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AMENDED FOURTH PRIVATE EQUITY LINE AGREEMENT
by and between
QUEEN LLC
and
FONIX CORPORATION
--------------------------------------------
dated May 12, 2003
This AMENDED FOURTH PRIVATE EQUITY LINE AGREEMENT is entered into as of
this 12th day of May, 2003 (this "Agreement"), by and between Queen LLC, (the
"Investor"), a limited liability company organized and existing under the laws
of the Cayman Islands, and Fonix Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions set forth herein, the Company may issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase from the
Company, up to $20,000,000 of the Class A Common Stock (as defined below); and
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and Regulation D ("Regulation D") of the United
States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in Class A Common Stock to be made
hereunder; and
WHEREAS, the parties hereto are concurrently entering into a Registration
Rights Agreement (as defined below) pursuant to which the Company shall register
the Class A Common Stock issued and sold to the Investor under this Agreement,
upon the terms as subject to the conditions set forth therein;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "Average Daily Trading Volume" shall mean, with respect to any
date, the average of the daily trading volumes for the Class A Common Stock on
the Principal Trading Facility for the thirty (30) Trading Days immediately
preceding such date.
Section 1.2. "Bid Price" shall mean the closing bid price (as reported by
Bloomberg L.P.) of the Class A Common Stock on the Principal Trading Facility.
Section 1.3. "Blackout Notice" shall mean such notice furnished by the
Company to the Investor and signed by the Chief Executive Officer of the Company
stating that the Board of Directors of the Company has, by duly authorized
resolution, determined in good faith that it would be seriously detrimental to
the Company and its shareholders for the Registration Statement to be filed (or
remain in effect) and it is therefore essential to defer the filing of such
Registration Statement (or temporarily suspend the effectiveness of such
Registration Statement or use of the related prospectus).
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Section 1.4. "Blackout Period" shall mean not more than two five-day
periods within any 12 month period, with at least a 10 business day separation
between blackout periods, (i) beyond the date by which such Registration
Statement was otherwise required hereunder to be filed or (ii) during which the
effectiveness of such Registration Statement or the use of the related
prospectus is deferred or suspended by the Company
Section 1.5. "Blackout Shares" shall have the meaning assigned to
them in Section 2.6.
Section 1.6. "Capital Shares" shall mean the Class A Common Stock,
whether now or hereafter authorized, having the right to participate in the
distribution of dividends (as and when declared) and assets (upon liquidation of
the Company).
Section 1.7. "Class A Common Stock" shall mean the Company's Class A
Common Stock, $.0001 par value per share.
Section 1.8. "Class A Common Stock Equivalents" shall mean any
securities that are convertible into or exchangeable for Class A Common Stock or
any warrants, options or other rights to subscribe for or purchase Class A
Common Stock or any such convertible or exchangeable securities.
Section 1.9. "Closing" shall mean one of the closings of a purchase
and sale of the Class A Common Stock pursuant to Section 2.3.
Section 1.10. "Closing Date" shall mean the second (2nd) Trading Day
following the Valuation Period related to such Closing, provided that all of the
conditions precedent to such Closing have been satisfied on or before such
Trading Day.
Section 1.11. "Commitment Period" shall mean the period commencing on
the earlier to occur of (i) the Effective Date or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earlier to occur of (x) the date on which the Investor shall have purchased Put
Shares pursuant to this Agreement for an aggregate Purchase Price equal to the
Maximum Commitment Amount, (y) the date this Agreement is terminated by the
Investor pursuant to Section 2.4, or (z) the date occurring twenty four (24)
months from the date of commencement of the Commitment Period.
Section 1.12. Reserved.
Section 1.13. Reserved.
Section 1.14. "Condition Satisfaction Date" shall have the meaning
set forth in Section 7.2 of this Agreement.
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Section 1.15. "Damages" shall mean any loss, claim, damage,
liability, costs and expenses (including, without limitation, reasonable
attorneys' fees and disbursements and costs and expenses of expert witnesses and
investigation).
Section 1.16. "Effective Date" shall mean the earlier of ninety (90)
days from the filing of the Registration Statement, or the date on which the SEC
first declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.17. "Escrow Agent" shall mean ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, c/▇
▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ LLP, ▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇.
Section 1.18. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended and the rules and regulations promulgated thereunder.
Section 1.19. "Filing Date" shall mean the day which is thirty (30)
days following the Subscription Date.
Section 1.20. Reserved.
Section 1.21. "Investment Amount" shall mean the dollar amount
(within the range specified in Section 2.2) to be invested by the Investor to
purchase Put Shares with respect to any Put Notice as provided by the Company to
the Investor in accordance with Section 2.2 hereof.
Section 1.22. "Legend" shall have the meaning specified in Section
8.1.
Section 1.23. "Market Price" on any given date shall mean the average
of the two lowest closing bid prices of the Class A Common Stock over the
Valuation Period. "Closing bid price" shall mean the closing bid price of the
Class A Common Stock (as reported by Bloomberg L.P.) at the close of any Trading
Day.
Section 1.24. "Maximum Commitment Amount" shall mean TWENTY MILLION
DOLLARS ($20,000,000).
Section 1.25. "Maximum Put Amount" shall mean, with respect to any
Put, the amount determined in accordance with Section 2.2.
Section 1.26. "Material Adverse Effect" shall mean any effect on the
business, operations, properties, prospects, or financial condition of the
Company that is material and adverse to the Company or to the Company and such
other entities controlling or controlled by the Company, taken as a whole,
and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
its obligations under any of (i) this Agreement, or (ii) the Registration Rights
Agreement.
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Section 1.27. "NASD" shall mean the National Association of
Securities Dealers, Inc.
Section 1.28. Reserved.
Section 1.29. "Outstanding" when used with reference to Class A
Common Stock or Capital Shares (collectively, the "Shares"), shall mean, at any
date as of which the number of such Shares is to be determined, all issued and
outstanding Shares, and shall include all such Shares issuable in respect of
outstanding scrip or any certificates representing fractional interests in such
Shares; provided, however, that "Outstanding" shall not refer to any such Shares
then directly or indirectly owned or held by or for the account of the Company.
Section 1.30. "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.31. "Preferred Stock" shall mean any outstanding class of
the Company's preferred stock.
Section 1.32. "Principal Trading Facility" shall mean the Nasdaq
National Market, the Nasdaq SmallCap Market, the New York Stock Exchange or the
OTC Bulletin Board, whichever is at the time the principal trading exchange or
market for the Class A Common Stock, it being acknowledged and agreed by the
parties that, as of the date hereof, the Principal Trading Facility is the OTC
Bulletin Board.
Section 1.33. "Purchase Price" shall mean, with respect to a Put,
ninety percent (90%) of the Market Price.
Section 1.34. "Put" shall mean each occasion the Company elects to
exercise its right to tender a Put Notice requiring the Investor to purchase the
Company's Class A Common Stock for the Investment Amount specified in such Put
Notice, upon the terms and subject to the conditions set forth in this
Agreement.
Section 1.35. "Put Date" shall mean the Trading Day during the
Commitment Period on which a Put Notice to sell Class A Common Stock to the
Investor is deemed delivered by the Company to the Investor pursuant to Section
2.2(b) hereof.
Section 1.36. "Put Notice" shall mean a written notice to the
Investor setting forth the Investment Amount that the Company intends to require
the Investor to pay to purchase Class A Common Stock upon the terms and subject
to the conditions set forth in this Agreement.
Section 1.37. "Put Shares" shall mean all shares of Class A Common
Stock issued or issuable pursuant to a Put that has been exercised or may be
exercised upon the terms and subject to the conditions set forth in this
Agreement.
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Section 1.38. "Registrable Securities" shall mean the (i) Put Shares,
(ii) the Blackout Shares, and (iii) any securities issued or issuable with
respect to any of the foregoing by way of exchange, stock dividend, or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation, or other reorganization or otherwise. As to any particular
Registrable Securities, once issued such securities shall cease to be
Registrable Securities when (w) the Registration Statement has been declared
effective by the SEC and all Registrable Securities have been disposed of
pursuant to the Registration Statement, (x) all Registrable Securities have been
sold under circumstances under which all of the applicable conditions of Rule
144 (or any similar provision then in force) under the Securities Act ("Rule
144") are met, (y) such time as all Registrable Securities have been otherwise
transferred to holders who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend, or
(z) in the opinion of counsel to the Company, which counsel shall be reasonably
acceptable to the Investor, all Registrable Securities may be sold without
registration and without any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act.
Section 1.39. "Registration Rights Agreement" shall mean the
registration rights agreement in the form of Exhibit B hereto.
Section 1.40. "Registration Statement" shall mean a registration
statement on Form S-2 or such other form promulgated by the SEC for which the
Company then qualifies and which counsel for the Company shall deem appropriate,
and which form shall be available for the resale of the Registrable Securities
to be registered thereunder in accordance with the provisions of this Agreement
and the Registration Rights Agreement and in accordance with the intended method
of distribution of such securities), for the registration of the resale by the
Investor of the Registrable Securities under the Securities Act.
Section 1.41. "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.42. "SEC" shall mean the Securities and Exchange
Commission.
Section 1.43. "SEC Documents" shall mean the Company's latest Form
10-K as of the time in question, all Forms 10-Q and 8-K filed thereafter, the
Proxy Statement for its latest fiscal year as of the time in question and the
Registration Statement until such time the Company no longer has an obligation
to maintain the effectiveness of a Registration Statement as set forth in the
Registration Rights Agreement.
Section 1.44. "Section 4(2)" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.45. "Securities Act" shall have the meaning set forth in
the recitals of this Agreement.
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Section 1.46. "Subscription Date" shall mean the date on which this
Agreement is executed and delivered by the parties hereto.
Section 1.47. "Trading Day" shall mean any day during which the
Principal Trading Facility shall be open for trading.
Section 1.48. "Transaction Documents" shall mean this Agreement and the
Registration Rights Agreement.
Section 1.49. "Underwriter" shall mean any underwriter participating
in any disposition of the Registrable Securities on behalf of the Investor
pursuant to the Registration Statement.
Section 1.50. "Valuation Event" shall mean an event in which the
Company at any time during a Valuation Period takes any of the following
actions:
(a) subdivides or combines its Class A Common Stock;
(b) pays a dividend in its Capital Stock or makes any other
distribution of its Capital Shares, except for dividends paid with respect
to the Preferred Stock;
(c) issues any additional Capital Shares ("Additional Capital
Shares"), otherwise than as provided in the foregoing Subsections (a) and
(b) above, at a price per share less, or for other consideration lower,
than the Bid Price in effect immediately prior to such issuance, or without
consideration;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant
to such warrants, options or other rights shall be less than the Bid Price
in effect immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable for Capital
Shares and the consideration per share for which Additional Capital Shares
may at any time thereafter be issuable pursuant to the terms of such
convertible or exchangeable securities shall be less than the Bid Price in
effect immediately prior to such issuance;
(f) makes a distribution of its assets or evidences of indebtedness to
the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or
surplus legally available for dividends under applicable law or any
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distribution to such holders made in respect of the sale of all or
substantially all of the Company's assets (other than under the
circumstances provided for in the foregoing subsections (a) through (e));
or
(g) takes any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Subsections
(a) through (f) hereof, inclusive, which in the opinion of the Company's
Board of Directors, determined in good faith, would have a materially
adverse effect upon the rights of the Investor at the time of a Put.
Section 1.52. "Valuation Period" shall mean the period of ten (10)
Trading Days during which the Market Price of the Class A Common Stock is
valued, which period shall be with respect to the Market Price on any Put Date,
the ten (10) Trading Days following the Trading Day on which the applicable
Put Notice is deemed to be delivered; provided, however, that if a Valuation
Event occurs during any Valuation Period, a new Valuation Period shall begin on
the Trading Day immediately after the occurrence of such Valuation Event and end
on the tenth (10th) Trading Day after the occurrence of such Valuation
Event.
ARTICLE II
PURCHASE AND SALE OF CLASS A COMMON STOCK;
TERMINATION OF OBLIGATIONS; BLACKOUT SHARES
Section 2.1. Investments.
(a) Puts. Upon the terms and conditions set forth herein (including,
without limitation, the provisions of Article VII hereof), on any Put Date the
Company may exercise a Put by the delivery of a Put Notice. The number of Put
Shares that the Investor shall receive pursuant to such Put shall be determined
by dividing the Investment Amount specified in the Put Notice by the Purchase
Price with respect to such Put Date, rounded to the nearest whole share.
(b) Reserved.
(c) Maximum Sale of Class A Common Stock. Unless the Company obtains the
requisite approval of its shareholders in accordance with the corporate laws of
Delaware and the applicable rules of the Principal Trading Facility and the
NASD, no more than 19.9% of the Outstanding shares of Class A Common Stock may
be issued and sold in the aggregate pursuant to this Agreement.
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Section 2.2. Mechanics.
(a) Put Notices. At any time during the Commitment Period, the Company
may deliver Put Notices to the Investor, subject to the conditions set
forth in Section 7.2; provided, however, the Investment Amount for each Put
as designated by the Company in the applicable Put Notice shall not be more
than the Maximum Put Amount. The Company may deliver Put Notices to the
Investor at its discretion, but no more frequently than every ten (10)
Trading Days. The Maximum Put Amount shall not exceed One Million Two
Hundred-fifty Thousand Dollars ($1,250,000), but in any event may not
result in a put to the Investor of more than fifty million (50,000,000) Put
Shares.
(b) Date of Delivery of Put Notice. A Put Notice shall be deemed
delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received prior to 12:00 noon New York
time, or (ii) the immediately succeeding Trading Day if it is received by
facsimile or otherwise after 12:00 noon New York time on a Trading Day or
at any time on a day which is not a Trading Day. No Put Notice may be
deemed to have been delivered on any day that is not a Trading Day.
Section 2.3. Closings. On each Closing Date for a Put, (i) the
Investor shall deliver to the Escrow Agent the Investment Amount specified in
the Put Notice and (ii), the Company shall deliver to the Escrow Agent one or
more certificates, at the Investor's option, representing the Put Shares to be
purchased by the Investor pursuant to Section 2.1 herein, registered in the name
of the Investor. Once the Escrow Agent has received the Investment Amount from
the Investor and the certificates from the Company, the Escrow Agent shall
deliver to the Company the Investment Amount by wire transfer of immediately
available funds to the Company's Account as identified on Exhibit A, and shall
deliver the certificates to the Investor. In addition, on or prior to such
Closing Date, each of the Company and the Investor shall deliver to the Escrow
Agent all documents, instruments and writings required to be delivered or
reasonably requested by either of them pursuant to this Agreement in order to
implement and effect the transactions contemplated herein. The Investor and the
Company agree that the Investor may provide interim funding in advance of the
Closing Date but after delivery of a put notice.
Section 2.4. Termination.
(a) The Investor may, at its sole discretion, terminate this Agreement
upon written notice to the Company in the event that (i) the Registration
Statement is not effective within ninety days following the Subscription
Date or (ii) there shall occur any stop order or suspension of the
effectiveness of the Registration Statement for an aggregate of ten (10)
Trading Days during the Commitment Period, for any reason other than
deferrals or suspension during a Blackout Period in accordance with the
Registration Rights Agreement, as a result of corporate developments
subsequent to the Subscription Date that would require such Registration
Statement to be amended to reflect such event in order to maintain its
compliance with the disclosure requirements of the Securities Act, or (iii)
the Company shall at any time fail to comply with the requirements of
Section
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6.3 (with respect to maintaining its listing on a Principal Trading
Facility), 6.4 (with respect to continued registration and reporting
obligations to the SEC), or 6.6 (with respect to maintenance of its
corporate existence).
(b) The Company may, at its sole discretion, terminate this Agreement
upon written notice to the Investor. Notwithstanding the foregoing, so long
as the Investor holds Registrable Securities issued hereunder, the
Company's obligations hereunder and under the Registration Rights Agreement
with respect to the Registration Statement shall survive such termination
of this Agreement.
Section 2.5. Cover. If the Company fails for any reason to deliver
the Put Shares on such Closing Date and the Investor, after the Closing Date,
purchases, in an open market transaction or otherwise, shares of Common Stock
(the "Covering Shares") in order to make delivery in satisfaction of a sale of
Common Stock by such Investor (the "Sold Shares"), which delivery such Investor
anticipated to make using the Put Shares (a "Buy-In"), then the Company shall
pay to such Investor, in addition to all other amounts contemplated in other
provisions of the Transaction Documents, and not in lieu thereof, the Buy-In
Adjustment Amount (as defined below). The "Buy-In Adjustment Amount" is the
amount equal to the excess, if any, of (x) such Investor"s total purchase price
(including brokerage commissions, if any) for the Covering Shares over (y) the
net proceeds (after brokerage commissions, if any) received by such Investor
from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment
Amount to such Investor in immediately available funds immediately upon demand
by such Investor. By way of illustration and not in limitation of the foregoing,
if such Investor purchases Covering Shares having a total purchase price
(including brokerage commissions) of $11,000 to cover a Buy-In with respect to
shares of Common Stock that it sold for net proceeds of $10,000, the Buy-In
Adjustment Amount that the Company will be required to pay to such Investor will
be $1,000.
Section 2.6. Deferral or Suspension During a Blackout Period;
Blackout Shares. If the Company shall furnish to the Investor a Blackout Notice
stating that the Board of Directors of the Company has, by duly authorized
resolution, determined in good faith that it would be seriously detrimental to
the Company and its shareholders for the Registration Statement to be filed (or
remain in effect) and it is therefore essential to defer the filing of such
Registration Statement (or temporarily suspend the effectiveness of such
Registration Statement or use of the related prospectus), the Company shall have
the right (i) immediately to defer such filing for a Blackout Period. The
Investor acknowledges that it would be seriously detrimental to the Company and
its shareholders for such Registration Statement to be filed (or remain in
effect) during a Blackout Period and therefore essential to defer such filing
(or suspend such effectiveness) during such Blackout Period and agrees to cease
any disposition of the Registrable Securities during such Blackout Period. The
Company may not utilize any of its rights under this Section 1.1(e) to defer the
filing of a Registration Statement (or suspend its effectiveness) more than
twice in any twelve (12) month period. In the event that, (a) within ten (10)
Trading Days following any Closing Date, the Company gives a Blackout Notice to
the Investor of a Blackout Period in accordance with the Registration Rights
Agreement, and (b) the Bid Price on the Trading Day immediately preceding
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such Blackout Period ("Old Bid Price") is greater than the Bid Price on the
first Trading Day following such Blackout Period that the Investor may sell its
Registrable Securities pursuant to an effective Registration Statement ("New Bid
Price"), then the Company shall issue to the Investor the number of additional
shares of Registrable Securities (the "Blackout Shares") equal to the difference
between (X) the product of the number of Registrable Securities held by Investor
immediately prior to the Blackout Period multiplied by the Old Bid Price,
divided by the New Bid Price, and (Y) the number of Registrable Securities held
by Investor immediately prior to the Blackout Period.
If the Registration Statement is not filed or its effectiveness is
not reinstated promptly after a Blackout Period, the Investor may, at its
option, terminate this Agreement including the funding of any further
commitments, and require the Company to redeem, subject to applicable law, all
unsold shares of Class A Common Stock purchased under prior Put Notices at the
greater of the Market Price of the Class A Common Stock on the Closing Date, or
the date of the Investor's redemption demand.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 3.1. Intent. The Investor is entering into this Agreement for
its own account and the Investor has no present arrangement (whether or not
legally binding) at any time to sell the Class A Common Stock to or through any
person or entity; provided, however, that by making the representations herein,
the Investor does not agree to hold the Class A Common Stock for any minimum or
other specific term and reserves the right to dispose of the Class A Common
Stock at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 3.2. Sophisticated Investor. The Investor is a sophisticated
investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited
investor (as defined in Rule 501 of Regulation D), and Investor has such
knowledge and experience in business and financial matters that it is capable of
evaluating the merits and risks of an investment in Class A Common Stock. The
Investor acknowledges that an investment in the Class A Common Stock is
speculative and involves a high degree of risk.
Section 3.3. Authority. Each of this Agreement and the Registration
Rights Agreement has been duly authorized by all necessary corporate action and
no further consent or authorization of the Company, or its Board of Directors or
stockholders is required. Each of this Agreement and the Registration Rights
Agreement was validly executed and delivered by the Investor and each is a valid
and binding agreement of the Investor enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, or similar laws
relating to, or affecting generally the enforcement of, creditors' rights and
remedies or by other equitable principles of general application.
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Section 3.4. Not an Affiliate. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. Organization and Standing. Investor is duly organized, validly
existing, and in good standing under the laws of the Cayman Islands.
Section 3.6. Absence of Conflicts. The execution and delivery of this
Agreement and any other document or instrument contemplated hereby, and the
consummation of the transactions contemplated thereby, and compliance with the
requirements thereof, will not (a) violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on Investor, or, to the
Investor's knowledge, (b) violate any provision of any indenture, instrument or
agreement to which Investor is a party or is subject, or by which Investor or
any of its assets is bound, (c) conflict with or constitute a material default
thereunder, (d) result in the creation or imposition of any lien pursuant to the
terms of any such indenture, instrument or agreement, or constitute a breach of
any fiduciary duty owed by Investor to any third party, or (e) require the
approval of any third-party (that has not been obtained) pursuant to any
material contract to which Investor is subject or to which any of its assets,
operations or management may be subject.
Section 3.7. Disclosure; Access to Information. Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by Investor. The Investor has
reviewed or received copies of the SEC Documents.
Section 3.8. Manner of Sale. At no time was Investor presented with
or solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 4.1. Organization of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted. Except as set forth in the SEC Documents, the Company does not own
more than fifty percent (50%) of the outstanding capital stock of or control any
other business entity. The Company is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary, other than those in which the failure so to qualify would not have a
Material Adverse Effect.
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Section 4.2. Authority. (i) The Company has the requisite corporate
power and authority to enter into and perform its obligations under this
Agreement and the Registration Rights Agreement, and to issue the Put Shares and
the Blackout Shares; (ii) the execution and delivery of this Agreement and the
Registration Rights Agreement by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required; and (iii) each of
this Agreement and the Registration Rights Agreement has been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against the Company in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
Section 4.3. Capitalization. THE COMPANY HAS AN AUTHORIZED
CAPITALIZATION CONSISTING OF 800,000,000 SHARES OF COMMON STOCK, PAR VALUE
$.0001 PER SHARE, AND 50,000,000 SHARES OF PREFERRED STOCK, PAR VALUE $.0001 PER
SHARE. AS OF THE DATE HEREOF, THE COMPANY HAS ISSUED AND OUTSTANDING
21,484,651SHARES OF CLASS A COMMON STOCK. AS OF THE DATE OF THIS AGREEMENT,
658,031SHARES OF CLASS A COMMON STOCK ARE SUBJECT TO ISSUANCE UPON THE
CONVERSION OR EXERCISE OF PRESENTLY ISSUED AND OUTSTANDING WARRANTS AND OPTIONS
OF THE COMPANY. 166,667 SHARES OF SERIES A PREFERRED STOCK HAVE BEEN ISSUED AND
166,667 SHARES ARE OUTSTANDING, WHICH SHARES ARE CONVERTIBLE INTO 4,167 SHARES
OF CLASS A COMMON STOCK. Except as set forth above, as of the date of this
Agreement, 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, securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Class A 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 Class A Common
Stock or securities or rights convertible or exchangeable into shares of Class A
Common Stock, except as disclosed herein.
Section 4.4. Class A Common Stock. The Company has registered its
Class A Common Stock pursuant to Section 12(b) or 12(g) of the Exchange Act and
is in full compliance with all reporting requirements of the Exchange Act, and
the Company has maintained all requirements for the continued listing or
quotation of its Class A Common Stock, and such Class A Common Stock is
currently listed or quoted on the Principal Trading Facility. As of the date
hereof, the Principal Trading Facility is the OTC Bulletin Board.
Section 4.5. SEC Documents. The Company has delivered or made
available to the Investor true and complete copies of the SEC Documents
(including, without limitation, proxy information and solicitation materials).
The Company has not provided to the Investor any information that, according to
applicable law, rule or regulation, should have been disclosed publicly prior to
the date hereof by the Company, but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
other federal, state and local laws, rules and
12
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents comply as to form and substance in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC or other applicable rules and regulations 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 (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of the Company as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).
Section 4.6. Exemption from Registration; Valid Issuances. The sale
and issuance of the Put Shares and any Blackout Shares in accordance with the
terms and on the bases of the representations and warranties set forth in this
Agreement, may and shall be properly issued pursuant to Section 4(2), Regulation
D and/or any applicable state law. When issued and paid for as herein provided,
the Put Shares and any Blackout Shares shall be duly and validly issued, fully
paid, and nonassessable. Neither the sales of the Put Shares or any Blackout
Shares pursuant to, nor the Company's performance of its obligations under, this
Agreement or the Registration Rights Agreement shall (i) result in the creation
or imposition of any liens, charges, claims or other encumbrances upon the Put
Shares, any Blackout Shares, or any of the assets of the Company, or (ii)
entitle the holders of Outstanding Capital Shares to preemptive or other rights
to subscribe to or acquire the Capital Shares or other securities of the
Company. The Put Shares and any Blackout Shares shall not subject the Investor
to personal liability by reason of the ownership thereof.
Section 4.7. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor any distributor
or any person acting on its or their behalf (i) has conducted or will conduct
any general solicitation (as that term is used in Rule 502(c) of Regulation D)
or general advertising with respect to any of the Put Shares or any Blackout
Shares, or (ii) made any offers or sales of any security or solicited any offers
to buy any security under any circumstances that would require registration of
the Class A Common Stock under the Securities Act since 1998.
Section 4.8. Corporate Documents. The Company has furnished or made
available to the Investor true and correct copies of the Company's Certificate
of Incorporation, as amended and in effect on the date hereof (the
"Certificate"), and the Company's By-Laws, as amended and in effect on the date
hereof (the "By-Laws").
Section 4.9. No Material Breach or Violation with Law. The execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby, including without
limitation the issuance of the Put Shares and
13
the Blackout Shares do not and will not (i) result in a violation of the
Certificate or By-Laws or (ii) conflict with or constitute a material default
(or an event that 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 material agreement, indenture, instrument or any "lock-up"
or similar provision of any underwriting or similar agreement to which the
Company is a party, or (iii) result in a violation of any federal, state, local
or foreign law, rule, regulation, order, judgment or decree (including federal
and state securities laws and regulations) applicable to the Company or by which
any property or asset of the Company is bound or affected (except for such
defaults, terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse Effect)
nor is the Company otherwise in violation of, in default under, any of the
foregoing; provided, however, that for purposes of the Company's representations
and warranties as to violations of foreign law, rule or regulation referenced in
clause (iii), such representations and warranties are made only to the best of
the Company's knowledge insofar as the execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby are or may be affected by the status of the
Investor under or pursuant to any such foreign law, rule or regulation. The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Class A Common Stock in accordance with the
terms hereof (other than any SEC, NASD or state securities filings that may be
required to be made by the Company subsequent to any Closing, any registration
statement that may be filed pursuant hereto, and any shareholder approval
required by the rules applicable to companies whose Class A Common Stock trades
on the Nasdaq SmallCap Market); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Investor
herein.
Section 4.10. No Material Adverse Change. Since March 31, 2003, no
event has occurred that would have a Material Adverse Effect on the Company,
except as disclosed in the SEC Documents.
Section 4.11. No Undisclosed Liabilities. The Company has no
liabilities or obligations that are material, individually or in the aggregate,
and that are not disclosed in the SEC Documents or otherwise publicly announced,
other than those incurred in the ordinary course of the Company's businesses
since March 31, 2003, and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect on the Company.
Section 4.12. No Undisclosed Events or Circumstances. Since March 31,
2003, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under applicable law, rule or regulation, requires
14
public disclosure or announcement prior to the date hereof by the Company but
which has not been so publicly announced or disclosed in the SEC Documents.
Section 4.13. No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security since 1998, other than pursuant to this Agreement and employee
benefit plans, under circumstances that would require registration of the Class
A Common Stock under the Securities Act.
Section 4.14. Litigation and Other Proceedings. Except as may be set
forth in the SEC Documents, there are no lawsuits or proceedings pending or to
the best knowledge of the Company threatened, against the Company, nor has the
Company received any written or oral notice of any such action, suit, proceeding
or investigation, which might have a Material Adverse Effect. Except as set
forth in the SEC Documents, no judgment, order, writ, injunction or decree or
award has been issued by or, so far as is known by the Company, requested of any
court, arbitrator or governmental agency which might result in a Material
Adverse Effect.
Section 4.15. No Misleading or Untrue Communication. The Company, any
Person representing the Company, and, to the knowledge of the Company, any other
Person selling or offering to sell the Put Shares or the Blackout Shares in
connection with the transactions contemplated by this Agreement, have not made,
at any time, any oral communication in connection with the offer or sale of the
same which contained any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements, in the light of the
circumstances under which they were made, not misleading.
Section 4.16. Material Non-Public Information. The Company is not in
possession of, nor has the Company or its agents disclosed to the Investor, any
material non-public information that (i) if disclosed, would, or could
reasonably be expected to have, an effect on the price of the Class A Common
Stock or (ii) according to applicable law, rule or regulation, should have been
disclosed publicly by the Company prior to the date hereof but which has not
been so disclosed.
Section 4.17. Principal Trading Facility. The Class A Common Stock of
the Company is listed and trades on the OTC Bulletin Board, and there is no
pending notice, either oral or written, with respect to its continued
eligibility for such listing.
ARTICLE V
COVENANTS OF THE INVESTOR
The Investor's trading activities with respect to shares of the
Company's Class A Common Stock will be in compliance with all applicable state
and federal securities laws, rules and regulations (including, without
limitation, the regulations set forth in Regulation M under the Securities Act)
15
and the rules and regulations of the Principal Trading Facility on which the
Company's Class A Common Stock is listed.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all respects with the terms thereof.
Section 6.2. Reservation of Class A Common Stock. As of the date
hereof, the Company has available and the Company shall reserve and keep
available at all times, free of preemptive rights, shares of Class A Common
Stock for the purpose of enabling the Company to satisfy any obligation to issue
the Put Shares and the Blackout Shares; such amount of shares of Class A Common
Stock to be reserved shall be calculated based upon a good faith estimate by the
Company of the minimum aggregate Purchase Price for the Put Shares under the
terms and conditions of this Agreement and a good faith estimate by the Company
of the number of Blackout Shares that will need to be issued. The number of
shares so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder. The Company shall not be entitled to deliver a Put Notice unless on
the date of such Put Notice the Company shall have at least fifty million
(50,000,000) shares of Class A Common Stock available for issuance in connection
with the Put.
Section 6.3. Listing of Class A Common Stock. The Company shall
maintain the listing of the Class A Common Stock on a Principal Trading
Facility, and as soon as practicable (but in any event prior to the commencement
of the Commitment Period) will cause the Put Shares and any Blackout Shares to
be listed on the Principal Trading Facility. The Company further shall, if the
Company applies to have the Class A Common Stock traded on any other Principal
Trading Facility, include in such application the Put Shares and any Blackout
Shares, and shall take such other action as is necessary or desirable in the
opinion of the Investor to cause the Class A Common Stock to be listed on such
other Principal Trading Facility as promptly as possible. The Company shall use
commercially reasonable efforts to continue the listing and trading of its Class
A Common Stock on the Principal Trading Facility (including, without limitation,
maintaining sufficient net tangible assets) and will comply in all respects with
the applicable reporting, filing and other obligations under the bylaws or rules
of the NASD and the Principal Trading Facility.
Section 6.4. Exchange Act Registration. The Company shall (i) cause its
Class A Common Stock to continue to be registered under Section 12(g) or 12(b)
of the Exchange Act, will comply in
16
all respects with its reporting and filing obligations under said Act, and will
not take any action or file any document (whether or not permitted by said Act
or the rules thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under said Act.
Section 6.5. Legends. The certificates evidencing the Put Shares and the
Blackout Shares shall be free of legends, except as provided for in Article
VIII.
Section 6.6. Corporate Existence. The Company shall take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.7. Additional SEC Documents. The Company shall deliver to
the Investor, as and when the originals thereof are submitted to the SEC for
filing, copies of all SEC Documents so furnished or submitted to the SEC.
Section 6.8. Notice of Certain Events Affecting Registration;
Suspension of Right to Make a Put. The Company shall immediately notify the
Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of
Registrable Securities: (i) receipt of any request for additional information by
the SEC or any other federal or state governmental authority during the period
of effectiveness of the registration statement for amendments or supplements to
the registration statement or related prospectus; (ii) the issuance by the SEC
or any other federal or state governmental authority of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose; (iii) receipt 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; (iv) the happening of any event
that makes any statement made in such Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in the registration statement, related prospectus or documents so that,
in the case of the Registration Statement, 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 not misleading, and
that in the case of the related prospectus, 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 the light of the
circumstances under which they were made, not misleading; and (v) the Company's
reasonable determination that a post-effective amendment to the registration
statement would be appropriate, and the Company shall promptly make available to
the Investor any such supplement or amendment to the related prospectus. The
Company shall not deliver to the Investor any Put Notice during the continuation
of any of the foregoing events.
Section 6.9. Expectations Regarding Put Notices. Within ten (10) days after
the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company undertakes to notify the
Investor as to its reasonable expectations
17
as to the dollar amount it intends to raise during such calendar quarter, if
any, through the issuance of Put Notices. Such notification shall constitute
only the Company's good faith estimate with respect to such calendar quarter and
shall in no way obligate the Company to raise such amount during such calendar
quarter or otherwise limit its ability to deliver Put Notices during such
calendar quarter. The failure by the Company to comply with this provision can
be cured by the Company's notifying the Investor at any time as to its
reasonable expectations with respect to the current calendar quarter.
Section 6.10. Consolidation; Merger. The Company shall not, at any
time after the date hereof, effect any merger or consolidation of the Company
with or into, or a transfer of all or substantially all of the assets of the
Company to, another entity unless the resulting successor or acquiring entity
(if not the Company) assumes by written instrument the obligation to deliver to
the Investor such shares of stock and/or securities as the Investor is entitled
to receive pursuant to this Agreement.
Section 6.11. Issuance of Put Shares and Blackout Shares. The sale of
the Put Shares and the issuance of any Blackout Shares shall be made in
accordance with the provisions and requirements of Regulation D and any
applicable state law.
Section 6.12. Legal Opinion on Subscription Date. The Company's independent
counsel shall deliver to the Investor on the Subscription Date an opinion in the
form of Exhibit C.
Section 6.13 Right of First Refusal. The Company shall not, directly
or indirectly, without the prior written consent of the Investor, 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 equity or
equity-equivalent securities or those of its Affiliates (as defined in Rule 405
under the Securities Act) in any transaction that is intended to be exempt from
the registration requirements of the Securities Act (a "Subsequent Financing")
for a period of 180 days after the Effective 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 Section 4.3,
(iii) Put Shares, (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 the
Investor a written notice (the "Subsequent Financing Notice") of its intention
to 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) the Investor shall not
have notified the Company by 5:00 p.m. (Salt Lake City time) on the fifth (5th)
Trading
18
Day after its receipt of the Subsequent Financing Notice of its willingness to
enter into or otherwise provide (or to cause its 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 the
Investor 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 the Investor with a second Subsequent Financing Notice,
and the Investor shall again have the right of first refusal set forth above in
this Section 6.13 (a), if the 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 sixty (60)
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.
Section 6.14. Reimbursement. If (i) the Investor, other than by
reason of its gross negligence or willful misconduct, becomes involved in any
capacity in any action, proceeding or investigation brought by any stockholder
of the Company, in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Documents, or if the Investor is
impleaded in any such action, proceeding or investigation by any Person, or (ii)
the Investor, other than by reason of its gross negligence or willful misconduct
or by reason of its trading of the Class A Common Stock in a manner that is
illegal under the federal securities laws, becomes involved in any capacity in
any action, proceeding or investigation brought by the SEC against or involving
the Company or in connection with or as a result of the consummation of the
transactions contemplated by the Transaction Agreements, or if the Investor is
impleaded in any such action, proceeding or investigation by any Person, then in
any such case, the Company will reimburse the Investor for its reasonable legal
and other expenses (including the cost of any investigation and preparation)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Investor who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Investor and any such Affiliate, and shall be binding upon and inure
to the benefit of any successors, assigns, heirs and personal representatives of
the Company, the Investor and any such Affiliate and any such Person. The
Company also agrees that neither any Investor nor any such Affiliate, partners,
directors, agents, employees or controlling persons shall have any liability to
the Company or any person asserting claims on behalf of or in right of the
Company in connection with or as a result of the consummation of the Transaction
Agreements except to the extent that any losses, claims, damages, liabilities or
expenses incurred by the Company result from the gross negligence or willful
misconduct of the Investor.
Section 6.15. Release. Effective upon the mutual execution hereof, the
Company, for itself and on behalf of all affiliated persons and entities,
representatives, and all predecessors in interest, successors and assigns
(collectively, the "Releasing Parties"), hereby releases and forever discharges
19
each of Investor, and Investor's direct and indirect partners, officers,
directors, employees, affiliates, representatives, agents, trustees,
beneficiaries, predecessors in interest, successors in interest and nominees, of
and from any and all claims, demands, actions and causes of action, whether
known or unknown, fixed or contingent, arising prior to the date of execution of
this Agreement, that the Company may have had, may now have or may hereafter
acquire with respect to any matters whatsoever under, relating to or arising
from any prior Purchase Agreement, Registration Agreement, and the agreements
entered into in connection therewith (sometimes collectively referred to as the
"Prior Agreements"). The Company also fully waives (i) any defenses it may have
with respect to honoring the terms of the Prior Agreements, or any (ii) offsets
it may have with respect to the amounts owed under the Prior Agreements.
Additionally, the Company represents, warrants and covenants that it has not,
and at the time this release becomes effective will not have, sold, assigned,
transferred, or otherwise conveyed to any other person or entity all or any
portion of its rights, claims, demands, actions, or causes of action herein
released.
Section 6.16. Dilution. The number of shares of Class A Common Stock
issuable as Put Shares may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the trading
price of the Common Stock declines during the period between the Effective Date
and the end of the Commitment Period. The Company's executive officers and
directors have studied and fully understand the nature of the transactions
contemplated by this Agreement and recognize that they have a potential dilutive
effect. The board of directors of the Company has concluded, in its good faith
business judgment, that such issuance is in the best interests of the Company.
The Company specifically acknowledges that its obligation to issue the Put
Shares is binding upon the Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.
Section 6.17. Certain Agreements. (i) The Company covenants and
agrees that it will not, without the prior written consent of the Investor,
enter into any subsequent or further offer or sale of Common Stock or Common
Stock Equivalents (collectively, "New Common Stock") with any third party
pursuant to a transaction which in any manner permits the sale of the New Common
Stock on any date which is sixty (60) days prior to or sixty (60) days following
each Closing Date.
(ii) In the event the Company breaches the provisions of this
Section , the Purchase Price (as defined in Section 1.33) for any
future puts and any shares purchased but still held of record shall be
amended to be equal to (x) 90% of the Purchase Price set forth herein,
and the Investor may terminate his obligations under this Agreement.
ARTICLE VII
CONDITIONS TO DELIVERY OF PUT NOTICES AND CONDITIONS TO CLOSING
Section 7.1. Conditions Precedent to the Obligation of the Company to Issue
and Sell Class A Common Stock. The obligation hereunder of the Company to issue
and sell the Put Shares to the
20
Investor incident to each Closing is subject to the satisfaction, at or before
each such Closing, of each of the conditions set forth below.
(a) Accuracy of the Investor's Representation and Warranties. The
representations and warranties of the Investor shall be true and correct in
all material respects as of the date of this Agreement and as of the date
of each such Closing as though made at each such time.
(b) Performance by the Investor. The Investor shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or
complied with by the Investor at or prior to such Closing.
Section 7.2. Conditions Precedent to the Right of the Company to
Deliver a Put Notice and the Obligation of the Investor to Purchase Put Shares.
The right of the Company to deliver a Put Notice and the obligation of the
Investor hereunder to acquire and pay for the Put Shares incident to a Closing
is subject to the satisfaction, on (i) the applicable Put Date and (ii) the
applicable Closing Date (each a "Condition Satisfaction Date"), of each of the
following conditions:
(a) Registration of the Registrable Securities with the SEC. As set
forth in the Registration Rights Agreement, the Company shall have filed
with the SEC a Registration Statement with respect to the resale of the
Registrable Securities by the Investor that shall have been declared
effective by the SEC prior to the first Put Date, but in no event later
than sixty (60) days following the date on which the Company files the
Registration Statement.
(b) Effective Registration Statement. Upon the terms and subject to
the conditions as set forth in the Registration Rights Agreement, the
Registration Statement shall have previously become effective and shall
remain effective on each Condition Satisfaction Date and (i) neither the
Company nor the Investor shall have received notice that the SEC has issued
or intends to issue a stop order with respect to the Registration Statement
or that the SEC otherwise has suspended or withdrawn the effectiveness of
the Registration Statement, either temporarily or permanently, or intends
or has threatened to do so (unless the SEC's concerns have been addressed
and the Investor is reasonably satisfied that the SEC no longer is
considering or intends to take such action), and (ii) no other suspension
of the use or withdrawal of the effectiveness of the Registration Statement
or related prospectus shall exist.
(c) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct in
all material respects as of each Condition Satisfaction Date as though made
at each such time (except for representations and warranties specifically
made as of a particular date).
(d) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement and the Registration
Rights Agreement to be performed, satisfied or complied with by the Company
at or prior to each Condition Satisfaction Date.
21
(e) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or adopted by any court or governmental authority of competent jurisdiction
that prohibits the transactions contemplated by this Agreement or otherwise
has a Material Adverse Effect, and no actions, suits or proceedings shall
be in progress, pending or threatened by any Person, that seek to enjoin or
prohibit the transactions contemplated by this Agreement or otherwise could
reasonably be expected to have a Material Adverse Effect. For purposes of
this paragraph (e), no proceeding shall be deemed pending or threatened
unless one of the parties has received written or oral notification thereof
prior to the applicable Closing Date.
(f) No Suspension of Trading In or Delisting of Class A Common Stock.
The trading of the Class A Common Stock shall not have been suspended by
the SEC, the Principal Trading Facility or the NASD and the Class A Common
Stock shall have been approved for listing or quotation on and shall not
have been delisted from the Principal Trading Facility. The issuance of
shares of Class A Common Stock with respect to the applicable Closing, if
any, shall not violate the shareholder approval requirements of the
Principal Trading Facility.
(g) Legal Opinion. The Company shall have caused to be delivered to
the Investor, within five (5) Trading Days of the effective date of the
Registration Statement, an opinion of the Company's independent counsel in
the form of Exhibit C hereto, addressed to the Investor.
(h) Adequacy of Disclosure. No dispute between the Company and the
Investor shall exist pursuant to Section 7.3 as to the adequacy of the
disclosure contained in the Registration Statement.
(i) Percent Limitation. On each Closing Date, the number of Put Shares
then to be purchased by the Investor shall not exceed the number of such
shares that, when aggregated with all other shares of Registrable
Securities then owned by the Investor beneficially or deemed beneficially
owned by the Investor, would result in the Investor owning no more than
4.999% of all of such Class A Common Stock as would be outstanding on such
Closing Date, as determined in accordance with Section 16 of the Exchange
Act and the regulations promulgated thereunder. For purposes of this
Section, in the event that the amount of Class A Common Stock outstanding
as determined in accordance with Section 16 of the Exchange Act and the
regulations promulgated thereunder is greater on a Closing Date than on the
date upon which the Put Notice associated with such Closing Date is given,
the amount of Class A Common Stock outstanding on such Closing Date shall
govern for purposes of determining whether the Investor, when aggregating
all purchases of Class A Common Stock made pursuant to this Agreement and,
if any, Warrant Shares and Blackout Shares, would own more than 4.999% of
the Class A Common Stock following such Closing Date.
(j) Minimum Average Daily Trading Volume. The Average Daily Trading
Volume for the Class A Common Stock with respect to the applicable Put Date
and Closing Date equals or exceeds 100,000 shares per Trading Day.
22
(k) No Knowledge. The Company shall have no knowledge of any event
more likely than not to have the effect of causing such Registration
Statement to be suspended or otherwise ineffective (which event is more
likely than not to occur within the fifteen Trading Days following the
Trading Day on which such Notice is deemed delivered).
(l) No Valuation Event; No Blackout Period. No Valuation Event shall
have occurred since the immediately preceding Put, and no Blackout Period
shall be in effect at the time a Put Notice is deemed delivered.
(m) Shareholder Vote. The issuance of shares of Class A Common Stock
with respect to the applicable Closing, if any, shall not violate the
shareholder approval requirements of the NASD or the Principal Trading
Facility.
(n) Reserved.
(o) Other. On each Condition Satisfaction Date, the Investor shall
have received and been reasonably satisfied with such other certificates
and documents as shall have been reasonably requested by the Investor in
order for the Investor to confirm the Company's satisfaction of the
conditions set forth in this Section 7.2., including, without limitation, a
certificate in substantially the form and substance of Exhibit E hereto,
executed in either case by an executive officer of the Company and to the
effect that all the conditions to such Closing shall have been satisfied as
at the date of each such certificate.
Section 7.3. Review of Registration Statement; Non-Disclosure of Non-Public
Information.
(a) The Company shall make available for inspection and review by the
Investor, advisors to and representatives of the Investor (who may or may
not be affiliated with the Investor and who are reasonably acceptable to
the Company), and any Underwriter, any Registration Statement or amendment
or supplement thereto or any blue sky, NASD or other filing, all financial
and other records, all SEC Documents and other filings with the SEC, and
all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the
Company's officers, directors and employees to supply all such information
reasonably requested by the Investor or any such representative, advisor or
Underwriter in connection with such Registration Statement (including,
without limitation, in response to all questions and other inquiries
reasonably made or submitted by any of them), prior to and from time to
time after the filing and effectiveness of the Registration Statement for
the sole purpose of enabling the Investor and such representatives,
advisors and Underwriters and their respective accountants and attorneys to
conduct initial and ongoing due diligence with respect to the Company and
the accuracy of the Registration Statement.
(b) Each of the Company, its officers, directors, employees and agents
shall in no event disclose non-public information to the Investor, advisors
to or representatives of
23
the Investor unless prior to disclosure of such information the Company
identifies such information as being non-public information and provides
the Investor, such advisors and representatives with the opportunity to
accept or refuse to accept such non-public information for review. The
Company may, as a condition to disclosing any non-public information
hereunder, require the Investor's advisors and representatives to enter
into a confidentiality agreement in form reasonably satisfactory to the
Company and the Investor.
(c) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and the
Company represents that it does not disseminate non-public information to
any investors who purchase stock in the Company in a public offering, to
money managers or to securities analysts; provided, however, that
notwithstanding anything herein to the contrary, the Company shall, as
hereinabove provided, immediately notify the advisors and representatives
of the Investor and any Underwriters of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration
Statement would cause such prospectus to include a material misstatement or
to omit a material fact required to be stated therein in order to make the
statements, therein, in light of the circumstances in which they were made,
not misleading. Nothing contained in this Section 7.3 shall be construed to
mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information)
may not obtain non-public information in the course of conducting due
diligence in accordance with the terms and conditions of this Agreement and
nothing herein shall prevent any such persons or entities from notifying
the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of a material fact or omits a material fact required to be stated
in the Registration Statement or necessary to make the statements contained
therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE VIII
LEGENDS
Section 8.1. Legends. Except during the effectiveness of the Registration
Statement covering the Registrable Securities, each certificate representing
Registrable Securities will bear the following legends, as applicable:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN
24
RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED OR OTHERWISE
DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH
REGISTRATION. THE HOLDER OF THIS CERTIFICATE IS THE
BENEFICIARY OF CERTAIN OBLIGATIONS OF THE COMPANY SET FORTH
IN A PRIVATE EQUITY LINE AGREEMENT BETWEEN FONIX
CORPORATION AND QUEEN LLC, DATED AS OF APRIL __, 2003. A
COPY OF THE PORTION OF THE AFORESAID AGREEMENT EVIDENCING
SUCH OBLIGATIONS MAY BE OBTAINED FROM THE COMPANY'S
EXECUTIVE OFFICES.
During the pendency of the effectiveness of the registration statement,
certificates representing Registrable Securities will bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
IN ANY MANNER UNLESS THE HOLDER OR A BROKER, ON BEHALF OF
THE HOLDER, REPRESENTS THAT IT HAS COMPLIED WITH THE
PROSPECTUS DELIVERY REQUIREMENTS CONTAINED IN SECTION 5 OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF SUCH ACT IS
AVAILABLE.
As soon as practicable after the execution and delivery hereof, but
in any event within five (5) Trading Days hereafter, the Company shall issue to
the transfer agent for its Class A Common Stock (and to any substitute or
replacement transfer agent for its Class A Common Stock upon the Company's
appointment of any such substitute or replacement transfer agent) instructions
in substantially the form of Exhibit E hereto, with a copy to the Investor. Such
instructions shall be irrevocable by the Company from and after the date hereof
or from and after the issuance thereof to any such substitute or replacement
transfer agent, as the case may be, except as otherwise expressly provided in
the Registration Rights Agreement.
Section 8.2. No Other Legend or Stock Transfer Restrictions. No
legend other than those specified in Section 8.1 has been or shall be placed on
the share certificates representing the Class A Common Stock issued to the
Investor and no instructions or "stop transfers orders," so called,
25
"stock transfer restrictions," or other restrictions have been or shall be given
to the Company's transfer agent with respect thereto other than as expressly set
forth in this Article VIII.
Section 8.3. Investor's Compliance. Nothing in this Article VIII
shall affect in any way the Investor's obligations under any agreement to comply
with all applicable securities laws upon resale of the Class A Common Stock.
ARTICLE IX
INDEMNIFICATION
Section 9.1. Indemnification. In consideration of the Investor's
execution and delivery of this Agreement and in addition to all of the Company's
other obligations under this Agreement, the Company shall defend, protect,
indemnify and hold harmless the Investor and its officers, directors and
employees and any of the foregoing person's agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), as incurred
by any Indemnitee as a result of, or arising out of, or relating to (a) any
cause of action, suit or claim brought or made against such Indemnitee and
arising out of or resulting from the execution, delivery, performance, breach or
enforcement of this Agreement, or (b) the status of the Investor as an investor
in the Company (however, the Investor shall not be entitled to indemnity under
this clause (b) as a result solely of investment losses it may suffer in its
investment in the Securities not attributable to Indemnified Liabilities). To
the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar rights of the Indemnitees against
the Company or others, and (ii) any liabilities to which the Indemnitees may be
subject.
ARTICLE X
MISCELLANEOUS
Section 10.1. Fees and Expenses. Except as set forth below, each of
the Company and the Investor agrees to pay its own expenses incident to the
performance of its obligations hereunder. Notwithstanding the foregoing,(a) the
Company agrees to pay reasonable legal fees of the Investor in connection with
the review and execution of this Agreement, the Registration Statement, and all
documents contemplated herein, upon receipt by the Company of a ▇▇▇▇ from the
Investor's counsel
26
for such services; (b) the Company agrees to pay to Greenfield Capital Partners
placement fees of SIX HUNDRED THOUSAND DOLLARS ($600,000), to be calculated pro
rata based on the percentage of the Maximum Commitment Amount funded in
connection with such Put. Such fee shall be paid within five (5) days of the
Company's receipt of the Investment Amount from the Investor.
Section 10.2. Reporting Entity for the Class A Common Stock. The
reporting entity relied upon for the determination of the trading price or
trading volume of the Class A Common Stock on any given Trading Day for the
purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto.
The written mutual consent of the Investor and the Company shall be required to
employ any other reporting entity.
Section 10.3. Brokerage. Except as set forth in Section 10.1, each of
the parties hereto represents that it has had no dealings in connection with
this transaction with any finder or broker who will demand payment of any fee or
commission from the other party. The Company on the one hand, and the Investor,
on the other hand, agree to indemnify the other against and hold the other
harmless from any and all liabilities to any persons claiming brokerage
commissions or finder's fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.
Section 10.4. Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery or facsimile, addressed as set
forth below or to such other address as such party shall have specified most
recently by written notice given in accordance herewith. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be:
If to the Company: Fonix Corporation
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
with a copy (which shall
not constitute notice) to: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇
27
Durham ▇▇▇▇▇ & ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
if to the Investor: QUEEN LLC
c/o Maxim Group
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇.
▇▇▇ ▇▇▇▇. ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
ATTN: ▇▇▇▇▇ ▇▇▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy (which shall
not constitute notice) to: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇
Fax: (▇▇▇) ▇▇▇-▇▇▇▇
Either party hereto may from time to time change its address or facsimile number
for notices under this Section by giving at least ten (10) days' prior written
notice of such changed address or facsimile number to the other party hereto.
Section 10.5. Assignment. Neither this Agreement nor any rights of
the Investor or the Company hereunder may be assigned by either party to any
other person. Notwithstanding the foregoing, (a) the provisions of this
Agreement shall inure to the benefit of, and be enforceable by, any transferee
of any of the Class A Common Stock purchased or acquired by the Investor
hereunder with respect to the Class A Common Stock held by such person, and (b)
the Investor's interest in this Agreement may be assigned at any time, in whole
or in part, to any other person or entity (including any affiliate of the
Investor) upon the prior written consent of the Company, which consent shall not
be unreasonably withheld.
Section 10.6. Amendment; No Waiver. No party shall be liable or bound
to any other party in any manner by any warranties, representations or covenants
except as specifically set forth in this Agreement or therein. Except as
expressly provided in this Agreement, neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated other than by a written
instrument signed by both parties hereto. The failure of the either party to
insist on strict compliance with this Agreement, or to exercise any right or
remedy under this Agreement, shall not constitute a waiver of any rights
provided under this Agreement, nor estop the parties from thereafter demanding
full and complete compliance nor prevent the parties from exercising such a
right or remedy in the future.
Section 10.7. Annexes and Exhibits; Entire Agreement. All annexes and
exhibits to this Agreement are incorporated herein by reference and shall
constitute part of this Agreement. This
28
Agreement and the Registration Rights Agreement set forth the entire agreement
and understanding of the parties relating to the subject matter hereof and
thereof and supersede all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written, relating to the
subject matter hereof.
Section 10.8. Termination; Survival. This Agreement shall terminate
on the earlier of (i) twenty four (24) months after the commencement of the
Commitment Period (ii) such date the Investor or the Company terminates this
Agreement in accordance with its terms and (iii) the date on which the Company
has made Puts with an aggregate Investment Amount equal to the Maximum
Commitment Amount; provided, however, that the provisions of Articles VI, VIII,
IX and X, and of Section 7.3, shall survive the termination of this Agreement.
Section 10.9. Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that such severability shall be
ineffective if it materially changes the economic benefit of this Agreement to
any party.
Section 10.10. Title and Subtitles. The titles and subtitles used in this
Agreement are used for the convenience of reference and are not to be considered
in construing or interpreting this Agreement.
Section 10.11. Counterparts. This Agreement may be executed in
multiple counterparts, each of which may be executed by less than all of the
parties and shall be deemed to be an original instrument which shall be
enforceable against the parties actually executing such counterparts and all of
which together shall constitute one and the same instrument.
Section 10.12. Choice of Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Delaware without regard
to the principles of conflicts of law. Each of the Company and Investor hereby
submit to the exclusive jurisdiction of the United States Federal and state
courts located in Delaware with respect to any dispute arising under the
Transaction Documents or in connection herewith or the transactions contemplated
hereby or thereby.
Section 10.13. Jury Trial Waiver. The Company and the Investor hereby
waive a trial by jury in any action, proceeding or counterclaim brought by
either of the parties hereto against the other in respect of any matter arising
out of or in connection with the Transaction Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOW]
29
IN WITNESS WHEREOF, the parties hereto have caused this Private Equity Line
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.
QUEEN LLC FONIX CORPORATION
By: /s/ illegible By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
===================== ==========================
ESCROW AGENT
/s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
---------------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
30
EXHIBIT A
ACCOUNT INFORMATION
EXHIBIT B
[FORM OF REGISTRATION RIGHTS AGREEMENT]
EXHIBIT C
FORM OF OPINION OF THE COMPANY'S INDEPENDENT COUNSEL
[FORM PROVIDED BY COMPANY COUNSEL]
EXHIBIT D
INSTRUCTIONS TO TRANSFER AGENT
FONIX CORPORATION
TRANSFER AGENT INSTRUCTIONS
May 12, 2003
Ladies and Gentlemen:
Reference is made to the Fourth Private Equity Line Agreement (the
"Agreement"), dated as of May 12, 2003, between Queen LLC (the "Investor") and
Fonix Corporation (the "Company"). Pursuant to the Agreement, subject to the
terms and conditions set forth in the Agreement the Investor has agreed to
purchase from the Company and the Company has agreed to sell to the Investor
from time to time during the term of the Agreement shares of Class A Common
Stock of the Company, $.0001 par value per share (the "Class A Common Stock").
As a condition to the effectiveness of the Agreement, the Company has agreed to
issue to you, as the transfer agent for the Class A Common Stock (the "Transfer
Agent"), these instructions relating to the Class A Common Stock to be issued to
the Investor (or a permitted assignee) pursuant to the Agreement. All terms used
herein and not otherwise defined shall have the meaning set forth in the
Agreement. The shares of Common Stock issuable to the Investor pursuant to the
Agreement are referred to herein as "Underlying Shares."
This letter shall serve as our irrevocable authorization and
direction to you (provided that you are the transfer agent of the Company at
such time) to issue shares of Common Stock upon a request from the Company for
the issuance of certificates.
So long as you have previously received an opinion of the Company's
outside counsel substantially in the form of Exhibit I attached hereto (which
the Company shall direct be delivered to you by such outside counsel upon the
effectiveness of the registration statement covering Underlying Shares) stating
that a registration statement covering resales of Underlying Shares has been
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and that Underlying Shares may be resold
without any restrictive legend (the "Opinion"), certificates representing
Underlying Shares shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
IN ANY MANNER UNLESS THE HOLDER OR A BROKER, ON BEHALF OF
THE HOLDER, REPRESENTS THAT IT HAS COMPLIED WITH THE
PROSPECTUS DELIVERY REQUIREMENTS CONTAINED IN SECTION 5 OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS AN
EXEMPTION FROM THE REGISTRATION PROVISIONS OF SUCH ACT IS
AVAILABLE.
Provided, however, that if you have not previously received a copy of the
Opinion, then the certificates for Underlying Shares shall bear the following
legend:
THESE SECURITIES HAVE NOT 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.
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for Underlying Shares in
the event a registration statement covering Underlying Shares is subject to
amendment for events then current.
Please be advised that the Holders have relied upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, the Holder is
a third party beneficiary to these instructions.
Should you have any questions concerning this matter, please contact
me at (801) ▇▇▇- ▇▇▇▇.
Very truly yours,
Fonix Corporation
By:
--------------------------------------------
Name:______________________________
Title:________________________________
Acknowledged and agreed to:
CONTINENTAL STOCK TRANSFER & TRUST CO.
By:
--------------------------------------------------
Title:
--------------------------------------------------------
Dated: ___________________, 2003
Exhibit I
[Form of Outside Counsel Opinion]
[Addressee]
[Address]
To Whom It May Concern:
The Registration Statement on Form S-2 (File No. 333-______________)
of Fonix Corporation (the "Registration Statement") was declared effective at
___:____ __.M. Eastern Time on _____________, 2003. Upon request by Fonix
Corporation for the issuance of certificates under the Private Equity Line
Agreement referred to in the Company's instruction letter attached, you are
authorized to issue certificates for the Company's common stock with the
applicable legends as set forth in the instruction letter attached.
Very truly yours,
1