of substitution in the premises.
Dated:
_______________, ____
_______________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant)
_______________________________________
Address of Transferee
_______________________________________
_______________________________________
In the presence of:
__________________________
EXHIBIT D
ESCROW AGREEMENT
ESCROW AGREEMENT (this "Agreement"), dated as of October 24,
1997, by and among fonix corporation (the "Company"), JNC Opportunity Fund
Ltd. ("JNC"), Diversified Strategies Fund, L.P. ("DSF"), and ▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP (the "Escrow Agent"). DSF and JNC
are each sometimes hereinafter referred to as a "Purchaser" and collectively
as the "Purchasers."
Recitals
A. Simultaneously with the execution of this Agreement, the
Company and the Purchasers have entered into a Convertible Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"),
pursuant to which the Company is issuing and selling to the Purchasers
certain of its Series C Convertible Preferred Stock (the "Preferred Stock")
and certain common stock purchase warrants (the "Warrants"). Capitalized
terms that are used but not defined in this Agreement that are defined in
the Purchase Agreement shall have the meanings set forth in the Purchase
Agreement.
B. The Escrow Agent is willing to act as escrow agent pursuant
to the terms of this Agreement with respect to the receipt and then delivery
of the aggregate purchase price (as described in Section 2.1(a) of the
Purchase Agreement) to be paid by the Purchasers for the Preferred Stock and
the Warrants (the "Purchase Price") and the receipt and then delivery of the
Preferred Stock and the Warrants, together with the Ancillary Closing
Documents (as defined below) and the Purchase Price (collectively, the
"Consideration").
C. Upon the closing of the transaction contemplated by the
Purchase Agreement (the "Closing") and the occurrence of an event described
in Section 2 below, the Escrow Agent shall cause the distribution of the
Consideration in accordance with the terms of this Agreement.
NOW, THEREFORE, IT IS AGREED:
1. Deposit of Consideration.
a. Concurrently with the execution hereof, each Purchaser
shall deposit with the Escrow Agent the portion of the Purchase Price due
for the Preferred Stock and Warrant to be purchased by it at the Closing in
accordance with Section 2.1(c) of the Purchase Agreement, and the Company
shall deliver to the Escrow Agent the Preferred Stock and the Warrants in
accordance with Section 2.1(c) of the Purchase Agreement, and wiring
instructions for the transfer of amounts to be paid to the Company in
accordance with Section 2(b). In addition, the Purchasers and the Company
shall each deposit with the Escrow Agent all other certificates and
other documents and agreements required under the Purchase Agreement to be
delivered by them at the Closing (such certificates and other documents
being hereinafter referred to as the "Ancillary Closing Documents").
(i) The Purchase Price shall be delivered by the
Purchasers to the Escrow Agent by wire transfer to the following account:
Citibank, N.A.
▇▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
ABA No.: ▇▇▇-▇▇▇-▇▇▇
For the Account of
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
& ▇▇▇▇▇▇ LLP
Attorney Business Account
Account No.: ▇▇-▇▇▇-▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇
Reference: fonix corporation (10849-8)
(ii) The Preferred Stock, Warrants and the Ancillary
Documents shall be delivered to the Escrow Agent at its address for notice
indicated in Section 5(a).
b. Until termination of this Agreement as set forth in
Section 2, all additional Consideration paid by or which becomes payable
between the Company and the Purchasers shall be deposited with the Escrow
Agent.
c. The Purchasers and the Company understand that all
Consideration delivered to the Escrow Agent pursuant to Section 1(a) shall
be held in escrow in the Escrow Agent's interest bearing business account
until the Closing. After the Purchase Price has been received by the Escrow
Agent and all other conditions of Closing are met, the parties hereto hereby
authorize and instruct the Escrow Agent to promptly effect the Closing.
d. At the Closing, the Escrow Agent is authorized and
directed to deduct from the Purchase Price (i) $15,000 which will be
retained by the Escrow Agent pursuant to Section 6.1 of the Purchase
Agreement and (ii) $7,000, which will be remitted to or as directed by
Encore pursuant to Section 6.1 of the Purchase Agreement. In addition, the
portion of the Purchase Price released to the Company hereunder shall be
reduced by all wire transfer fees incurred thereupon.
2. Terms of Escrow.
a. The Escrow Agent shall hold the Consideration in
escrow until the earlier to occur of (i) the receipt by the Escrow Agent of
the Purchase Price, the Preferred Stock,
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the Warrants and the Ancillary Closing Documents and a writing instructing
the Closing and (ii) the receipt by the Escrow Agent of a written notice,
executed by the Company or one or more of the Purchasers, stating that the
Purchase Agreement has been terminated in accordance with its terms and
instructing the Escrow Agent with respect to the Purchase Price, the
Preferred Stock, the Warrants and the Ancillary Closing Documents.
b. If the Escrow Agent receives the items referenced in
clause (i) of Section 2(a) prior to its receipt of the notice referenced in
clause (ii) of Section 2(a), then, promptly thereafter, the Escrow Agent
shall deliver (i) to JNC (A) 150,000 shares of Preferred Stock, (B) the JNC
Warrant and (C) any interest earned on account of the portion of the
Purchase Price paid by JNC that shall have accrued through the Closing; (ii)
to DSF (A) 37,500 shares of Preferred Stock, (B) the DSF Warrant and (C) any
interest earned on account of the portion of the Purchase Price paid by DSF
that shall have accrued through the Closing; (iii) to the Company (A) the
Purchase Price (net of amounts described under Section 1(d)) to the Company;
(iv) to or as directed by Encore, $7,000 in accordance with Section 1(d);
and (iv) the Ancillary Closing Documents to the party entitled to receive
the same. In addition, the Escrow Agent shall retain $15,000 of the
Purchase Price on account of its fees pursuant to the Purchase Agreement and
Section 1(d).
c. If the Escrow Agent receives the notice referenced in
clause (ii) of Section 2(a) prior to its receipt of the items referenced in
clause (i) of Section 2(a), then the Escrow Agent shall promptly upon
receipt of such notice return (i) the Purchase Price (together with any
interest earned thereon through such date) to the Purchasers in such amounts
as shall have been delivered to and received by prior thereto, (ii) the
Preferred Stock and Warrants to the Company and (iii) the Ancillary Closing
Documents to the party that delivered the same.
d. If the Escrow Agent, prior to delivering or causing to
be delivered the Consideration in accordance herewith, receives notice of
objection, dispute, or other assertion in accordance with any of the
provisions of this Agreement, the Escrow Agent shall continue to hold the
Consideration until such time as the Escrow Agent shall receive (i) written
instructions jointly executed by the Purchasers and the Company, directing
distribution of such Consideration, or (ii) a certified copy of a judgment,
order or decree of a court of competent jurisdiction, final beyond the right
of appeal, directing the Escrow Agent to distribute said Consideration to
any party hereto or as such judgment, order or decree shall otherwise
specify (including any such order directing the Escrow Agent to deposit the
Consideration into the court rendering such order, pending determination of
any dispute between any of the parties). In addition, the Escrow Agent
shall have the right to deposit any of the Consideration with a court of
competent jurisdiction pursuant to Section 1006 of the New York Civil
Practice Law and Rules without liability to any party if said dispute is not
resolved within 30 days of receipt of any such notice of objection, dispute
or otherwise.
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3. Duties and Obligations of the Escrow Agent.
a. The parties hereto agree that the duties and
obligations of the Escrow Agent are only such as are herein specifically
provided and no other. The Escrow Agent's duties are as a depositary only,
and the Escrow Agent shall incur no liability whatsoever, except as a direct
result of its willful misconduct.
b. The Escrow Agent may consult with counsel of its
choice, and shall not be liable for any action taken, suffered or omitted by
it in accordance with the advice of such counsel.
c. The Escrow Agent shall not be bound in any way by the
terms of any other agreement to which the Purchasers and the Company are
parties, whether or not it has knowledge thereof, and the Escrow Agent shall
not in any way be required to determine whether or not any other agreement
has been complied with by the Purchasers and the Company, or any other party
thereto. The Escrow Agent shall not be bound by any modification,
amendment, termination, cancellation, rescission or supersession of this
Agreement unless the same shall be in writing and signed by each of the
Purchasers and the Company, and agreed to in writing by the Escrow Agent.
d. In the event that the Escrow Agent shall be uncertain
as to its duties or rights hereunder or shall receive instructions, claims
or demands which, in its opinion, are in conflict with any of the provisions
of this Agreement, it shall be entitled to refrain from taking any action,
other than to keep safely, all Considerations held in escrow until it shall
jointly be directed otherwise in writing by the Purchasers and the Company
or by a final judgment of a court of competent jurisdiction.
e. The Escrow Agent shall be fully protected in relying
upon any written notice, demand, certificate or document which it, in good
faith, believes to be genuine. The Escrow Agent shall not be responsible
for the sufficiency or accuracy of the form, execution, validity or
genuineness of documents or securities now or hereafter deposited hereunder,
or of any endorsement thereon, or for any lack of endorsement thereon, or
for any description therein; nor shall the Escrow Agent be responsible or
liable in any respect on account of the identity, authority or rights of the
persons executing or delivering or purporting to execute or deliver any such
document, security or endorsement.
f. The Escrow Agent shall not be required to institute
legal proceedings of any kind and shall not be required to defend any legal
proceedings which may be instituted against it or in respect of the
Consideration.
g. If the Escrow Agent at any time, in its sole
discretion, deems it necessary or advisable to relinquish custody of the
Consideration, it may do so by giving five (5)
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days written notice to the parties of its intention and thereafter
delivering the consideration to any other escrow agent mutually agreeable to
the Purchasers and the Company and, if no such escrow agent shall be
selected within three days of the Escrow Agent's notification to the
Purchasers and the Company of its desire to so relinquish custody of the
Consideration, then the Escrow Agent may do so by delivering the
Consideration (a) to any bank or trust company in the Borough of Manhattan,
City and State of New York, which is willing to act as escrow agent
thereunder in place and instead of the Escrow Agent, or (b) to the clerk or
other proper officer of a court of competent jurisdiction as may be
permitted by law within the State, County and City of New York. The fee of
any such bank or trust company or court officer shall be borne one-half by
the Purchasers and one-half by the Company. Upon such delivery, the Escrow
Agent shall be discharged from any and all responsibility or liability with
respect to the Consideration and the Company and the Purchasers shall
promptly pay to the Escrow Agent all monies which may be owed it for its
services hereunder, including, but not limited to, reimbursement of its out-
of-pocket expenses pursuant to paragraph (i) below.
h. This Agreement shall not create any fiduciary duty on
the Escrow Agent's part to the Purchasers or the Company, nor disqualify the
Escrow Agent from representing either party hereto in any dispute with the
other, including any dispute with respect to the Consideration. The Company
understands that the Escrow Agent has acted and will continue to act as
counsel to the Purchasers.
i. The reasonable out-of-pocket expenses paid or incurred
by the Escrow Agent in the administration of its duties hereunder,
including, but not limited to, all counsel and advisors' and agents' fees
and all taxes or other governmental charges, if any, shall be paid by one-
half by the Purchasers and one-half by the Company.
4. Indemnification. The Purchasers and the Company, jointly
and severally, hereby indemnify and hold the Escrow Agent harmless from and
against any and all losses, damages, taxes, liabilities and expenses that
may be incurred, directly or indirectly, by the Escrow Agent, arising out of
or in connection with its acceptance of appointment as the Escrow Agent
hereunder and/or the performance of its duties pursuant to this Agreement,
including, but not limited to, all legal costs and expenses of the Escrow
Agent incurred defending itself against any claim or liability in connection
with its performance hereunder and the costs of recovery of amounts pursuant
to this Section 4.
5. Miscellaneous.
a. All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the other
parties hereto, and shall be deemed to have been duly given when (i) if
delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of
proof of sending thereof, (iii) if sent by nationally recognized overnight
delivery service (receipt requested), the next business day or (iv) if
mailed by first-class registered or certified mail, return
-5-
receipt requested, postage prepaid, four days after posting in the U.S.
mails, in each case if delivered to the following addresses:
If to the Company: fonix corporation
▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
With copies to: Durham, Evans, ▇▇▇▇▇ & ▇▇▇▇▇▇▇, P.C.
Suite 850 Key Bank Tower
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▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇▇▇▇▇
If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
With copies to (for Encore Capital Management, L.L.C.
communications to ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇
either Purchaser): ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇
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If to the Escrow Agent ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ &
(the Escrow Agent shall ▇▇▇▇▇▇ LLP
receive copies of all 1290 Avenue of the Americas
communications under ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇ this Agreement)
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇ ▇. ▇▇▇▇▇, Esq.
or at such other address as any of the parties to this Agreement may
hereafter designate in the manner set forth above to the others.
(b) This Agreement shall be construed and enforced in
accordance with the law of the State of New York applicable to contracts
entered into and performed entirely within New York.
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[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be signed the day and year first above written.
fonix corporation
By:_____________________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: ___________________________
▇▇▇▇ ▇▇▇▇▇
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: Encore Capital Management, L.L.C.
By:___________________________
▇▇▇▇ ▇. ▇▇▇▇
Director
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
ARONSOHN & ▇▇▇▇▇▇ LLP
By:____________________________________
A Member of the Firm