UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______to______.
Commission file number 0-23862
fonix corporation
(Exact name of registrant as specified in its charter)
Delaware 22-2994719
(State of Incorporation) (I.R.S. Employer Identification No.)
60 East South Temple Street, Suite 1225
Salt Lake City, UT 84111
(Address of principal executive offices and zip code)
(801) 328-0161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] or
No [ ].
As of August 8, 1997, 42,219,061 shares of the issuer's Common Stock, par
value $.0001 per share, were issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The interim financial statements required by Rule 10-01 of Regulation
S-X follow immediately.
2
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
(Unaudited) (Audited)
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,693,742 $ 22,805,786
Notes Receivable 950,000 1,000,000
Interest receivable 85,780 157,643
Prepaid Assets 291,314 4,172
-------------- --------------
Total Current Assets 21,020,836 23,967,601
Equipment, net of accumulated depreciation
of $225,652 and $80,232 1,671,304 1,279,746
Intangible assets, net of accumulated amortization
of $4,993 and $3,107 67,450 53,011
Financing costs 315,000 -
Other assets 44,647 30,912
-------------- --------------
$ 23,119,237 $ 25,331,270
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 347,409 $ 307,931
Accounts payable - related party 8,309 411,743
Accrued expenses 461,509 1,464,049
Convertible debenture 3,500,000 500,000
Notes payable 17,969,988 16,377,358
-------------- --------------
Total Current Liabilities 22,287,215 19,061,081
-------------- --------------
Stockholders' equity:
Preferred stock - -
Common stock 4,213 4,163
Additional paid-in capital 27,447,781 26,107,833
Accumulated deficit (26,619,972) (19,841,807)
-------------- --------------
Total stockholders' equity 832,022 6,270,189
-------------- --------------
$ 23,119,237 $ 25,331,270
============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Three months ended Six months ended 1993
June 30, June 30, (inception) to
------------------------------- ------------------------------- June 30,
1997 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
-------------- -------------- -------------- -------------- --------------
Expenses:
General and administrative 2,457,278 487,451 3,750,669 850,653 13,050,227
Research and development 1,455,221 1,090,877 3,065,279 1,907,538 13,936,278
-------------- -------------- -------------- -------------- --------------
Total expenses 3,912,499 1,578,328 6,815,948 2,758,191 26,986,505
-------------- -------------- -------------- -------------- --------------
Loss from operations (3,912,499) (1,578,328) (6,815,948) (2,758,191) (26,986,505)
-------------- -------------- -------------- -------------- --------------
Other income (Expenses):
Interest income 296,876 361,695 602,425 488,309 1,994,882
Interest (expense) (299,079) (140,552) (564,642) (244,490) (1,658,897)
-------------- -------------- -------------- -------------- --------------
Total Other Income (Expenses) (2,203) 221,143 37,783 243,819 335,985
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary item (3,914,702) (1,357,185) (6,778,165) (2,514,372) (26,650,520)
Extraordinary item-
Forgiveness of debt - - - - 30,548
-------------- -------------- -------------- -------------- --------------
Net Loss $ (3,914,702) $ (1,357,185) $ (6,778,165) $ (2,514,372) $ (26,619,972)
============== ============== ============== ============== ==============
Loss per common share:
Loss before extraordinary items $ (0.09) $ (0.04) $ (0.16) $ (0.07) $ (1.04)
Extraordinary item Nil Nil Nil Nil Nil
-------------- -------------- -------------- -------------- --------------
Loss per common share $ (0.09) $ (0.04) $ (0.16) $ (0.07) $ (1.04)
============== ============== ============== ============== ==============
Weighted average shares 42,105,189 36,311,941 41,982,952 33,710,102 25,582,531
============== ============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Six months ended 1993
June 30, (inception) to
------------------------------- June 30,
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from development activities:
Net loss $ (6,778,165) $ (2,514,372) $ (26,619,972)
Adjustments to reconcile net loss to net cash
used in development activities:
Common stock issued for services 915,000 - 2,239,270
Additional compensation expense recorded in
accordance with APB Opinion No. 25 - - 2,282,900
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 146,243 14,656 230,643
Non cash gain on forgiveness of debt - - (30,548)
Changes in assets and liabilities:
(Increase) decrease in interest receivable 71,863 (107,758) (85,780)
(Increase) in financing costs (315,000) - (315,000)
(Increase) in prepaid assets (287,142) - (291,314)
(Increase) in other assets (8,735) - (39,647)
Increase (decrease) in accounts payable 39,478 (51,819) 1,982,678
Increase (decrease) in accounts payable - related party (403,434) - 8,309
Increase in unearned interest revenue 9,000
Increase (decrease) in accrued expenses (1,002,540) 43,770 553,427
-------------- -------------- --------------
Net cash used in operating activities (7,622,432) (2,606,523) (20,083,753)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (536,978) (185,932) (1,896,956)
Investment in intangible assets (15,264) (9,598) (72,443)
Investment in notes receivable (888,600) (3,160,000) (1,888,600)
Payment of notes receivable 933,600 800,000 933,600
-------------- -------------- --------------
Net cash used in investing activities (507,242) (2,555,530) (2,924,399)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in revolving note payable 1,592,630 9,057,936 17,969,988
Proceeds from notes payable - - 2,351,667
Payment of notes payable - - (1,779,806)
Proceeds from issuance of convertible debenture 3,000,000 - 3,500,000
Proceeds from issuance of common stock 425,000 10,759,962 20,660,045
-------------- -------------- --------------
Net cash provided by financing activities 5,017,630 19,817,898 42,701,894
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (3,112,044) 14,655,845 19,693,742
Cash and cash equivalents at beginning of period 22,805,786 7,849,610 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 19,693,742 $ 22,505,455 $ 19,693,742
============== ============== ==============
</TABLE>
[Continued]
5
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
[Unaudited]
<TABLE>
<CAPTION>
October 1,
Six months ended 1993
June 30, (inception) to
------------------------------- June 30,
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 534,248 $ 200,720 $ 1,422,714
Income taxes paid $ - $ - $ -
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the six months ended June 30, 1997:
The Company issued 100,000 shares of common stock to an unrelated party
for consulting fees valued at $583,594.
The Company issued 155,000 shares of common stock to unrelated parties for
consulting fees valued at $331,406.
For the six months ended June 30, 1996:
The Company issued 220,000 shares of common stock to unrelated parties for
finders fees valued at $597,520.
The Company issued 200,000 shares of common stock to unrelated parties for
finders fees valued at $304,000.
See accompanying notes to consolidated financial statements.
6
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements have been
prepared by the Company without audit in accordance with generally accepted
accounting principles for interim information and pursuant to Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (which included only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
for all periods presented, have been made.
These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's Form 10-KSB for the year ended December 31, 1996.
The results of operations for the six months ended June 30, 1997 and 1996
are not necessarily indicative of the operating results for the full year.
Research and Development - All payments for research and development are
charged to research and development expense as incurred. None of these
costs are capitalized because the Company does not have a product that
meets applicable capitalization requirements.
Recently Enacted Accounting Standards - In February 1997, SFAS Nos. 128,
"Earnings Per Share" and 129, "Disclosures of Information about Capital
Structure," were issued. SFAS No. 128 changes the computation,
presentation, and disclosure requirements of earnings per share (EPS) for
entities with publicly held common stock. SFAS No. 129 addresses standards
for disclosing information about an entity's capital structure. Although
such statements are not effective until December 31, 1997, the effect of
the adoption of the above statements is not significant.
2. NOTES RECEIVABLE
At June 30, 1997 the Company had an unsecured note receivable from an
unrelated third party in the amount of $250,000 which bears interest at 12%
per annum and is due and payable thirty days after written notice from the
Company.
At June 30, 1997 the Company had a secured note receivable from an
unrelated third party in the amount of $700,000 which bears interest at 12%
per annum and is due and payable on July 31, 1997.
7
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. EQUIPMENT
Equipment consists of the following at June 30, 1997:
Furniture and fixtures $ 630,931
Computer equipment 1,196,655
Leasehold improvements 69,371
-------------
Total 1,896,957
Less accumulated depreciation and amortization (225,653)
-------------
Net equipment $ 1,671,304
=============
4. CONVERTIBLE DEBENTURES
In June 1997, the Company entered into a Convertible Debenture Purchase
Agreement (the "Agreement") whereby an unrelated investment entity agreed
to purchase up to an aggregate principal amount of $10,000,000 of the
Company's Series B 5% Convertible Debentures. The debentures are due June
18, 2007, bear interest at 5% and are convertible into shares of the
Company's common stock at anytime after issuance at the holder's option.
Under terms of the Agreement, the debentures are to be purchased in three
payments. The first payment of $3,000,000 was made to the Company on June
18, 1997. The second and third payments of $3,000,000 and $4,000,000,
respectively, are to be paid to the Company upon written notice, provided
that the Company's market capitalization is in excess of $200,000,000 and
other conditions are meet. The debentures may be converted into shares of
the Company's common stock at the lesser of $6.81 or the average of the per
share market value for the five trading days immediately preceding the
conversion date multiplied by 90% for any conversion on or prior to the
120th day after the original issue date and 87.5% for any conversion
thereafter. As part of the same transaction, the Company also issued to
the investor a warrant to purchase up to 250,000 shares of common stock at
any time prior to June 18, 2002 at the exercise price of $8.28 per share.
Additionally, the Company entered into a registration rights agreement with
the investor under which the Company is contractually obligated to take
steps to register the common stock issuable upon conversion of the
debentures and exercise of the warrant. The registration statement was
filed with the Securities and Exchange Commission on July 16, 1997. The
Company covenanted in the debentures and the warrant to reserve out of its
authorized and unissued shares of common stock no less than that number of
shares that would be issuable upon the conversion of the debentures and any
interest then payable on the debentures and the exercise of the warrant.
As of June 30, 1997 none of the debentures had been converted.
Subsequently, $500,000 face value of the Series B 5% Convertible Debentures
were converted into 87,498 shares of the Company's common stock.
In October 1995, the Company issued a Series A Subordinated Convertible
Debenture in the amount of $500,000 to a private investment entity. That
debenture is due October 23, 1997 and has an annual interest rate of 5%.
The holder of that debenture has given notice of conversion and has
requested that
8
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the Company issue 166,667 shares of Series A Preferred Stock. The
Company is in the process of taking the necessary action to authorize the
issuance of the Series A Preferred Stock, into which that debenture is
convertible.
5. NOTE PAYABLE
At June 30, 1997, the Company has a revolving note payable to a bank in the
amount of $17,969,988 which bears interest at the rate of 5.8%. This note
was due July 31, 1997, and is secured by a certificate of deposit in the
amount of $20,000,000. Subsequently, similar terms were negotiated to
extend the maturity date of the note for three months.
6. STOCKHOLDERS' EQUITY
Issuance of Stock - During the six months ended June 30, 1997, the Company
issued 505,000 shares of common stock. 150,000 of such shares were issued
to an unrelated private investor, 250,000 of such shares were issued upon
the exercise of previously granted warrants, and 105,000 of such shares
were issued to unaffiliated individuals for services rendered.
Preferred Stock - In 1995, the Company's board of directors adopted a
resolution to amend the articles of incorporation to provide for the
issuance of a class of preferred stock and give the board of directors
authority to fix the rights, preferences, privileges and restrictions of
any series of preferred stock. At the same time the board of directors
adopted a resolution establishing a class of Series A Preferred Stock. The
amendment has not yet been presented to the Company's shareholders nor were
any shares of Series A Preferred Stock issued. In June of 1997, the same
resolution was re-adopted by the board of directors to be presented for
approval by the shareholders.
Funding Agreement - In October 1995, the Company entered into a funding
arrangement with a private investment entity. Under the terms of the
agreement, the investor agreed to invest $6,050,000 ("Funding Commitment")
in exchange for 11,562,500 shares of the Company's common stock, and a
$500,000 debenture convertible into 166,667 Series A Preferred Stock or
166,667 shares of common stock. The Company received $3,945,000 (which
included the $500,000 convertible debenture) and $2,105,000 of the Funding
Commitment in 1996 and 1995, respectively. All of the common stock and the
debentures have been issued.
Stock Options and Warrants - On March 10, 1997, the Company's board of
directors approved a stock option plan for directors, employees and other
persons acting on behalf of the Company, under which the aggregate number
of shares available for issuance is 7,500,000. The term of options granted
under the plan is ten years from the date of grant.
In April 1996, the directors approved a directors' stock option plan, under
which the aggregate number of shares available for issuance is 5,400,000.
The shareholders of the Company approved the plan at
9
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
their annual meeting in July 1996. The plan is administered by a committee
consisting of two or more directors of the Company. The plan provides that
each director shall receive options to purchase 200,000 shares of common stock
for services rendered as a director during each entire calendar year or
portion of a calendar year in excess of six months. The exercise price of
such options is the closing market price of the stock on the date the options
are granted. The option term is ten years from the date of grant.
In April 1996, the directors approved an employee stock option plan under
which the aggregate number of shares available for issuance is 900,000
shares. The exercise price of such options is the closing market price of
the stock on the date the options are granted. The term of the plan is 10
years and options are subject to a three year vesting schedule, pursuant to
which one-third of the total number of options granted may be exercised
each year.
A summary of options granted under the Company's various stock option plans
for the six months ended June 30, 1997 is presented below:
<TABLE>
<CAPTION>
Wt. Ave.
Stock Exercise
Options Price
-------------- --------------
<S> <C> <C>
Total options outstanding at beginning of period 4,626,000 $ 4.06
Granted 3,310,000 6.56
Exercised - -
Forfeited - -
Canceled ( 35,000) 6.23
-------------- --------------
Total options outstanding at end of period 7,901,000 $ 5.11
============== ==============
Total options exercisable at end of period 3,301,003 $ 4.06
============== ==============
</TABLE>
A summary of options outstanding under the Company's various stock option
plans at June 30, 1997 is presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$2.97 - 3.66 155,000 8.8 years $ 3.55 75,669 $ 3.43
4.06 4,400,000 8.8 years 4.06 3,200,000 4.06
5.00 - 6.50 3,026,000 9.9 years 6.49 25,334 5.00
7.13 - 9.31 320,000 9.7 years 7.17
- -------------- ------------- ------------ ------------ ------------ ------------
$2.97 - 9.31 7,901,000 9.3 years $ 5.11 3,301,003 $ 4.06
============== ============= ============ ============ ============ ============
</TABLE>
10
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of warrants granted by the Company during the six months ended
June 30, 1997 is presented below:
<TABLE>
<CAPTION>
June 30, 1997
-----------------------------------
Weighted
Average
Exercise
Shares Price
--------------- ---------------
<S> <C> <C>
Total outstanding at beginning of period 600,000 $ 1.63
Granted - -
Exercised (250,000) 1.40
Forfeited - -
Canceled - -
--------------- ---------------
Total outstanding at end of period 350,000 $ 1.80
=============== ===============
</TABLE>
A summary of warrants outstanding at June 30, 1997 is presented below:
<TABLE>
<CAPTION>
Warrants Outstanding Exercisable
-------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ .50 130,000 1.1 years $ 0.50 130,000 $ 0.50
2.00 120,000 0.8 years 2.00 120,000 2.00
3.24 100,000 0.8 years 3.24 100,000 3.24
- -------------- ------------- ------------ ------------ ------------ ------------
$.50 - 3.24 350,000 0.9 years $ 1.80 350,000 $ 1.80
============== ============= ============ ============ ============ ============
</TABLE>
7. RELATED PARTY TRANSACTIONS
Related party transactions with a company owned by the majority
shareholders not otherwise disclosed for the six months ended June 30, 1997
were as follows:
1997
--------------
Expenses:
Base rent expense $38,600
Payables:
Accounts payable $ 8,309
The Company rents office space under a month-to-month lease from a company
owned by three individuals who are each executive officers, directors and
10% beneficial owners of the Company. The lease to the company owned by
these individuals is guaranteed by them.
11
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During 1996, the disinterested members of the Company's Board of Directors
authorized the Company to reimburse certain officers for all taxes payable
by the officers in conjunction with the exercise of 3,700,000 warrants by a
company owned by the officers. The warrants were exercised in 1995. The
total amount to be reimbursed to these officers is approximately
$2,500,000. As of June 30, 1997, the officers had drawn $1,913,536 of the
authorized reimbursements.
8. RESEARCH AND DEVELOPMENT
In October 1993, the Company entered into an agreement with Synergetics,
Inc., a research and development entity, whereby Synergetics was to develop
certain technologies related to the Company's automated speech recognition
technology ("ASRT"). The president of the Company is one of seven members
of the board of directors of Synergetics, and three executive officers,
directors and 10% beneficial owners of the Company own less than five
percent of the common stock of Synergetics. Under the terms of the
Synergetics Agreement, as subsequently modified, the Company acquired
intellectual property rights, technologies and technology rights that were
developed by Synergetics. The Company agreed to provide all funding
necessary for Synergetics to develop commercially viable technologies.
There is no minimum requirement or maximum limit with respect to the amount
of the funding to be provided by the Company. However, under the terms of
the Synergetics Agreement the Company is obligated to use its best efforts
in raising the necessary funding for the engineering, development and
marketing of the ASRT. As part of the Synergetics Agreement, the Company
agreed to pay Synergetics a royalty of 10% of gross revenues from sales of
its ASRT. The Company has not yet licensed or sold its technologies, and
consequently, has not made any royalty payments. Under the terms of the
Synergetics Agreement, the Company paid to Synergetics $312,000 and
$1,673,884 for the three and six months ended June 30, 1997, for research
and development efforts.
Until March 1997, Synergetics had compensated its engineers, employees,
members of its development team, and other financial backers, in part, with
the issuance of "Project Shares" granting the holders of such shares the
right, within limits, to share pro rata in future royalty payments. In
addition to issuance of Project Shares, Synergetics had made loans and
advances to some members of its project team on a non-recourse basis.
Repayment of the Advances was secured by future disbursements under the
Project Shares.
On March 13, 1997, the Company and Synergetics reached an agreement in
principle to modify the Synergetics Agreement with regard to the
development and assignment of the Company's ASRT.
The Synergetics Agreement is to be modified as follows:
* The rights and obligations of Synergetics under the Agreement,
including the royalty, will be assigned to a newly created wholly-
owned subsidiary of the Company, fonix Acquisition ("Acquisition");
12
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
* Acquisition will also assume the obligations of Synergetics to all
holders of Project Shares;
* The Company and Acquisition will release Synergetics from any further
obligation or duty under the Synergetics Agreements;
* In consideration for the assignment of the rights to the royalty by
Synergetics to Acquisition, the Company will issue warrants to
Synergetics and the holders of Project Shares to acquire, in the
aggregate, up to 4,800,000 shares of the Company's common stock at an
exercise price of $10.00 per share (the Warrants). A holder of
Project Shares will be entitled to receive Warrants to purchase 800
shares of the Company's common stock for each Project Share held;
provided, however, that the number of Warrants to be issued will be
reduced by the amount of one Warrant for each $37.50 in Advances;
* The Warrants will become exercisable subject to progress made in
further development of the ASRT Technology and the first to occur of
(i) a minimum daily closing bid price for shares of the Company's
common stock of $37.50 for a period of at least 15 consecutive
trading days, or (ii) thirty months from the date the Warrants are
issued. The exercise date shall be accelerated upon certain business
combinations or reorganizations, such as a merger, involving the
Company. The terms relating to development of the ASRT Technology
will be subject to a confidentiality and non-disclosure agreement and
covenants;
* In consideration of the assumption by Acquisition of the obligations
of Synergetics, the release of Synergetics from its further duties
under the Synergetics Agreements, and the issuance of the Warrants to
Synergetics and holders of Project Shares, the royalty and Project
Shares tendered in exchange for Warrants will be canceled;
* Effective March 1997, the Company employed certain former members of
the Synergetics project team as employees of the Company on terms and
conditions approximately equivalent to the terms and conditions of
their prior employment with Synergetics, and including the right to
participate in the Company's employee stock option plans; and
* The Company engaged the founder and principal stockholder of
Synergetics as a full-time consultant to assist with the further
development of the ASRT.
The Company and Synergetics have acknowledged the consummation of the
transactions described above will require, among other things, execution of
definitive agreements and compliance with applicable federal and state
laws, including securities laws. Those agreements will include standard
terms and provisions that are typical of such transactions, including
mutual releases and indemnification covenants. Synergetics has other
business interests and activities and will continue to conduct its business
in the usual course following the closing.
13
<PAGE>
fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The U.S. Patent and Trademark Office issued the initial patent to the
Company describing 36 claims on June 17, 1997.
The Company has incurred total research and development costs of $1,455,221
and $3,065,279 for the three and six months ended June 30, 1997.
9. INCOME TAXES
At June 30, 1997, net deferred tax assets, before considering the valuation
allowance, totaled approximately $10,300,000. The amount of and ultimate
realization of the benefits from the deferred tax assets for income tax
purposes is dependent, in part, upon the tax laws then in effect, the
Company's future earnings, and other future events, the effects of which
cannot presently be determined. Because of the uncertainty surrounding the
realization of the loss carryforwards the Company has established a
valuation allowance for all net deferred tax assets. Accordingly, because
of recurring losses and the valuation allowance, there is no provision for
income taxes in the accompanying statements of operations. The net change
in the valuation allowance was approximately $1,530,000 and $2,500,000 for
the three and six months ended June 30, 1997.
The Company has available at June 30, 1997, unused federal operating loss
carryforwards of approximately $23,600,000 and unused state operating loss
carryforwards of approximately $24,500,000, which may be applied against
future taxable income and which expire in various years beginning in 2008
through 2011.
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements - On November 1, 1996, the Company entered into three
employment contracts with three executive officers which expire on December
31, 2001. The minimum salary payments required on these contracts are as
follows:
Year ending December 31:
1997 $ 787,500
1998 1,025,000
1999 1,337,500
2000 1,750,000
2001 1,875,000
----------------
Total $ 6,775,000
================
Litigation - On February 10, 1997 an action (the "Palomba Action") was
filed against the Company and six of its directors. The Palomba Action is
a derivative action seeking relief on behalf of all shareholders for the
benefit of the Company. The Palomba Action alleges that certain employee
directors caused the Company to engage in a series of loan transactions
with K.L.S. Enviro Resources, Inc. and thereafter appropriated for
themselves certain corporate opportunities resulting from such loan
transactions. A
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fonix(TM) corporation
[A Development Stage Company]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
settlement agreement in principle was reached prior to service of the
complaint and is currently being documented. The settlement agreement will
be subject to the approval of the court and will not result in any expense
to the Company except incidental attorneys fees. The terms of the
settlement are confidential until approved by the court. Because of
certain contingencies, it is not presently possible to predict the amount
of benefit, if any, the Company may realize under the settlement.
Lease Agreement - The Company has a long-term operating lease agreement for
its Draper, Utah research and office facility with an unrelated party.
Future aggregate minimum obligations under this operating lease are as
follows:
Years ending December 31:
1997 $ 340,672
1998 340,672
1999 340,672
2000 340,672
2001 340,672
Thereafter 958,549
--------------
Total $ 2,661,909
==============
11. SUBSEQUENT EVENTS
On July 31, 1997 the holder of certain of the Company's Series B 5%
Convertible Debentures exercised its right to convert $500,000 of such
debentures into 87,498 shares of the Company's common stock.
15
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED BY THE COMPANY AND DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES ARE
DISCUSSED BELOW IN THE SECTION ENTITLED "FACTORS AFFECTING FUTURE OPERATING
RESULTS."
Overview
fonix is a development-stage company engaged in scientific research
and development of proprietary automatic speech recognition and related
technologies ("ASRT") comprised of components which may be licensed in
whole or in part to third parties. The Company has completed the core
technologies related to the ASRT such that they are available for
third-party licensing and co-development. The Company is presently engaged
in discussions with potential licensees and co-developers. However, the
Company has to date received no revenues from operations, including
licenses, and there can be no assurance that revenues from operations will
be received in the future.
The Company's primary development objective is to further develop,
refine and enhance the main components of its ASRT and certain supplemental
technologies. The Company's initial marketing direction is to focus on
licensing its ASRT to third parties and co-developers. These licenses will
be made broadly available to many segments of the computer industry,
including application software, operating systems, computers and
microprocessor chips, and research and development entities worldwide,
including academia, government, industry and commercial speech product
developers who may want to take advantage of the Company's ASRT or related
technologies in their existing products. The Company anticipates that it
will sell or license its ASRT or related technologies on terms advantageous
to the Company, and that run-time product license royalty rates will vary
according to applications, sales volumes, and end-user pricing of products
using the ASRT. The Company may reserve exclusive rights in some fields of
use for the internal development of high value end-user products and
applications.
Results of Operations
Research and Development
The Company's scientific research and development activities
historically have been conducted by an unaffiliated third party,
Synergetics, Inc. pursuant to product development and assignment contracts
between the Company and Synergetics. Under that arrangement, Synergetics
provided personnel and facilities, and the Company financed such scientific
research and development activities on an as-required basis. There was no
minimum requirement or maximum limit with respect to the amount of funding
the Company was obligated to provide to Synergetics under the Agreement,
and the Company was obligated to use its best efforts in raising all of the
necessary funding for the development of the ASRT. The amounts of payments
to Synergetics pursuant to the Agreement were determined as Synergetics
submitted weekly pre-authorized work orders and budgets, which were then
reviewed and approved by the Company. All funds paid to Synergetics have
been accounted for by the Company as research and development expense.
Moreover, under the Agreement, the Company, if and when the Company began
receiving revenue from sales of the ASRT or products
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incorporating the ASRT, was obligated to pay a royalty of 10% of such
revenues to Synergetics. On March 13, 1997, the Company and Synergetics
reached an agreement in principle to modify the Synergetics Agreement with
regard to the development and assignment of the Company's ASRT. Under the
Memorandum, and further assuming that the definitive agreements relating
thereto are executed and the other preconditions to the effectiveness of
the modification understanding are satisfied, of which there can be no
assurance, the Company will no longer have any obligation to pay to
Synergetics the Royalty or any percentage of the revenues received from
entering into licensing and/or co-development agreements or otherwise from
the manufacture of products incorporating the ASRT. The Company does not
expect there to be a material change to the overall amount of research and
development spending as a result of the modification.
As a development stage company which has not yet licensed its ASRT,
the Company has not received any revenues from operations. During the
three months ended June 30, 1997 the Company incurred research and
development expenses of $1,455,221, an increase of $364,344 or
approximately 33 percent over the three months ended June 30, 1996. This
increase is due in part to increases in research and development personnel.
The Company anticipates similar or increased research and development costs
as it expands and continues to develop and market its technologies.
Operating Losses
General and administrative expenses were $2,457,278 and $487,451,
respectively, for the three months ended June 30, 1997 and June 30, 1996.
This increase over the comparable period was due primarily to increases in
salaries, rents, legal and accounting fees, outside services and a fee of
$1,913,536 paid to certain officers for taxes payable by the officers in
conjunction with the exercise of 3,700,000 warrants in 1995 by a company
owned by the officers (see note 7). Due to the lack of revenues and these
general and administrative and research and development expenses, the
Company has incurred losses from operations of $3,912,499 and $1,578,328
for the three months ended June 30, 1997 and 1996, respectively. Net
expense from other income and expenses was $2,203 for the three months
ended June 30, 1997, an increase in net expense of $223,346 over the three
months ended June 30, 1996. This increase was due primarily to the Company
drawing on its line of credit for internal operations, investing smaller
amounts of cash reserves, decreasing interest income and increasing
interest expense. At June 30, 1997, the Company had an accumulated deficit
of $26,619,972 and stockholders' equity of $832,022. The Company
anticipates that its investment in ongoing scientific research and
development of the ASRT and related artificial intelligence and
compression/decompression technologies will continue at present or
increased levels for at least the remainder of fiscal 1997.
Liquidity and Capital Resources
The Company's current liabilities exceeded its current assets by
$1,266,379 at June 30, 1997 and current assets exceeded current liabilities
by $4,906,520 at December 31, 1996. The current ratio of assets to
liabilities was .94 at June 30, 1997 as compared with 1.26 at December 31,
1996. Current assets decreased by $2,946,765 to $21,020,836 from December
31, 1996 to June 30, 1997. Current liabilities increased by $3,226,134 to
$22,287,215 during the same period. The decrease in working capital over
this period is primarily attributable to the Company's use of its cash
reserves to support increased operational expenses during the six months
ended June 30, 1997. Total assets were $23,119,237 at June 30, 1997 as
compared to $25,331,270 at December 31, 1996.
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From its inception, the Company's principal source of operating
capital has been private and other exempt sales of the Company's equity
securities. Private and other exempt sales of the Company's equity
securities resulted in net cash proceeds of $425,000 for the six months
ended June 30, 1997. There were no private or other exempt sales of the
Company's equity securities for the three months ended June 30, 1997.
In June 1997, the Company entered into a Convertible Debenture
Purchase Agreement (the "Agreement") whereby an unrelated investment entity
agreed to purchase up to an aggregate principal amount of $10,000,000 of
the Company's Series B 5% Convertible Debentures. The debentures are due
June 18, 2007, bear interest at 5% and are convertible into shares of the
Company's common stock at anytime after issuance at the holder's option.
Under terms of the Agreement, the debentures are to be purchased in three
payments. The first payment of $3,000,000 was made to the Company on June
18, 1997. The second and third payments of $3,000,000 and $4,000,000,
respectively, are to be paid to the Company upon written notice, provided
that the Company's market capitalization is in excess of $200,000,000 and
other conditions are meet. The debentures may be converted into shares of
the Company's common stock at the lesser of $6.81 or the average of the per
share market value for the five trading days immediately preceding the
conversion date multiplied by 90% for any conversion on or prior to the
120th day after the original issue date and 87.5% for any conversion
thereafter. As part of the same transaction, the Company also issued to
the investor a warrant to purchase up to 250,000 shares of common stock at
any time prior to June 18, 2002 at the exercise price of $8.28 per share.
Additionally, the Company entered into a registration rights agreement with
the investor under which the Company is contractually obligated to take
steps to register the common stock issuable upon conversion of the
debentures and exercise of the warrant. The registration statement was
filed with the Securities and Exchange Commission on July 16, 1997. The
Company covenanted in the debentures and the warrant to reserve out of its
authorized and unissued shares of common stock no less than that number of
shares that would be issuable upon the conversion of the debentures and any
interest then payable on the debentures and the exercise of the warrant.
Although the Company presently anticipates that it will enter into
third party license or co-development agreements for its ASRT by the end of
fiscal 1997, there can be no assurance that the Company will be able to
license the ASRT within that time frame. Even assuming that the Company is
able to begin licensing the ASRT during 1997, the Company may not receive
revenues from operations until 1998. Accordingly, the Company expects to
incur significant losses at least through the end of fiscal 1997 and until
such time as it is able to enter into substantial licensing and co-
development agreements and actually receive substantial revenues from such
arrangements.
The Company has an established relationship with a major regional
federally insured financial institution pursuant to which the Company has
entered into an agreement allowing it to borrow against its own funds on
deposit with the institution. As of December 31, 1996, the Company had
funds on deposit of $20,000,000, and the Company owed $16,377,358 to the
institution. As of June 30, 1997, the Company had funds on deposit of
$20,000,000, and the Company owed the institution $17,969,988, which
obligation matured on July 31, 1997. The relationship with the institution
is re-negotiated quarterly to enhance the earning potential to the Company
of that deposit. Subsequently, the Company and the institution agreed to
extend the term of the borrowing relationship for an additional three-month
term on comparable competitive terms. The rate of interest paid by the
institution for the Company's funds on deposit at the institution and the
interest rate paid to the Company by the institution is a net difference of
1%. Interest income and expense is payable monthly and the principal
amount is payable in full at maturity.
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Presently, the Company anticipates that it will need to raise
additional funds to be able to satisfy its cash requirements during the
next twelve months. The scientific research and development, corporate
operations and marketing expenses will continue to require additional
capital. Because the Company presently has no revenue from operations, the
Company intends to continue to rely primarily on financing through the sale
of its equity and debt securities to satisfy future capital requirements
until such time as the Company is able to enter into acceptable third party
licensing or co-development arrangements such that it will be able to
finance ongoing operations out of license, royalty and sales revenue.
There can be no assurance that the Company will be able to enter into
acceptable third party licensing or co-development agreements.
Furthermore, the issuance of equity securities or other securities which
are or may become convertible to the equity securities of the Company in
connection with such financing would result in dilution to the shareholders
of the Company.
In connection with the Memorandum, 55 employees of Synergetics became
full-time or part-time employees of the Company. Taking account of these
employees, the Company presently employs 78 persons and has a need for
approximately 15 additional scientific professionals and 10 additional
technology asset managers.
The Company has no plans to purchase any new plants or expand beyond
any existing facility.
Factors Affecting Future Operating Results
Notwithstanding the Company's efforts and planning, any one or more
of several factors could delay, obstruct or otherwise hinder the Company's
ability to achieve its objectives or cause actual results of operations to
materially differ from expected or anticipated results including, without
limitation, those which are expressed in forward-looking statements
contained in this Report. Included among such factors could be those Risk
Factors described in the Company's reports on Form 10-KSB for the period
ending December 31, 1996 and Form 10-Q for the period ending March 31,
1997, as well as the following:
Substantial and Continuing Losses; Accumulated Deficit.
Since commencing its business of developing its automatic speech
recognition technologies ("ASRT") and certain other proprietary
technologies, including data compression and neural network design
technologies (collectively the ASRT and such other related technologies are
referred to in this Prospectus as the "Core Technologies"), the Company has
had no revenues from operations. During each of the preceding three fiscal
years, the Company has sustained ongoing losses associated with its
research and development costs. The Company incurred a net loss of
$7,829,508 for the year ended December 31, 1996 and a net loss of
$6,778,165 for the six-month period ended June 30, 1997. Accordingly, the
auditor's report in the fiscal 1996 financial statements includes an
explanatory paragraph relating to the Company's ability to continue as a
going concern. Losses of this magnitude are expected to continue for the
near term and until such time as the Company is able to complete licensing
or co-development arrangements with third parties which produce revenues
sufficient to offset losses associated with the Company's ongoing operating
expenses, and there can be no assurance that the Company will achieve
profitable operations or that profitable operations will be sustained if
achieved. At December 31, 1996, the Company's accumulated deficit was
$19,841,807 and at June 30, 1997, the Company's accumulated deficit was
$26,619,972. The Company anticipates incurring substantial research and
development expenses for the foreseeable future, which will require
substantial amounts of additional cash on an ongoing basis. The Company
must continue to secure additional financing to complete its research and
development activities, and to seek and engage in negotiations with
potential strategic alliance partners and otherwise market its technology
to industry segments that can incorporate the Company's technologies into
their
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products. The Company believes that the cash generated to date from its
financing activities and the Company's ability to raise cash in future
financing activities will be sufficient to satisfy its working capital
requirements through the next twelve-month period. However, there can be
no assurance that this assumption will prove to be accurate or that events
in the future will not require the Company to obtain additional financing
sooner than presently anticipated. To the extent that the Company's future
financing activities involve the issuance of equity securities or
securities convertible into equity securities, additional dilution to the
interests of the Company's stockholders will result. Although the Company
continues to investigate several financing alternatives, including
strategic partnerships, private, debt and equity financing and other
sources in relation to its ongoing and research and development activities,
there can be no assurance that the current levels of funding or additional
funding will be available when needed, or if available will be on terms
satisfactory to the Company. Failure to obtain additional financing could
have a material adverse effect on the Company, including possibly requiring
it to significantly curtail its operations.
Development Stage of Core Technologies.
While the Company generally is pleased with the progress made to date
with respect to the research and development of its Core Technologies,
currently there are no products incorporating the Core Technologies. As a
development stage company, fonix intends to enter into licensing and
co-development arrangements or strategic alliances with third parties,
although no such relationships presently exist. The Company presently
anticipates that any products incorporating the Company's Core Technologies
would be manufactured and marketed by such third party licensees and
co-development and strategic alliance partners. There can be no assurance
that the Company will ever be able to license its Core Technologies or
enter into co-development or strategic alliance agreements such that the
Core Technologies or products based thereon will be commercially viable.
Implementation of Business Strategy.
The Company's business strategy is to achieve revenues through
appropriate strategic alliances, co-development arrangements and license
agreements. To date, the Company has not yet entered into any
revenue-generating license, co-development or strategic relationships. The
Company's ability to implement its strategy fully over the long term, and
the ultimate success of this strategy, are subject to a broad range of
uncertainties and contingencies, many of which are beyond the Company's
control. The Company may not be able to achieve the revenue it is seeking
as a result of incompatibilities between its Core Technologies and the
needs of third-party developers and manufacturers or an unwillingness of
companies with existing voice recognition products to integrate the
Company's technologies. In addition, there can be no assurance that the
Company will be able to enter into revenue-generating licensing or
co-development arrangements or to implement strategic relationships, or, if
entered into, that such strategic relationships will in fact further the
implementation of the Company's business strategy.
Unproven Market; Risks of New Technology.
The market for speech recognition technologies is relatively new.
The Company's Core Technologies are new and represent a significant
departure from technologies which have already found a degree of acceptance
in the nascent voice recognition marketplace. The financial performance of
the Company will depend, in part, on the future development, growth and
ultimate size of the market for voice recognition products generally, and
products incorporating the Company's Core Technologies specifically.
Products, if any, incorporating the Company's Core Technologies will
compete with more conventional means of
20
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information processing (e.g., data entry or access by keyboard or
touch-tone phone). The Company believes that there is a substantial
potential market for products incorporating speaker- independent, natural
language, continuous speech recognition technology with vocabulary
contextually sufficient to be useful for general purpose consumer,
commercial and industrial use, and capable of operating in real time with
acceptable levels of accuracy. Nevertheless, there can be no assurance
that any market for the Company's Core Technologies or for products
incorporating the Company's Core Technologies will develop, or that the
Company's technology will find general acceptance in the marketplace, or
that sales of products incorporating the Core Technologies will be
profitable. Accordingly, the Company is subject to all of the risks
inherent in developing and marketing new products based on new technology,
together with the risks associated with market acceptance of such
technology, technological obsolescence, inappropriate and/or illegal
intellectual property appropriation and inadequate funding to commence
and/or sustain operations. Even if the Core Technologies are licensed and
products incorporating such technologies are manufactured and marketed, the
occurrence of warranty or product liability, or retraction of market
acceptance due to product failure, excess product returns or failure of the
products to meet market expectations could prevent the Company from
achieving or sustaining profitable operations.
Reliance on Strategic Partners.
The Company's strategy for commercialization of its Core Technologies
depends, in part, upon the formation of strategic alliances and licensing
arrangements, although the Company has not entered into any such
arrangements to date. There can be no assurance that the Company will be
able to establish such strategic alliance or licensing arrangements, that
any such arrangements or licenses will be on terms favorable to the
Company, or that any such strategic alliances or licensing arrangements
ultimately will be successful. Even if the Company were to enter into
third party licensing agreements, the extent of revenues to the Company
resulting from such agreements would depend on factors beyond the Company's
control such as the timing and extent of such licensee's manufacture of
products incorporating the Company's Core Technologies, the scope of the
marketing effort related to such products, the price of any product
incorporating the Company's Core Technologies, and competition from new or
existing products. Moreover, disputes may arise with respect to the
ownership of rights to any technology developed with strategic partners.
These and other possible disagreements between strategic partners and the
Company could lead to delays in the collaborative research, development or
commercialization of certain product candidates, or could require or result
in litigation or arbitration, which could be time consuming and expensive,
and which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition and Technological Change.
The computer hardware and software industries into which the Core
Technologies would be incorporated are highly and intensely competitive.
In particular, the speech recognition field and the computer voice and
communications industries in which products employing the Company's Core
Technologies would be incorporated are characterized by rapid technological
change. Competition in the field of speech recognition is based largely on
technological superiority. The development of new technology or material
improvements to existing technologies by the Company's competitors may
render the Company's technology obsolete. Accordingly, the success of the
Company will depend upon its ability to continually enhance its Core
Technologies to keep pace with or ahead of technological developments and
to address the changing needs of the marketplace. Although the Company
expects to continue to devote significant resources to research and
development activities, there can be no assurance that these activities
will allow the Company's Core
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Technologies to successfully be incorporated into marketable products or to
keep pace with changing demands and needs of the marketplace. In addition,
there can be no assurance that the introduction of products or
technological developments by others will not have a material adverse
effect on the Company's operations. Although the Company believes that its
Core Technologies could beneficially be incorporated into most existing
computer speech recognition applications based on traditional Hidden Markov
Models ("HMMs") technology, several companies already manufacture and
market computer speech recognition products against which products
incorporating the Core Technologies would compete. Some, if not all, of
those companies have greater experience in manufacturing and marketing
speech recognition products, and many have far greater financial and other
resources than the Company and/or its potential licensees and
co-developers, as well as broader name-recognition, more-established
technology reputations, and mature distribution channels for their
products. One computer speech company, Dragon Systems, Inc., has recently
introduced a continuous speech dictation product that could have the effect
of desensitizing the market to new dictation products and increasing the
installed base of products incorporating traditional voice recognition
technologies. Additionally, as the market for automatic speech recognition
expands and matures, the Company expects many more entrants into this
already competitive arena. There can be no assurance that the
distinguishing characteristics of the Core Technologies as presently
completed and/or as may be enhanced in the future and any products
employing such technology will be sufficient to allow the Company to
successfully compete in the marketplace.
Need for Additional Financing.
The development of the Company's Core Technologies has required that
fonix establish a substantial research and scientific infrastructure
consisting of teams of experts in, among others, the fields of computer
programming and design, electrical engineering and linguistics, as well as
the assembly of certain specialized equipment and developmental and
diagnostic software and hardware, some of which has been designed and built
exclusively by the Company. The Company has consumed substantial amounts
of cash to date in developing this infrastructure and in developing and
refining its Core Technologies. During the year ended December 31, 1996,
the Company incurred total research and development expenses in the amount
of $4,758,012. During the six months ended June 30, 1997, the Company
incurred total research and development expenses of $3,065,279. The
Company anticipates that its research and development expenditures will
continue at present rates or increased rates for the foreseeable future.
Absent revenues from co-development or licensing agreements, the Company
believes that existing cash and cash from anticipated financings will be
required to support the Company's operations for at least the next 12
months. The Company's future capital requirements will depend on many
factors, including further development of its Core Technologies, the
Company's ability to enter into strategic alliance, co-development and
licensing arrangements, the progress of the development, manufacturing and
marketing efforts of the Company's strategic partners, if any, the level of
the Company's activities relating to commercialization rights it may retain
in its strategic alliance arrangements, competing technological and market
developments, and the costs involved in enforcing patent claims and other
intellectual property rights. When and as substantial amounts of
additional financing are required, the Company does not believe it will be
able to obtain such financing from traditional commercial lenders. Rather,
the Company likely will have to conduct additional sales of its equity
and/or debt securities. There can be no assurance that such additional
financing will be available if and when, and in the amounts required, by
the Company. Moreover, even if such financing is available if and when
required, there can be no assurance that such financing will be obtained on
terms that are favorable to the Company, and substantial and immediate
dilution to existing stockholders likely would result from any sales of
equity securities or other securities convertible into equity securities.
To the extent that the Company raises additional funds through strategic
alliance and licensing arrangements, the Company may be required to
relinquish rights to certain of its technologies, or to grant licenses on
terms that are not favorable to the Company, either of which could have
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a material adverse effect on the Company's business, financial condition
and results of operations. In the event that adequate funds are not
available when and as needed, the Company's business would be adversely
affected.
Intellectual Property Protection.
On June 17, 1997, the United States Patent and Trademark Office
issued U.S. Patent No. 5,640,490 entitled "A User Independent, Real-time
Speech Recognition System and Method." . The patent has a 20-year life
running from the November 4, 1994 filing date, and has been assigned to the
Company. However, there can be no assurance that such patent will be
incontestable to a user with prior rights. The Company is unaware of any
facts or circumstances suggesting that the Core Technologies or the
Company's anticipated use thereof infringes or will infringe any third
party intellectual property rights. Regardless of the foregoing, there can
be no assurance that the Core Technologies will not infringe upon third
party intellectual property rights, nor can there be any assurance that a
third party will not assert that the Company has infringed its intellectual
property rights, in which case the Company could be involved in protracted
and costly litigation which could seriously impede the Company's
development or otherwise adversely affect its operations. Additionally,
attempts may be made to copy or reverse engineer aspects of the Core
Technologies, or to obtain, use or exploit information or methods which the
Company deems proprietary. Policing the use of the Core Technologies and
perhaps infringing technology is difficult and expensive. Litigation or
other action may be necessary in the future to protect the Company's
proprietary rights and to determine the validity and scope of the
proprietary rights of others. Such litigation or proceedings could result
in substantial costs and diversions of resources and management's
attention, and could have a material adverse impact upon the Company's
business, operating results and financial condition. In addition to
patents, the Company relies on proprietary technology that it closely
guards as trade secrets. The Company has required non-disclosure and
confidentiality agreements to be executed by its employees, potential
licensees, and potential strategic alliance and co-development partners,
and the Company expects to continue this requirement. However, there can be
no assurance that such non-disclosure and confidentiality agreements will
be legally enforceable or sufficient to maintain the secrecy of the
Company's proprietary technology. Moreover, although the Company presently
is seeking patent protection for certain additional technologies, there can
be no assurance that such patents will issue or that the Company will be
able to sufficiently protect any technologies developed by it in the
future.
Controlling Interest of Related Parties.
Thomas A. Murdock, a director, executive officer and founding
shareholder of the Company is the trustee of a voting trust into which is
deposited a majority of the Company's issued and outstanding common stock,
which effectively gives Mr. Murdock control of the Company. The Company
believes that it will be controlled by Mr. Murdock, as the trustee of the
voting trust and one of its founding shareholders, for the foreseeable
future.
Lack of Diversification of the Company's Business.
The Company is not engaged in and does not intend to engage in any
business other than the further development and marketing of its Core
Technologies and related technologies.
Dependence on Key Personnel.
The Company is dependent on the knowledge, skill and expertise of
several key scientific employees and consultants, including but not limited
to C. Hal Hansen, Dale Lynn Shepherd, R. Brian Moncur, and Tony R.
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Martinez, and its executive officers, Messrs. Studdert, Murdock and Dudley.
The loss of any of such personnel could materially and adversely affect the
Company's future business efforts. Moreover, although the Company has
taken reasonable steps to protect its intellectual property rights, if one
or more of the Company's key scientific employees or consultants resigns
from the Company to join a competitor, the loss of such personnel and the
employment of such personnel by a competitor could have a material adverse
effect on the Company. In the event of loss of any of the Company's key
employees or consultants, there can be no assurance that the Company would
be able to prevent the unauthorized disclosure or use of its proprietary
technology by such former employees or consultants, although the Company's
employees and consultants have entered into confidentiality agreements with
the Company. The Company does not presently have any key man life insurance
on any of its employees.
Assets Consisting Primarily of Intangible Intellectual Property Rights.
The Company's assets consist primarily of intangible assets,
principally intellectual rights such as patents, trademarks and trade
secrets, the value of which will depend significantly upon the success of
the Company's development of the Core Technologies and its ability to enter
into licensing and co-development arrangements with third parties. In the
event of default on indebtedness or liquidation of the Company, there can
be no assurance that the value of these assets will be sufficient to
satisfy its obligations.
Significant Outstanding Indebtedness.
The Company has incurred substantial indebtedness in relation to its
assets and will be subject to all of the risks associated with substantial
leverage, including the risk that available cash may not be adequate to
make required payments to the holders of the Company's debentures. The
Company's ability to satisfy its obligations under the debentures from cash
flow will be dependent upon the Company's future performance and will be
subject to financial, business and other factors affecting the operation of
the Company, many of which may be beyond the Company's control. In the
event the Company does not have sufficient cash resources to satisfy
repayment obligations or other obligations of the Company to the holders of
the debentures, the Company will be in default under the debentures, which
would have a material adverse effect on the Company and could result in a
reduction of the price of the Company's Common Stock. The debentures are
unsecured and subordinate in right of payment to all senior indebtedness of
the Company. The debentures do not restrict the Company's ability to incur
additional senior indebtedness and most other indebtedness. The terms of
senior indebtedness now existing or incurred in the future could affect the
Company's ability to make payments of principal and/or interest to the
holders of debentures.
Risks Associated With Pending Litigation.
The Company has been named as a defendant in a shareholder derivative
action brought by a shareholder of the Company against certain directors of
the Company and a third party affiliated with certain of the
director-defendants. Although the parties have reached, in principal, a
settlement agreement, as is discussed in more detail below, the complaint
in that action alleges that certain of the individual employee director
defendants wrongfully caused the Company to engage in a series of loan
transactions with K.L.S. Enviro Resources, Inc., a Nevada corporation
("KLSE"), and thereafter appropriated to themselves certain corporate
opportunities resulting from such loan transactions. The Complaint further
alleges that the non-employee director defendants wrongfully acquiesced in
or ratified the conduct of the employee-directors, and that all of the
individual defendants breached their fiduciary duties to the Company. The
Complaint seeks to compel an accounting for any alleged profits earned by
the employee director defendants, equitable relief in the form of
24
<PAGE>
an order requiring certain of the employee director defendants to forfeit
certain securities of KLSE they allegedly acquired in breach of their
fiduciary duties to the Company, monetary damages in an unspecified amount,
and costs and legal fees. After that action was filed but before process
was served, the Company commenced settlement negotiations with the
plaintiff. Although a settlement agreement in principal was reached by the
parties, no settlement agreement has been executed; process has been served
and the discovery process with respect to the settlement is ongoing. The
terms of the definitive settlement agreement between the parties will be
subject to approval by the court. Regardless of the outcome of the
discovery relating to the settlement or the commencement of litigation
proceedings if the settlement is not consummated, the Company believes that
the claims asserted against the Company in this action are entirely without
merit, and that the material facts and circumstances surrounding the
relationship between the Company and KLSE have been fully disclosed in
accordance with applicable laws and regulations. After consideration of
the nature of the claims and the facts relating to this action, the Company
believes that the resolution of this action will not have a material effect
on the Company's business, financial condition and results of operations;
however, the results of this action, including any potential settlement,
are uncertain and there can be no assurance to that effect. At a minimum
this action will result in some diversion of management time and effort
from the operations of the business.
PART II
Item 2. Changes in Securities
c. Unregistered sales of equity securities during quarter (other
than in reliance on Regulation S).
Recent Sales of Unregistered Securities. During the quarter ended
June 30, 1997, the Company issued equity securities that were not
registered under the Securities Act of 1933, as amended (the "Act"), other
than unregistered sales in reliance on Regulation S under the Act, as
follows:
On April 24, 1997 the Company issued 100,000 shares of common stock
to a company as compensation for consulting services rendered. The Company
issued such shares without registration under the Act in reliance on
Section 4(2) of the Act and/or Regulation D. Such shares of common stock
were issued as restricted securities and the certificates representing such
shares were stamped with a restrictive legend to prevent any resale without
registration under the Act or in compliance with an exemption.
On May 21, 1997 the Company granted options to purchase 10,000
shares of common stock to an employee. All of such options were issued
under the Company's 1997 Stock Incentive Plan without registration under
the Act in reliance on Sections 3(b) and 4(2) of the Act and the rules and
regulations promulgated thereunder. The exercise price of such options is
$7.16, which was the closing market price on the date of grant.
On May 29, 1997 the Company granted options to purchase an aggregate
of 3,000,000 shares of common stock to various employees. All of such
options were issued under the Company's 1997 Stock Incentive Plan without
registration under the Act in reliance on Sections 3(b) and 4(2) of the Act
and the rules and regulations promulgated thereunder. The exercise price
of such options is $6.50, which was the closing market price on the date of
grant.
25
<PAGE>
Item 4. Submission of Vote of Security Holders
At its Annual Meeting of Shareholders on June 16, 1997, the following
actions were submitted and approved by vote of the majority of the issued
and outstanding shares of the Company:
(1) Election of directors;
(2) Approval of the Board of Directors' selection of Deloitte &
Touche LLP, as the Company's independent certified public
accountants.
A total of 33,643,095 shares (approximately 80%) of the issued and
outstanding shares of the Company were represented by proxy or in person at
the meeting. These shares were voted on the matters described above as
follows:
1. For the directors as follows:
<TABLE>
<CAPTION>
# Shares Abstaining/
Name # Shares For # Shares Against Withheld
- -------------------------- -------------- ----------------- --------------------
<S> <C> <C> <C>
Stephen M. Studdert 33,573,429 6,203 63,463
Alan C. Ashton, Ph.D. 33,573,429 6,203 63,463
John A. Oberteuffer, Ph.D. 33,573,429 6,203 63,463
Joseph Verner Reed 33,573,429 6,203 63,463
James B. Hayes 33,573,429 6,203 63,463
Thomas A. Murdock 33,573,429 6,203 63,463
Roger D. Dudley 33,572,429 7,203 63,463
Rick D. Nydegger 33,573,429 6,203 63,463
</TABLE>
2. For the ratification of the Board of Directors' selection of
Deloitte & Touche LLP as the independent certified accountants of the
Company as follows:
# Shares For # Shares Against # Shares Abstaining
------------- ---------------- -------------------
33,570,577 9,055 63,463
Broker non-votes were counted as abstentions on matter 2 above.
Item 6. Exhibits and Reports on Form 8-K
a. Regulation S-K Exhibits.
Exhibit No. Description
(3)(i) Articles of Incorporation of the Company which are
incorporated by reference from the Company's Registration
Statement on Form S-18 dated as of September 12, 1989
26
<PAGE>
(3)(ii) Certificate of Amendment of Certificate of Incorporation
dated as of March 21, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(iiii) Certificate of Amendment of Certificate of Incorporation
dated as of May 13, 1994, which is incorporated by
reference from the Company's Annual Report for the Fiscal
Year Ended December 31, 1994 on Form 10-KSB
(3)(iv) The Company's Bylaws, as amended, which are incorporated
by reference from the Company's Annual Report for the
Fiscal Year Ended December 31, 1994 on Form 10-KSB
(4) Description of the Company's common stock and other
securities and specimen certificates representing such
securities which are incorporated by reference from the
Company's Registration Statement on Form S-18 dated as of
September 12, 1989, as amended
(10)(i) Product Development and Assignment Agreement dated as of
October 16, 1993 between Phonic Technologies, Inc. and
Synergetics, Inc., which is incorporated by reference
from the Company's Current Report on Form 8-K dated as
of June 17, 1994
(10)(ii) Re-Stated Product Development and Assignment Agreement
dated as of March 30, 1995, between fonix Corporation and
Synergetics, Inc., which is incorporated by reference
from the Company's Annual Report for the Fiscal Year
Ended December 31, 1994 on Form 10-KSB
(10)(iii) Memorandum of Understanding dated as of March 13, 1997,
by and among the Company, Synergetics, Inc. and C. Hal
Hansen, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996
(10)(iv) Employment Agreement by and between the Company and
Stephen M. Studdert, which is incorporated by reference
from the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996
(10)(v) Employment Agreement by and between the Company and
Thomas A. Murdock, which is incorporated by reference
from the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996
(10)(vi) Employment Agreement by and between the Company and Roger
D. Dudley, which is incorporated by reference from the
Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996
(10)(vii) Convertible Debenture Purchase Agreement dated as of June 18,
1997, between the Company and Southbrook International
Investments, Ltd.
27
<PAGE>
(27) Financial Data Schedule, filed herewith.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
fonix corporation
Date: September 5, 1997 /s/ Douglas L. Rex
-------------------------------
Douglas L. Rex, Chief Financial Officer
29
Exhibit (10)(vii)
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, dated as of June 18, 1997
(this "Agreement"), between fonix corporation, a corporation organized and
existing under the laws of Delaware (the "Company"), and Southbrook
International Investments, Ltd., a corporation organized and existing under
the laws of the British Virgin Islands (the "Purchaser").
WHEREAS, subject to the terms and conditions set forth in this
Agreement, the Company desires to issue and sell to the Purchaser and the
Purchaser desires to purchase up to an aggregate principal amount of
$10,000,000 of the Company's to be created Series B 5% Convertible
Debentures, due June 18, 2007 (the "Convertible Debentures"), which are
convertible into shares of the Company's Common Stock, par value $.0001 per
share (the "Common Stock").
IN CONSIDERATION of the mutual covenants and agreements set forth
herein and for good and valuable consideration, the receipt of which is
hereby acknowledged, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
1.1 Purchase and Sale. Subject to the terms and conditions set
forth herein, the Company shall issue and sell to the Purchaser and the
Purchaser shall purchase up to an aggregate principal amount of $10,000,000
of Convertible Debentures, in denominations of $100,000 and integral
multiples of $50,000 in excess thereof, at the closings described below.
1.2 The Closings.
(a) The Tranche 1 Closing. (i) Subject to the terms and
conditions set forth in this Agreement, the Company shall issue and sell to
the Purchaser and the Purchaser shall purchase an aggregate principal amount
of $3,000,000 of Convertible Debentures (the "Tranche 1 Debentures") for a
purchase price of $3,000,000. The closing of the purchase and sale of the
Tranche 1 Debentures (the "Tranche 1 Closing") shall take place at the
offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("Robinson
Silverman"), 1290 Avenue of the Americas, New York, New York 10104,
immediately following the execution hereof or such later date as the parties
shall agree. The date of the Tranche 1 Closing is hereinafter referred to
as the "Tranche 1 Closing Date."
(ii) At the Tranche 1 Closing, (a) the Company shall
deliver to the Purchaser (1) the Tranche 1 Debentures and the Warrant (as
defined in Section 3.17), each registered in the name of the Purchaser, (2)
the legal opinion of Durham, Evans, Jones &
<PAGE>
Pinegar, P.C. substantially in the form attached hereto as Exhibit C, and
(3) all other documents, instruments and writings required to have been
delivered at or prior to the Tranche 1 Closing by the Company pursuant to
this Agreement and the Registration Rights Agreement and (b) the Purchaser
shall deliver to the Company (1) $3,000,000, less the fees contemplated in
Section 5.1, in United States dollars in immediately available funds by wire
transfer to an account designated in writing by the Company for such purpose
on or prior to the Tranche 1 Closing Date and (2) all documents, instruments
and writings required to have been delivered at or prior to the Tranche 1
Closing by the Purchaser pursuant to this Agreement and the Registration
Rights Agreement.
(b) The Tranche 2 Closing. (i) Subject to the terms and
conditions set forth in this Agreement, the Company shall have the right to
deliver a written notice to the Purchaser (a "Subsequent Financing Notice")
requiring the Purchaser to purchase Convertible Debentures in such principal
amount as the Company may designate in such notice (the "Tranche 2
Debentures"), provided, however that such amount shall not be in excess of
(i) $750,000, if the Company's Market Capitalization (as defined below) is
between $100,000,000 and $150,000,000, (ii) $1,500,000, if the Company's
Market Capitalization is between $150,000,001 and $200,000,000, and (iii)
$3,000,000, if the Company's Market Capitalization is in excess of
$200,000,000. The Company may deliver the Subsequent Financing Notice
relating to the Tranche 2 Debentures no earlier than the 61st Trading Day
after the date that a registration statement (an "Underlying Securities
Registration Statement") contemplated by the Registration Rights Agreement,
dated the date hereof, between the Purchaser and the Company substantially
in the form of Exhibit B attached hereto (the "Registration Rights
Agreement") covering the shares of Common Stock issuable upon conversion of
the Tranche 1 Debentures and the Warrant has been declared effective by the
Securities and Exchange Commission (the "Commission") (provided, that
Trading Days during which the Purchaser (or its successors, permitted
assigns or other successors in interest) are unable to resell securities
under such Underlying Securities Registration Statement shall be added to
such 61 Trading Day period), and no later than the 210th day after the date
hereof (the "Tranche 2 Closing Expiration Date"). The closing of the
purchase and sale of the Tranche 2 Debentures (the "Tranche 2 Closing")
shall take place at the offices of Robinson Silverman on the date (which may
not be prior to the fifteenth Trading Day after receipt of the Subsequent
Financing Notice relating to the Tranche 2 Debentures) indicated by the
Company in such Subsequent Financing Notice; provided, however, that in no
case shall the Tranche 2 Closing take place unless and until the conditions
listed in Section 4.1 have been satisfied or waived by the appropriate
party. The date of the Tranche 2 Closing is hereinafter referred to as the
"Tranche 2 Closing Date."
(ii) At the Tranche 2 Closing, (a) the Company shall
deliver to the Purchaser the Tranche 2 Debentures registered in the name of
the Purchaser and all documents, instruments and writings required to have
been delivered at or prior to the Tranche 2 Closing by the Company pursuant
to this Agreement and the Registration Rights Agreement and (b) the
Purchaser shall deliver to the Company an amount equal to the aggregate
principal amount of Tranche 2 Debentures to be issued and sold at the
Tranche 2
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<PAGE>
Closing in accordance with this Section, less the legal fees contemplated in
Section 5.1, in immediately available funds by wire transfer to an account
designated in writing by the Company for such purpose and delivered to the
Purchaser on or prior to the Tranche 2 Closing Date, and all documents,
instruments and writings required to have been delivered at or prior to the
Tranche 2 Closing by the Purchaser pursuant to this Agreement and the
Registration Rights Agreement.
(c) The Tranche 3 Closing. (i) Subject to the terms and
conditions set forth in this Agreement, the Company shall have the right to
deliver a Subsequent Financing Notice requiring the Purchaser to purchase
Convertible Debentures in such principal amount as the Company may designate
in such notice (the "Tranche 3 Debentures"), provided, however, that such
amount shall not be in excess of (i) $1,000,000 if the Company's Market
Capitalization is between $100,000,000 and $150,000,000, (ii) $2,000,000, if
the Company's Market Capitalization is between $150,000,001 and
$200,000,000, and (iii) $4,000,000, if the Company's Market Capitalization
is in excess of $200,000,000. The Company may deliver the Subsequent
Financing Notice relating to the Tranche 3 Debentures no earlier than (A) if
the Tranche 2 Closing shall have occurred, the 61st Trading Day after the
date the Commission shall have declared effective an Underlying Securities
Registration Statement that covers the shares of Common Stock issuable upon
the conversion of the Tranche 2 Debentures (provided, that Trading Days
during which the Purchaser (or its successors, permitted assigns or other
successors in interest) are unable to resell Securities under such
Underlying Shares Registration Statement shall be added to such 61 Trading
Day period) and (B) if no Tranche 2 Closing shall have occurred, the Tranche
2 Closing Expiration Date; and no later than 210 days after the Tranche 2
Closing Expiration Date. The closing of the purchase and sale of the
Tranche 3 Debentures (the "Tranche 3 Closing") shall take place at the
offices of Robinson Silverman on the date (which may not be prior to the
fifteenth Trading Day after receipt of the Subsequent Financing Notice
relating to the Tranche 3 Debentures) indicated by the Company in such
Subsequent Financing Notice; provided, however, that in no case shall the
Tranche 3 Closing take place unless and until the conditions listed in
Section 4.1 have been satisfied or waived by the appropriate party. The
date of the Tranche 3 Closing is hereinafter referred to as the "Tranche 3
Closing Date."
(ii) At the Tranche 3 Closing, (a) the Company shall
deliver to the Purchaser the Tranche 3 Debentures registered in the name of
the Purchaser and all documents, instruments and writings required to have
been delivered at or prior to the Tranche 3 Closing by the Company pursuant
to this Agreement and the Registration Rights Agreement and (b) the
Purchaser shall deliver to the Company an amount equal to the aggregate
principal amount of Tranche 3 Debentures to be issued and sold at the
Tranche 3 Closing in accordance with this Section, less the legal fees
contemplated in Section 5.1, in immediately available funds by wire transfer
to an account designated in writing by the Company for such purpose and
delivered to the Purchaser on or prior to the Tranche 3 Closing Date and all
documents, instruments and writings required to have been delivered at or
prior to the Tranche 3 Closing by the Purchaser pursuant to this Agreement
and the Registration Rights Agreement.
-3-
<PAGE>
1.3 Form of Convertible Debentures. The Tranche 1 Debentures shall
be in the form of Exhibit A attached hereto. The Tranche 2 and Tranche 3
Debentures shall be identical to the Tranche 1 Debentures, except that the
Conversion Price (as defined below) for such Convertible Debentures shall
reset as of the Original Issue Date (as defined below) for such Tranche.
For purposes of this Agreement, "Conversion Price," "Original
Issue Date," "Conversion Date" "Trading Day" and "Per Share Market Value"
shall have the meanings set forth in the Tranche 1 Debentures; and "Market
Price" as at any date shall mean the average Per Share Market Value for the
five (5) Trading Days immediately preceding such date. The Company's
"Market Capitalization" shall be determined by taking the weighted volume
average of the Per Share Market Value for the twenty (20) Trading Days
immediately prior to each applicable Closing Date (as defined below) and by
multiplying such 20 day weighted volume average by the number of outstanding
shares of Common Stock on the date preceding the applicable Closing Date (as
defined in Section 2.1(d)).
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby makes the following representations and warranties to the
Purchaser, which representations and warranties shall be true and correct in
all material respects as of the Tranche 2 Closing Date and the Tranche 3
Closing Date, as applicable, as though made on and of such date (except for
representations and warranties that speak as of a specific date, which shall
be true and correct in all material respects on and as of such date):
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under
the laws of the State of Delaware, 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 2.1(a) attached hereto (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 full 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 this Agreement, the Convertible
Debentures, the Warrant and the Registration Rights Agreement (collectively,
the "Transaction Documents"), (y) have a material adverse effect on the
results of operations, assets, prospects, or financial condition of the
Company and the Subsidiaries,
-4-
<PAGE>
taken as a whole, or (z) adversely impair the Company's ability to perform
fully on a timely basis its obligations under the Transaction Documents (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 otherwise to
carry out its obligations thereunder. The execution and delivery of each of
the Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby has been duly authorized by all necessary
action on the part of the Company. Each of the Transaction Documents
executed at or prior to the date hereof has been duly executed by the
Company and when delivered in accordance with the terms hereof constitutes
the 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 of the provisions of its respective certificate of
incorporation, by-laws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company is set forth in Schedule 2.1(c). No shares of
Common Stock are entitled to preemptive or similar rights, nor is any holder
of the Common Stock entitled to preemptive or similar rights arising out of
any agreement or understanding with the Company by virtue of any of the
Transaction Documents. Except as disclosed in Schedule 2.1(c), there are no
outstanding options, warrants, script 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 Convertible Debentures and Warrant
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 (as
defined below) or Schedule 2.1(c), no Person (as defined below) beneficially
owns (as determined pursuant to Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (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. A "Person"
means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other
entity of any kind.
(d) Issuance of Convertible Debentures and Warrant. The
Convertible Debentures and the Warrant are duly authorized, and, when issued
and paid for in accordance with the terms hereof, shall be validly issued,
fully paid and nonassessable. The Company, as at the Tranche 1 Closing
Date, Tranche 2 Closing Date and Tranche 3 Closing Date, as the case may be
(each, a "Closing Date" and, collectively, the "Closing Dates"),
-5-
<PAGE>
has and at all times while the Convertible Debentures and the Warrant 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 Warrant and the Convertible Debentures
with respect to the amount of Convertible Debentures outstanding at such
Closing Date and in no circumstances shall such reserved and available
shares of Common Stock be less than the sum of (i) two times the number of
shares of Common Stock which would be issuable upon conversion in full of
the Convertible Debentures ("Underlying Shares") issued with respect to the
number of Convertible Debentures issued and outstanding at such Closing Date
were such conversion effected on the Original Issue Date for such
Convertible Debentures, and (ii) the number of shares of Common Stock which
would be issuable upon exercise in full of the Warrant (the "Warrant
Shares"). When issued in accordance with the terms hereof and the
Convertible Debentures, the Underlying Shares will be duly authorized,
validly issued, fully paid and nonassessable; and when issued upon exercise
of the Warrant in accordance with its respective terms, the Warrant Shares
will be duly authorized, validly issued, fully paid and nonassessable.
(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
or bylaws (each as amended through the date hereof) or (ii) subject to
obtaining the consents referred to in Section 2.1(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 to which the Company is a party, or (iii) to the knowledge of the
Company, result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or govern-
mental authority to which the Company is subject (including Federal and
state securities laws and regulations), or by which any material property or
asset of the Company is bound or affected, except in the case of each of
clauses (ii) and (iii), such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations 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 or in the aggregate, do not have a Material Adverse Effect.
(f) Consents and Approvals. Except as specifically set
forth in Schedule 2.1(f), 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 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 Underlying Securities Registration Statements
with the Commission, which shall be filed in the time periods set forth in
the Registration Rights Agreement, (ii) the applications for the listing of
the Underlying Shares and the Warrant Shares with the Nasdaq Stock Market
(and with any other national securities exchange or market on which the
-6-
<PAGE>
Common Stock is then listed), and (iii) 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 have or result in,
individually or in the aggregate, a Material Adverse Effect and to deliver
to the Purchaser the Convertible Debentures (and, upon conversion
thereunder, the Underlying Shares) or the Warrant (and, upon exercise of the
Warrant, the Warrant Shares) (the Convertible Debentures, Underlying Shares,
Warrant and Warrant Shares are collectively, the "Securities") in the manner
contemplated hereby and by the Registration Rights Agreement free and clear
of all liens and encumbrances of any nature whatsoever (together with the
consents, waivers, authorizations, orders, notices and filings referred to
in Schedule 2.1(f), the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically dis-
closed in the Disclosure Materials (as hereinafter defined) or in Schedule
2.1(g), 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 of the Transaction Documents or the Securities or (ii)
could not, individually or in the aggregate, have or result in a Material
Adverse Effect.
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or 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,
individually or in the aggregate, Material Adverse Effect.
(i) Private Offering. Neither the Company nor any Person
acting on its behalf has taken or will take any action which might subject
the offering, issuance or sale of the Securities to the registration
requirements of Section 5 of the Securities Act.
(j) SEC Documents. 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" and, together with the Schedules to this
Agreement and other documents and information furnished by or on behalf of
the Company at any time prior to the Tranche 3 Closing, as the "Disclosure
Materials") on a timely basis or has filed the documents required to obtain
a valid extension of such time of filing. 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
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<PAGE>
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
published 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 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 statements included in the
Company's last filed Quarterly Report on Form 10-Q prior to the date of this
Agreement, there has been no event, occurrence or development that has had
or that could have or result in a Material Adverse Effect which has not been
specifically disclosed in writing to the Purchaser by the Company. The
Company last filed audited financial statements with the Commission on April
15, 1997, and has not received any comments from the Commission in respect
thereof.
(k) Investment Company. The Company is not, and is not an
Affiliate of an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(l) 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, or bank with respect to the transactions
contemplated by this Agreement. The Purchaser 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 by this Agreement. The
Company shall indemnify and hold harmless the Purchaser, its employees,
officers, directors, agents, and partners, and their respective Affiliates
(as such term is defined under Rule 405 promulgated under the Securities
Act), 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.
(m) Solicitation Materials. The Company has not (i)
distributed any offering materials in connection with the offering and sale
of the Securities other than the Disclosure Materials and any amendments and
supplements thereto or (ii) solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) Form S-3 Eligibility. The Company is eligible to
register securities for resale with the Commission under Form S-3
promulgated under the Securities Act.
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(o) Exclusivity. The Company shall not issue and sell the
Convertible Debentures to any Person other than the Purchaser other than
with the specific prior written consent of the Purchaser.
(p) Listing and Maintenance Requirements Compliance. Other
than as specifically listed in Schedule 2.1(p) the Company has not in the
two years preceding the date hereof received written notice from any stock
exchange or market on which the Common Stock is or has been listed (or on
which it has been quoted) to the effect that the Company is not in
compliance with the listing or maintenance requirements of such exchange or
market. The Company has provided to the Purchaser true and complete copies
of any notices referenced in Schedule 2.1(p).
(q) Use of Proceeds. The Company shall use all of the
proceeds from the placement of the Securities for working capital purposes
and not for the satisfaction of any portion of Company debt or to redeem
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.
2.2 Representations and Warranties of the Purchaser. The Purchaser
hereby makes the following representations and warranties to the Company,
which representations and warranties shall be true and correct in all
material respects as of the Tranche 2 Closing Date and Tranche 3 Closing
Date, as applicable, as though made on and of such date (except for
representations and warranties that speak as of a specific date, which shall
be true and correct in all material respects on and as of such date).
(a) Organization; Authority. The Purchaser 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 enter into and to consummate the
transactions contemplated hereby and by the Registration Rights Agreement
and otherwise to carry out its obligations hereunder and thereunder. The
purchase by the Purchaser of the Convertible Debentures and the Warrant
hereunder has been duly authorized by all necessary action on the part of
the Purchaser. Each of this Agreement and the Registration Rights Agreement
has been duly executed and delivered by the Purchaser and constitutes the
valid and legally binding obligation of the Purchaser, enforceable against
the Purchaser, 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. The Purchaser is acquiring the
Securities 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 the 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 Convertible
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<PAGE>
Debentures, Underlying Shares, Warrants or Warrant Shares 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 the Purchaser was
offered the Convertible Debentures and the Warrant, it was, and at the date
hereof, it is, and at each Closing Date and each exercise date under the
Warrant, it will be, an "accredited investor" as defined in Rule 501(a)
under the Securities Act.
(d) Experience of Purchaser. The 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.
(e) Ability of Purchaser to Bear Risk of Investment.
Purchaser acknowledges that the Securities are speculative investments and
involve a high degree of risk and the Purchaser is able to bear the economic
risk of an investment in the Securities, and, at the present time, is able
to afford a complete loss of such investment.
(f) Access to Information. The 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 Convertible
Debentures and the Warrant, and the merits and risks of investing in the
Convertible Debentures and the Warrant; (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.
(g) Affiliate Status. On the date prior to this Agreement,
the Purchaser was not an Affiliate of the Company.
(h) Reliance. The Purchaser understands and acknowledges
that (i) the Convertible Debentures and the Warrant are being offered and
sold to the Purchaser 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 the Purchaser hereby consents to such
reliance.
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<PAGE>
The Company acknowledges and agrees that the Purchaser makes no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III.
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) If the Purchaser should decide to
dispose of any of the Convertible Debentures or any portion of the Warrant
(and upon conversion or exercise thereof, as the case may be, any of the
Underlying Shares or Warrant Shares) held by it, the Purchaser understands
and agrees that it may do so only pursuant to an effective registration
statement under the Securities Act, to the Company or pursuant to an
available exemption from the registration requirements thereof. In
connection with any transfer of any portion of the principal balance of any
Convertible Debentures, any portion of the Warrant or any Underlying Shares
or Warrant Shares other than pursuant to an effective registration statement
or to the Company, the Company may require the transferor thereof at its
sole expense to provide to the Company an opinion of counsel experienced in
the area of United States securities laws 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 of
such transferred securities under the Securities Act.
(b) The Purchaser agrees to the imprinting, so long as is
required by this Section 3.1(b), of the following legend 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 CONVERTIBLE DEBENTURES ONLY] THIS CONVERTIBLE DEBENTURE IS
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSIONS SET FORTH
IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS OF JUNE 18,
1997, BETWEEN fonix corporation (THE "COMPANY") AND THE ORIGINAL
HOLDER HEREOF. A COPY OF
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<PAGE>
THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
The Underlying Shares issuable upon conversion of Convertible
Debentures and the Warrant Shares issuable upon exercise of the Warrant, as
the case may be, shall not contain the legend set forth above if the
conversion of such Convertible Debentures or exercise of the Warrant, 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 experienced in the area of
United States securities laws 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 Securities shall
also bear any other legends required by applicable Federal or state
securities laws, which legends shall be removed when not required in
accordance with this Section 3.1(b). The Company agrees that it will
provide the Purchaser, upon request, with a certificate or certificates
representing Underlying Shares and Warrant Shares, free from such legend at
such time as such legend is no longer required hereunder.
3.2 Stop Transfer Instruction. The Company may not make any
notation on its records or give instructions to any transfer agent of the
Company which enlarge the restrictions of transfer set forth in Section 3.1,
except that the Company may, to the extent and as long as appropriate,
enlarge such restrictions if it is determined by a court of competent
jurisdiction that the Purchaser has breached in any material respects the
transfer restrictions set forth in Section 3.1.
3.3 Furnishing of Information. As long as the Purchaser owns
Convertible Debentures, Underlying Shares, the Warrant or Warrant Shares,
the Company covenants to timely file (or obtain extensions in respect
thereof) 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 and upon
request therefor by the Purchaser, to promptly furnish the Purchaser with
true and complete copies of all such filings. If the Company is not at the
time required to file reports pursuant to such sections, it will prepare and
furnish to the Purchaser 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.
3.4 Copies and Use of Disclosure Materials. The Company consents
to the use of the Disclosure Materials, and any amendments and supplements
thereto, by the Purchaser in connection with resales of the Securities,
provided that the Purchaser agrees that by giving the consent set forth in
this Section 3.4, the Company undertakes no obligation to update any such
materials after the date of this Agreement except as required under the
Registration Rights Agreement with respect to the SEC Documents.
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<PAGE>
3.5 Blue Sky Laws. In accordance with the Registration Rights
Agreement, the Company shall qualify the Underlying Shares and the Warrant
Shares under the securities or Blue Sky laws of such jurisdictions as the
Purchaser may request and shall continue such qualification at all times
through the third anniversary of the last Closing Date; 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 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.
3.6 Integration. The Company shall not and shall use its best
efforts to ensure that no Person controlling, controlled by or under common
control with the Company (an "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 Convertible Debentures, the Warrant, the Underlying
Shares or the Warrant Shares in a manner that would require the registration
under the Securities Act of the issue or sale of the Convertible Debentures,
the Warrant, the Underlying Shares or the Warrant Shares to the Purchaser.
3.7 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 the full
outstanding principal amount of Convertible Debentures (and paying any
accrued but unpaid interest in respect thereof in shares of Common Stock)
that remain unconverted at such date or (b) honoring the exercise in full of
the Warrant due to the unavailability 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 restated certificate of incorporation to increase the
number of shares of Common Stock which the Company is authorized to issue to
at least 200,000,000 shares. In connection therewith, the Board of
Directors shall (a) adopt proper resolutions authorizing such increase, (b)
recommend to and otherwise use its best efforts to promptly and duly obtain
stockholder 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 (c) within 5 Business Days of
obtaining such shareholder authorization, file an appropriate amendment to
the Company's certificate of incorporation to evidence such increase.
3.8 Purchaser Ownership of Common Stock. The Purchaser may not use
its ability to convert Convertible Debentures hereunder or use its ability
to acquire shares of Common Stock upon exercise of the Warrants, to the
extent that such conversion or exercise would result in the Purchaser
beneficially owning (for purposes of Rule 13d-3 under the Exchange Act) more
than 4.999% of the outstanding shares of the Common Stock; provided,
however, that if ten days shall have elapsed since Purchaser has declared an
event of default under any Transaction Document and such event shall not
have been cured to Purchaser's
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<PAGE>
satisfaction prior to the expiration of such ten-day period, the provisions
of this Section 3.8 shall be null and void ab initio.
3.9 Listing of Underlying Shares. The Company shall (a) not later
than the fifth Business Day following the applicable Closing Date prepare
and file with the Nasdaq Stock Market (as well as any other national
securities exchange or market 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 the Convertible Debentures to be issued on such Closing Date,
assuming such conversion occurred on the Original Issue Date for such
Convertible Debentures and (ii) in the case of the Tranche 1 Closing, the
Warrant Shares issuable upon exercise in full of the Warrant shares of
Common Stock, (b) take all steps necessary to cause the such shares to be
approved for listing in the Nasdaq Stock Market (as well as on any other
national securities exchange or market on which the Common Stock is then
listed) as soon as possible thereafter, and (c) provide to the Purchaser
evidence of such listing, and the Company shall maintain the listing of its
Common Stock on such exchange or market.
3.10 Conversion Procedures. Exhibit D attached hereto sets forth
the procedures with respect to the conversion of the Convertible Debentures,
including the forms of conversion notice to be provided upon conversion,
instructions as to the procedures for conversion, the form of legal opinion,
if necessary, that shall be rendered to the Company's transfer agent and
such other information and instructions as may be reasonably necessary to
enable the Purchaser to exercise its right of conversion smoothly and
expeditiously.
3.11 Purchaser's Rights if Trading in Common Stock is Suspended or
Delisted. If at any time while the Purchaser (or any assignee thereof) owns
any Convertible Debentures, the Warrant or any Underlying Shares trading in
the shares of the Common Stock is suspended on or delisted from the Nasdaq
SmallCap Market or any other principal market or exchange for such shares
(other than as a result of the suspension of trading in securities on such
market or exchange generally or temporary suspensions pending the release of
material information) for more than four Trading Days, at the Purchaser's
option exercisable by five Business Days prior written notice to the
Company, the Company shall repay the entire principal amount of then
outstanding Convertible Debentures and redeem all then outstanding
Underlying Shares then held by the Purchaser, at an aggregate purchase price
equal to the sum of (I) the aggregate outstanding principal amount of
Convertible Debentures then held by the Purchaser multiplied by (1) the
Market Price preceding (a) the day of such notice or (b) the date of payment
in full of the repurchase price calculated under this Section 3.11,
whichever is greater, divided by (2) the Conversion Price on the date of the
repurchase notice, (II) the aggregate of all accrued but unpaid interest and
other non-principal amounts then payable in respect of all Convertible
Debentures to be repaid, (III) the number of Underlying Shares and Warrant
Shares then held by such Purchaser multiplied by the Market Price
immediately preceding (A) the date of the notice or (B) the date of payment
in full by the Company of the repurchase price calculated under this Section
3.11, whichever is greater, and (IV) interest on the amounts set forth in I
- - III above accruing from the 5th day
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after such notice until the repurchase price under this Section 3.11 is paid
in full at the rate of 15% per annum.
3.12 No Violation of Applicable Law. Notwithstanding any provision
of this Agreement to the contrary, if the repurchase of Convertible
Debentures or redemption of Underlying Shares otherwise required under this
Agreement or the Registration Rights Agreement would be prohibited by the
relevant provisions of the Delaware General Corporation Law, such repurchase
shall be effected as soon as it is permitted under such law; provided,
however, that interest payable by the Company with respect to any such
repurchase shall continue to accrue in accordance with Section 3.11.
3.13 Redemption Restrictions. Notwithstanding any provision of
this Agreement to the contrary, if any repurchase of Convertible Debentures
or redemption of Underlying Shares otherwise required under this Agreement
or the Registration Rights Agreement would be prohibited in the absence of
consent from any lender of the Company or any of the Subsidiaries, or by the
holders of any class of securities of the Company, the Company shall use its
best efforts to obtain such consent as promptly as practicable after the
redemption is required. Interest payable by the Company with respect to any
such repurchase shall continue to accrue in accordance with Section 3.11
until such consent is obtained. Nothing contained in this Section 3.13
shall be construed as a waiver by the Purchaser of any rights it may have by
virtue of any breach of any representation or warranty of the Company herein
as to the absence of any requirement to obtain any such consent.
3.14 Notice of Breaches. Each of the Company and the Purchaser
shall give prompt written notice to the other of any breach of any
representation, warranty or other agreement contained in this Agreement or
in the Registration Rights Agreement, as well as any events or occurrences
arising after the date hereof and prior to, with respect to the Tranche 1
Closing, the Tranche 1 Closing Date, with respect to the Tranche 2 Closing,
the Tranche 2 Closing Date, or with respect to the Tranche 3 Closing, the
Tranche 3 Closing Date, which would reasonably be likely to cause any
representation or warranty or other agreement of such party, as the case may
be, contained herein to be incorrect or breached as of such Closing Date.
However, no disclosure by either party pursuant to this Section 3.14 shall
be deemed to cure any breach of any representation, warranty or other
agreement contained herein or in the Registration Rights Agreement.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchaser 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 hereby and by the Registration
Rights Agreement 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 holders of the Convertible Debentures a
copy of any written statement in support of or relating to such claim or
notice.
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3.15 Conversion Obligations of the Company. The Company covenants
to convert Convertible Debentures and to deliver Underlying Shares in
accordance with the terms and conditions and time period set forth in the
respective Convertible Debentures, and to deliver the Warrant Shares in
accordance with the terms and conditions and time periods set forth in the
Warrant.
3.16 Right of First Refusal; Subsequent Registrations; Certain
Company Actions. The Company shall not, directly or indirectly, without the
prior written consent of Purchaser, offer, sell, grant any option to
purchase, or otherwise dispose (or announce any offer, sale, grant or any
option to purchase or other disposition) of any of its or its Affiliates
equity or equity-equivalent securities at a price which is on the face
thereof or implied therein, less than either the market price or fair market
value for such securities (a "Subsequent Offering") for a period of 100 days
after the last to occur of the Tranche 1 Closing Date, Tranche 2 Closing
Date or Tranche 3 Closing Date, except (i) the granting of options 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 as and to the extent
disclosed in Schedule 2.1(a), (iii) shares of Common Stock issued upon
conversion of Convertible Debentures in accordance herewith and (iv) shares
of Common Stock issuable to Nelson Partners, Olympus Securities, Ltd. and/or
Heights Capital Management in connection with the Company's issuance of up
to $10,000,000 of convertible debentures to such Persons, unless (A) the
Company delivers to Purchaser a written notice (the "Subsequent Offering
Notice") of its intention to effect such Subsequent Offering, which
Subsequent Offering Notice shall describe in reasonable detail the proposed
terms of such Subsequent Offering, the amount of proceeds intended to be
raised thereunder, the Person with whom such Subsequent Offering shall be
affected, and a term sheet or similar document relating thereto (which shall
be attached to such Subsequent Offering Notice) and (B) Purchaser shall not
have notified the Company by 5:00 p.m. (Salt Lake City time) on the second
Business Day after its receipt of the Subsequent Offering Notice of its
willingness to provide (or to cause its sole designee to provide) financing
to the Company on substantially the terms set forth in the Subsequent
Offering Notice subject to completion of mutually acceptable and appropriate
documentation therefor. If Purchaser does not notify the Company of its
intention to enter into such negotiations within such time period, the
Company may effect the Subsequent Offering substantially upon the terms and
to the Persons (or Affiliates of such Persons) set forth in the Subsequent
Offering Notice or to Nelson Partners, Olympus Securities, Ltd. and/or
Heights Capital Management which have a right of first refusal substantially
similar to the foregoing, but subordinate to the rights granted to Purchaser
above; provided, that the Company shall provide Purchaser with a second
Subsequent Offering Notice, and Purchaser shall again have the right of
first refusal set forth above in this paragraph (a), if the Subsequent
Offering subject to the initial Subsequent Offering Notice shall not have
been consummated for any reason on the terms set forth in such Subsequent
Offering Notice within 60 Business Days after the date of the initial
Subsequent
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Offering Notice with the Person (or an Affiliate of such Person) identified
in the Subsequent Offering Notice.
Other than 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
in Schedule 7(c) to the Registration Rights Agreement (which securities may
not be registered prior to the time the Registrable Securities are
registered), the Company shall, for a period of not less than 90 Trading
Days after the date that the Underlying Shares Registration Statement
relating to the securities issued at last to occur of the Tranche 1 Closing
Date, Tranche 2 Closing Date or Tranche 3 Closing Date is declared effective
by the Commission, not, without the prior written consent of Purchaser, (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 Purchaser is unable (either because the Company has notified
the Purchaser that the Purchaser may not utilize such Underlying Shares
Registration Statement, or because any securities exchange or market has
suspended trading in the Common Stock or because any governmental authority
has suspended the use of such Underlying Shares Registration Statement) to
sell Underlying Shares under the Underlying Shares Registration Statement
shall be added to such 90 Trading Day period for the purposes of (i) and
(ii) above.
As long as there are Convertible Debentures outstanding, the Company
shall not and shall cause the Subsidiaries not to, without the consent of
Purchaser, (i) amend its certificate of incorporation, bylaws or other
charter documents so as to adversely affect any rights of Purchaser;
(ii) repay, repurchase or offer to repay, repurchase or otherwise acquire
shares of its Common Stock other than as to the Underlying Shares; or
(iii) enter into any agreement with respect to any of the foregoing.
3.17 The Warrant. At the Tranche 1 Closing, the Company shall
issue to the Purchaser, a common stock purchase Warrant, in the form of
Exhibit D (the "Warrant"), pursuant to which the Purchaser shall have the
right at any time thereafter through the fifth anniversary of the date of
issuance thereof, to acquire 250,000 shares of Common Stock at an exercise
price per share equal to 120% of the Conversion Price on the Tranche 1
Closing Date.
3.18 Transactions in the Common Stock. The Purchaser will not
establish a short position in the Company Stock during the fifteen (15)
Trading Days prior to the Tranche 2 Closing Date or Tranche 3 Closing Date.
Any existing short position may be maintained.
ARTICLE IV
CONDITIONS
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4.1 Conditions Precedent to the Obligation of the Purchaser to
Purchase the Tranche 2 Debentures and the Tranche 3 Debentures. The
obligation of the Purchaser hereunder to acquire and pay for the Tranche 2
Debentures and the Tranche 3 Debentures is subject to the satisfaction or
waiver by the Purchaser, at or before the Tranche 2 Closing, and the Tranche
3 Closing, as applicable, of each of the following conditions:
(i) Tranche 1 Closing. The Tranche 1 Closing shall
have occurred.
(ii) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company contained
herein and in the Registration Rights Agreement shall be true and correct in
all material respects as of the date when made and as of the Tranche 2
Closing Date and the Tranche 3 Closing Date, as applicable, as though made
on and as of such date;
(iii) 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 the Tranche 2 Closing Date or the Tranche 3
Closing Date, as applicable;
(iv) Underlying Securities Registration Statements.
With respect to the Tranche 2 Closing the Company is eligible to register
securities for resale with the Commission under Form S-3 promulgated under
the Securities Act and the Underlying Securities Registration Statement with
respect to the Underlying Shares issuable on conversion of all outstanding
Tranche 1 Debentures Shares and Warrant Shares issuable upon exercise of the
Warrant shall have been declared effective under the Securities Act by the
Commission; with respect to the Tranche 3 Closing the Company is eligible to
register securities for resale with the Commission under Form S-3
promulgated under the Securities Act and the Underlying Securities
Registration Statement with respect to the Underlying Shares issuable on
conversion of all outstanding Tranche 2 Debentures shall have been declared
effective under the Securities Act by the Commission; and in each such case
such Underlying Registration Statement shall have remained effective and
shall not be subject to any stop order and no stop order shall be pending or
threatened as at such Closing Date;
(v) Market Capitalization. The Market
Capitalization of the Company shall be at least $100,000,000.
(vi) No Injunction. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court of governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights
Agreement relating to the issuance or conversion of any portion of the
principal amount of the Convertible Debentures or exercise of the Warrant;
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(vii) Adverse Changes. Since the date of the
financial statements included in the Company's last filed Quarterly Report
on Form 10-Q or Annual Report on Form 10-K, whichever is more recent, last
filed prior to the date of this Agreement, no event which has or can
reasonably be expected to have a Material Adverse Effect which has not
specifically been disclosed on Schedule 3.1(g) hereto prior to the date of
this Agreement shall have occurred, nor shall there have occurred a material
adverse change in the financial conditions or prospects of the Company,
which is not disclosed in the Disclosure Materials;
(viii) Management. Stephen M. Studdert, Thomas A.
Murdock and Roger D. Dudley shall not have left the Company or suffered a
voluntary or involuntary material lessening of responsibility.
(ix) No Suspensions of Trading in Common Stock. The
trading in the Common Stock shall not have been suspended by the Commission
or on the Nasdaq SmallCap Market (except for any suspension of trading of
limited duration solely to permit dissemination of material information
regarding the Company and except if, at the time there is any suspension on
the Nasdaq SmallCap Market, the Common Stock is then listed and approved for
trading on the Nasdaq National Market within one (1) trading day thereof);
(x) Listing of Common Stock. The Common Stock shall
have been at all times between the Tranche 1 Closing Date, the Tranche 2
Closing Date and the Tranche 3 Closing Date, as applicable, and on such
applicable Closing Date be, listed for trading on the Nasdaq National Market
or Nasdaq SmallCap Market.
(xi) Change of Control. No Change of Control in the
Company shall have occurred. "Change of Control" means the occurrence of
any of (i) an acquisition after the date hereof by an individual or legal
entity of in excess of 30% of the voting securities of the Company, (ii) a
replacement of more than one-half of the members of the Company's board of
directors which is not approved by those individuals who are members of the
board of directors on the date hereof in one or a series of related
transactions, (iii) the merger of the Company with or into another entity,
consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions or (iv) the execution by
the Company of an agreement to which the Company is a party or by which it
is bound, providing for any of the events set forth above in (i), (ii) or
(iii).
(xii) Legal Opinion. The Company shall have
delivered to the Purchaser an opinion of outside legal counsel to the
Company in substantially the form attached hereto as Exhibit C and dated the
applicable Closing Date;
(xiii) Required Approvals. All Required Approvals
shall have been obtained;
(xiv) Shares of Common Stock. On each of the
Tranche 2 Closing Date and Tranche 3 Closing Date, as applicable, the
Company shall have reserved for
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issuance to the Purchaser two times the number of Underlying Shares which
would be issuable upon conversion in full of the Tranche 2 Debentures and
Tranche 3 Debentures, as applicable, assuming such conversion occurred on
the Original Issue Date for such Convertible Debentures;
(xv) Delivery of Securities. The Company shall have
delivered to the Purchaser or such Purchaser's designee the Convertible
Debentures being purchased at such Closing, registered in the name of such
Purchaser, each in form satisfactory to the Purchaser; and
(xvi) Performance of Conversion/Exercise
Obligations. The Company shall have (a) delivered Underlying Shares upon
conversion of Convertible Debentures and otherwise performed its obligations
in accordance with the terms, conditions and timing requirements of each
Convertible Debenture and (b) shall have delivered Warrant Shares upon
exercise of the Warrant and otherwise performed its obligations in
accordance with the terms of the Warrant to the extent the Purchaser (or its
permitted assigns and other successors in interest) has elected to convert
any Convertible Debentures or exercise the Warrant, as the case may be.
ARTICLE V
MISCELLANEOUS
5.1 Fees and Expenses. 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, except
as set forth in the Registration Rights Agreement and except that the
Company shall reimburse the Purchaser for (a) $15,000 of legal fees in
connection with the negotiation and preparation of the Transaction Documents
and (b) $5,000 of legal fees in connection with each of the Tranche 2
Closing and Tranche 3 Closing. The Company shall pay all stamp and other
taxes and duties levied in connection with the issuance of the Shares
pursuant hereto. The Purchaser shall be responsible for the Purchaser's own
tax liability that may arise as a result of the investment hereunder or the
transactions contemplated by this Agreement.
5.2 Entire Agreement; Amendments. This Agreement, together with
the Exhibits and Schedules hereto, the Registration Rights Agreement, the
Convertible Debentures and the Warrant 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.
5.3 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
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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 4:30 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 4:30 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
60 East South Temple Street
Suite 1225
Salt Lake City, Utah 84111
Facsimile No.: (801) 328-8778
Attn: Jeffrey N. Clayton, Esq.
With copies to: Durham, Evans, Jones & Pinegar
Key Bank Tower
50 South Main
Salt Lake City, Utah 84144
Facsimile No.: (801) 538-2425
Attn: Jeffrey M. Jones
If to the Purchaser: Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, NY 10111
Facsimile No.: (212) 332-3256
Attn: Robert L. Miller
With copies to: Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
or such other address as may be designated in writing hereafter, in the same
manner, by such person.
5.4 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
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both the Company and the Purchaser; 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.
5.5 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.
5.6 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns. Neither the Company nor any Purchaser may assign this Agreement or
any rights or obligations hereunder without the prior written consent of the
other. The assignment by a party of this Agreement or any rights hereunder
shall not affect the obligations of such party under this Agreement.
5.7 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 5.6, is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
5.8 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.
5.9 Survival. The agreements and covenants contained in Article IV
and this Article V shall survive the delivery and conversion of the
Convertible Debentures pursuant to this Agreement and the representations
and warranties of the Company and the Purchaser contained in Article III
shall survive until a date that is three years after the last Closing Date.
5.10 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 party, it being understood
that both 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.
5.11 Publicity. The Company and the Purchaser shall consult with
each other in issuing any press releases or otherwise making public
statements with respect to the
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<PAGE>
transactions contemplated hereby and neither party shall issue any such
press release or otherwise make any such public statement without the prior
written consent of the other, 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 party with prior notice of such public statement.
5.12 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 affecting 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.
5.13 EDGAR. The Purchaser agrees to provide to the Company upon
request therefor electronic copies of this Agreement and all exhibits
thereto, including any subsequent amendments or modifications thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized persons as of
the date first indicated above.
Company:
fonix corporation
By: /s/ Stephen M. Studdert
---------------------------
Name: Stephen M. Studdert
Title: Chairman and CEO
Purchaser:
SOUTHBROOK INTERNATIONAL
INVESTMENTS, LTD.
By: /s/ Kenneth L. Henderson
-----------------------------
Kenneth L. Henderson
Assistant Secretary
<PAGE>
SCHEDULE 2.1 (a)
1. fonix systems corporation, a Utah corporation, wholly owned by the
Company.
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<PAGE>
SCHEDULE 2.1 (c)
1. Authorized Common Stock - 100,000,000 shares
2. Authorized Preferred Stock - 100,000,000 shares
3. Issued Common Stock - 41,8876,563 at May 12, 1997
4. Issued Preferred Stock - 0
5. Outstanding Options, Warrants and Similar Rights -
(a) Total Warrants - 350,000
(b) Total Options - 4,936,000 granted
(c) Total Convertible Debentures - $500,000 Series A
Convertible Debenture that is convertible into either
166,667 shares of Series A Convertible Preferred Stock
(when approved for issuance by the Company's
shareholders) or 166,667 shares of the
Company's Common Stock.
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<PAGE>
EXHIBIT A
NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
THIS DEBENTURE IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND
CONVERSION SET FORTH IN A CONVERTIBLE DEBENTURE PURCHASE AGREEMENT, DATED AS
OF JUNE 18, 1997, BETWEEN fonix corporation (THE "COMPANY") AND THE ORIGINAL
HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE
OF THE COMPANY.
No. B-1 U.S. $100,000
fonix corporation
SERIES B 5% CONVERTIBLE DEBENTURE DUE JUNE 18, 2007
THIS DEBENTURE is one of a duly authorized issue of debentures of fonix
corporation, a Delaware corporation, having a principal place of business at
60 East South Temple Street, Suite 1225, Salt Lake City, Utah 84111 (the
"Company"), designated as its Series B 5% Convertible Debentures, due June 18,
2007 (the "Debentures"), in an aggregate principal amount of up to $10,000,000.
FOR VALUE RECEIVED, the Company promises to pay to Southbrook International
Investments, Ltd., or registered assigns (the "Holder"), the principal sum of
One Hundred Thousand Dollars ($100,000), on or prior to June 18, 2007 or such
earlier date as the Debentures are required to be repaid as provided hereunder
(the "Maturity Date") and to pay interest to the Holder on the principal sum at
the rate of 5% per annum, payable upon conversion as provided hereunder, or on
the Maturity Date if not earlier converted. Interest shall accrue daily
commencing on the Original Issue Date (as defined in Section 6) until payment
in full of the principal sum, together with all accrued and unpaid interest and
other amounts which may become due hereunder, has been made. Interest shall
be calculated on the basis of a 360-day year and for the actual number of days
elapsed. Interest hereunder will be paid to the person in whose name this
Debenture (or one or more predecessor Debentures) is registered on the records
of the Company regarding registration and transfers of the Debentures (the
"Debenture Register") on the Conversion Date (as defined below) or the Maturity
Date, as the case may be; provided, however, that the Company's obligation to
a transferee of this Debenture
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<PAGE>
arises only if such transfer, sale or other disposition is made in accordance
with the terms and conditions hereof and of the Convertible Debenture Purchase
Agreement, dated as of June 18, 1997, as amended from time to time (the
"Purchase Agreement"), executed by the original Holder. All overdue, accrued
and unpaid interest and other amounts due hereunder shall bear interest at the
rate of 15% per annum from the day of conversion hereunder or the Maturity Date
or earlier date on which this Debenture is accelerated through and including
the date of payment. The principal of, and interest on, this Debenture are
payable in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts, at the
address of the Holder last appearing on the Debenture Register, except that
interest due hereunder may, at the Company's option, be paid in shares of the
Common Stock (as defined in Section 6) calculated based upon the average Per
Share Market Value for the five (5) Trading Days immediately preceding the
Conversion Date or Maturity Date, as the case may be. All amounts due
hereunder other than interest shall be paid in cash. Notwithstanding anything
to the contrary contained herein, the Company may not issue shares of the
Common Stock in payment of interest on the principal amount if: (i) the number
of shares of Common Stock at the time authorized, unissued and unreserved for
all purposes, or held as treasury stock, is insufficient to pay interest
hereunder in shares of Common Stock; (ii) such shares are not registered for
resale pursuant to an effective registration statement that names the recipient
of such interest shares as a selling stockholder thereunder and may not be sold
without volume restrictions pursuant to Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), as determined by
counsel to the Company pursuant to a written opinion letter, addressed to the
Holder, in form and substance acceptable to the Holder; (iii) such shares are
not listed on the Nasdaq National Market (or the American Stock Exchange,
Nasdaq National Market or The New York Stock Exchange) and any other exchange
on which the Common Stock is then listed for trading; or (iv) the issuance of
such shares would result in the recipient thereof beneficially owning more than
4.999% of the issued and outstanding shares of Common Stock as determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended. Payment of interest on the Debentures in shares of Common Stock is
also subject to the provisions of Section 4(a)(ii). Notwithstanding anything
to the contrary contained herein, the Company may not, without the written
consent of the Holder, pay interest on account of the Debentures unless both
the payment and the retention thereof by the Holders are consented to in
writing free of any subordination prior thereto by all lenders or holders of
any indebtedness or class of securities of the Company who have the right to
consent to or force the subordination of such payment. A transfer of the right
to receive principal and interest under this Debenture shall be transferable
only through an appropriate entry in the Debenture Register as provided herein.
This Debenture is subject to the following additional provisions:
Section 1.The Debentures are issuable in denominations of One Hundred
Thousand Dollars ($100,000) and integral multiples of Fifty Thousand Dollars
($50,000) in excess thereof. The Debentures are exchangeable for an equal
aggregate principal amount of Debentures of different authorized
denominations, as requested by the Holder surrendering the same but shall not
be issuable in denominations of less than integral multiplies of Fifty Thousand
Dollars ($50,000). No service charge will be made for such registration of
transfer or exchange.
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<PAGE>
Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement.
Prior to due presentment to the Company for transfer of this Debenture, the
Company and any agent of the Company may treat the person in whose name this
Debenture is duly registered on the Debenture Register as the owner hereof for
the purpose of receiving payment as herein provided and for all other purposes,
whether or not this Debenture is overdue, and neither the Company nor any such
agent shall be affected by notice to the contrary.
Section 3. Events of Default.
"Event of Default", wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary
or effected by operation of law or pursuant to any judgment, decree or order
of any court, or any order, rule or regulation of any administrative or
governmental body):
(a) any default in the payment of the principal of, interest on or
liquidated damages in respect of, this Debenture, free of any claim of
subordination, as and when the same shall become due and payable on the
Conversion Date or the Maturity Date or by acceleration or otherwise;
(b) the Company shall fail to observe or perform any other covenant,
agreement or warranty contained in, or otherwise commit any breach of, this
Debenture, the Purchase Agreement or the Registration Rights Agreement (as
defined in Section 6), and such failure or breach shall not have been remedied
within 10 days after the date on which notice of such failure or breach shall
have been given;
(c) the Company or any of its subsidiaries shall commence a voluntary
case under the United States Bankruptcy Code or insolvency laws as now or
hereafter in effect or any successor thereto (the "Bankruptcy Code"); or an
involuntary case is commenced against the Company under the Bankruptcy Code and
the petition is not controverted within 30 days, or is not dismissed within 60
days, after commencement of such involuntary case; or a "custodian" (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Company or
there is commenced against the Company any such proceeding which remains
undismissed for a period of 60 days; or the Company is adjudicated insolvent
or bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company suffers any appointment of any custodian
or the like for it or any substantial part of its property which continues
undischarged or unstayed for a period of 60 days; or the Company makes a
general assignment for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be unable to pay, its
debts generally as they become due; or the Company shall call a meeting of its
creditors with a view to arranging a composition or adjustment of its debts;
or the Company shall by
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<PAGE>
any act or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is taken by the
Company for the purpose of effecting any of the foregoing;
(d) the Company shall default in any of its obligations under any
mortgage, credit agreement or other facility, indenture agreement or other
instrument under which there may be issued, or by which there may be secured
or evidenced any indebtedness of the Company in an amount exceeding one hundred
thousand dollars ($100,000), whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable;
(e) the Common Stock shall be delisted from the Nasdaq SmallCap Market
or any other national securities exchange or market on which such Common Stock
is listed for trading or suspended from trading thereon without being relisted
or having such suspension lifted, as the case may be, within four Trading Days;
or
(f) the Company shall be a party to any merger or consolidation
pursuant to which the Company shall not be the surviving entity or shall
dispose of all or substantially all of its assets in one or more transactions,
or shall redeem more than a de minimis number of shares of Common Stock (other
than redemptions of Underlying Shares issued upon conversion of Debentures).
If during the time that any portion of this Debenture remains outstanding, any
Event of Default occurs and is continuing, and in every such case, then the
Holder may, by notice to the Company, declare the full principal amount of this
Debenture, together with all accrued but unpaid interest and other amounts
owing hereunder, to the date of acceleration, to be, plus the "Adjustment
Amount" (as defined in Section 6) whereupon the same shall become, immediately
due and payable in cash (notwithstanding anything herein contained to the
contrary) without presentment, demand, protest or other notice of any kind, all
of which are waived by the Company, notwithstanding anything herein contained
to the contrary, and the Holder may immediately and without expiration of any
grace period enforce any and all of its rights and remedies hereunder and all
other remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder. No
such rescission or annulment shall affect any subsequent Event of Default or
impair any right consequent thereon.
Section 4. Conversion.
(a)(i) This Debenture shall be convertible into shares of the
Common Stock (subject to reduction pursuant to Section 4(a)(ii) below and
Section 3.8 of the Purchase Agreement at the option of the Holder in whole or
in part at any time and from time to time after the Original Issue Date and
prior to the close of business on the Maturity Date. The Holder shall effect
conversions by surrendering the Debentures (or such portions thereof) to be
converted, together with the form of conversion notice attached hereto as
Exhibit A (the "Conversion Notice") to the Company. Each Conversion Notice
shall specify the principal
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amount of Debentures to be converted and the date on which such conversion is
to be effected, which date may not be prior to the date of such Conversion
Notice is deemed to have been delivered pursuant to Section 4(h) (the
"Conversion Date"). If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to Section 4(h). Subject to Sections 4(a)(ii) and 4(b)
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
principal amount represented by the Debenture(s) tendered by the Holder with
the Conversion Notice, or if a conversion hereunder cannot be effected in full
for any reason, the Company shall honor such conversion to the extent
permissible hereunder and shall promptly deliver to such Holder (in the manner
and within the time set forth in Section 5(b)) a new Debenture for such
principal amount as has not been converted.
(ii) Certain Regulatory Approval. If on the Conversion Date
applicable to any conversion, (A) the Common Stock is then listed for trading
on the Nasdaq National Market or if the rules of the Nasdaq Stock Market are
hereafter amended to extend Rule 4460(i) promulgated thereby (or any successor
or replacement provision thereof) to the Nasdaq SmallCap Market or the American
Stock Exchange and the Common Stock is then listed for trading on such market
or exchange, (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 of the entire outstanding principal amount of Debentures, together
with any shares of the Common Stock previously issued upon conversion of
Debentures and in respect of payment of interest hereunder would equal or
exceed 20% of the number of shares of the Common Stock outstanding on the
Original Issue Date (the "Issuable Maximum"), and (C) the Company has not
previously obtained the Stockholder Approval (as defined below), then the
Company shall issue to the Holder requesting such conversion the Issuable
Maximum and, with respect to any shares of the Common Stock that otherwise
would have been issuable to such holder in respect of the Conversion Notice at
issue or in respect of payment of interest hereunder in excess of the Issuable
Maximum, the Holder shall have the option to require the Company to either (1)
as promptly as possible, but in no event later than 90 days after such
Conversion Date, convene a meeting of the holders of the Common Stock and use
its best efforts to obtain the Stockholder Approval or (2) prepay, from funds
legally available therefor at the time of such prepayment, the balance of the
principal amount of the Debentures subject to such Conversion Notice and the
remaining aggregate principal amount of Debentures then outstanding and held
by such Holder at a price equal to the sum of (A) the principal amount of
Debentures then outstanding and held by such Holder multiplied by the product
of (i) the average Per Share Market Value for the five (5) Trading Days
immediately preceding (1) the Conversion Date or (2) the date of payment in
full by the Company of such prepayment price, whichever is greater, divided by
(ii) the Conversion Price calculated on the Conversion Date plus (B) all
accrued and unpaid interest and other amounts then due in respect of such
Debentures; provided, however, that if the Holder has requested that the
Company obtain Stockholder Approval under paragraph (1) above and the Company
fails for any reason to obtain such Stockholder Approval within the time period
set forth in (1) above, the Company shall be obligated to prepay Debentures in
accordance with the provisions of paragraph (2) above, and in such case the
interest contemplated by the immediately succeeding sentence shall be deemed
to accrue from the Conversion Date. If the Holder has requested that the
Company prepay Debentures pursuant to this Section and the Company fails
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for any reason to pay the prepayment price under (2) above within seven days
after the Conversion Date, the Company will pay interest on such prepayment
price at a rate of 15% per annum to the converting Holder, accruing from the
Conversion Date until the prepayment price plus any accrued interest thereon
is paid in full. The entire prepayment price, including interest thereon,
shall be paid in cash. "Stockholder Approval" means the approval by a majority
of the total votes cast on the proposal, in person or by proxy, at a meeting
of the stockholders of the Company held in accordance with the Company's
Certificate of Incorporation and by-laws, of the issuance by the Company of
shares of the Common Stock exceeding the Issuable Maximum as a consequence of
the conversion of Debentures into the Common Stock at a price less than the
greater of the book or market value on the Original Issue Date as and to the
extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market or Rule 713
of the American Stock Exchange (or any successor or replacement provision
thereof), as applicable.
(b) Not later than three Trading Days after the Conversion Date,
the Company will deliver to the Holder (i) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number
of shares of the Common Stock being acquired upon the conversion of Debentures
(subject to reduction pursuant to Section 4(a)(ii) hereof and Section 3.8 of
the Purchase Agreement), (ii) Debentures in a principal amount equal to the
principal amount of Debentures not converted; (iii) a bank check in the amount
of all accrued and unpaid interest (if the Company has elected to pay accrued
interest in cash), together with all other amounts then due and payable in
accordance with the terms hereof, in respect of Debentures tendered for
conversion and (iv) if the Company has elected to pay accrued interest in
shares of the Common Stock, certificates, which shall be free of restrictive
legends and trading restrictions (other than those required by the Purchase
Agreement), representing such number of shares of the Common Stock as equals
such interest divided by the average Per Share Market Value for the five
Trading Days immediately preceding the Conversion Date; provided, however, that
the Company shall not be obligated to issue certificates evidencing the shares
of the Common Stock issuable upon conversion of the principal amount of
Debentures until Debentures are either delivered for conversion to the Company
or any transfer agent for the Debentures or the Common Stock, or the Holder
notifies the Company that such Debenture has 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 (in which case the Company shall issue a replacement Debenture in
like principal amount). The Company shall, upon request of the Holder, use its
best efforts to deliver any certificate or certificates required to be
delivered by the Company under this Section electronically through the
Depository Trust Corporation or another established clearing corporation
performing similar functions. If in the case of any Conversion Notice such
certificate or certificates, including for purposes hereof, any shares of the
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid interest hereunder, are not delivered to or as directed by the
applicable Holder by the third Trading Day after 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 thereafter, to rescind
such conversion, in which event the Company shall immediately return the
Debentures 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 the Common Stock to be issued on the Conversion
Date on account of accrued but unpaid interest hereunder,
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prior to the fifth Trading Day after the Conversion Date, the Company shall pay
to such Holder, in cash, as liquidated damages and not as a penalty, $1,500 for
each day after such fifth 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 20th day after the Conversion Date, the
Company shall, at the Holder's option (i) prepay, from funds legally available
therefor at the time of such prepayment, the aggregate of the principal amount
of Debentures then held by such Holder, as requested by such Holder, and (ii)
pay all accrued but unpaid interest on account of the Debentures for which the
Company shall have failed to issue the Common Stock certificates hereunder, in
cash. The prepayment price shall be equal to the sum of (A) the aggregate of
all accrued but unpaid interest and other non-principal amounts then payable
in respect of all Debentures to be prepaid hereunder and for which prepayment
hereunder is demanded, plus (B) the aggregate of the principal amount of
Debentures then held by such Holder multiplied by (1) the average Per Share
Market Value for the five (5) Trading Days immediately preceding (x) the
Conversion Date or (y) the date of payment in full by the Company of such
prepayment price, whichever is greater, divided by, (2) the Conversion Price
calculated on the Conversion Date. If the Holder has requested that the
Company prepay Debentures pursuant to this Section and the Company fails for
any reason to pay the prepayment price within seven days after such notice is
deemed delivered pursuant to Section 4(h), the Company will pay interest on the
prepayment price at a rate of 15% per annum, in cash to such Holder, accruing
from such seventh day until the prepayment price and any accrued interest
thereon is paid in full.
(c) (i) The conversion price (the "Conversion Price") in
effect on any Conversion Date shall be the lesser of (a) $6.81 (the "Initial
Conversion Price") and (b) the product of the average of the Per Share Market
Value for the five Trading Days immediately preceding the Conversion Date
multiplied by the Applicable Percentage (as defined in Section 6); provided
that, (a) if the registration statement registering the resale of the shares
of Common Stock issuable upon conversion of the Debentures and payment of
interest thereunder and naming the Holder as a Selling Stockholder thereunder
(the "Underlying Shares Registration Statement") is not filed on or prior to
the 30th day after the Original Issue Date, or (b) the Company fails to file
with the Securities and Exchange Commission (the "Commission") a request for
acceleration in accordance with Rule 12d1-2 promulgated under the Securities
Exchange Act of 1934, as amended, within five (5) days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that an Underlying Shares Registration Statement will not be
"reviewed" or is not subject to further review or comment by the Commission,
or (c) if the Underlying Shares Registration Statement is not declared
effective by the Commission on or prior to the 180th day after the Original
Issue Date, or (d) if such Underlying Shares Registration Statement is filed
with and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities (as such term is defined in the
Registration Rights Agreement) at any time prior to the expiration of the
"Effectiveness Period" (as such term as defined in the Registration Rights
Agreement), without being succeeded by a subsequent Underlying Shares
Registration Statement filed with and declared effective by the Commission
within 10 Business Days (as defined in Section 6), or (e) if trading in the
Common Stock shall be suspended for any reason for more than four Trading Days,
or (f) if the conversion rights of the Holders of Debentures hereunder are
suspended for any reason (any such failure being referred to as an "Event," and
for purposes of clauses (a), (c) and (f) the date
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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 clause (d) the date
which such 10 Business Day-period is exceeded, or for purposes of clause (e)
the date on which such four Trading Day period is exceeded, being referred to
as "Event Date"), the Conversion Price shall be decreased by 2.5% on each
monthly anniversary of an 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, at the
option of each Holder for each applicable monthly period either (a) the Company
shall pay to the Holders 2.5% of the product of the principal amount of
outstanding Debentures (each Holder being entitled to receive such portion of
such amount as equals its pro rata portion of Debentures then outstanding), in
cash or (b) the Conversion Price shall be decreased by 2.5% for each additional
such month (to be effective in full on the monthly applicable Event Date) as
liquidated damages, and not as a penalty on the first day of each monthly
anniversary of the Event Date in either case until such time as the applicable
Event is cured. Any decrease in the Conversion Price pursuant to this Section
shall remain in effect notwithstanding the fact that the Event causing such
decrease has been subsequently cured and further monthly decreases have ceased.
The provisions of this Section are not exclusive and shall in no way limit the
Company's obligations under the Registration Rights Agreement. Notwithstanding
anything to the contrary set forth herein, the Company may not, without the
prior written consent of the Holders, pay liquidated damages hereunder in cash
unless it shall have received the prior written consent of all lenders, debt
holders or holders of any class of securities of the Company or its Affiliates
that have the right to require such consent or to subordinate any such cash
payment, which consent shall provide that the payment by the Company of any
such liquidated damages hereunder (and the retention of such sum by the
receiving Holder) is not subject to any applicable subordination rights of such
lender or holders of such class of securities. If such consent is not
received, the Holders shall have the right to require such damages be paid in
further discount.
(ii) If the Company, at any time while any Debentures are
outstanding, (a) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of the Common Stock, (b) subdivide
outstanding shares of the Common Stock into a larger number of shares, (c)
combine outstanding shares of the Common Stock into a smaller number of shares,
or (d) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, the Initial Conversion Price shall be multiplied
by a fraction of which the numerator shall be the number of shares of the
Common Stock (excluding treasury shares, if any) outstanding before such event
and of which the denominator shall be the number of shares of the Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
4(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of
a subdivision, combination or re-classification.
(iii) If the Company, at any time while any Debentures are
outstanding, shall issue rights or warrants to all holders of the Common Stock
(and not to Holders of Debentures) entitling them to subscribe for or purchase
shares of the Common Stock at a price per share less than the Per Share Market
Value of the Common Stock at the record date mentioned below, the Initial
Conversion Price shall be multiplied by a fraction, of which the
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denominator shall be the number of shares of the Common Stock (excluding
treasury shares, if any) outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of the Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants plus the number of shares which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration of
any right or warrant to purchase shares of the Common Stock the issuance of
which resulted in an adjustment in the Initial Conversion Price pursuant to
this Section 4(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 4 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 the Common Stock actually purchased upon
the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while Debentures are
outstanding, shall distribute to all holders of the Common Stock (and not to
Holders of Debentures) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred
to in Sections 4(c)(ii) and (iii) above), then in each such case the Initial
Conversion Price at which Debentures 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 the Common Stock determined as of the record date
mentioned above, and of which the numerator shall be such Per Share Market
Value of the Common Stock on such record date less the then fair market value
at such record date of the portion of such assets or evidence of indebtedness
so distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith; provided, however, that in
the event of a distribution exceeding ten percent (10%) of the net assets of
the Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of the Company) (an "Appraiser")
selected in good faith by the holders of a majority in interest of Debentures
then outstanding; and provided, further, that the Company, after receipt of the
determination by such Appraiser shall have the right to select an additional
Appraiser, in good faith, in which case the fair market value shall be equal
to the average of the determinations by each such Appraiser. In either case
the adjustments shall be described in a statement provided to the holders of
Debentures of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one share of the Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
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(v) All calculations under this Section 4 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vi) Whenever the Initial Conversion Price is adjusted
pursuant to Section 4(c)(ii),(iii) or (iv), the Company shall promptly mail to
each Holder of Debentures, a notice setting forth the Initial Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(vii) In case of any reclassification of the Common Stock
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property, the Holder of this Debenture
shall have the right thereafter to, at its option, (A) convert the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Debenture only into
the shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following such
reclassification or share exchange, and the Holders of the Debentures shall be
entitled upon such event to receive such amount of securities, cash or property
as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Debenture could have
been converted immediately prior to such reclassification or share exchange
would have been entitled or (B) require the Company to prepay, from funds
legally available therefor at the time of such prepayment, all of its
Debentures at a price equal to the sum of (i) the aggregate of the principal
amount of Debentures then held by the Holder multiplied by (a) the average Per
Share Market Value for the five (5) Trading Days immediately preceding (1) the
effective date of the reclassification or share exchange triggering such
prepayment right or (2) the date of payment in full by the Company of the
prepayment price hereunder, whichever is greater, divided by (b) the Conversion
Price calculated on such effective date, plus (ii) the aggregate of all accrued
but unpaid interest and other amounts then payable in respect of all Debentures
to be repaid hereunder. The entire redemption price shall be paid in cash, and
the terms of payment of such redemption price shall be subject to the
provisions set forth in Section 5(b). The terms of any such reclassification
or share exchange shall include such terms so as to continue to give to the
Holder the right to receive the securities, cash or property set forth in this
Section 4(c)(vii) upon any conversion following such event. This provision
shall similarly apply to successive reclassifications or share exchanges.
(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
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purchase any shares of capital stock of any class or
of any rights; or
D. the approval of any stockholders of the Company
shall be required in connection with any
reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a
party, any sale or transfer of all or substantially
all of the assets of the Company, of any compulsory
share of exchange whereby the Common Stock is
converted into other securities, cash or property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of
the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of the Debentures, and shall cause to be mailed
to the Holders of Debentures at their last addresses as they shall appear upon
the stock books of the Company, at least 30 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, however,
that the failure to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action required to be
specified in such notice. Holders are entitled to convert Debentures during
the 30-day period commencing the date of such notice to the effective date of
the event triggering such notice.
(d)If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the Holders (different than or distinguished
from the effect generally on rights of holders of any class of the Company's
capital stock) or if at any time any such conditions are expected to arise by
reason of any action contemplated by the Company, the Company shall mail a
written notice briefly describing the action contemplated and the material
adverse effects of such action on the rights of the Holders at least 30
calendar days prior to the effective date of such action, and an Appraiser
selected by the Holders of majority in interest of the Debentures shall give
its opinion as to the adjustment, if any (not inconsistent with the standards
established in this Section 4), of the Conversion Price (including, if
necessary, any adjustment as to the securities into which Debentures may
thereafter be convertible) and any distribution which is or would be required
to preserve without diluting the rights of the Holders; provided, however, that
the Company,
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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 shares of the Common Stock
solely for the purpose of issuance upon conversion of the Debentures and
payment of interest on the Debentures, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of the Common Stock
as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 4(c)) upon the
conversion of the outstanding principal amount of the Debentures and payment
of interest hereunder. The Company covenants that all shares of the Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Underlying Shares
Registration Statement has been declared effective under the Securities Act,
freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of the
Common Stock, but may if otherwise permitted, make a cash payment in respect
of any final fraction of a share based on the Per Share Market Value at such
time. If the Company elects not, or is unable, to make such a cash payment,
the holder shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(g) The issuance of certificates for shares of the Common Stock
on conversion of the Debentures shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such Debentures so
converted and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(h) Any and all notices or other communications or deliveries
to be provided by the Holders of the Debentures hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed to
the Company, at 60 East South Temple Street, Suite 1225, Salt Lake City, Utah
84111 (facsimile number (801) 328-8778), attention Chief Financial Officer, or
such other address or facsimile number as the Company may specify for such
purposes by notice to the
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Holders delivered in accordance with this Section. Any and all notices or
other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each Holder of the Debentures
at the facsimile telephone number or address of such Holder appearing on the
books of the Company, or if no such facsimile telephone number or address
appears, at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this
Section prior to 4:30 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 4:30 p.m.
(Salt Lake City time) on any date and earlier than 11:59 p.m. (Salt Lake City
time) on such date, (iii) four days after deposit in the United States mails,
(iv) the Business Day following the date of mailing, if send by nationally
recognized overnight courier service, or (v) upon actual receipt by the party
to whom such notice is required to be given.
Section 5. Prepayment.
(a) The Company shall have the right, exercisable at any time upon
20 Trading Days notice to the Holders of the Debentures given at any time after
the Original Issue Date to prepay, from funds legally available therefor at the
time of such prepayment, all or any portion of the outstanding principal amount
of the Debentures which have not previously been converted or repaid, at a
price equal to the sum of (A) the aggregate of the principal amount of the
Debentures to be prepaid multiplied by (i) the average Per Share Market Value
for the five (5) Trading Days immediately preceding (1) the date of the
prepayment notice referenced above or (2) the date of payment in full by the
Company of the prepayment price hereunder, whichever is greater, divided by
(ii) the Conversion Price calculated on the date of such prepayment notice and
(B) the aggregate of all accrued but unpaid interest and other amounts owing
in respect of the Debentures to be prepaid. The entire prepayment price shall
be paid in cash. Holders of the Debentures may convert the Debentures,
including the Debentures subject to a prepayment notice given under this
Section, during the period from the date of such prepayment notice through the
19th Trading Day thereafter.
(b) If any portion of the prepayment price under Sections 5(a)
shall not be paid by the Company within seven (7) calendar days after the date
due, interest shall accrue thereon at the rate of 15% per annum until the
prepayment 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 prepayment price remains unpaid for more than 7 calendar days after the
date due, the Holder of the Debentures subject to such prepayment may elect,
by written notice to the Company given within 30 days after the date due, to
either (i) demand conversion in accordance with the formula and the time frame
therefor set forth in Section 4 of all Debentures for which such prepayment
price, plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Prepayment Principal"), in which event the Per Share Market Price for
such Unpaid Prepayment Principal shall be the lower of the Per Share Market
Price calculated on the date such prepayment 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 prepayment, notwithstanding
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anything herein contained to the contrary. If the Holder elects option
(i) above, the Company shall within three (3) Trading Days of its receipt of
such election deliver to the Holder the shares of the Common Stock issuable
upon conversion of the Unpaid Prepayment Principal subject to such Holder
conversion demand and otherwise perform its obligations hereunder with respect
thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt
of holder's notice of such election, return to the holder all of the Unpaid
Prepayment Principal. Notwithstanding anything to the contrary contained
herein, the Company may not, without the written consent of the Holder, prepay
Debentures unless both the payment thereof and the retention of such paid cash
by the Holder is consented to in writing free of any subordination by all
lenders or holders of any indebtedness or class of securities of the Company
who have the right to consent to or force the subordination of such payment.
Section 6.Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Adjustment Amount" is equal to (i) the aggregate principal amount
of Debentures then outstanding multiplied by (A) the average Per Share Market
Value for the five Trading Days immediately preceding (1) the applicable
Trigger Date or (2) the date of payment of all amounts due as a result of such
Event of Default, whichever is greater, divided by (B) the Conversion Price
with respect to the aggregate principal amount of Debentures then outstanding
calculated on the applicable Trigger Date, minus (ii) the aggregate principal
amount of Debentures then outstanding, plus all accrued and unpaid interest
thereon and all other amounts due, except for those referred to in (i) above
pursuant to the terms hereof.
"Applicable Percentage" means (i) 90% for any conversion honored
on or prior to the expiration of the 120th day after the Original Issue Date
and (ii) 87.5% for any conversion honored thereafter.
"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 Company's common stock, $.0001 par value
per share, of the Company and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"Original Issue Date" shall mean the date of the first issuance of
any Debentures regardless of the number of transfers of any Debenture and
regardless of the number of instruments which may be issued to evidence such
Debenture.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other stock exchange or quotation system on which the Common
Stock is then listed 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
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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 Debentures; provided, however, that the Company, after receipt of the
determination by such appraiser, shall have the right 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 a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated June 18, 1997, between the Company and the original holder of
Debentures.
"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).
"Trigger Date" shall mean, (i) with respect to an Event of Default
caused by an event described in Section 3(a), the date the payment of principal
or interest at issue was due, (ii) with respect to an Event of Default caused
by an event described in Section 3(b), the date specified in any other
provision of this Debenture, the Purchase Agreement, the Class B Exchange
Agreement or the Registration Rights Agreement that require prepayment of the
outstanding principal amount of this Debenture as a result of an event so
contemplated, if not, the date such event becomes an Event of Default pursuant
to Section 3(b), and (iii) with respect to an Event of Default caused by an
event described in Section 3(c), (d), (e) and (f), the date such event becomes
an Event of Default pursuant to such Sections.
"Underlying Shares" means the number of shares of Common Stock into
which the Debentures are convertible in accordance with the terms hereof and
the Purchase Agreement.
Section 7.Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, and interest on, this
Debenture at the time, place, and rate, and in the coin or
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currency, herein prescribed. This Debenture is a direct obligation of the
Company. This Debenture ranks pari passu with all other Debentures now or
hereafter issued under the terms set forth herein. The Company may only
voluntarily prepay the outstanding principal amount on the Debentures in
accordance with Section 5 hereof.
Section 8.This Debenture shall not entitle the Holder to any of
the rights of a stockholder of the Company, including without limitation, the
right to vote, to receive dividends and other distributions, or to receive any
notice of, or to attend, meetings of stockholders or any other proceedings of
the Company, unless and to the extent converted into shares of Common Stock in
accordance with the terms hereof.
Section 9.If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
Section 10.This Debenture shall be governed by and construed in
accordance with the laws of the State of Delaware, without giving effect to
conflicts of laws thereof.
Section 11.Any waiver by the Company or the Holder of a breach of
any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to
insist upon strict adherence to any term of this Debenture on one or more
occasions shall not be considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any other term of
this Debenture. Any waiver must be in writing.
Section 12. If any provision of this Debenture is invalid, illegal
or unenforceable, the balance of this Debenture shall remain in effect, and if
any provision is inapplicable to any person or circumstance, it shall
nevertheless remain applicable to all other persons and circumstances.
Section 13.Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day (or, if such next succeeding Business Day
falls in the next calendar month, the preceding Business Day in the appropriate
calendar month).
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed by an officer thereunto duly authorized as of the date first
above indicated.
fonix corporation
By :
-------------------------
Name: Stephen M. Studdert
Title: Chairman & CEO
Attest:
By:___________________________
Name:
Title:
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Debenture)
The undersigned hereby elects to convert Debenture No. B-1 into shares of
Common Stock, par value $.0001 per share (the "Common Stock"), of fonix
corporation (the "Company") according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the holder for any conversion, except for such transfer taxes, if any.
Conversion calculations: _______________________________________________
Date to Effect Conversion
_______________________________________________
Principal Amount of Debentures to be Converted
_______________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________
Applicable Conversion Price
_______________________________________________
Signature
_______________________________________________
Name
_______________________________________________
Address
The Company undertakes to promptly upon its receipt of this conversion notice
(and, in any case prior to the time it effects the conversion requested
hereby), notify the converting holder by facsimile of the number of shares of
Common Stock outstanding on such date and the number of shares of Common Stock
which would be issuable to the holder if the conversion requested in this
conversion notice were effected in full, whereupon, if the Company determines
that such conversion would result in it owning in excess of 4.999% of the
outstanding shares of Common Stock on such date, the Company shall convert up
to an amount equal to 4.999% of the outstanding shares of Common Stock and
issue to the holder one or more certificates representing Debentures which have
not been converted as a result of this provision.
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of June 18, 1997, between fonix corporation, a Delaware
corporation (the "Company"), and Southbrook International Investments, Ltd.,
a corporation existing under the laws of the British Virgin Islands (the
"Purchaser").
This Agreement is made pursuant to the Convertible Debenture
Purchase Agreement, dated as of the date hereof between the Company and the
Purchaser (the "Purchase Agreement").
The Company and the Purchaser hereby agree as follows:
1. DEFINITIONS
Capitalized terms used and not otherwise defined herein 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 of "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 United States Securities and Exchange
Commission.
"Common Stock" means the Company's Common Stock, par value $.0001
per share.
<PAGE>
"Debentures" means the Series B 5% Convertible Debentures purchased
by the Purchaser pursuant to the Purchase Agreement.
"Effectiveness Date" means (i) with respect to the Registration
Statement to be filed with respect to the Tranche 1 Debentures, the 90th day
following the Tranche 1 Closing Date, (ii) with respect to the Registration
Statement to be filed with respect to the Tranche 2 Debentures, the 90th day
following the Series Tranche 2 Closing Date, and (iii) with respect to the
Registration Statement to be filed with respect to the Tranche 3 Debentures,
the 90th day following the Tranche 3 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 (i) with respect to the shares of Common Stock
issuable upon conversion of the Tranche 1 Debentures and the Warrant, the 30th
day following the Tranche 1 Closing Date, (ii) with respect to the shares of
Common Stock issuable upon conversion of the Tranche 2 Debentures, the 30th day
following the Tranche 2 Closing Date, and (iii) with respect to the shares of
Common Stock issuable upon conversion of the Tranche 3 Debentures, the 30th day
following the Tranche 3 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.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial proceed-
ing, 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
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<PAGE>
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 (a) with respect to the Registration
Statement to be filed after the Tranche 1 Closing Date, the shares of Common
Stock issuable upon (i) conversion of the Tranche 1 Debentures and (ii)
exercise of the Warrant, (b) with respect to the Registration Statement to be
filed after the Tranche 2 Closing Date, the shares of Common Stock issuable
upon conversion of the Tranche 2 Debentures and (c) with respect to the
Registration Statement to be filed after the Tranche 3 Closing Date, the shares
of Common Stock issuable upon conversion of the Tranche 3 Debentures; provided,
however that in order to account for the fact that the number of shares of
Common Stock that are issuable upon conversion of Debentures is determined in
part upon the market price of the Common Stock at the time of conversion, in
the case of each of (a), (b) and (c), Registrable Securities shall include (but
not be limited to) a number of shares of Common Stock equal to no less than the
sum of (1) two times the number of shares of Common Stock into which the
Debentures are convertible, assuming such conversion occurred on the particular
Closing Date for such Debentures and (2) the number of shares of Common Stock
issuable upon exercise in full of the Warrant, or such other number of shares
of Common Stock as agreed to by the parties to the Purchase Agreement (assuming
such Warrant was issued on the Tranche 1 Closing Date). Notwithstanding
anything herein contained to the contrary, if the actual number of shares of
Common Stock into which the Debentures are convertible exceeds twice the number
of shares of Common Stock into which particular tranches of Debentures are
convertible based upon a computation as at a particular Closing Date, the term
"Registrable Securities" shall be deemed to include such additional shares of
Common Stock. If an additional Registration Statement is required to be filed
because the actual number of shares of Common Stock into which the Debentures
are convertible, plus shares issuable upon payment of dividends as described
above and shares issuable upon exercise of the Warrant exceeds the number of
shares of Common Stock initially registered in respect of any particular
tranche of Debentures based upon the computation on a particular Closing Date,
the Company shall have 10 Business Days after it makes such a determination or
receives notice from the Holders of Registrable Securities as to such a
determination to file such additional Registration Statement.
"Registration Statement" means the registration statement
contemplated by Section 2(a) (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 144" means Rule 144 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.
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<PAGE>
"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 any special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
"Tranche 1 Closing Date" means the date of the issuance and sale
of the Tranche 1 Debentures pursuant to the Purchase Agreement.
"Tranche 1 Debentures" means the Debentures issued and sold to the
Purchaser on the Tranche 1 Closing Date.
"Tranche 2 Closing Date" means the date of the issuance and sale
of the Tranche 2 Debentures pursuant to the Purchase Agreement.
"Tranche 2 Debentures" means the Debentures issued and sold to the
Purchaser on the Tranche 2 Closing Date.
"Tranche 3 Closing Date" means the date of the issuance and sale
of the Tranche 3 Debentures pursuant to the Purchase Agreement.
"Tranche 3 Debentures" means the Debentures issued and sold to the
Purchaser on the Tranche 3 Closing Date.
"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.
"Warrant" means the Common Stock purchase warrant to be issued and
sold to the Purchaser on the date hereof, entitling the Purchaser to acquire
up to 250,000 shares of Common Stock upon the exercise thereof.
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<PAGE>
2. SHELF REGISTRATION
(a) On or prior to each applicable Filing Date, the Company shall
prepare and file with the Commission a "Shelf" Registration Statement covering
the applicable 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 (except if otherwise directed by the Holders in accordance herewith
or if the Company is not then eligible to register for resale the Registrable
Securities on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith). The Company shall (i) not permit any
securities other than the Registrable Securities to be included in the
Registration Statement and the additional securities permitted thereunder in
accordance with Section 7(c) hereof and (ii) 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 to keep such Registration Statement continuously effec-
tive 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 as determined by the counsel to the Company
pursuant to a written opinion letter, addressed to the Holders to such effect
(the "Effectiveness Period"); provided, however, that 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 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, and if the managing underwriters advise the Company and such 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.
(c) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by the Holders
of a majority of the Registrable Securities included in such offering. No
Holder may participate in any Underwritten Offering hereunder unless such
Person (i) agrees to sell its Registrable Securities on the basis provided in
any underwriting agreements approved by the Persons entitled hereunder to
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<PAGE>
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 each
applicable Filing Date, a Registration Statement on Form S-3 (or such other
form if directed by the Holders in connection with an Underwritten Offering
hereunder or if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be
on another appropriate form in accordance herewith) in accordance with the
method or methods of distribution thereof as specified by the Holders (except
if otherwise directed by the Holders), 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 and two (2) Business Days
prior to the filing of 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 reasonably 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
to the "selling stockholders" or "plan of distribution" sections thereof within
five (5) Business Days of their receipt thereof.
(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 the
applicable 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
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<PAGE>
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 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) when the Commission notifies the Company whether
there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement and (C) 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 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 promptly provide the Holders with copies of all
oral and written comments received by or on its behalf from the Commission in
respect of a Registration Statement, and shall furnish such Holders with copies
of all intended written responses thereto one (1) Business Day in advance of
their filing 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.
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(e) If requested by any managing underwriter or the Holders of
a majority of the Registrable Securities to be sold in connection with an
Underwritten 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.
(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 Prospec-
tuses (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 within the United States 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 reasonable 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, which certificates shall, after the
Registration Statement is declared effective by the Commission, be free of all
restrictive legends, and to enable such Registrable Securities to be
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<PAGE>
in such denominations and registered in such names as any such managing
underwriters or Holders may request at least two 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) 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, and, in the case of an Underwritten Offering, at the time of
delivery of any Registrable Securities sold pursuant thereto, 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
selling Holder and each of the underwriters, if any, in 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 6 (or such other
provisions and procedures acceptable to the managing underwriters, if any),
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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) Provide a CUSIP number for all Registrable Securities, not
later than the effective date of the Registration Statement.
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
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<PAGE>
registration the Registrable Securities of any such Holder who unreasonably
fails to furnish such information within a reasonable time after receiving such
request.
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 rec-
ommendation 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.
The Purchaser covenants and agrees 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) the Purchaser and its officers, directors
or Affiliates, if any, will comply with the prospectus delivery requirements
of the Securities Act as applicable to them in connection with sales of
Registrable Securities pursuant to the Registration Statement.
The 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), the 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(c), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration State-
ment 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 and each other securities
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<PAGE>
exchange or market 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
Holders in connection with Blue Sky qualifications of the 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; provided, however, that the Company shall
not be obligated to pay fees and expenses of Special Counsel for the Holders
in a total amount greater than $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 usual and customary
costs, fees and expenses in connection therewith, except for the fees and
disbursements of the Underwriters and their legal counsel and accountants
(which shall be borne by the Holders). Therefore, in such circumstances the
Holder shall bear the expenses of the fees and disbursements of any legal
counsel or accounting firm retained by the underwriters in connection with such
Underwritten Offering and the costs of any determination (but not filing) by
the underwriters of the eligibility of the Registrable Securities for
investment under the applicable state securities laws. 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
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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 (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, the 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
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<PAGE>
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 defense thereof, including the
employment of 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 Indem-
nified Party or Parties unless: (1) the Indemnifying Party has agreed 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
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<PAGE>
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
The Indemnified Party shall notify the Indemnifying Party promptly
of any Proceeding of which the Indemnified Party shall have been notified in
writing in connection with the transactions contemplated by this Agreement and
as to which the Indemnified Party believes it may be entitled to
indemnification hereunder. The failure of the Indemnified Party to so notify
the Indemnifying Party of such a Proceeding shall not impair or affect the
Indemnified Party's rights to indemnification hereunder except and only to the
extent that such failure is shown to be the proximate cause of additional Loss.
(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 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 attorneys' or other 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 para-
graph. Notwithstanding the provisions of this Section 5(d), the Purchaser
shall not be required to contribute, in the aggregate, any amount in excess of
the amount by which the proceeds actually received by the Purchaser from the
sale of the Registrable Securities subject to the Proceeding exceeds the amount
of any damages that the Purchaser has 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.
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<PAGE>
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. RULE 144
The Company shall file the reports required to be filed by it under
the Securities Act and the Exchange Act in a timely manner and, if at any time
the Company is not required to file such reports, it will, upon the request of
any Holder, make publicly available other information so long as necessary to
permit sales of its securities pursuant to Rule 144. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Holder to
sell Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144. Upon the request
of any Holder, the Company shall deliver to such Holder a written certification
of a duly authorized officer as to whether it has complied with such
requirements.
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) NO INCONSISTENT AGREEMENTS. Except as and to the extent
specifically set forth in Schedule 7(b) 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 and to the extent specifically set forth on Schedule
7(b) 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, during the Effectiveness Period, 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 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.
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<PAGE>
(c) NO PIGGYBACK ON REGISTRATIONS. Except as and to the extent
specifically set forth on Schedule 7(c) 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.
(d) PIGGY-BACK REGISTRATIONS. If at any time 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, 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, except that if, in connection with any
Underwritten Offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the registration statement because, in
such underwriter(s)' judgment, such limitation is necessary to effect an
orderly public distribution of securities covered thereby, then the Company
shall be obligated to include in such registration statement only such limited
portion of the Registrable Securities for to which such Holder has requested
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Holders seeking to include Registrable Securities, in proportion
to the number of Registrable Securities sought to be included by such Holders;
provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
Holders of which are not entitled by right to inclusion of securities in such
registration statement; and provided, further, however, that, after giving
effect to the immediately preceding proviso, any exclusion of Registrable
Securities shall be made pro rata with holders of other securities having the
right to include such securities in such registration statement. No right to
registration of Registrable Securities under this Section shall be construed
to limit any registration otherwise required hereunder.
(e) 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 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
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<PAGE>
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.
(f) 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 4:30 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 4:30
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.
If to the Company: fonix corporation
60 East South Temple Street
Suite 1225
Salt Lake City, Utah 84111
Attn: Jeffrey N. Clayton, Esq.
Fax: (801) 328-8778
With copies to: Durham, Evans, Jones & Pinegar, P.C.
Suite 850 Key Bank Tower
50 South Main Street
Salt Lake City, Utah 84144
Attn: Jeffrey M. Jones
Fax: (801) 538-2425
If to the Purchaser: Southbrook International Investments, Ltd.
c/o Trippoak Advisors, Inc.
630 Fifth Avenue, Suite 2000
New York, New York 10111
Attn: Robert L. Miller
Fax: (212) 332-3256
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<PAGE>
With copies to Robinson Silverman Pearce
Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Eric L. Cohen
Fax: (212) 541-4630
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.
(g) 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 Purchaser may assign its rights hereunder in the manner
and to the Persons as permitted under the Purchase Agreement.
(h) ASSIGNMENT OF REGISTRATION RIGHTS. The rights of the
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 the Purchaser to any assignee or
transferee of all or a portion of the Debentures, the Warrant or the
Registrable Securities if: (i) the 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) following such transfer or assignment
the further disposition of such securities by the transferee or assignees
restricted under the Securities Act and applicable state securities laws, (iv)
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 (v)
such transfer shall have been made in accordance with the applicable
requirements of the Purchase Agreement. The rights to assignment shall apply
to the Purchaser's (and to subsequent) successors and assigns.
(i) 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
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<PAGE>
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.
(j) 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.
(k) CUMULATIVE REMEDIES. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(l) 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.
(m) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
(n) 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 Purchaser or transferees or successors or
assigns thereof if such Persons are deemed to be 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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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
fonix corporation
By:
----------------------------------------------
Name:
Title:
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By:
----------------------------------------------
Kenneth L. Henderson
Assistant Secretary
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<PAGE> Schedule 7(b)
INCONSISTENT AGREEMENTS
1. The Company may grant registration rights to Nelson Partners, Heights
Capital Management and/or Olympus Securities, Ltd. and thereafter file
a registration statement in connection with the placement by the Company
to such Persons of up to $10,000,000 aggregate principal amount of the
Company's convertible debentures, provided, however, that such shares may
not be registered prior to the time the Registrable Securities are
registered.
2. The Company has agreed to file a registration statement concerning an
offering of Company Common Stock purchase warrants enabling holders of
"project shares" to purchase up to 4,800,000 shares of Common Stock after
such time as the sales price for the Common Stock as reported by The
Nasdaq Stock Market, Inc. reaches $37.50 per share pursuant to the terms
of a memorandum of understanding between Synergetics, Inc., Hal Hanson
and the Company, dated March 13, 1997, and the definitive agreements
between those parties to be executed hereafter.
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<PAGE>
Schedule 7(c)
PERMISSIBLE PIGGYBACK SECURITIES
1. Shares of Common Stock issuable upon the conversion of the Company's
convertible debentures in an aggregate principal amount of up to
$10,000,000 to be issued to Nelson Partners, Heights Capital Management
and/or Olympus Securities, Ltd. may be included in the Registration
Statements.
2. 39,326 shares of Common Stock issued to Mark Goldstein, 1133 North
Dearborn Street, Chicago, Illinois 60610, December, 1995.
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<PAGE>
EXHIBIT D
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
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 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
Dated June 18, 1997
fonix corporation, a Delaware corporation (the "Company"), hereby
certifies that, for value received, Southbrook International Investments, Ltd.,
or its registered assigns ("Holder"), is entitled, subject to the terms set
forth below, to purchase from the Company up to a total of 250,000 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 $8.28 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 June 18, 2002
(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.
<PAGE>
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
Transfer Agent or to the Company at the office specified in or pursuant to
Section 3(b), provided, however that the Holder shall not make any transfers
to any transferee pursuant to this Section for the right to acquire less than
25,000 Warrant Shares (or the balance of the Warrant Shares to which this
Warrant relates). 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) 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.
Prior to the Expiration Date, the Company may not call or otherwise redeem this
Warrant without the prior written consent of the Holder.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its office at 60 East South Temple
Street, Suite 1225, Salt Lake City, Utah 84111, Attention: Chief Financial
Officer, or at such other address as the Company may specify in writing to the
then registered Holder, 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) 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 applicable law. 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.
-2-
<PAGE>
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.
(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 including supplements thereto, but not
additionally filed registration statements in respect of such securities, 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) unless the
Company provides the Holder with not less than five business days notice to
each of the Holder and Robinson Silverman Peace Aronsohn & Berman LLP,
attention Eric L. Cohen, notice of its intention to file such registration
statement and provides the Purchaser 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. DEMAND REGISTRATION RIGHTS. At any time during the term of
this Warrant when the Warrant Shares are not registered pursuant to an
effective registration statement, the Holder may make a written request for the
registration under the Securities Act of 1933, as amended (a "Demand
Registration"), of all or any portion of the Warrant Shares (the "Registrable
Securities"), and the Company shall use its best efforts to effect such Demand
Registration as promptly as possible, but in any case within 90 days
thereafter. Any request for a Demand Registration shall specify the aggregate
number of Registrable Securities proposed to be sold and shall also specify the
intended method of disposition thereof. The right to cause a registration of
the Registrable Securities under this Section 5 shall be limited to two such
registrations. In any registration initiated as a Demand Registration, the
Company will pay all registration expenses in connection therewith. A Demand
Registration shall not be counted as a Demand Registration hereunder until such
Demand Registration has been declared effective by the Securities and Exchange
Commission and maintained continuously effective for a period of at least 360
days or such shorter period when all Registrable Securities included therein
have been sold in accordance with such Demand Registration, provided, however
that any days on which such registration statement is not effective or on which
the Holder is not permitted by the
-3-
<PAGE>
Company or any governmental authority to sell Warrant Shares under such
registration statement shall not count towards such 360 day period.
6. 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.
7. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost,
stolen or destroyed, the Company may in its discretion 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 requested, 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.
8. 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 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 9). 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.
9. 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 9. Upon each such adjustment of the
Exercise Price pursuant to this Section 9, 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 (except scheduled dividends paid
on outstanding preferred stock as
-4-
<PAGE>
of the date hereof which contain a stated divided rate) 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 or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash 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 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 9(b) upon any exercise following any such reclassification,
consolidation, merger, sale, transfer or share exchange.
(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 9(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 the Company's independent certified public accountants
that regularly examines the financial statements of the Company (an
"Appraiser").
(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
-5-
<PAGE>
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 9, 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
Convertible Securities, or (B) to subscribe for or purchase Common Stock or
Convertible Securities, 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.
(g) Whenever the Exercise Price is adjusted pursuant to
Section 9(c) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser. The Holder shall promptly mail or cause to be mailed to
the Company, a notice setting forth the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
Such adjustment shall become effective immediately after the record date
mentioned above.
(h) 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
-6-
<PAGE>
(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.
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
9, be issuable on the exercise of this Warrant, the Company shall pay an amount
in cash equal to the Exercise Price multiplied by such fraction.
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
-7-
<PAGE>
telephone number specified in this Section prior to 4:30 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 this Section later than 4:30 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 addresses for
such communications shall be: (i) if to the Company, to fonix corporation, 60
East South Temple Street, Suite 1225, Salt Lake City, Utah 84111, Attention:
Chief Financial Officer, or to facsimile no. (801) 328-8778, 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.
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.
-8-
<PAGE>
(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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<PAGE>
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:
_______________________________
<PAGE>
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, 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)
<PAGE>
[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:
__________________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,694
<SECURITIES> 0
<RECEIVABLES> 1,036
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21,021
<PP&E> 1,897
<DEPRECIATION> 226
<TOTAL-ASSETS> 23,119
<CURRENT-LIABILITIES> 22,287
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 828
<TOTAL-LIABILITY-AND-EQUITY> 23,119
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 565
<INCOME-PRETAX> (6,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,778)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,778)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> 0
</TABLE>
