UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 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 November 13, 1997, 43,062,475 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
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,967,309 $ 22,805,786
Note receivable 250,000 1,000,000
Interest receivable - 157,643
Prepaid assets 156,861 4,172
Stock subscription receivable (Note 7) 3,794,500 -
-------------- --------------
Total Current Assets 24,168,670 23,967,601
Equipment, net of accumulated depreciation of $315,727 and $80,232 1,669,848 1,279,746
Intangible assets, net of accumulated amortization of $6,459 and $3,107 125,755 53,011
Other assets 49,332 30,912
-------------- --------------
$ 26,013,605 $ 25,331,270
============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 354,573 $ 307,931
Accrued expenses 811,081 1,464,049
Convertible debenture - 500,000
Accrued expenses - related party 400,993 411,743
Notes payable - related party 760,000
Notes payable 19,729,995 16,377,358
-------------- --------------
Total Current Liabilities 22,056,642 19,061,081
-------------- --------------
Stockholders' equity:
Preferred stock 46 -
Common stock 4,229 4,163
Paid-in capital-common stock 31,423,819 26,107,833
Paid-in capital-preferred stock 7,886,385
Accumulated deficit (35,357,516) (19,841,807)
-------------- --------------
Total stockholders' equity 3,956,963 6,270,189
-------------- --------------
$ 26,013,605 $ 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 Nine months ended 1993
September 30, September 30, (inception) to
------------------------------- ------------------------------- September 30,
1997 1996 1997 1996 1997
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
Expenses:
General and administrative 1,997,669 595,717 5,748,338 1,446,369 15,047,896
Research and development 1,650,371 1,226,559 4,715,650 3,134,097 15,586,649
-------------- -------------- -------------- -------------- --------------
Total expenses 3,648,040 1,822,276 10,463,988 4,580,466 30,634,545
-------------- -------------- -------------- -------------- --------------
Loss from operations (3,648,040) (1,822,276) (10,463,988) (4,580,466) (30,634,545)
-------------- -------------- -------------- -------------- --------------
Other income (Expenses):
Interest income 279,671 370,637 882,096 858,946 2,274,553
Interest (expense) (1,697,550) (243,270) (3,203,735) (487,760) (4,297,990)
-------------- -------------- -------------- -------------- --------------
Total Other Income (Expenses) (1,417,879) 127,367 (2,321,639) 371,186 (2,023,437)
-------------- -------------- -------------- -------------- --------------
Loss before extraordinary item (5,065,919) (1,694,909) (12,785,627) (4,209,280) (32,657,982)
Extraordinary item-
Loss on extinguishment of debt (1,069,364) - (1,069,364) - (1,038,816)
-------------- -------------- -------------- -------------- --------------
Net Loss (6,135,283) (1,694,909) (13,854,991) (4,209,280) (33,696,798)
Dividend on preferred stock 1,660,718 1,660,718 1,660,718
-------------- -------------- -------------- -------------- --------------
Net loss applicable to common stock $ (7,796,001) $ (1,694,909) $ (15,515,709) $ (4,209,280) $ (35,357,516)
============== ============== ============== ============== ==============
Loss per common share:
Loss before extraordinary item $ (0.16) $ (0.04) $ (0.34) $ (0.12) $ (1.29)
Extraordinary item (0.03) - (0.03) - (0.04)
-------------- -------------- -------------- -------------- --------------
Loss per common share $ (0.18) $ (0.04) $ (0.37) $ (0.12) $ (1.33)
============== ============== ============== ============== ==============
Weighted average shares 42,192,776 38,842,204 42,053,697 35,434,318 26,629,162
============== ============== ============== ============== ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
October 1,
Nine months ended 1993
September 30, (inception) to
------------------------------- September 30,
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from development activities:
Net loss applicable to common stock $ (15,515,709) $ (4,209,280) $ (35,357,516)
Adjustments to reconcile net loss to net cash
used in operations for development activities:
Common stock issued for services 1,120,004 - 2,444,274
Non-cash interest expense related to issuance
of debentures, warrants and common stock 1,986,836 - 1,986,836
Additional compensation expense related to issuance
of stock options - - 2,282,900
Write-off of assets received in acquisition - - 1,281
Depreciation and amortization 237,784 32,135 322,184
Preferred stock dividend 1,660,718 1,660,718
Extraordinary item-debt extinguishment 1,069,364 1,038,816
Changes in assets and liabilities:
Interest receivable 157,643 (116,409) -
Prepaid assets (152,689) (98,789) (156,861)
Other assets (18,420) - (49,332)
Accounts payable 40,870 (2,169) 1,984,070
Accrued expenses - related party (4,978) 119,596 406,765
Accrued expenses (1,006,905) 69,892 549,062
-------------- -------------- --------------
Net cash used in operations for development activities (10,425,482) (4,205,024) (22,886,803)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equipment (625,597) (516,640) (1,985,575)
Investment in intangible assets (75,035) (9,598) (132,214)
Investment in notes receivable (883,600) (5,400,000) (1,883,600)
Payments received on notes receivable 1,633,600 4,166,894 1,633,600
-------------- -------------- --------------
Net cash (used in) provided by investing activities 49,368 (1,759,344) (2,367,789)
-------------- -------------- --------------
Cash flows from financing activities:
Net increase in notes payable 3,352,637 10,226,031 20,301,856
Net increase in notes payable - related party 760,000 760,000
Proceeds from issuance of convertible debenture 3,000,000 - 3,500,000
Proceeds from issuance of common stock 425,000 12,759,962 20,660,045
-------------- -------------- --------------
Net cash provided by financing activities 7,537,637 22,985,993 45,221,901
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (2,838,477) 17,021,625 19,967,309
Cash and cash equivalents at beginning of period 22,805,786 7,849,610 -
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 19,967,309 $ 24,871,235 $ 19,967,309
============== ============== ==============
</TABLE>
[Continued]
5
<PAGE>
fonix corporation
[A Development Stage Company]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
October 1,
Nine months ended 1993
September 30, (inception) to
------------------------------- September 30,
1997 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid $ 771,037 $ 417,868 $ 1,659,503
Income taxes paid $ - $ - $ -
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the Nine months ended September 30, 1997:
A subscription receivable in the amount of $44,500 was recorded in
connection with the exercise of options to purchase 15,000 shares of
common stock.
Convertible debentures in the amount of $850,000 plus accrued interest
thereon in the amount of $7,850 were converted into 145,747 shares
of common stock.
The Company recorded a subscription receivable in the amount of
$3,750,000 in connection with the issuance of 187,500 shares of
convertible preferred stock. The receivable was received in October
1997.
A dividend and an increase in paid in capital of $1,060,718 and $600,000
were recorded for the discount associated with the issuance of 187,500
shares of convertible preferred stock and for the issuance of warrants
to purchase 200,000 shares of common stock in connection with the
issuance of such preferred stock.
The Company recorded an accrued expense and a debit to paid in capital in
the amount of $390,000 as a finders fee associated with the issuance of
$3,750,000 in convertible preferred stock.
The Company recorded the conversion of convertible debentures in the
amount of $2,150,000 plus accrued interest thereon in the amount of
$28,213 into 108,911 shares of convertible preferred stock, although
prior to the actual issuance of such convertible preferred stock, the
$2,150,000 amount was converted into common stock.
An extra-ordinary loss of $881,864 was recorded in connection with the
extinguishment of debt and corresponding issuance of convertible
preferred stock with prepaid financing costs in the amount of $220,014
and paid-in capital in the amount of $661,850.
A convertible debenture in the amount of $500,000 was converted into
166,667 shares of Series A Preferred Stock.
Interest expense and an increase in paid in capital of $897,750 was
recorded for the issuance of 250,000 warrants in connection with the
sale of $3,000,000 in convertible debentures.
The Company recorded a prepaid financing cost and an increase in
additional paid-in capital of $427,900 related to the issuance of
$3,000,000 in convertible debentures.
Interest expense and an increase in paid in capital of $881,250 was
recorded in connection with the issuance of 150,000 shares of common
stock below market value to an unrelated party.
The Company issued 100,000 shares of common stock to an unrelated party
for consulting fees valued at $778,129.
The Company issued 155,000 shares of common stock to unrelated parties
for consulting fees valued at $341,875.
For the nine months ended September 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 condensed consolidated financial statements.
6
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying financial statements have
been prepared by the Company 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, as amended. The results of operations for the nine months ended
September 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.
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. EMPLOYEE BENEFIT PLAN
The Company has a 401(k)/ profit sharing plan covering its full time
employees. Under the profit sharing portion, the Company may make
discretionary profit sharing contributions. Such contributions are
entirely discretionary as determined by the board of directors. No
such profit sharing contributions have been made by the Company.
Under the 401(k) feature, employees may reduce their salaries, in
amounts allowed by law, and contribute the salary reduction amount to
the plan on a pretax basis. The 401(k) feature also allows the
Company to make matching contributions at the sole discretion of the
Company as determined by the board of directors. No matching
contributions have been made by the Company.
3. NOTE RECEIVABLE
At September 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
7
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
after written notice from the Company. Subsequent to September 30,
1997, the principal and accrued interest were paid in full.
4. EQUIPMENT
Equipment consists of the following at September 30, 1997:
Furniture and fixtures $ 639,339
Computer equipment 1,276,865
Leasehold improvements 69,371
------------
Total 1,985,575
Less accumulated depreciation
and amortization (315,727)
------------
Net equipment $ 1,669,848
============
5. 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 were due June 18, 2007, bore interest at 5% and were
convertible into shares of the Company's common stock at anytime after
issuance at the holder's option. Under the terms of the Agreement,
the debentures were to be purchased in three installments. 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,
were to be paid to the Company upon written notice, provided that the
Company's market capitalization was then in excess of $200,000,000 and
other conditions were met. The debentures were convertible 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. Utilizing the conversion
terms most beneficial to the investor, the Company recorded a prepaid
financing cost of approximately $427,900. This amount represents the
maximum potential discount of 12.5%, which was available to the
investor after 120 days, applied to the market price on the date of
issuance of $6.81 per share. This amount was being amortized as
additional interest expense over the 120 day period commencing June
18, 1997. Upon the conversion of any of the debentures during the 120
days, an allocable portion of the prepaid financing costs was
expensed. 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. In connection with the issuance of these warrants,
the Company recorded the fair value of the warrants, totaling $897,750
as a charge to interest expense. The fair value of such warrants was
determined as of the date of grant using the Black-Scholes pricing
model assuming the following: Dividend yield 0.00%; expected
volatility 65%; risk free interest rate of 5.9% and expected life to
exercise of 5 years. Prior to September 30, 1997 $850,000 face value
of the Series B 5% Convertible Debenture was converted into 145,747
shares of common stock. Pursuant to a memorandum of understanding
between the Company and the investor dated as of
8
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
September 30, 1997 (the "MOU") the parties agreed to modify the
Agreement to convert all then outstanding debentures in the amount of
$2,150,000 into 107,500 shares of Series B Convertible Preferred
Stock, convertible into common shares under the same terms as the
debentures. In connection with the conversion of the convertible
debentures to convertible preferred stock set forth in the MOU, the
Company recorded all unamortized prepaid financing costs as an extra-
ordinary item, loss on extinguishment of debt. Also in connection
with this modification, the Company agreed to issue an additional
warrant to purchase up to 175,000 shares of common stock at any time
prior to October 24, 2002, at the exercise price of $7.48 per share.
In connection with the issuance of that warrant, the Company recorded
the fair value of the warrant, totaling $661,850 (representing an
additional loss on extinguishment of debt) as an extraordinary item
which was determined as of the date of the grant using the Black-
Scholes pricing model assuming the following: Dividend yield 0.00%;
expected volatility 65%; risk free interest rate of 5.8% and expected
life to exercise of 5 years. Additionally, the Company entered into
an amended and restated registration rights agreement with the
investor under which the Company is obligated to take steps to
register the common stock issuable upon conversion of the preferred
stock and exercise of the warrants. The Company covenanted 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 preferred stock and any dividends then payable in stock on the
preferred stock and the exercise of the warrant. Under the MOU, the
Company agreed that it would convert the remaining $2,150,000 balance
into 107,500 shares of convertible preferred stock effective as of
September 30, 1997. Prior to the actual issuance of such convertible
preferred stock, however, the investor converted the balance of
$2,150,000 into 431,619 shares of common stock. Also, subsequent to
September 30, 1997, the Company received a second payment in the
amount of $2,500,000 in exchange for 125,000 shares of preferred
stock. 92,500 of these preferred shares and dividends earned thereon
have been converted into 338,486 shares of 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 was due October 23, 1997 and had an
annual interest rate of 5%. During the three months ended September
30, 1997, the debenture was converted into 166,667 shares of Series A
Preferred Stock which are convertible at the option of the holder
thereof into 166,667 shares of common stock. A one time dividend in
the amount of $2.905 for each preferred share is payable in the event
that any dividend is declared on any stock.
6. NOTES PAYABLE
At September 30, 1997, the Company has a revolving note payable to a
bank in the amount of $19,729,995 which bears interest at the rate of
5.84%. This note was due October 29, 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 six months to April 29, 1998.
At September 30, 1997, the Company has an unsecured note payable to a
company owned by three individuals who are each executive officers,
directors and 10% beneficial owner of the Company in the
9
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
amount of $760,000. This note is payable on demand and bears interest
at 12%. Subsequent to September 30, 1997, the balance due under the
note payable was reduced to $189,000.
7. STOCKHOLDERS' EQUITY
Issuance of Stock - During the nine months ended September 30, 1997,
the Company issued 665,747 shares of common stock. 150,000 of such
shares were issued to an unrelated private investor, 265,000 of such
shares were issued upon the exercise of previously granted warrants
and options, 105,000 of such shares were issued to unaffiliated
individuals for services rendered, and 145,747 were issued upon
conversion of convertible debentures.
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 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.
On or about August 29, 1997, a majority of the shareholders of the
Company authorized an amendment to the Company's certificate of
incorporation authorizing and approving the issuance of preferred
stock. The amendment became effective September 24, 1997.
Effective September 30, 1997 the Company entered into a Memorandum of
Understanding ("MOU2") with an unrelated investment entity whereby
that entity agreed to subscribe for the purchase of 187,500 shares of
the Company's Series C Convertible Preferred Stock for a purchase
price of $3,750,000. Dividends accrue on the stated value of
preferred stock at a rate of 5% per annum, are payable quarterly in
cash or common stock at the option of the Company and are convertible
into shares of the Company's common stock at anytime after issuance at
the holder's option. The preferred stock, together with dividends
accrued thereon, may be converted into shares of the Company's common
stock at the lesser of $5.98 or the average of the five lowest
closing bid prices for the 15 trading days preceding the date of any
conversion notice multiplied by 91% for any conversion on or prior to
the 120th day after the original issue date, 90% for any conversion
between 121 and 180 days and 88% for any conversion thereafter.
Utilizing the conversion terms most beneficial to the investor, the
Company has recorded in the accompanying financial statements a
dividend of $1,060,718 which represents a discount of 9%, which is
available to the investor on or before 120 days of closing. A 3%
discount of $164,002 will be amortized as a dividend over 180 days.
In connection with the issuance of the preferred stock described in
MOU2, the Company also recorded the issuance to the investor of a
warrant to purchase up to 200,000 shares of common stock at any time
prior to October 24, 2000, at the exercise price of $7.18 per share.
In connection with the issuance of that warrant, the Company recorded
the fair value of the warrant, totaling $600,000, as a dividend. The
fair value of such warrant was determined as of October 24, 1997 using
the Black-Scholes pricing model assuming the following: Dividend yield
0.00%; expected volatility 65%; risk free interest rate of 5.8% and
expected life to exercise of 3 years. Additionally, the Company has
entered into a registration rights agreement with the investor under
which the Company is obligated to take steps to register the common
stock issuable upon conversion of the preferred stock
10
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
and exercise of the warrant. The Company has covenanted 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 preferred stock and any dividends then payable on the preferred
stock and the exercise of the warrant. Subsequent to September 30,
1997, the Company received the subscription anticipated by the MOU2
and $3,750,000 as consideration for the 187,500 shares of Series C
Preferred Stock.
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 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 nine months ended September 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 3,555,000 6.52
Exercised (15,000) 2.97
Forfeited - -
Canceled ( 35,000) 6.23
-------------- --------------
Total options outstanding at end of period 8,131,000 $ 5.14
============== ==============
Total options exercisable at end of period 3,589,337 $ 4.32
============== ==============
</TABLE>
11
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
A summary of options outstanding under the Company's various stock
option plans at September 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 - 3.66 140,000 8.5 years $ 3.61 60,669 $ 3.61
4.06 4,400,000 8.6 years 4.06 3,200,000 4.06
5.00 - 6.50 3,271,000 9.7 years 6.45 25,334 6.45
7.13 - 9.31 320,000 9.4 years 7.17 303,334 7.17
-------------- ------------- ------------- ------------ -------------- ------------
$2.97 - 9.31 8,131,000 9.1 years $ 5.14 3,589,337 $ 4.32
============== ============= ============= ============ ============== ============
</TABLE>
A summary of warrants granted by the Company during the nine months
ended September 30, 1997 is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
---------------- --------------
<S> <C> <C>
Total outstanding at beginning of period 600,000 $ 1.63
Granted 250,000 8.28
Exercised (250,000) 1.40
Forfeited - -
Canceled - -
---------------- --------------
Total outstanding at end of period 600,000 $ 4.50
================ ==============
</TABLE>
A summary of warrants outstanding at September 30, 1997 is presented
below:
<TABLE>
<CAPTION>
Warrants Outstanding Warrants 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>
$ 0.50 130,000 0.8 years $ 0.50 130,000 $ 0.50
2.00 120,000 0.5 years 2.00 120,000 2.00
3.24 100,000 0.5 years 3.24 100,000 3.24
8.28 250,000 4.7 years 8.28 250,000 8.28
-------------- ------------- ------------- ------------ -------------- ------------
$0.50 - 8.28 600,000 2.3 years $ 4.50 600,00 0 $ 4.50
============== ============= ============= ============ ============== ============
</TABLE>
12
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
8. RELATED PARTY TRANSACTIONS
Related party transactions with a company owned by the majority
shareholders not otherwise disclosed for the nine months ended
September 30, 1997 were as follows:
Expenses:
Base rent expense $ 57,900
Payables:
Accounts payable $ 5,772
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.
At September 30, 1997, the Company has a note payable to a company
owned by three individuals who are each executive officers, directors
and 10% beneficial owners of the Company in the amount of $760,000.
This note is payable on demand and bears interest at 12%. Subsequent
to September 30, 1997, the balance due under the note payable was
reduced to $189,000.
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 September 30, 1997, the
officers had drawn $2,099,007 of the authorized reimbursements,
leaving a disbursable balance of $400,993.
9. 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
13
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
its technologies, and consequently, has not made any royalty payments.
Under the terms of the Synergetics Agreement, the Company paid to
Synergetics $498,992 and $2,104,467 for the three and nine months
ended September 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");
* 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;
14
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
* 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. The Company presently is in the process of preparing the
documentation in connection with the modification of the Synergetics
Agreement.
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
$1,650,371 and $4,715,650 for the three and nine months ended
September 30, 1997.
10. INCOME TAXES
At September 30, 1997, net deferred tax assets, before considering the
valuation allowance, totaled approximately $12,800,000. 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 $2,200,000 and $5,000,000 for the three and nine
months ended September 30, 1997. The Company has available at
September 30, 1997, unused federal operating loss carryforwards of
approximately $30,600,000 and unused state operating loss
carryforwards of approximately
15
<PAGE>
fonix (TM) corporation
[A Development Stage Company]
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
$31,400,000, which may be applied against future taxable income and
which expire in various years beginning in 2008 through 2011.
11. 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 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 notice is given to shareholders
under direction of 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
================
16
<PAGE>
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
17
<PAGE>
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 ( the
"Modification Terms") with regard to the development and assignment of the
Company's ASRT. Under the Modification Terms, and further assuming that the
definitive agreements relating thereto are executed and certain other
preconditions 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, if and when the Company generates revenue. 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 of the
Synergetics Agreement.
Because the Company has not yet licensed its ASRT, the Company has not
received any revenues from operations. During the three months ended
September 30, 1997 the Company incurred research and development expenses of
$1,650,371, an increase of $423,812 or approximately 35 percent over the
three months ended September 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.
Development Losses
General and administrative expenses were $1,997,669 and $595,717,
respectively, for the three months ended September 30, 1997 and September
30, 1996. This is an increase of approximately 235% over the three months
ended September 30, 1996. This increase over the comparable period was due
primarily to increases in salaries, rents, legal and accounting fees,
outside services and an accrued fee of $586,464 payable 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 8).
Due to the lack of revenues and these general and administrative and
research and development expenses, the Company has incurred losses from
operations of $3,648,040 and $1,822,276 for the three months ended September
30, 1997 and 1996, respectively. Net expense from other income and expenses
was $1,417,879 for the three months ended September 30, 1997, an increase in
net expense of $1,545,246 over the three months ended September 30, 1996.
This increase was due primarily to financing costs associated with the
issuance of convertible debentures, convertible preferred stock, warrants
and common stock and 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 September 30, 1997, the Company
had an accumulated deficit of $35,357,516 and stockholders' equity of
$3,956,963. 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 assets exceeded its current liabilities by
$2,112,028 at September 30, 1997 and current assets exceeded current
liabilities by $4,906,520 at December 31, 1996. The current ratio of assets
to liabilities was 1.10 at September 30, 1997 as compared with 1.26 at
December 31, 1996. Current assets increased by $201,069 to $24,168,670 from
December 31, 1996 to September 30, 1997. Current liabilities increased by
$2,995,561 to $22,056,642 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
18
<PAGE>
expenses during the nine months ended September 30, 1997. Total assets were
$26,013,605 at September 30, 1997 as compared to $25,331,270 at December 31,
1996.
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 nine months
ended September 30, 1997. During the three months ended September 30, 1997
the Company recorded a subscription receivable for $44,500 for common stock
and $3,750,000 for the issuance of convertible preferred stock pursuant to a
Memorandum of Understanding ( the "MOU2") under which an unrelated
investment entity agreed to subscribe for 187,500 shares of convertible
preferred stock for the purchase price of $3,750,000. The cash proceeds
were received subsequent to September 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 were due June
18, 2007, bore interest at 5% and were convertible into shares of the
Company's common stock at anytime after issuance at the holder's option.
Under the terms of the Agreement, the debentures were to be purchased in
three installments. 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, were to be paid to the Company upon written
notice, provided that the Company's market capitalization was then in excess
of $200,000,000 and other conditions were met. The debentures were
convertible 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. Utilizing the conversion terms most
beneficial to the investor, the Company recorded a prepaid financing cost of
approximately $427,900. This amount represents the maximum potential
discount of 12.5%, which was available to the investor after 120 days,
applied to the market price on the date of issuance of $6.81 per share.
This amount was being amortized as additional interest expense over the 120
day period commencing June 18, 1997. Upon the conversion of any of the
debentures during the 120 days, an allocable portion of the prepaid
financing costs was expensed. 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. In connection with the issuance of these warrants, the
Company recorded the fair value of the warrants, totaling $897,750 as a
charge to interest expense. The fair value of such warrants was determined
as of the date of grant using the Black-Scholes pricing model assuming the
following: Dividend yield 0.00%; expected volatility 65%; risk free interest
rate of 5.9% and expected life to exercise of 5 years. Prior to September
30, 1997 $850,000 face value of the Series B 5% Convertible Debenture was
converted into 145,747 shares of common stock. Pursuant to a memorandum of
understanding between the Company and the investor dated as of September 30,
1997 (the "MOU") the parties agreed to modify the Agreement to convert all
then outstanding debentures in the amount of $2,150,000 into 107,500 shares
of Series B Convertible Preferred Stock, convertible into common shares
under the same terms as the debentures. In connection with the conversion
of the convertible debentures to convertible preferred stock set forth in
the MOU, the Company recorded all unamortized prepaid financing costs as an
extra-ordinary item, loss on extinguishment of debt. Also in connection
with this modification, the Company agreed to issue an additional warrant
to purchase up to 175,000 shares of common stock at any time prior to
October 24, 2002, at the exercise price of $7.48 per share. In connection
with the issuance of that warrant, the Company recorded the fair value of
the warrant, totaling $661,850 (representing an additional loss on
extinguishment of debt) as an extraordinary item which was determined as of
the date of the grant using the Black-Scholes pricing model assuming the
following: Dividend yield 0.00%; expected volatility 65%; risk free interest
rate of 5.8% and
19
<PAGE>
expected life to exercise of 5 years. Additionally, the Company entered
into an amended and restated registration rights agreement with the investor
under which the Company is obligated to take steps to register the common
stock issuable upon conversion of the preferred stock and exercise of the
warrants. The Company covenanted 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 preferred stock and any
dividends then payable in stock on the preferred stock and the exercise of
the warrant. Prior to September 30, 1997 $850,000 face value of the Series
B 5% Convertible Debenture was converted into 145,747 shares of common
stock. Under the MOU, the Company agreed that it would convert the
remaining $2,150,000 balance into 107,500 shares of convertible preferred
stock effective as of September 30, 1997. Prior to the actual issuance of
such convertible preferred stock, however, the investor converted the
balance of $2,150,000 into 431,619 shares of common stock. Also, subsequent
to September 30, 1997, the Company received a second payment in the amount
of $2,500,000 in exchange for 125,000 shares of preferred stock. 92,500 of
these preferred shares and dividends earned thereon have been converted into
338,486 shares of common stock.
Effective September 30, 1997 the Company entered into a Memorandum of
Understanding ("MOU2") with an unrelated investment entity whereby that
entity agreed to subscribe for the purchase of 187,500 shares of the
Company's Series C Convertible Preferred Stock for a purchase price of
$3,750,000. Dividends accrue on the stated value of preferred stock at a
rate of 5% per annum, are payable quarterly in cash or common stock at the
option of the Company and are convertible into shares of the Company's
common stock at anytime after issuance at the holder's option. The
preferred stock, together with dividends accrued thereon, may be converted
into shares of the Company's common stock at the lesser of $5.98 or the
average of the five lowest closing bid prices for the 15 trading days
preceding the date of any conversion notice multiplied by 91% for any
conversion on or prior to the 120th day after the original issue date, 90%
for any conversion between 121 and 180 days and 88% for any conversion
thereafter. Utilizing the conversion terms most beneficial to the investor,
the Company has recorded in the accompanying financial statements a dividend
of $1,060,718 which represents a discount of 9%, which is available to the
investor on or before 120 days of closing. A 3% discount of $164,002 will be
amortized as a dividend over 180 days. In connection with the issuance of
the preferred stock described in MOU2, the Company also recorded the
issuance to the investor of a warrant to purchase up to 200,000 shares of
common stock at any time prior to October 24, 2000, at the exercise price of
$7.18 per share. In connection with the issuance of that warrant, the
Company recorded the fair value of the warrant, totaling $600,000, as a
dividend. The fair value of such warrant was determined as of October 24,
1997 using the Black-Scholes pricing model assuming the following: Dividend
yield 0.00%; expected volatility 65%; risk free interest rate of 5.8% and
expected life to exercise of 3 years. Additionally, the Company has entered
into a registration rights agreement with the investor under which the
Company is obligated to take steps to register the common stock issuable
upon conversion of the preferred stock and exercise of the warrant. The
Company has covenanted 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 preferred stock and any dividends then payable on
the preferred stock and the exercise of the warrant. Subsequent to September
30, 1997, the Company received the subscription anticipated by the MOU2 and
$3,700,000 as consideration for the 187,500 shares of Series C Preferred
Stock.
Although the Company presently anticipates that it will enter into a
third party license or licenses or co-development agreement or 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, if at all.
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, of which there can be
no assurance.
20
<PAGE>
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 September 30, 1997, the Company had funds on deposit of
$20,000,000, and the Company owed the institution $19,729,995, which
obligation matured on October 29, 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
six-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.
Presently, the Company anticipates that unless it receives substantial
licensing or other revenues prior to the end of fiscal 1997 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 which could be substantial.
In connection with the Modification Terms, 55 employees of Synergetics
became full-time or part-time employees of the Company in March 1997.
Taking account of these employees, the Company presently employs 82 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, Form 10-Q for the period ending March 31, 1997,
and Form 10-Q for the period ending June 30, 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 Report as the "Core Technologies"), the Company has had
no revenues from operations. During each of the preceding three fiscal
21
<PAGE>
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 applicable to common stock
of $15,515,709 for the nine months ended September 30, 1997. 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 September 30, 1997, the Company's accumulated deficit was
$35,357,516. 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
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 or that financing will be available if and
when needed. To the extent that the Company's future financing activities
involve the issuance of equity securities or securities convertible into
equity securities, additional and possibly substantial 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
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<PAGE>
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 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
23
<PAGE>
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.
Nasdaq Stock Market Listing Requirements.
The Company's Common Stock presently is listed on the Nasdaq SmallCap
Market under the symbol "FONX". In order to maintain the continued listing
on such market, the Company, like all companies listed on the Nasdaq
SmallCap Market, is subject to certain minimum asset and capital and surplus
requirements; specifically, the Company's capital and surplus as indicated
on its financial statements prepared in accordance with generally accepted
accounting principles must be at least $1,000,000, and the Company's total
assets must be at least $2,000,000. Effective February 1998, companies with
securities listed on the Nasdaq SmallCap market will be able to satisfy
continued listing requirements by reference, among other factors, to such
companies' total market capitalization. Nevertheless, until such rule
changes take effect, the Company will continue to be subject to the asset
and capital and surplus maintenance requirements referenced above. If the
Company fails to meet such requirements, there can be no assurance that the
Company's Common Stock will not be delisted from the Nasdaq SmallCap Market.
If delisted, the Company's management believes that the Common Stock would
continue to be traded in the over-the-counter market. Nevertheless, in such
event, there can be no assurance that such delisting would not adversely
affect the prevailing market price of the Common Stock or the general
liquidity of an investment in the Company's Common Stock.
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 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
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<PAGE>
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 nine months ended September 30, 1997, the Company
incurred total research and development expenses of $4,715,650. 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 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
25
<PAGE>
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. 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
26
<PAGE>
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.
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 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. A
settlement agreement in principal was reached by the parties. Limited
discovery has been undertaken and documentation is being drafted to submit
to the court for approval. Regardless of the outcome of 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
September 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 July 31, 1997, the Company issued 87,496 shares of common stock to
a private unaffiliated investment entity upon that entity's conversion of
the principal amount of $500,000 of the Company's Series B 5% Convertible
Debentures. 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.
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<PAGE>
On September 25, 1997, the Company issued 166,667 shares of its Series
A Preferred Stock to an affiliated investment entity upon that entity's
conversion of the principal amount of $500,000 of the Company's Series A
Convertible Subordinated Debentures. The Series A Preferred stock is
convertible at any time at the option of the holder thereof, into 166,667
shares of the Company's common stock. 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 September 26, 1997, the Company issued 58,249 shares of common
stock to a private unaffiliated investment entity upon that entity's
conversion of the principal amount of $350,000 of the Company's Series B 5%
Convertible Debentures. The Company issued such shares without registration
under the Act in reliance on Section 4(2) of the Act and/or Regulation D,
although such shares were registered for resale as of the time of issuance
of such securities pursuant to a Registration Statement on Form S-3.
Item 4. Submission of Vote of Security Holders
During the quarter ended September 30, 1997, no matter was submitted
for vote of the Company's shareholders. However, pursuant to written
consent resolutions adopted by the owners of approximately 61 percent of the
issued and outstanding shares of the Company's common stock, and effective
on or about September 24, 1997, the Company's certificate of incorporation
was amended to: (i) authorize the issuance of a new class of preferred
stock of the Company, par value $.0001 per share, and (ii) ratify the
actions of the board of directors of the Company in designating 166,667
shares of a new Series A Preferred Stock of the Company, for issuance to an
affiliated investment entity, in connection with the conversion of the
principal amount of $500,000 of the Company's Series A Subordinated
Convertible Debentures. A report in the form of an Information Statement on
Schedule 14C was prepared and submitted to the record owners of the
Company's shareholders and was filed with the Securities and Exchange
Commission on September 3, 1997, which report is referenced pursuant to
Instruction 6 of Item 4 of Form 10-Q.
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
(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)(iii) 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
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<PAGE>
(3)(iv) Certificate of Amendment of Certificate of Incorporation
dated as of September 24, 1997, filed herewith.
(3)(v) 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)(i) 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
(4)(ii) Certificate of Designation of Rights and Preferences of
Series A Preferred Stock, filed with the Secretary of
State of Delaware on September 24, 1997, filed herewith
(4)(iii) Certificate of Designation of Rights and Preferences of
Series B Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 27, 1997, filed
herewith
(4)(iv) Certificate of Designation of Rights and Preferences of 5%
Series C Convertible Preferred Stock, filed with the
Secretary of State of Delaware on October 24, 1997, filed
herewith
(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
29
<PAGE>
(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., incorporated by reference from
Amendment No. 1 to the Quarterly Report on Form 10-Q for
the period ended June 30, 1997
(10)(viii)Amended and Restated Purchase Agreement effective as of
September 30, 1997 and dated as of October 24, 1997 by and
between the Company and Southbrook International
Investments, Ltd., filed herewith.
(10)(ix) Convertible Preferred Stock Purchase Agreement effective
as of September 30, 1997 and dated as of October 24, 1997
by and among the Company and JNC Opportunity Fund Ltd.
and Diversified Strategies Fund, L.P., filed herewith.
(27) Financial Data Schedule, filed herewith.
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<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: November 14, 1997 /s/ Douglas L. Rex
------------------ ---------------------------------
Douglas L. Rex, Chief Financial Officer
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
fonix CORPORATION
fonix corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That pursuant to the recommendation of the Board of Directors
of the Company, the following resolution amending the Certificate of
Incorporation of the Company has been adopted by the vote of stockholders
of the Company holding a majority of the outstanding stock entitled to vote
thereon. The resolutions setting forth the amendment are as follows:
RESOLVED, that the Company's Certificate of Incorporation be amended
to authorize and provide for the issuance of a preferred stock of the
Company as more fully set forth herein.
FURTHER RESOLVED, the form of the Amendment to the Certificate of
Incorporation of the Company (the " Amendment") attached hereto as Exhibit A
is hereby adopted and approved. Pursuant to the Amendment, Article "FOURTH"
of the Company's Certificate Of Incorporation will be amended to provide
that the authorized capital of the Company will consist of 100,000,000
shares of common stock, par value $.0001 per share, and 20,000,000 shares
of Preferred Stock, par value $.0001 per share, and that the Board of
Directors of the Company shall have authority to create by resolution of
the directors the powers, designations, preferences and relative,
participating, optional or other rights, or the qualifications, limitations
or restrictions of any such series, to issue shares of one or more series
of Preferred Stock of the Company, and to designate the relative rights and
preferences of any such series.
SECOND: That these resolutions have been adopted by written consent of
stockholders holding a majority of the outstanding stock entitled to vote
thereon in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of
perjury, that the foregoing instrument is the act and deed of the Company
and that the facts stated therein are true. Dated this 24th day of
September, 1997.
fonix corporation
By: /s/ JEFFREY N. CLAYTON
---------------------------------
Jeffrey N. Clayton
Title: Vice President and Secretary
Certificate of Designation of Rights and Preferences
for Series A Preferred Stock
of
fonix corporation
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, fonix corporation, a Delaware corporation (the "Company"), does
hereby certify:
FIRST: That pursuant to authority expressly vested in it by the
Certificate of Incorporation of the Company, the Board of Directors of the
Company has adopted the following unanimous consent resolutions establishing
a new series of Preferred Stock of the Company, consisting of 166,667 shares
designated "Series A Preferred Stock," with such powers, designations,
preferences and relative participating, optional or other rights, if any,
and the qualifications, limitations or restrictions thereof, as are set
forth in the resolutions :
RESOLVED, that in the judgment of the Board of Directors of the
Company, and to fulfill the obligations of the Company pursuant
to that certain Securities Purchase Agreement dated as of
October 23, 1995, between and among Beesmark Investments, L.C.
("Beesmark"), Alan C. Ashton, and the Company and to comply with
the terms of the Series A Subordinated Convertible Debenture
dated October 23, 1995, which has subsequently been renewed
between the Company and Beesmark (the "Debenture"), it is deemed
advisable and in the best interests of the Company, subject to
approval by the shareholders of the Company, to amend the
Company's Articles of Incorporation to authorize and provide for
the issuance of a preferred class of stock of the Company,
including the creation and designation of a new series of
preferred stock to be known as Series A Preferred Stock, par
value $.0001 per share (the "Series A Stock"), which Series A
Stock may be issued to Beesmark upon exercise by Beesmark of its
conversion rights under the Debenture.
. . . .
FURTHER RESOLVED, that upon approval of the Amendment [to the
Certificate of Incorporation of the Company (the "Amendment")] by
the Company's shareholders, the directors hereby resolve to
create and establish a new series of preferred stock designated
"Series A Preferred Stock," which series shall have the relative
rights and preferences set forth in that certain Certificate of
Designation of Rights and Preferences for Series A Preferred
Stock (the "Certificate of Designation") attached hereto as
Exhibit B and by this reference incorporated herein.
FURTHER RESOLVED, that upon filing of the Amendment and the
Certificate of Designation with the Secretary of State of
Delaware, the officers of the Company are hereby authorized and
directed to issue shares of the Series A Stock to Beesmark
Investments, L.C., pursuant to the terms and provisions
governing conversion of the Debenture into shares of Series A
Stock.
FURTHER RESOLVED, that the forms of Amendment and Certificate of
Designation be,
<PAGE>
and the same hereby are, adopted and approved in all respects, and
that each of the executive officers of the Company be, and they hereby
are, authorized and directed to execute and deliver said documents in
substantially the forms attached hereto, with such changes therein as
such officers shall, upon advice of counsel, approve, which approval
shall be conclusively evidenced by such officers' execution thereof.
. . . .
FURTHER RESOLVED, that the Chairman, the President, any Vice-
President, and the Secretary of the Company be, and they hereby
are, and each of them hereby is, authorized and directed:
(i) to execute, deliver and file, on behalf of the
Company, the Amendment and the Certificate of
Designation.
(ii) upon filing of the Amendment and the Certificate of
Designation with the Secretary of State of Delaware,
to issue stock certificates representing shares of
Series A Stock to Beesmark Investments, L.C.,
pursuant to the terms and provisions governing
conversion of the Debenture into shares of Series A
Stock.
(iii)to execute, deliver and file any and all additional
certificates, documents or other papers, and to do
any and all things which they may deem necessary or
appropriate in order to authorize the new class of
Preferred Stock, to authorize and issue the new
Series A Preferred Stock of such class, as
originally contemplated in the Debenture, and to
implement and carry out all matters herein
authorized pursuant to the intent and purpose of the
foregoing resolutions.
FURTHER RESOLVED, that the actions of the officers and directors
of the Company heretofore taken in connection with the
authorization of the new class of Preferred Stock be, and that
same hereby are, ratified and approved in all respects.
SECOND: That said resolutions of the directors of the Company were
duly adopted in accordance with the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of
perjury, that the foregoing instrument is the act and deed of the Company
and that the facts stated therein are true. Dated this 24TH day of
September, 1997.
fonix corporation
By: /s/ JEFFREY N. CLAYTON
---------------------------
Jeffrey N. Clayton
Title: Vice President and Secretary
<PAGE>
EXHIBIT "B"
to
UNANIMOUS CONSENT RESOLUTIONS OF DIRECTORS
Designation of Rights and Preferences
for Series A Preferred Stock
The ONE HUNDRED SIXTY SIX THOUSAND SIX HUNDRED SIXTY-SEVEN (166,667) of
Series A Preferred Stock which class and series of stock shall have the
following rights and preferences:
1. Designation and Number of Shares. The Series A Preferred Stock shall
be designated and known as "Series A Preferred Stock" and shall consist
of ONE HUNDRED SIXTY-SIX THOUSAND SIX HUNDRED SIXTY-SEVEN (166,667)
shares.
2. Voting Rights. The holders of the Series A Preferred Stock shall be
entitled to vote on any matters submitted to the shareholders of the
company; each share of Series A Preferred Stock shall have the voting
rights of one share of the Company's Common Stock.
3. Election of Director. The holders of the Series A Preferred Sock
shall have the right to elect one (1) person to the Company's Board of
Directors. Such director shall serve until such time as his or her
successor shall elected or until there are no more shares of the
Series A Preferred Stock issued and outstanding. The election of such
director shall take place simultaneously with the annual election of
the other directors of the Company, or at such other time as allowed
by the Delaware General Business Company Statute, the Company's
Certificate of Incorporation, or its Bylaws.
4. Dividends. In the event the Board of Directors of the Company shall
declare any dividend or dividends on any class or series of stock, the
holders of the shares of Series A Preferred Stock shall be entitled to
receive, out of legally available funds and payable in preference and
priority to any payment of any cash dividend on the Common Stock or
any other shares of capital stock in this Company, a dividend of
$2.905 per share of Series A Preferred Stock (the "Series A Dividend").
In the event the Company shall not have legally available funds
sufficient to pay the entire divided for all of the shares of the
Series A Preferred Stock issued and outstanding at the record date for
any dividend declaration, the Series A Dividend shall be paid to the
extent of legally available funds pro rata to the holders of the
Series A Preferred Stock, and any balance of the Series A Dividend as
to which there is not legally available funds shall be payable out of
the next declared dividend or dividends. The Series A Dividend shall
be payable to the holders of record at the close of business on the
date specified by the Board of Directors of the Company at the time
such dividend is declared. No dividends shall be declared or paid or
set apart specifically for payment on the Common Stock, or on the
Preferred Stock of any series ranking, as to dividends, junior to the
Series A Preferred Stock, for any period unless the Series A Dividend
shall have been paid or is contemporaneously paid. Unless the
Series A Dividend shall have been paid in full, no other distribution
shall be made upon the Common Stock of the Company or upon any
securities junior to the Series A Preferred Stock.
<PAGE>
5. Conversion. The holders of the Series A Preferred Stock shall have
conversion rights as follows:
a. Right to Convert. Subject to the provision for adjustment set
forth below, each share of Series A Preferred Stock shall be
convertible (the "Conversion Right"), at the option of the holder
of such shares, at any time and from time to time, into one
fully paid and non-assessable share of the Company's Common
Stock.
b. Mandatory Conversion. In the event that after issuance of the
Series A Preferred Stock the market price of the Company's
common Stock, as quoted on the NASDAQ Electronic Bulletin Board
or any other similarly reliable quotation service, shall have
equaled or exceeded $15.00 per share for a period of fifteen
(15) consecutive market days, the entire amount of the then
issued and outstanding shares of Series A Preferred Stock
automatically shall be converted into shares of Common Stock at
a conversion rate of one share of Common Stock for each share of
Series A Preferred Stock.
c. Effect of Liquidation. If the Company is liquidated, the
Conversion Right of the Series A Preferred Stock shall terminate
at the close of business on the first full day preceding the
date fixed for the payment of any amounts distributable on
liquidation to the holders of the Series A Preferred Stock.
d. Mechanics of Conversion. To convert shares of Series A
Preferred Stock to shares of Common Stock, the holder of such
shares shall surrender the certificate or certificates for such
shares of Series A Preferred Stock at the office of the transfer
agent for the Common Stock, together with written notice that
such holder elects to convert all or any number of shares of the
Series A Preferred Stock represented by such certificate or
certificates. The date of receipt of such certificates and
notice by the transfer agent shall be the conversion date
("Conversion Date"). The Company shall, as soon as practicable
after the Conversion Date, issue and deliver to such holder of
the Series A Preferred Stock, a certificate for the number of
shares of Common Stock to which such holder shall be entitled.
e. Reservation of Shares of Common Stock. The Company shall, for
so long as there are shares of Series A Preferred Stock
outstanding, reserve and keep available out of its authorized
but unissued shares of Common Stock, for the purpose of
effecting the conversion of the Series A Preferred Stock, such
number of duly authorized shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock.
6. Conversion Adjustment. The number of shares of Common Stock into
which the shares of Series A Preferred Stock may be converted shall be
subject to adjustment from time to time in certain circumstances as
follows:
a. If at any time before such conversion the Company shall (i)
subdivide the outstanding shares of Common Stock into a greater
number of shares; (ii) combine the outstanding shares of Common
Stock into a smaller number of shares; (iii) change the
outstanding shares of Common Stock into the same or a given
number of shares or another class or classes of shares; (iv)
declare a dividend on or in respect of the shares or other
securities
2
<PAGE>
of the Company; or (v) offer to the holders of the shares of
Common Stock any rights to subscribe for shares or for other
securities of the Company; then the holders of the shares of
Series A Preferred Stock shall be entitled, as the case may be,
to receive the same number of shares of Common Stock or other
securities of the Company, or to purchase, at the same price
that the shares or securities are being offered to the holders
of the shares of Common Stock, the number of such shares or the
amount of such securities as will represent the same proportion
of the outstanding shares of Common Stock before such increase
or decrease as they would have been entitled to receive or
subscribe for, as the case may be, had they been holders of the
number of shares of Common Stock into which their convertible
Series A Preferred Stock was convertible on the record date for
any such even.
b. If at any time any of the shares of Series A Preferred Stock are
outstanding the Company shall be consolidated with or merged
into any other corporation or corporations, or shall sell or
lease substantially all of its property and business as an
entirety, lawful provision shall be made as part of the terms of
such consolidation, merger, sale or lease that the holder of any
shares of Series A Preferred Stock receive, as securities or
cash compensation for its shares of Series A Preferred Stock,
the same kind and amount of securities, cash or assets as may be
issuable, distributable or payable upon such consolidation,
merger, sale or lease with respect to the shares of Common Stock
of the Company, applying the conversion rate which would
otherwise be in effect at the time of conversion as provided in
this Resolution.
7. Liquidation Rights. In the event of insolvency or the liquidation,
dissolution or winding up of the Company, whether voluntarily or
involuntarily, the holders of the Series A Preferred Stock shall be
entitled to receive, after due payment or provision for the payment of
the debts and other liabilities of the Company and before any
liquidating distribution in respect of any other class of stock, a
liquidating distribution of $36.33 per share of Series A Preferred
Stock. After such payments to the holders of the Series A Preferred
Stock, all remaining assets and funds of the Company shall be divided
among and paid to the holders of the Company's Common Stock and the
holders of the Series A Preferred Stock, pro rata, provided that the
holders of the Series A Preferred Stock shall receive, for each share
held, an amount equal to 1.5 multiplied by the per share amount
distributed to the holders of the Common Stock.
3
Certificate of Designation of Rights and Preferences
for Series B Convertible Preferred Stock
of
fonix corporation
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, fonix corporation, a Delaware corporation (the "Company"), does
hereby certify:
FIRST: That pursuant to authority expressly vested in it by the
Certificate of Incorporation of the Company, the Board of Directors of the
Company has adopted the following unanimous consent resolution(s)
establishing a new series of Preferred Stock of the Company, consisting of
125,000 shares designated "Series B Convertible Preferred Stock," with such
powers, designations, preferences and relative participating, optional or
other rights, if any, and the qualifications, limitations or restrictions
thereof, as are set forth in the resolutions :
FURTHER RESOLVED, that the Company's Board of Directors
hereby unanimously approves the designation and issuance of the
Series B Preferred Stock according to the terms and conditions
as set forth in Exhibit B and authorizes and instructs the
Company's officers to proceed in filing the Certificate of
Designation with the State of Delaware and to take such other
action as shall be appropriate in connection with the issuance
of the Series B Preferred Stock.
SECOND: That said resolutions of the directors of the Company were
duly adopted in accordance with the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of
perjury, that the foregoing instrument is the act and deed of the Company
and that the facts stated therein are true. Dated this 24th day of October,
1997.
fonix corporation
By: /s/ ROGER D. DUDLEY
----------------------------
Roger D. Dudley
Title: Executive Vice President
<PAGE>
EXHIBIT B
SERIES B CONVERTIBLE PREFERRED STOCK TERMS
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the Series B Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated shall
be 125,000. Each share of Preferred Stock shall have a par value of $.0001
per share and a stated value of $20 per share (the "Stated Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December
31, 1997, and on each Conversion Date (as hereinafter defined), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of
the Stated Value per share) equal to 5% per annum, payable in cash or shares
of Common Stock (as defined in Section 6) at the option of the Company. The
number of shares of Common Stock issuable as payment of dividends hereunder
shall equal the aggregate dollar amount of dividends then being paid,
divided by the Conversion Price (as defined in Section 5(c)(i)) then in
effect. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing the Original Issue Date (as
defined in Section 6), and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for
any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably
among the holders of the Preferred Stock based upon the number of shares
then held by each holder. In order for the Company to exercise its right to
pay dividends in shares of Common Stock, the Company shall, no less than
five (5) Trading Days prior to the first day of the calendar quarter in
which a dividend payment date (other than a Conversion Date) occurs, provide
the holders of the Preferred Stock written notice of its intention to pay
dividends in shares of Common Stock.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if: ( the
number of shares of Common Stock at the time authorized, unissued and
unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the
Company has not duly reserved for issuance in respect of such dividends a
sufficient number of shares of Common Stock, ( such shares are not
registered for resale pursuant to an effective Underlying Securities
<PAGE>Registration Statement (as defined in Section 6) and may not be sold
without volume restrictions pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), as determined by
counsel to the Company pursuant to a written opinion letter, addressed and
acceptable to the Company's transfer agent or other Person performing
functions similar thereto, ( such shares are not listed for trading on the
Nasdaq SmallCap Market, Nasdaq National Market, The New York Stock Exchange
or the American Stock Exchange (and any other exchange, market or trading
facility in which the Common Stock is then listed for trading), ( the
issuance of such shares would result in the recipient thereof beneficially
owning, determined in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, more than 4.999% of the then
issued and outstanding shares of Common Stock, unless the issuance of shares
of Common Stock in excess of such amount is then permitted by Section 3.9 of
the Purchase Agreement, or (v) the Company shall have failed to timely
satisfy its obligations pursuant to any Conversion Notice.
Payment of dividends in shares of Common Stock is further
subject to the provision of Section 5(a)(ii).
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined
in Section 6), nor shall the Company directly or indirectly pay or declare
any dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect
of, any Junior Securities, nor shall any monies be set aside for or applied
to the purchase or redemption (through a sinking fund or otherwise) of any
Junior Securities or shares pari passu with the Preferred Stock.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding,
the Company shall not and shall cause its subsidiary not to, without the
affirmative vote of 66 of the holders of all of the shares of the Preferred
Stock then outstanding, alter or change adversely the powers, preferences
or rights given to the Preferred Stock, (b) alter or amend this Certificate
of Designation, (c) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in
Section 4) or otherwise senior to or pari passu with the Preferred Stock,
(d) amend its Certificate of Incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders of the
Preferred Stock, (e) increase the authorized or designated number of shares
of Preferred Stock, (f) issue any additional shares of Preferred Stock or
(g) enter into any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of Preferred Stock shall be entitled to receive
out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid
-2-
<PAGE>
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts,
then the entire assets to be distributed to the holders of Preferred Stock
shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares
if all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any
other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall
mail written notice of any such Liquidation, not less than 45 days prior to
the payment date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock is convertible at the option
of the holder in whole or in part at any time after the Original Issue Date
into shares of Common Stock (subject to reduction pursuant to Section
5(a)(ii) hereof and Section [ ] of the Purchase Agreement) at the Conversion
Ratio (as defined in Section 6). The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (the "Conversion Notice").
Each Conversion Notice shall specify the number of shares of Preferred Stock
to be converted and the date on which such conversion is to be effected,
which date may not be prior to the date the holder delivers such Conversion
Notice by facsimile (the "Conversion Date"). If no Holder Conversion Date
is specified in a Holder Conversion Notice, the Holder Conversion Date shall
be the date that the Holder Conversion Notice is deemed delivered pursuant
to Section 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof and Section [
] of the Purchase Agreement, each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all shares of Preferred
Stock represented by the certificate or certificates tendered by the holder
with the Conversion Notice, or if a conversion hereunder cannot be effected
in full for any reason, the Company shall promptly deliver to such holder
(in the manner and within the time set forth in Section 5(b)) a certificate
for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on the Conversion
Date applicable to any conversion, (A) the Common Stock is then listed for
trading on the Nasdaq National Market, The New York Stock Exchange, the
American Stock Exchange or if the rules of The Nasdaq Stock Market, Inc. are
hereafter amended to extend or adopt rules similar to Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to
the Nasdaq SmallCap Market and the Company's Common Stock is listed for
trading on such market or exchange, (B) the Conversion Price then in effect
is such that the aggregate number of shares of Common Stock that would then
be issuable upon conversion of all outstanding shares of Preferred Stock,
together with any shares of Common Stock previously issued upon conversion
of Preferred Stock and in
-3-
<PAGE>
respect of payment of dividends hereunder, would equal or exceed 20% of the
number of shares of Common Stock outstanding on the Original Issue Date (the
"Issuable Maximum"), and (C) the Company has not previously obtained
Shareholder Approval (as defined below), then the Company shall issue to the
holder so requesting a conversion of Preferred Stock its pro rata portion of
the Issuable Maximum in the same ratio that the number of shares of
Preferred Stock then outstanding and held by such holder bears to the
aggregate number of shares of Preferred Stock then outstanding and, with
respect to the remainder of the shares of Preferred Stock then held by such
holder for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of such holder's pro rata
portion of the Issuable Maximum, the converting holder shall have the option
to require the Company to either (1) use its best efforts to obtain the
Shareholder Approval applicable to such issuance as soon as is possible, but
in any event not later than the 60th day after such request, or (2)(i) issue
and deliver to such holder a number of shares of Common Stock as equals (x)
the number of shares of Preferred Stock (or such portions thereof) tendered
for conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of such holder's pro rata portion of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined in
Section 5(c)(i)), and (ii) cash in an amount equal to the product of (x) the
Per Share Market Value on the Conversion Date and (y) the number of shares
of Common Stock in excess of such holder's pro rata portion of the Issuable
Maximum that would have otherwise been issuable to the holder in respect of
such conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). If the Company
fails to pay the Discount Equivalent in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum to the converting holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid
in full. The entire Discount Equivalent, including interest thereon, shall
be paid in cash. "Shareholder 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 shareholders 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 Common Stock exceeding the Issuable Maximum as a consequence of
the conversion of Preferred Stock into 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 (3) Trading Days after a Conversion
Date, the Company will deliver to the holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) hereof and Section 3.9 of the Purchase
Agreement), (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay accrued and unpaid dividends in cash) and (iv) if the Company has
elected and is permitted hereunder to pay accrued dividends in shares
-4-
<PAGE>
of Common Stock, 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 such number of shares of Common Stock as
are issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a); provided, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Common Stock
issuable upon conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are delivered for conversion to
the Company, or the holder of such Preferred Stock notifies the Company that
such certificates have been lost, stolen or destroyed and provides a bond
(or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
The Company shall, upon request of the holder, use its best efforts to
deliver any certificate or certificates required to be delivered by the
Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable holder by
the third Trading Day after the Conversion Date, the holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such conversion, in
which event the Company shall immediately return the certificates
representing the shares of Preferred Stock tendered for conversion. If the
Company fails to deliver to the holder such certificate or certificates
pursuant to this Section, including for purposes hereof, any shares of
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid dividends hereunder, prior to the fifth (5th) Trading Day after the
Conversion Date, the Company shall pay to such holder, in cash, as
liquidated damages and not as a penalty, $2,500 for each day after such
fifth (5th) Trading Day until the tenth (10th) Trading Day after the
Conversion Date, thereafter, the Company shall, pay to such holder, in cash,
as liquidated damages and not as a penalty, $5,000 for each day after such
tenth (10th) Trading Day after the Conversion Date until such certificates
are delivered. Nothing herein shall limit a holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein
(including, without limitation, damages relating to any purchase of shares
of Common Stock by such holder to make delivery on a sale effected in
anticipation of receiving certificates representing shares of Common Stock
upon conversion, such damages to be in an amount equal to (A) the aggregate
amount paid by such holder for the shares of Common Stock so purchased minus
(B) the aggregate amount of net proceeds, if any, received by such holder
from the sale of the shares of Common Stock issued by the Company pursuant
to such conversion), and such holder shall have the right to pursue all
remedies available to it at law or in equity (including, without limitation,
a decree of specific performance and/or injunctive relief).
(c) (i) The conversion price for each share of Preferred
Stock (the "Conversion Price") in effect on any Conversion Date shall be the
lesser of (A) the average Per Share Market Value for the five (5) Trading
Days immediately preceding the Original Issue Date (the "Initial Conversion
Price") and (B) the product of the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date multiplied
by the Applicable
-5-
<PAGE>
Percentage (as defined in Section 6); provided that, (a) if the Underlying
Shares Registration Statement is not filed on or prior to the 20th day after
the Original Issue Date, or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Securities Exchange Act of 1934, as amended, within
five (5) Trading Days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the staff of the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not
subject to further review or (c) if the Underlying Shares Registration
Statement is not declared effective by the Commission on or prior to the
60th 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
within ten (10) Trading Days by a subsequent Underlying Shares Registration
Statement filed with and declared effective by the Commission, or (e) if
trading in the Common Stock shall be suspended for any reason (other than as
a result of the suspension of trading in securities generally) for more than
four days in the aggregate, or (f) if the conversion rights of the holders
of Preferred Stock hereunder are suspended for any reason or (g) if the
Company breaches in a material respect any covenant or other material term
or condition to the Purchase Agreement, the Registration Rights Agreement or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby, and such breach
continues for a period of thirty (30) days after written notice thereof to
the Company (any such failure being referred to as an "Event," and for
purposes of clauses (a), (c) and (f) the date on which such Event occurs, or
for purposes of clause (b) the date on which such five (5) Trading Days
period is exceeded, or for purposes of clause (d) the date which such 10
Trading Day-period is exceeded, or for purposes of clause (e) the date on
which such four day period is exceeded, or for clause (g) the date on which
such thirty (30) day period is exceeded, being referred to as "Event Date"),
the Applicable Percentage shall be decreased by 2.5% each month (i.e., the
Applicable Percentage would decrease by 2.5% as of the Event Date and an
additional 2.5% as of the first monthly anniversary of the Event Date) until
the later to occur of the second month anniversary after the Event Date and
such time as the applicable Event is cured. Commencing the second month
anniversary after the Event Date, the Company shall pay to each holder of
Preferred Stock the product of 2.5% and the aggregate of the Stated Values
for the shares of Preferred Stock then held by such holder, in cash as
liquidated damages, and not as a penalty on the first day of each monthly
anniversary of the Event Date until such time as the applicable Event, is
cured. Any decrease in the Conversion Price pursuant to this Section shall
continue notwithstanding the fact that the Event causing such decrease has
been subsequently cured. The provisions of this Section are not exclusive
and shall in no way limit the Company's obligations under the Registration
Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities
payable in shares of Common Stock, (b) subdivide outstanding shares of
Common Stock into a larger number of shares, (c) combine outstanding shares
of
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<PAGE>
Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company, the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of 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 outstanding after
such event. Any adjustment made pursuant to this Section 5(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 shares of
Preferred Stock are outstanding, shall issue rights or warrants to all
holders of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, the Initial Conversion
Price shall be multiplied by a fraction, of which the denominator shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right or warrant to purchase Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section
5(c)(iii), if any such right or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to
the price which it would have been (but reflecting any other adjustments in
the Conversion Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of the
Conversion Price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights
or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which
the numerator shall be such Per Share Market
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<PAGE>
Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common
Stock as determined by the Board of Directors in good faith; provided,
however, that in the event of a distribution exceeding ten percent (10%) of
the net assets of the Company, such fair market value shall be determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may
be the firm that regularly examines the financial statements of the Company)
(an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the holders of Preferred Stock
of the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another Person pursuant
to which the Company will not be the surviving entity, the sale or transfer
of all or substantially all of the assets of the Company or any compulsory
share exchange pursuant to which the Common Stock is converted into other
securities, cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to, at their option, (A) convert
such shares of Preferred Stock, together with all accrued and unpaid
dividends thereon, only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or
share exchange, and the holders of the Preferred Stock shall be entitled
upon such event to receive such amount of securities, cash or property as
the shares of the Common Stock of the Company into which such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon
could have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled or (B) to require that the Person with whom such consolidation,
merger, sale or transfer or share exchange takes place issue and deliver to
the holders of the Preferred Stock shares of convertible preferred stock or
convertible debentures of such Person which newly issued shares or
debentures (as the case may be) shall have terms substantially similar in
all material respects to the terms of the Preferred Stock (including with
respect to conversion) and shall be entitled to all of the rights and
privileges of a holder of Preferred Stock set forth herein, in the
Registration Rights Agreement and in the Purchase Agreement (including
without limitation, such rights as relates to the acquisition,
transferability, registration and listing of the stock or other securities
issuable upon conversion of such convertible preferred stock or convertible
debentures). In such case, the conversion price for such newly issued
convertible securities shall be based upon the amount of securities, cash or
property that each share of Common Stock would receive in the transaction
giving rise to the obligation to issue such securities, the Conversion Ratio
immediately prior to the effective or closing date for such transaction and
the Conversion
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<PAGE>
Price stated herein. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to
give to the holder of Preferred Stock the right to receive the securities,
cash or property set forth in this Section upon any conversion following
such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(vi) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly
mail to each holder of Preferred Stock, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, 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 Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 30 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating
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<PAGE>
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
Holders are entitled to convert shares of Preferred Stock during the 30-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(ix) If the Company (i) makes a public announcement that
it intends to enter into a Change of Control Transaction (as defined below)
or (ii) any person, group or entity (including the Company, but excluding a
Holder or any affiliate of a Holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a Holder seeks to convert
shares of Preferred Stock on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed transaction
or tender offer, exchange offer or other transaction and the Abandonment
Date (as defined below), be equal to the lower of (x) the average Per Share
Market Value on the five Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect on
the Conversion Date for such Preferred Stock. "Abandonment Date" means with
respect to any proposed transaction or tender offer, exchange offer or other
transaction for which a public announcement as contemplated by this
paragraph has been made, the date upon which the Company (in the case of
clause (i) above) or the person, group or entity (in the case of clause (ii)
above) publicly announces the termination or abandonment of the proposed
transaction or tender offer, exchange offer or another transaction which
caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as
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<PAGE>
to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
good faith, in which case the adjustment shall be equal to the average of
the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion
Price shall be made which in the opinion of the Appraiser(s) giving the
aforesaid opinion or opinions would result in an increase of the Conversion
Price to more than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock solely
for the purpose of issuance upon conversion of Preferred Stock and payment
of dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Preferred Stock, not less than such number of
shares of Common Stock as shall (subject to any additional requirements of
the Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and restrictions
of Section 5(c)) upon the conversion of all outstanding shares of Preferred
Stock and payment of dividends hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid, nonassessable and freely
tradeable.
(f) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the
holder of a share of Preferred Stock shall be entitled to receive, in lieu
of the final fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the holder of such
shares of Preferred Stock so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(h) Shares of Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued
shares of undesignated stock.
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<PAGE>
(i) Any and all notices or other communications or
deliveries to be provided by the holders of the Preferred Stock hereunder,
including, without limitation, any Conversion Notice, shall be in writing
and delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Legal
Department of the Company at the facsimile telephone number or address of
the principal place of business of the Company as set forth in the Purchase
Agreement. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight
courier service, addressed to each holder of Preferred Stock at the
facsimile telephone number or address of such holder appearing on the books
of the Company, or if no such facsimile telephone number or address appears,
at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 4:30 p.m. (New York), (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 7:00 p.m. (New York Time) on any date and earlier than 11:59 p.m. (New
York Time) on such date, (iii) upon receipt, if sent by a nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given.
Section 6. Optional Redemption.
(a) All outstanding and unconverted shares of Preferred Stock
after the Original Issue Date may, at the Company's option upon at least ten
(10) days notice to the Purchaser, be redeemed by the Company pursuant to
this Section 6(a), from funds legally available therefor at a price per
share of Preferred Stock equal to the Conversion Price in Section 5, plus
accrued dividends. Thereafter, all shares of Preferred Stock shall cease to
be outstanding and shall have the status of authorized but undesignated
stock. The entire redemption price shall be paid in cash.
(b) If any portion of the applicable redemption price under
Section 6(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 8% per
annum until the redemption price plus all such interest is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). In
addition, if any portion of such redemption price remains unpaid for more
than 7 calendar days after the date due, the holder of the Preferred Stock
subject to such redemption 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
5 of all of the shares of Preferred Stock for which such redemption price,
plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Redemption Shares"), in which event the Per Share Market Price for
such shares shall be the lower of the Per Share Market Price calculated on
the date such redemption price was originally due and the Per Share Market
Price as of the holder's written demand for conversion, or (ii) invalidate
ab initio such redemption, notwithstanding anything herein contained to the
contrary. If 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 Common
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<PAGE>
Stock issuable upon conversion of the Unpaid Redemption Shares subject to
such holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if 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 Redemption Shares.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"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.
"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.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including any
accrued but unpaid interest thereon) but only to the extent not paid in
shares of Common Stock in accordance with the terms hereof, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation
preference to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers
of any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other 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 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
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<PAGE>
determined by an Appraiser selected in good faith by the holders of a
majority in interest of the shares of the Preferred Stock; provided,
however, that the Company, after receipt of the determination by such
Appraiser, shall have the right 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.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase and Exchange Agreement, dated as of October 24, 1997, between the
Company and the original holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of October 24, 1997, between the Company and the
original holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market or other stock exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq National 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); provided, however, that in the event that the Common
Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State
of New York are authorized or required by law or other government action to
close.
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof
and the Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series [ ]
Convertible Preferred Stock indicated below, into shares of Common Stock,
par value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
__________________________________________________
Date to effect conversion
__________________________________________________
Number of shares of Preferred Stock to be converted
_________________________________________________
Number of shares of Common Stock to be issued
__________________________________________________
Applicable conversion price
__________________________________________________
Name of Holder
____________________________________________________
Address of Holder
__________________________________
Authorized Signature
Certificate of Designation of Rights and Preferences
for Series C Preferred Stock
of
fonix corporation
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, fonix corporation, a Delaware corporation (the "Company"), does
hereby certify:
FIRST: That pursuant to authority expressly vested in it by the
Certificate of Incorporation of the Company, the Board of Directors of the
Company has adopted the following unanimous consent resolutions establishing
a new series of Preferred Stock of the Company, consisting of 187,500 shares
designated "Series C Convertible Preferred Stock," with such powers,
designations, preferences and relative participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof,
as are set forth in the resolutions :
FURTHER RESOLVED, that the Company's Board of Directors
hereby unanimously approves the designation and issuance of the
Series C Preferred Stock according to the terms and conditions
as set forth in Exhibit D and authorizes and instructs the
Company's Executive Officers to proceed in filing the
Certificate of Designation with the State of Delaware and to
take such other action as shall be appropriate in connection
with the issuance of the Series C Preferred Stock.
SECOND: That said resolutions of the directors of the Company were
duly adopted in accordance with the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned hereby affirms, under penalties of
perjury, that the foregoing instrument is the act and deed of the Company
and that the facts stated therein are true. Dated this 24th day of October,
1997.
fonix corporation
By: /s/ JEFFREY N. CLAYTON
-------------------------------
Jeffrey N. Clayton
Title: Vice President and Secretary
<PAGE>
SERIES C TERMS
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the 5% Series C Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated and
authorized shall be 187,500. Each share of Preferred Stock shall have a par
value of $.0001 per share and a stated value of $20 per share (the "Stated
Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December
31, 1997, and on each Conversion Date (as hereinafter defined), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of
the Stated Value per share) equal to 5% per annum, payable in cash or shares
of Common Stock (as defined in Section 7) at the option of the Company. The
number of shares of Common Stock issuable as payment of dividends hereunder
shall equal the aggregate dollar amount of dividends then being paid,
divided by the Conversion Price (as defined in Section 5(c)(i)) then in
effect. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing the Original Issue Date (as
defined in Section 7), and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for
any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably
among the holders of the Preferred Stock based upon the number of shares
then held by each holder. In order for the Company to exercise its right to
pay dividends in shares of Common Stock, the Company shall, no less than two
(2) Trading Days prior to the first day of the calendar quarter in which a
dividend payment date (other than a Conversion Date) occurs, provide the
holders of the Preferred Stock written notice of its intention to pay
dividends in shares of Common Stock. In order for the Company to exercise
its right to pay dividends in shares of Common Stock on any Conversion Date,
the Company must provide written notice to the holders of Preferred Stock at
least one Trading Day prior to the issuance of shares of Common Stock as
payment therefor, which notice will remain in effect for subsequent
Conversion Notices until rescinded by the Company in a written notice to
such effect that is addressed to the holders of the Preferred Stock.
Notwithstanding the foregoing, if any such holder shall deliver a Conversion
Notice (as hereinafter defined) within five (5) Trading Days after receipt
of such rescinding notice from the Company, such holder shall be entitled to
receive payment of dividends in shares of Common Stock.
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends on
the Preferred Stock (and must deliver cash in respect thereof) if: ( the
number of shares of Common Stock at the time authorized, unissued
<PAGE>
and unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the
Company has not duly reserved for issuance in respect of such dividends a
sufficient number of shares of Common Stock, ( such shares are not
registered for resale pursuant to an effective Underlying Securities
Registration Statement (as defined in Section 7) and may not be sold without
volume restrictions pursuant to Rule 144(k) promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), as determined by counsel to
the Company pursuant to a written opinion letter, addressed and acceptable
to the Company's transfer agent or other Person performing functions similar
thereto, ( such shares are not listed for trading on the Nasdaq SmallCap
Market, Nasdaq National Market, The New York Stock Exchange ("NYSE") or the
American Stock Exchange (the "AMEX") (and any other exchange, market or
trading facility in which the Common Stock is then listed for trading), (
the issuance of such shares would result in the recipient thereof
beneficially owning, determined in accordance with Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended, more than 4.999% of
the then issued and outstanding shares of Common Stock, unless the issuance
of shares of Common Stock in excess of such amount is then permitted by
Section 3.8 of the Purchase Agreement, or (v) the Company shall have failed
to timely satisfy its obligations pursuant to any Conversion Notice.
Payment of dividends in shares of Common Stock is further subject to
the provision of Section 5(a)(ii).
(c) So long as any shares of Preferred Stock remain
outstanding, neither the Company nor any subsidiary thereof shall, without
the consent of the holders of 66 2/3% of the shares of Preferred Stock then
outstanding, redeem, repurchase or otherwise acquire directly or indirectly
any Junior Securities (as defined in Section 7), nor shall the Company
directly or indirectly pay or declare any dividend or make any distribution
(other than a dividend or distribution described in Section 5) upon, nor
shall any distribution be made in respect of, any Junior Securities, nor
shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities.
Notwithstanding the foregoing, the Company may redeem, repurchase or
otherwise acquire shares of the Company's Series B Convertible Preferred
Stock, provided that any such redemption, repurchase or acquisition is
carried out pro rata with the Preferred Stock.
Section 3. Voting Rights; Protective Provisions. Except as
otherwise provided herein and as otherwise required by law, the Preferred
Stock shall have no voting rights. However, so long as any shares of
Preferred Stock are outstanding, the Company shall not and shall cause its
subsidiaries not to, without the affirmative vote of each of the holders of
the Preferred Stock then outstanding, alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as
defined in Section 4) or otherwise senior to or pari passu with the
Preferred Stock (other than the Company's Series B Convertible Preferred
Stock, which shall rank pari passu with the Preferred Stock), (d) amend its
certificate of incorporation, bylaws or other charter documents so as to
affect adversely any rights of any holders of the Preferred Stock, (e)
increase the authorized or designated number of shares of Preferred Stock,
(f) issue any additional shares of Preferred Stock or (g) enter into any
agreement with respect to the foregoing.
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Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of the Preferred Stock shall be entitled to
receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid dividends per share, whether declared or
not, and all other amounts in respect thereof (including liquidated damages,
if any) then due and payable before any distribution or payment shall be
made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of Preferred Stock shall be
distributed among the holders of Preferred Stock ratably in accordance with
the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all
or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written
notice of any such Liquidation, not less than 45 days prior to the payment
date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock is convertible at the
option of the holder in whole or in part at any time after the Original
Issue Date into shares of Common Stock (subject to reduction pursuant to
Section 5(a)(ii) hereof and Section 3.8 of the Purchase Agreement) at the
Conversion Ratio (as defined in Section 7). A holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date the holder delivers
such Conversion Notice by facsimile (the "Conversion Date"). If no
Conversion Date is specified in a Conversion Notice, the Conversion Date
shall be the date that the Conversion Notice is deemed delivered pursuant to
Section 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof and Section 3.8
of the Purchase Agreement, each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all of the shares of
Preferred Stock represented by the certificate or certificates tendered by
the holder with the Conversion Notice, or if a conversion hereunder cannot
be effected in full for any reason, the Company shall promptly deliver to
such holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on any Conversion
Date (A) the Common Stock is listed for trading on the Nasdaq National
Market, Nasdaq SmallCap Market, the NYSE or the AMEX, (B) the Conversion
Price then in effect is such that the aggregate number of shares of the
Common Stock that would then be issuable upon conversion in full of all of
the shares of Preferred Stock then outstanding, together with any shares of
the Common Stock previously issued upon conversion of Preferred Stock and as
payment of dividends thereon would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date
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(such maximum number of shares as would not equal or exceed such 20% limit,
the "Issuable Maximum"), and (C) the Company shall not have previously
obtained the vote of shareholders, if any, as may be required by the rules
and regulations of The Nasdaq Stock Market, the NYSE or the AMEX (as
applicable) applicable to approve the issuance of Common Stock in excess of
the Issuable Maximum in a private placement for less than the greater of
book or fair market value of the Common Stock (as applicable, the
"Shareholder Approval"), then the Company shall issue to the holder so
requesting a conversion of Preferred Stock its pro rata portion of the
Issuable Maximum in the same ratio that the number of shares of Preferred
Stock then outstanding and held by such holder bears to the aggregate number
of shares of Preferred Stock then outstanding and, with respect to the
remainder of the shares of Preferred Stock then held by such holder for
which a conversion in accordance with the Conversion Price would result in
an issuance of Common Stock in excess of such holder's pro rata portion of
the Issuable Maximum, the converting holder shall have the option to require
the Company to either (1) use its best efforts to obtain the Shareholder
Approval applicable to such issuance as soon as is possible, but in any
event not later than the 60th day after such request, or (2)(i) issue and
deliver to such holder a number of shares of Common Stock as equals (x) the
number of shares of Preferred Stock (or such portions thereof) tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of such holder's pro rata portion of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined in
Section 5(c)(i)), and (ii) cash in an amount equal to the product of (x) the
Per Share Market Value on the Conversion Date and (y) the number of shares
of Common Stock in excess of such holder's pro rata portion of the Issuable
Maximum that would have otherwise been issuable to the holder in respect of
such conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). If the Company
fails to pay the Discount Equivalent in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum to the converting holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid
in full. The entire Discount Equivalent, including interest thereon, shall
be paid in cash.
(b) Not later than three (3) Trading Days after a Conversion
Date, the Company will deliver to the holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 4.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) hereof and Section 3.8 of the Purchase
Agreement), (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay accrued and unpaid dividends in cash) and (iv) if the Company has
elected and is permitted hereunder to pay accrued dividends in shares of
Common Stock, certificates, which shall be free of restrictive legends and
trading restrictions (other than those required by Section 4.1(b) of the
Purchase Agreement), representing such number of shares of Common Stock as
are issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a). Notwithstanding the foregoing, the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered
for conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the
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holder of such Preferred Stock notifies the Company that such certificates
have been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith. The Company shall,
upon request of the holder, use its best efforts to deliver any certificate
or certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in the
case of any Conversion Notice such certificate or certificates, including
for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are
not delivered to or as directed by the applicable holder by the third
Trading Day after the Conversion Date, the holder shall be entitled by
written notice to the Company at any time on or before its receipt of such
certificate or certificates, to rescind such conversion, in which event the
Company shall immediately return the certificates representing the shares of
Preferred Stock tendered for conversion. If the Company fails to deliver to
the holder such certificate or certificates pursuant to this Section,
including for purposes hereof, any shares of Common Stock to be issued on
the Conversion Date on account of accrued but unpaid dividends hereunder,
prior to the fifth (5th) Trading Day after the Conversion Date, the Company
shall pay to such holder, in cash, as liquidated damages and not as a
penalty, $2,500 for each day after such fifth (5th) Trading Day until such
certificates are delivered. If the Company fails to deliver to the holder
such certificate or certificates pursuant to this Section prior to the
twelfth (12th) day after the Conversion Date, the Company shall, at the
holder's option (i) redeem, from funds legally available therefor at the
time of such redemption, such number of shares of Preferred Stock then held
by such holder, as requested by such holder, and (ii) pay all accrued but
unpaid dividends and all other amounts then owing on account of the
Preferred Stock for which the Company shall have failed to issue Common
Stock certificates hereunder, in cash. The redemption price for the shares
of Preferred Stock to be redeemed in accordance with this Section shall be
the Redemption Price (as defined in Section 7). If the holder has requested
redemption pursuant to this Section and the Company fails for any reason to
pay the Redemption Price under this Section within seven (7) days after such
notice is given pursuant to Section 5(i), the Company will pay interest on
the unpaid portion of the Redemption Price at a rate of 18% per annum,
accruing from such seventh day until the Redemption Price and any accrued
interest thereon is paid in full. Nothing herein shall limit a holder's
right to pursue actual damages for the Company's failure to deliver
certificates representing shares of Common upon conversion within the period
specified herein (including, without limitation, damages relating to any
purchase of shares of Common Stock by such holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares of
Common Stock upon conversion, such damages to be in an amount equal to (A)
the aggregate amount paid by such holder for the shares of Common Stock so
purchased minus (B) the aggregate amount of net proceeds, if any, received
by such holder from the sale of the shares of Common Stock issued by the
Company pursuant to such conversion), and such holder shall have the right
to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive
relief).
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") on any Conversion Date shall be the lesser of (A)
the Average Price on the Original Issue Date (the "Initial Conversion
Price") and (B) the Applicable Percentage (as defined in Section 7)
multiplied by the average of the five (5) lowest Per Share Market Values
during the fifteen (15) Trading Days immediately preceding the Conversion
Date; provided that, (a) if an Underlying Securities
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Registration Statement is not filed on or prior to the Filing Date (as such
term is defined in the Registration Rights Agreement), or (b) if the Company
fails to file with the Commission a request for acceleration in accordance
with Rule 461 promulgated under the Securities Act within five (5) days of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that an Underlying Securities Registration
Statement will not be "reviewed" or is not subject to further review or
comment by the Commission, or (c) if the Underlying Securities Registration
Statement is not declared effective by the Commission on or prior to the
75th day after the Original Issue Date, or (d) if such Underlying Securities
Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities (as such term is defined in the Registration Rights Agreement) at
any time prior to the expiration of the Effectiveness Period (as such term
as defined in the Registration Rights Agreement), without being succeeded by
a subsequent Underlying Securities Registration Statement filed with and
declared effective by the Commission within ten (10) days, or (e) if trading
in the Common Stock shall be suspended, or if the Common Stock shall be
delisted from trading, on the Nasdaq SmallCap Market or on any other
national securities market, exchange or trading facility on which the Common
Stock is then listed or quoted for trading for any reason for more than
three (3) Trading Days, or (f) if the conversion rights of any holder of
Preferred Stock are suspended for any reason or if any holder is not
permitted to resell Registrable Securities under the Underlying Securities
Registration Statement, or (g) if an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission
within ten (10) days after notification by the Commission that such
amendment is required in order for the Underlying Securities Registration
Statement to remain effective (any such failure being referred to as an
"Event," and for purposes of clauses (a), (c) and (f) the date on which such
Event occurs, or for purposes of clause (b) the date on which such five (5)
days period is exceeded, or for purposes of clauses (d) and (g) the date
which such ten (10) day period is exceeded, or for purposes of clause (e)
the date on which such three (3) Trading Day period is exceeded, being
referred to as "Event Date"), the Conversion Price shall be decreased by
2.5% each month (i.e., the Conversion Price would decrease by 2.5% as of the
Event Date and additional 2.5% as of each monthly anniversary of the Event
Date) until the earlier to occur of the second month anniversary after the
Event Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to each
holder of Preferred Stock the product of 2.5% and the aggregate of the
Stated Values for the shares of Preferred Stock then held by such holder, in
cash as liquidated damages, and not as a penalty on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing such
decrease has been subsequently cured. The provisions of this Section are
not exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution on account of or to holders of Junior Securities payable
in shares of Common Stock, (b) subdivide outstanding shares of Common Stock
into a larger number of shares, or (c) combine outstanding shares of Common
Stock into a smaller number of shares, then the Initial Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and the denominator of which shall be the
number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(c)(ii)
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shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all
holders of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, the Initial Conversion
Price shall be multiplied by a fraction, the denominator of which shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right or warrant to purchase Common Stock the issuance of which
resulted in an adjustment in the Initial Conversion Price pursuant to this
Section 5(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Initial Conversion Price shall immediately upon
such expiration be recomputed and effective immediately upon such expiration
be increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions
of this Section 5 after the issuance of such rights or warrants) had the
adjustment of the Initial Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased upon
the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Initial Conversion Price at which each share of Preferred
Stock shall thereafter be convertible shall be determined by multiplying the
Initial Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of
the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however, that
in the event of a distribution exceeding ten percent (10%) of the net assets
of the Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest
of the shares of Preferred Stock then outstanding; and provided, further,
that the Company, after receipt of the determination by such Appraiser shall
have the right
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to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each
such Appraiser. In either case the adjustments shall be described in a
statement provided to the holders of Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another Person
pursuant to which the Company will not be the surviving entity, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (collectively, a "Business
Combination"), the holders of the Preferred Stock then outstanding shall
have the right thereafter to, at their option, (A) convert such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon,
only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following
such reclassification, consolidation, merger, sale, transfer or share
exchange, and the holders of the Preferred Stock shall be entitled upon such
event to receive such amount of securities, cash or property as the shares
of the Common Stock of the Company into which such shares of Preferred
Stock, together with all accrued and unpaid dividends thereon could have
been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled, (B)
require the Company to redeem its shares of Preferred Stock then outstanding
at the Redemption Price, but only if the Business Combination was the
voluntary act of the Company (i.e. not a tender offer) or (C) to require
that the Person with whom such consolidation, merger, sale or transfer or
share exchange takes place issue and deliver to the holders of the Preferred
Stock shares of convertible preferred stock or convertible debentures of
such Person which newly issued shares or debentures (as the case may be)
shall have terms substantially similar in all material respects to the terms
of the Preferred Stock (including with respect to conversion) and shall be
entitled to all of the rights and privileges of a holder of Preferred Stock
set forth herein, in the Registration Rights Agreement and in the Purchase
Agreement (including without limitation, such rights as relates to the
acquisition, transferability, registration and listing of the stock or other
securities issuable upon conversion of such convertible preferred stock or
convertible debentures). In such case, the conversion price for such newly
issued convertible securities shall be based upon the amount of securities,
cash or property that each share of Common Stock would receive in the
transaction giving rise to the obligation to issue such securities, the
Conversion Ratio immediately prior to the effective or closing date for such
transaction and the Conversion Price stated herein. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holders of Preferred Stock the right
to receive the securities, cash or property set forth in this Section upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges. If the holder has requested redemption pursuant to this Section
and the Company fails for any reason to pay the Redemption Price under this
Section within seven (7) days after such notice is given pursuant to Section
5(i), the Company will pay interest on the unpaid portion of the Redemption
Price at a rate of 18% per annum, accruing from such seventh day until the
Redemption Price and any accrued interest thereon is paid in full.
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(vi) All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly
mail to each holder of Preferred Stock, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, or any compulsory share
or exchange whereby the Common Stock is
converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 45 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distributions, redemption, rights
or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be
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specified in such notice. Holders are entitled to convert shares of
Preferred Stock during the 30-day period commencing the date of such notice
to the effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that
it intends to enter into a Change of Control Transaction (as defined below)
or (ii) any Person or group of Persons (including the Company, but excluding
a holder or any affiliate of a holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a holder of Preferred Stock
seeks to convert shares of Preferred Stock on or following the Announcement
Date, the Conversion Price shall, effective upon the Announcement Date and
continuing through the earlier to occur of the consummation of the proposed
transaction or tender offer, exchange offer or other transaction and the
Abandonment Date (as defined below), be equal to the lower of (x) the
Conversion Price measured on the Announcement Date and (y) the Conversion
Price in effect on the Conversion Date for such Preferred Stock.
"Abandonment Date" means with respect to any proposed transaction or tender
offer, exchange offer or other transaction for which a public announcement
as contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
good faith, in which case the adjustment shall be equal to the average of
the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion
Price shall be made which in the opinion of the Appraiser(s) giving the
aforesaid opinion or opinions would result in an increase of the Conversion
Price to more than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of
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Preferred Stock and payment of dividends on Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the holders of Preferred Stock, not
less than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder.
The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect
of any final fraction of a share based on the Per Share Market Value at such
time. If the Company elects not, or is unable, to make such a cash payment,
the holder of a share of Preferred Stock shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the holder of such
shares of Preferred Stock so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(h) Shares of Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(i) Any and all notices or other communications or deliveries
to be provided by the holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed
to the attention of the Chief Financial Officer of the Company at the
facsimile telephone number or address of the principal place of business of
the Company as set forth in the Purchase Agreement. Any and all notices or
other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each holder of Preferred
Stock at the facsimile telephone number or address of such holder appearing
on the books of the Company, or if no such facsimile telephone number or
address appears, at the principal place of business of the holder. Any
notice or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:00 p.m. (Salt Lake
City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake
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City time) on any date and earlier than 11:59 p.m. (Salt Lake City time) on
such date, (iii) four days after deposit in the United States mails, (iv)
the Business Day following the date of mailing, if send by nationally
recognized overnight courier service, or (v) upon actual receipt by the
party to whom such notice is required to be given. For purposes of Section
5(c)(i), if a Conversion Notice is delivered by facsimile prior to 5:00 p.m.
(Salt Lake City time) on any date, then the day prior to such date shall be
the last Trading Day calculated to determine the Conversion Price applicable
to such Conversion Notice, and the date of such delivery shall commence the
counting of days for purposes of Section 5(b).
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any time,
to redeem from funds legally available therefor all or any portion of the
then outstanding and unconverted shares of Preferred Stock at a price equal
to the Redemption Price. Any redemptions pursuant to this Section shall be
effected by the delivery of a notice to each holder of Preferred Stock to be
redeemed, which notice shall indicate the number of shares of Preferred
Stock of each holder to be redeemed and the date that such redemption is to
be effected, which shall be the 20th Trading Day after the date such notice
is deemed delivered pursuant to Section 5(i) (the "Optional Redemption
Date"). All redeemed shares of Preferred Stock shall cease to be
outstanding and shall have the status of authorized but undesignated stock,
but may not be reissued as Preferred Stock. The entire Redemption Price
under this Section shall be paid in cash by the Optional Redemption Date.
The holders of the Preferred Stock shall have the right to tender, and the
Company shall honor, Conversion Notices for shares of Preferred Stock,
including shares subject to the notice of redemption described in this
Section, at any time through the 19th Trading Day after receipt of such
notice of redemption.
(b) If any portion of the Redemption Price under this section
is not paid by the Company on or prior to the Optional Redemption Date,
interest shall accrue thereon at the rate of 18% per annum thereafter until
such Redemption Price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if
any portion of such Redemption Price remains unpaid for more than five (5)
calendar days after the date due, each holder of the Preferred Stock subject
to such redemption may elect, by written notice to the Company, to either
(i) demand conversion in accordance with the formula and the time frame
therefor set forth in Section 5 of all of the shares of Preferred Stock for
which such Redemption Price has not been paid in full (the "Unpaid
Redemption Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the
date such Redemption Price was originally due and the Per Share Market Price
as of the holder's written demand for conversion, or (ii) invalidate ab
initio such redemption, notwithstanding anything herein contained to the
contrary. If a holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to such
holder the shares of Common Stock issuable upon conversion of the Unpaid
Redemption Shares subject to such holder conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if such holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of the holder's notice of
such election, return to the holder all of the Unpaid Redemption Shares.
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Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Applicable Percentage" means (i) 91% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 90% for any
conversion honored on or after the 120th and prior to the 180th after the
Original Date and (iii) 88% for any conversion honored thereafter.
"Average Price" as at any date means the average Per Share
Market Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of Delaware are authorized or required by law or other government
action to close.
"Common Stock" means the common stock, $.0001 par value per
share, of the Company, and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value plus accrued but unpaid dividends to the extent to
be paid in shares of Common Stock and the denominator of which is the
Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company.
"Original Issue Date" means the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other principal stock exchange or quotation system on
which the Common Stock is then listed or quoted or if there is no such price
on such date, then the closing bid price on such exchange or quotation
system on the date nearest preceding such date, or (b) if the Common Stock
is not listed then on the Nasdaq SmallCap Market or any stock exchange or
quotation system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated or similar organization or agency succeeding
to its functions of reporting prices, then the average of the "Pink Sheet"
quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser
selected in good faith by the holders of a majority in interest of the
shares of the Preferred Stock; provided, however, that the Company, after
receipt of the determination by such Appraiser, shall have the right
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to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company
and the original holders of the Preferred Stock.
"Redemption Price" shall be equal to the sum of (a) the number
of shares of Preferred Stock to be redeemed (including for purposes of any
redemption pursuant to Section 5(b), the number of shares of Preferred Stock
tendered for conversion but for which the Company shall have failed to issue
and deliver shares of Common Stock in respect thereof), multiplied by the
product of (i) the sum of $20 plus all accrued and unpaid dividends, divided
by the Conversion Price on (x) the date the Redemption Price is demanded (in
the case of a redemption pursuant to Section 5(b)) or the date such
Redemption Price is due (in the case of a redemption pursuant to Section 6)
or (y) the date the Redemption Price is paid in full, whichever is less,
multiplied by (ii) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date that such Redemption Price
is demanded or due, as the case may be, or (y) the date the Redemption Price
is paid in full, whichever is greater, and (b) all other amounts, costs,
expenses and liquidated damages due in respect of such shares of Preferred
Stock to be redeemed.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the Original Issue Date, between the Company and the
original holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market or other stock exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted
on the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions
of reporting prices).
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof
and the Purchase Agreement and shares of Common Stock issuable on account of
dividends on or with respect to the Preferred Stock.
"Underlying Securities Registration Statement" shall mean a
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights
Agreement, covering the resale of the Underlying Shares and naming the
holders of the Preferred Stock as "selling stockholders" thereunder.
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EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of Common Stock,
par value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
_____________________________________________
Date to effect conversion
_____________________________________________
Number of shares of Preferred Stock to be converted
______________________________________________
Number of shares of Common Stock to be issued
_____________________________________________
Applicable conversion price
_____________________________________________
Name of Holder
_____________________________________________
______________________________________________
Address of Holder
__________________________________
Authorized Signature
THIS AMENDED AND RESTATED PURCHASE AGREEMENT, dated as of October 24,
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"), amends and
restates in their entirety all of the terms of the Convertible Debenture
Purchase Agreement between the parties dated June 18, 1997 (the "Convertible
Debenture Purchase Agreement");
WHEREAS, on or about June 18, 1997, the Purchaser entered into the
Convertible Debenture Purchase Agreement with the Company whereby the
Purchaser agreed, subject to the terms and conditions set forth therein, to
purchase up to $10,000,000 of Series B 5% Convertible Debentures of the
Company (the "Convertible Debentures");
WHEREAS, on June 18, 1997, Purchaser paid the Company $2,500,000 to
purchase the aggregate principal amount of $2,500,000 of Convertible
Debentures pursuant to the terms of the Convertible Debenture Purchase
Agreement;
WHEREAS, on or before the date hereof, Purchaser has converted the
entire principal amount of $3,000,000 of Convertile Debentures into shares
of the Company's common stock, par value $.0001 per share (the "Common
Stock");
WHEREAS, the Company has requested that the Purchaser agree that to
the extent Purchaser invests any portion of the balance of the amount
anticipated to be paid under the Convertible Debenture Purchase Agreement,
Purchaser shall acquire the Company's Series B Convertible Preferred Stock,
par value $.0001 per share, (the "Preferred Stock"), rather than additional
Convertible Debentures pursuant to the Convertible Debenture Purchase
Agreement;
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 acquire shares of Preferred Stock; and
WHEREAS, as set forth in this Agreement, the Company and the Purchaser
have agreed to amend and restate all of the terms of the Convertible
Debenture Purchase Agreement.
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:
<PAGE>
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
1.1 Purchase and Sale. (a) Subject to the terms and conditions set
forth herein, the Company shall issue and sell to the Purchaser, and the
Purchaser shall purchase from the Company, an aggregate of 125,000 shares of
Preferred Stock at a price per share of $20 (the "Stated Value"). The
aggregate purchase price (the "Purchase Price") for the Preferred Stock is
$2,500,000.
(b) The Preferred Stock shall have the respective rights,
preferences and privileges set forth in Exhibit A attached hereto, which
shall be incorporated into a Certificate of Designation to be approved by
the Purchaser and filed on or prior to the Closing (as defined below) by the
Company with the Secretary of State of Delaware (the "Certificate of
Designation").
1.2 The Closing.
(a) The closing of the purchase and sale of the Preferred
Stock (the "Closing") shall take place at the offices of Durham, Evans,
Jones & Pinegar, P.C., Suite 850 Key Bank Tower, 50 South Main Street, Salt
Lake City, UT 84144 (the "Escrow Agent"), immediately following the
execution hereof or such later date as the parties shall agree. The date of
the Closing is hereinafter referred to as the "Closing Date."
(i) Prior to the Closing, the parties shall deliver to
the Escrow Agent such items as are required to be delivered by them in
accordance with and subject to the terms and conditions of the escrow
agreement, dated as of the date hereof, by and among the Company, the
Purchaser and the Escrow Agent (the "Escrow Agreement"), including the
following: (a) the Company shall deliver (1) certificates representing the
Preferred Stock and the Closing Date Warrants (as defined in Section 3.15),
each registered in the name of the Purchaser, (2) the legal opinion of
Durham, Evans, Jones & 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 Closing by the Company
pursuant to this Agreement and the registration rights agreement covering
the shares of Common Stock issuable upon conversion of the Preferred Stock
(the "Registration Rights Agreement") and (b) the Purchaser shall deliver
(1) the Purchase Price, 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
Closing Date and (2) all documents, instruments and writings required to
have been delivered at or prior to the Closing by the Purchaser pursuant to
this Agreement and the Registration Rights Agreement.
1.3 Certain Definitions. For purposes of this Agreement,
"Conversion Price," "Original Issue Date," "Conversion Date" "Trading Day"
and "Per Share Market Value" shall
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have the meanings set forth in the Certificate of Designation; 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.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations, Warranties and Agreements of the Company. The
Company hereby represents and warrants to the Purchaser as follows:
(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 Certificate of
Designation, the Warrants, the Escrow Agreement, the Put Option (as defined
in Section 3.3) 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, 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
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<PAGE>
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 Preferred Stock and Warrants hereunder,
securities, rights or obligations convertible into or exchangeable for, or
giving any person any right to subscribe for or acquire any shares of Common
Stock, or contracts, commitments, understandings, or arrangements by which
the Company or any Subsidiary is or may become bound to issue additional
shares of Common Stock, or securities or rights convertible or exchangeable
into shares of Common Stock. To the knowledge of the Company, except as
specifically disclosed in the SEC Documents (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 Preferred Stock and Warrants. The Preferred
Stock and the Warrants are duly authorized, and, when issued exchanged and
paid for in accordance with the terms hereof, shall be validly issued, fully
paid and nonassessable. The Company, as at the Closing Date, has and at all
times while the Preferred Stock and the Warrants are outstanding will
maintain an adequate reserve of duly authorized shares of Common Stock to
enable it to perform its conversion, exercise and other obligations under
this Agreement, the Certificate of Designation and the Warrants, which
reserve shall be no less than the sum of (i) two times the number of shares
of Common Stock which would be issuable upon conversion in full of the
Preferred Stock ("Underlying Shares"), were such conversion effected on the
Original Issue Date, (ii) the number of shares of Common Stock as are
issuable as payment of dividends on the Preferred Stock, and (iii) the
number of shares of Common Stock which would be issuable upon exercise in
full of the Warrants (the "Warrant Shares"). When issued in accordance with
the terms hereof and the Certificate of Designation, the Underlying Shares
will be duly authorized, validly issued, fully paid and nonassessable; and
when issued upon exercise of the Warrants 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
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<PAGE>
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 governmental 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 govern-
mental 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 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 Preferred Stock (and, upon conversion thereunder, the Underlying Shares)
or the Warrants (and, upon exercise of the Warrants, the Warrant Shares)
(the Preferred Stock, Underlying Shares, Warrants 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 disclosed
in the Disclosure Materials (as hereinafter defined) or in a writing to
Purchaser, 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.
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<PAGE>
(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 and except in the
case of clause (i) above as has not been waived.
(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. Notwithstanding the
foregoing sentence, the Company has engaged in unregistered sales of its
debt and equity securities as described in Schedule 2.1(i), and the Company
makes no warranty or representation about the extent to which such prior
unregistered offerings may be integrated with each other or with any public
resales of the securities sold in such unregistered offering, whether
pursuant to an effective registration statement filed with the Commission or
otherwise.
(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, 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 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
September 8, 1997, and has not received any comments from the Commission in
respect thereof.
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<PAGE>
(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 the 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.
(o) Exclusivity. The Company shall not issue and sell the
Preferred Stock 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 a writing to Purchaser 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 any applicable writing to the Purchaser.
(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.
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2.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Company as follows:
(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 of the Preferred
Stock and the Warrants and the payment of the Purchase Price thereof by the
Purchaser 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 Preferred Stock, 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 Preferred Stock and the Warrants, it was, and at the date hereof, it is,
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 Preferred Stock
and the
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Warrants, and the merits and risks of investing in the Preferred Stock and
the Warrants; (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 Preferred Stock and the Warrants 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.
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 Preferred Stock or any portion of the Warrants (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 shares of Preferred
Stock, any portion of the Warrants 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 or a substantially
similar legend on the Securities:
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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 PREFERRED STOCK ONLY] THE SHARES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND CONVERSIONS SET
FORTH IN AN AMENDED AND RESTATED PURCHASE AGREEMENT, DATED AS OF
OCTOBER 24, 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.
The Underlying Shares issuable upon conversion of Preferred
Stock and the Warrant Shares issuable upon exercise of the Warrants, as the
case may be, shall not contain the legend set forth above if the conversion
of such Preferred Stock or exercise of the Warrants, 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.
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3.3 Put Option. The Company shall execute and deliver the Preferred
Stock Put Option Agreement dated as of October 24, 1997 (the "Put Option")
in the form of Exhibit F, prior to the Closing.
3.4 Furnishing of Information. As long as the Purchaser owns the
Securities or any other securities of the Company, 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.
3.5 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 3.5, 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.
3.6 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 reasonably request and shall continue such qualification at
all times through first to occur of (i) the third anniversary of the last
Closing Date or (ii) until the Purchaser shall notify the Company in writing
that it no longer owns the Securities; provided, however, that neither the
Company nor its Subsidiaries shall be required in connection therewith to
qualify as a foreign corporation where they are not now so qualified or to
take any action that would subject the Company to general service of process
or payments of taxes in any such jurisdiction where it is not then so
subject.
3.7 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 Securities in a manner that would require the
registration under the Securities Act of the issue or sale of the Securities
to the Purchaser.
3.8 Increase in Authorized Shares. At such time as the Company
would be, if a notice of conversion or exercise (as the case may be) were to
be delivered on such date, precluded from (a) converting in full all of the
outstanding shares of Preferred Stock (and paying any accrued but
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unpaid dividends in respect thereof in shares of Common Stock) that remain
unconverted at such date or (b) honoring the exercise in full of the
Warrants 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 thirty (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 five (5) Business
Days of obtaining such shareholder authorization, file an appropriate
amendment to the Company's certificate of incorporation to evidence such
increase.
3.9 Purchaser Ownership of Common Stock. The Purchaser may not use
its ability to convert Preferred Stock hereunder or use its ability to
acquire Warrant Shares 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 (10) 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 satisfaction prior to the expiration of such ten-day
period, the provisions of this Section 3.8 shall be null and void ab initio.
3.10 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 Preferred Stock to be issued on the Closing Date, assuming
such conversion occurred on the Original Issue Date, and (ii) the Warrant
Shares issuable upon exercise in full of the Warrants, (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.
3.11 Conversion Procedures. Exhibit E attached hereto sets forth the
procedures with respect to the conversion of the Preferred Stock, 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.
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3.12 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, 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 the Closing Date.
However, no disclosure by either party pursuant to this Section 3.12 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 Preferred Stock a copy
of any written statement in support of or relating to such claim or notice.
3.13 Conversion Obligations of the Company. The Company covenants to
convert Preferred Stock and to deliver Underlying Shares in accordance with
the terms and conditions and time period set forth in the Certificate of
Designation, and to deliver the Warrant Shares in accordance with the terms
and conditions and time periods set forth in the Warrants.
3.14 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 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(c), (iii) shares of Common Stock issued upon conversion of
Preferred Stock in accordance herewith, (iv) shares of Common Stock issuable
to Elliott and Associates (and any Person affiliated with it) in connection
with the Company's issuance of up to $20,000,000 of convertible debentures
or convertible preferred stock to such Persons, and (v) shares issued in
connection with the creation or capitalization of a joint venture, an
acquisition of assets of a Person (excluding an individual) a merger or any
public offering 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
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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 Elliott
Associates (and any Person affiliated with it) or other Persons 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, 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 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 and in the preceding
paragraph (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 ninety (90) Trading Days after the date that the Underlying
Shares Registration Statement relating to the securities issued 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 ninety (90) Trading Day period for the purposes of
(i) and (ii) above.
As long as there are Common Stock and Preferred Stock 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.
3.15 The Warrants. The Company shall issue to the Purchaser, common
stock purchase warrants, in the form of Exhibit D, pursuant to which the
Purchaser shall have the right at any
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time thereafter through the fifth anniversary of the date of issuance
thereof, to acquire (i) 175,000 shares of Common Stock on the Closing Date
(the "Closing Date Warrants"), (ii) 10,000 shares of Common Stock six (6)
months from the Closing Date, for (a) every 50,000 shares of Preferred Stock
and (b) Underlying Shares, then held by the Purchaser having an aggregate
Per Share Market Value of $1,000,000 (the "Six Month Warrants"), and (iii)
30,000 shares of Common Stock twelve (12) months from the Closing Date
hereof, for (a) every 50,000 shares of Preferred Stock, and (b) Underlying
Shares, then held by the Purchaser having an aggregate Per Share Market
Value of $1,000,000 (the "Twelve Month Warrants"), The exercise price per
share of the Warrants shall be equal to 125% of the average price per share
of Common Stock for the five (5) Trading Days immediately preceding the date
on which the Closing Date Warrants, Six Month Warrants and Twelve Month
Warrants, respectively, are made. The Closing Date Warrants, Six Month
Warrants and Twelve Month Warrants shall collectively be referred to as the
"Warrants".
ARTICLE IV
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 its of legal fees in connection
with the negotiation and preparation of the Transaction Documents. 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 Certificate of Designation, Put Option and the Warrants 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 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
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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 94144
Facsimile No.: (801) 538-2425
Attn: Jeffrey M. Jones, Esq.
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: Kenneth L. Henderson, Esq.
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 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.
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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 Preferred Stock 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.
Notwithstanding the foregoing, the parties agree that the Company may file
conformed copies of the Transaction Documents as exhibits to the reports
required under the Exchange Act and no prior written notice of such filing
shall be required under this Section 5.10.
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 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.
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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.
5.14 Effective Date. Notwithstanding anything to the contrary
in this Agreement, Purchaser and the Company expressly agree that the
transactions contemplated by this Agreement are in furtherance of the
transactions contemplated by that certain Memorandum of Understanding by and
between Purchaser and the Company and dated as of September 30, 1997 (the
"MOU"). Furthermore, Purchaser agrees that, for purposes of financial
accounting, the Company may record the transactions contemplated by this
Agreement as if they occurred on September 30, 1997 in furtherance of the
MOU, although Purchaser's agreement in such regard shall have no effect on
the substance of this Agreement or any document or instrument executed in
connection with this Agreement.
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SIGNATURE PAGE FOLLOWS]
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<PAGE>
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/ ROGER D. DUDLEY
-----------------------------------
Name: Roger D. Dudley
Title: Executive Vice President
Purchaser:
SOUTHBROOK INTERNATIONA 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.
<PAGE>
SCHEDULE 2.1 (c)
Capitalization
1. Authorized Common Stock - 100,000,000 shares, $.0001 per share
2. Authorized Preferred Stock - 20,000,000 shares, $.0001 per share
3. Issued Common Stock - 42,723,989 shares at October 24, 1997
4. Issued Preferred Stock -
Series A Preferred Stock, 166,667 shares authorized for
issuance, 166,667 shares issued and outstanding (certificate of
designation of rights and preferences of which is attached
hereto)
Series C Preferred Stock, 187,500 shares authorized for
issuance, 187,500,000 shares issued and outstanding (certificate
of designation of rights and preferences of which is attached
hereto)
5. Outstanding Options, Warrants and Similar Rights at October 24, 1997-
(a) Total Warrants-600,000 Warrants granted (1)
(b) Total Options-9,075,000 Options granted (2)
________________________
(1) Excludes the 200,000 Warrants to be issued under the Purchase
Agreement
(2) Estimate. Actual number of warrants issued as of October 24,
1997 could be as much as 200,000 shares lower, depending on the
outcome of pending negotiations with and deliberations about
employee stock option grants.
<PAGE>
EXHIBIT A
SERIES B CONVERTIBLE PREFERRED STOCK TERMS
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the Series B Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated shall
be 125,000. Each share of Preferred Stock shall have a par value of $.0001
per share and a stated value of $20 per share (the "Stated Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December
31, 1997, and on each Conversion Date (as hereinafter defined), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of
the Stated Value per share) equal to 5% per annum, payable in cash or shares
of Common Stock (as defined in Section 6) at the option of the Company. The
number of shares of Common Stock issuable as payment of dividends hereunder
shall equal the aggregate dollar amount of dividends then being paid,
divided by the Conversion Price (as defined in Section 5(c)(i)) then in
effect. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing the Original Issue Date (as
defined in Section 6), and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for
any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably
among the holders of the Preferred Stock based upon the number of shares
then held by each holder. In order for the Company to exercise its right to
pay dividends in shares of Common Stock, the Company shall, no less than
five (5) Trading Days prior to the first day of the calendar quarter in
which a dividend payment date (other than a Conversion Date) occurs, provide
the holders of the Preferred Stock written notice of its intention to pay
dividends in shares of Common Stock.
(b) Notwithstanding anything to the contrary contained herein, the
Company may not issue shares of Common Stock in payment of dividends on the
Preferred Stock (and must deliver cash in respect thereof) if: ( the
number of shares of Common Stock at the time authorized, unissued and
unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the
Company has not duly reserved for issuance in respect of such dividends a
sufficient number of shares of Common Stock, ( such shares are not
registered for resale pursuant to an effective Underlying Securities
<PAGE>Registration Statement (as defined in Section 6) and may not be sold
without volume restrictions pursuant to Rule 144(k) promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), as determined by
counsel to the Company pursuant to a written opinion letter, addressed and
acceptable to the Company's transfer agent or other Person performing
functions similar thereto, ( such shares are not listed for trading on the
Nasdaq SmallCap Market, Nasdaq National Market, The New York Stock Exchange
or the American Stock Exchange (and any other exchange, market or trading
facility in which the Common Stock is then listed for trading), ( the
issuance of such shares would result in the recipient thereof beneficially
owning, determined in accordance with Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended, more than 4.999% of the then
issued and outstanding shares of Common Stock, unless the issuance of shares
of Common Stock in excess of such amount is then permitted by Section 3.9 of
the Purchase Agreement, or (v) the Company shall have failed to timely
satisfy its obligations pursuant to any Conversion Notice.
Payment of dividends in shares of Common Stock is further
subject to the provision of Section 5(a)(ii).
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined
in Section 6), nor shall the Company directly or indirectly pay or declare
any dividend or make any distribution (other than a dividend or distribution
described in Section 5) upon, nor shall any distribution be made in respect
of, any Junior Securities, nor shall any monies be set aside for or applied
to the purchase or redemption (through a sinking fund or otherwise) of any
Junior Securities or shares pari passu with the Preferred Stock.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding,
the Company shall not and shall cause its subsidiary not to, without the
affirmative vote of 66 of the holders of all of the shares of the Preferred
Stock then outstanding, alter or change adversely the powers, preferences
or rights given to the Preferred Stock, (b) alter or amend this Certificate
of Designation, (c) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in
Section 4) or otherwise senior to or pari passu with the Preferred Stock,
(d) amend its Certificate of Incorporation, bylaws or other charter
documents so as to affect adversely any rights of any holders of the
Preferred Stock, (e) increase the authorized or designated number of shares
of Preferred Stock, (f) issue any additional shares of Preferred Stock or
(g) enter into any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of Preferred Stock shall be entitled to receive
out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid -2-
<PAGE>
dividends per share, whether declared or not, before any distribution or
payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts,
then the entire assets to be distributed to the holders of Preferred Stock
shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares
if all amounts payable thereon were paid in full. A sale, conveyance or
disposition of all or substantially all of the assets of the Company or the
effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any
other company or companies shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall
mail written notice of any such Liquidation, not less than 45 days prior to
the payment date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock is convertible at the option
of the holder in whole or in part at any time after the Original Issue Date
into shares of Common Stock (subject to reduction pursuant to Section
5(a)(ii) hereof and Section [ ] of the Purchase Agreement) at the Conversion
Ratio (as defined in Section 6). The holder shall effect conversions by
surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as Exhibit A (the "Conversion Notice").
Each Conversion Notice shall specify the number of shares of Preferred Stock
to be converted and the date on which such conversion is to be effected,
which date may not be prior to the date the holder delivers such Conversion
Notice by facsimile (the "Conversion Date"). If no Holder Conversion Date
is specified in a Holder Conversion Notice, the Holder Conversion Date shall
be the date that the Holder Conversion Notice is deemed delivered pursuant
to Section 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof and Section [
] of the Purchase Agreement, each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all shares of Preferred
Stock represented by the certificate or certificates tendered by the holder
with the Conversion Notice, or if a conversion hereunder cannot be effected
in full for any reason, the Company shall promptly deliver to such holder
(in the manner and within the time set forth in Section 5(b)) a certificate
for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on the Conversion
Date applicable to any conversion, (A) the Common Stock is then listed for
trading on the Nasdaq National Market, The New York Stock Exchange, the
American Stock Exchange or if the rules of The Nasdaq Stock Market, Inc. are
hereafter amended to extend or adopt rules similar to Rule 4460(i)
promulgated thereby (or any successor or replacement provision thereof) to
the Nasdaq SmallCap Market and the Company's Common Stock is listed for
trading on such market or exchange, (B) the Conversion Price then in effect
is such that the aggregate number of shares of Common Stock that would then
be issuable upon conversion of all outstanding shares of Preferred Stock,
together with any shares of Common Stock previously issued upon conversion
of Preferred Stock and in
-3-
<PAGE>
respect of payment of dividends hereunder, would equal or exceed 20% of the
number of shares of Common Stock outstanding on the Original Issue Date (the
"Issuable Maximum"), and (C) the Company has not previously obtained
Shareholder Approval (as defined below), then the Company shall issue to the
holder so requesting a conversion of Preferred Stock its pro rata portion of
the Issuable Maximum in the same ratio that the number of shares of
Preferred Stock then outstanding and held by such holder bears to the
aggregate number of shares of Preferred Stock then outstanding and, with
respect to the remainder of the shares of Preferred Stock then held by such
holder for which a conversion in accordance with the Conversion Price would
result in an issuance of Common Stock in excess of such holder's pro rata
portion of the Issuable Maximum, the converting holder shall have the option
to require the Company to either (1) use its best efforts to obtain the
Shareholder Approval applicable to such issuance as soon as is possible, but
in any event not later than the 60th day after such request, or (2)(i) issue
and deliver to such holder a number of shares of Common Stock as equals (x)
the number of shares of Preferred Stock (or such portions thereof) tendered
for conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of such holder's pro rata portion of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined in
Section 5(c)(i)), and (ii) cash in an amount equal to the product of (x) the
Per Share Market Value on the Conversion Date and (y) the number of shares
of Common Stock in excess of such holder's pro rata portion of the Issuable
Maximum that would have otherwise been issuable to the holder in respect of
such conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). If the Company
fails to pay the Discount Equivalent in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum to the converting holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid
in full. The entire Discount Equivalent, including interest thereon, shall
be paid in cash. "Shareholder 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 shareholders 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 Common Stock exceeding the Issuable Maximum as a consequence of
the conversion of Preferred Stock into 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 (3) Trading Days after a Conversion
Date, the Company will deliver to the holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 3.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) hereof and Section 3.9 of the Purchase
Agreement), (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay accrued and unpaid dividends in cash) and (iv) if the Company has
elected and is permitted hereunder to pay accrued dividends in shares
-4-
<PAGE>
of Common Stock, 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 such number of shares of Common Stock as
are issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a); provided, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Common Stock
issuable upon conversion of any shares of Preferred Stock until certificates
evidencing such shares of Preferred Stock are delivered for conversion to
the Company, or the holder of such Preferred Stock notifies the Company that
such certificates have been lost, stolen or destroyed and provides a bond
(or other adequate security) reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection therewith.
The Company shall, upon request of the holder, use its best efforts to
deliver any certificate or certificates required to be delivered by the
Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, including for purposes hereof, any shares of Common Stock to
be issued on the Conversion Date on account of accrued but unpaid dividends
hereunder, are not delivered to or as directed by the applicable holder by
the third Trading Day after the Conversion Date, the holder shall be
entitled by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such conversion, in
which event the Company shall immediately return the certificates
representing the shares of Preferred Stock tendered for conversion. If the
Company fails to deliver to the holder such certificate or certificates
pursuant to this Section, including for purposes hereof, any shares of
Common Stock to be issued on the Conversion Date on account of accrued but
unpaid dividends hereunder, prior to the fifth (5th) Trading Day after the
Conversion Date, the Company shall pay to such holder, in cash, as
liquidated damages and not as a penalty, $2,500 for each day after such
fifth (5th) Trading Day until the tenth (10th) Trading Day after the
Conversion Date, thereafter, the Company shall, pay to such holder, in cash,
as liquidated damages and not as a penalty, $5,000 for each day after such
tenth (10th) Trading Day after the Conversion Date until such certificates
are delivered. Nothing herein shall limit a holder's right to pursue actual
damages for the Company's failure to deliver certificates representing
shares of Common Stock upon conversion within the period specified herein
(including, without limitation, damages relating to any purchase of shares
of Common Stock by such holder to make delivery on a sale effected in
anticipation of receiving certificates representing shares of Common Stock
upon conversion, such damages to be in an amount equal to (A) the aggregate
amount paid by such holder for the shares of Common Stock so purchased minus
(B) the aggregate amount of net proceeds, if any, received by such holder
from the sale of the shares of Common Stock issued by the Company pursuant
to such conversion), and such holder shall have the right to pursue all
remedies available to it at law or in equity (including, without limitation,
a decree of specific performance and/or injunctive relief).
(c) (i) The conversion price for each share of Preferred
Stock (the "Conversion Price") in effect on any Conversion Date shall be the
lesser of (A) the average Per Share Market Value for the five (5) Trading
Days immediately preceding the Original Issue Date (the "Initial Conversion
Price") and (B) the product of the average Per Share Market Value for the
five (5) Trading Days immediately preceding the Conversion Date multiplied
by the Applicable
-5-
<PAGE>
Percentage (as defined in Section 6); provided that, (a) if the Underlying
Shares Registration Statement is not filed on or prior to the 20th day after
the Original Issue Date, or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Securities Exchange Act of 1934, as amended, within
five (5) Trading Days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the staff of the Commission that an
Underlying Shares Registration Statement will not be "reviewed," or not
subject to further review or (c) if the Underlying Shares Registration
Statement is not declared effective by the Commission on or prior to the
60th 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
within ten (10) Trading Days by a subsequent Underlying Shares Registration
Statement filed with and declared effective by the Commission, or (e) if
trading in the Common Stock shall be suspended for any reason (other than as
a result of the suspension of trading in securities generally) for more than
four days in the aggregate, or (f) if the conversion rights of the holders
of Preferred Stock hereunder are suspended for any reason or (g) if the
Company breaches in a material respect any covenant or other material term
or condition to the Purchase Agreement, the Registration Rights Agreement or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby, and such breach
continues for a period of thirty (30) days after written notice thereof to
the Company (any such failure being referred to as an "Event," and for
purposes of clauses (a), (c) and (f) the date on which such Event occurs, or
for purposes of clause (b) the date on which such five (5) Trading Days
period is exceeded, or for purposes of clause (d) the date which such 10
Trading Day-period is exceeded, or for purposes of clause (e) the date on
which such four day period is exceeded, or for clause (g) the date on which
such thirty (30) day period is exceeded, being referred to as "Event Date"),
the Applicable Percentage shall be decreased by 2.5% each month (i.e., the
Applicable Percentage would decrease by 2.5% as of the Event Date and an
additional 2.5% as of the first monthly anniversary of the Event Date) until
the later to occur of the second month anniversary after the Event Date and
such time as the applicable Event is cured. Commencing the second month
anniversary after the Event Date, the Company shall pay to each holder of
Preferred Stock the product of 2.5% and the aggregate of the Stated Values
for the shares of Preferred Stock then held by such holder, in cash as
liquidated damages, and not as a penalty on the first day of each monthly
anniversary of the Event Date until such time as the applicable Event, is
cured. Any decrease in the Conversion Price pursuant to this Section shall
continue notwithstanding the fact that the Event causing such decrease has
been subsequently cured. The provisions of this Section are not exclusive
and shall in no way limit the Company's obligations under the Registration
Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities
payable in shares of Common Stock, (b) subdivide outstanding shares of
Common Stock into a larger number of shares, (c) combine outstanding shares
of
-6-
<PAGE>
Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company, the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of 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 outstanding after
such event. Any adjustment made pursuant to this Section 5(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 shares of
Preferred Stock are outstanding, shall issue rights or warrants to all
holders of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, the Initial Conversion
Price shall be multiplied by a fraction, of which the denominator shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right or warrant to purchase Common Stock the issuance of which
resulted in an adjustment in the Conversion Price pursuant to this Section
5(c)(iii), if any such right or warrant shall expire and shall not have been
exercised, the Conversion Price shall immediately upon such expiration be
recomputed and effective immediately upon such expiration be increased to
the price which it would have been (but reflecting any other adjustments in
the Conversion Price made pursuant to the provisions of this Section 5 after
the issuance of such rights or warrants) had the adjustment of the
Conversion Price made upon the issuance of such rights or warrants been made
on the basis of offering for subscription or purchase only that number of
shares of Common Stock actually purchased upon the exercise of such rights
or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Conversion Price at which each share of Preferred Stock
shall thereafter be convertible shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which
the numerator shall be such Per Share Market
-7-
<PAGE>
Value of the Common Stock on such record date less the then fair market
value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of Common
Stock as determined by the Board of Directors in good faith; provided,
however, that in the event of a distribution exceeding ten percent (10%) of
the net assets of the Company, such fair market value shall be determined by
a nationally recognized or major regional investment banking firm or firm of
independent certified public accountants of recognized standing (which may
be the firm that regularly examines the financial statements of the Company)
(an "Appraiser") selected in good faith by the holders of a majority in
interest of the shares of Preferred Stock then outstanding; and provided,
further, that the Company, after receipt of the determination by such
Appraiser shall have the right to select an additional Appraiser, in good
faith, in which case the fair market value shall be equal to the average of
the determinations by each such Appraiser. In either case the adjustments
shall be described in a statement provided to the holders of Preferred Stock
of the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock, any
consolidation or merger of the Company with or into another Person pursuant
to which the Company will not be the surviving entity, the sale or transfer
of all or substantially all of the assets of the Company or any compulsory
share exchange pursuant to which the Common Stock is converted into other
securities, cash or property, the holders of the Preferred Stock then
outstanding shall have the right thereafter to, at their option, (A) convert
such shares of Preferred Stock, together with all accrued and unpaid
dividends thereon, only into the shares of stock and other securities, cash
and property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, consolidation, merger, sale, transfer or
share exchange, and the holders of the Preferred Stock shall be entitled
upon such event to receive such amount of securities, cash or property as
the shares of the Common Stock of the Company into which such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon
could have been converted immediately prior to such reclassification,
consolidation, merger, sale, transfer or share exchange would have been
entitled or (B) to require that the Person with whom such consolidation,
merger, sale or transfer or share exchange takes place issue and deliver to
the holders of the Preferred Stock shares of convertible preferred stock or
convertible debentures of such Person which newly issued shares or
debentures (as the case may be) shall have terms substantially similar in
all material respects to the terms of the Preferred Stock (including with
respect to conversion) and shall be entitled to all of the rights and
privileges of a holder of Preferred Stock set forth herein, in the
Registration Rights Agreement and in the Purchase Agreement (including
without limitation, such rights as relates to the acquisition,
transferability, registration and listing of the stock or other securities
issuable upon conversion of such convertible preferred stock or convertible
debentures). In such case, the conversion price for such newly issued
convertible securities shall be based upon the amount of securities, cash or
property that each share of Common Stock would receive in the transaction
giving rise to the obligation to issue such securities, the Conversion Ratio
immediately prior to the effective or closing date for such transaction and
the Conversion
-8-
<PAGE>
Price stated herein. The terms of any such consolidation, merger, sale,
transfer or share exchange shall include such terms so as to continue to
give to the holder of Preferred Stock the right to receive the securities,
cash or property set forth in this Section upon any conversion following
such consolidation, merger, sale, transfer or share exchange. This
provision shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(vi) All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly
mail to each holder of Preferred Stock, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, 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 Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 30 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating
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(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be specified in such notice.
Holders are entitled to convert shares of Preferred Stock during the 30-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
(ix) If the Company (i) makes a public announcement that
it intends to enter into a Change of Control Transaction (as defined below)
or (ii) any person, group or entity (including the Company, but excluding a
Holder or any affiliate of a Holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a Holder seeks to convert
shares of Preferred Stock on or following the Announcement Date, the
Conversion Price shall, effective upon the Announcement Date and continuing
through the earlier to occur of the consummation of the proposed transaction
or tender offer, exchange offer or other transaction and the Abandonment
Date (as defined below), be equal to the lower of (x) the average Per Share
Market Value on the five Trading Days immediately preceding (but not
including) the Announcement Date and (y) the Conversion Price in effect on
the Conversion Date for such Preferred Stock. "Abandonment Date" means with
respect to any proposed transaction or tender offer, exchange offer or other
transaction for which a public announcement as contemplated by this
paragraph has been made, the date upon which the Company (in the case of
clause (i) above) or the person, group or entity (in the case of clause (ii)
above) publicly announces the termination or abandonment of the proposed
transaction or tender offer, exchange offer or another transaction which
caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as
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to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
good faith, in which case the adjustment shall be equal to the average of
the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion
Price shall be made which in the opinion of the Appraiser(s) giving the
aforesaid opinion or opinions would result in an increase of the Conversion
Price to more than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued Common Stock solely
for the purpose of issuance upon conversion of Preferred Stock and payment
of dividends on Preferred Stock, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the holders of Preferred Stock, not less than such number of
shares of Common Stock as shall (subject to any additional requirements of
the Company as to reservation of such shares set forth in the Purchase
Agreement) be issuable (taking into account the adjustments and restrictions
of Section 5(c)) upon the conversion of all outstanding shares of Preferred
Stock and payment of dividends hereunder. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
and validly authorized, issued and fully paid, nonassessable and freely
tradeable.
(f) Upon a conversion hereunder the Company shall not be required
to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time.
If the Company elects not, or is unable, to make such a cash payment, the
holder of a share of Preferred Stock shall be entitled to receive, in lieu
of the final fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the holder of such
shares of Preferred Stock so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(h) Shares of Preferred Stock converted into Common Stock
shall be canceled and shall have the status of authorized but unissued
shares of undesignated stock.
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(i) Any and all notices or other communications or
deliveries to be provided by the holders of the Preferred Stock hereunder,
including, without limitation, any Conversion Notice, shall be in writing
and delivered personally, by facsimile or sent by a nationally recognized
overnight courier service, addressed to the attention of the Legal
Department of the Company at the facsimile telephone number or address of
the principal place of business of the Company as set forth in the Purchase
Agreement. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered
personally, by facsimile or sent by a nationally recognized overnight
courier service, addressed to each holder of Preferred Stock at the
facsimile telephone number or address of such holder appearing on the books
of the Company, or if no such facsimile telephone number or address appears,
at the principal place of business of the holder. Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 4:30 p.m. (New York), (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 7:00 p.m. (New York Time) on any date and earlier than 11:59 p.m. (New
York Time) on such date, (iii) upon receipt, if sent by a nationally
recognized overnight courier service, or (iv) upon actual receipt by the
party to whom such notice is required to be given.
Section 6. Optional Redemption.
(a) All outstanding and unconverted shares of Preferred Stock
after the Original Issue Date may, at the Company's option upon at least ten
(10) days notice to the Purchaser, be redeemed by the Company pursuant to
this Section 6(a), from funds legally available therefor at a price per
share of Preferred Stock equal to the Conversion Price in Section 5, plus
accrued dividends. Thereafter, all shares of Preferred Stock shall cease to
be outstanding and shall have the status of authorized but undesignated
stock. The entire redemption price shall be paid in cash.
(b) If any portion of the applicable redemption price under
Section 6(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 8% per
annum until the redemption price plus all such interest is paid in full
(which amount shall be paid as liquidated damages and not as a penalty). In
addition, if any portion of such redemption price remains unpaid for more
than 7 calendar days after the date due, the holder of the Preferred Stock
subject to such redemption 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
5 of all of the shares of Preferred Stock for which such redemption price,
plus accrued liquidated damages thereof, has not been paid in full (the
"Unpaid Redemption Shares"), in which event the Per Share Market Price for
such shares shall be the lower of the Per Share Market Price calculated on
the date such redemption price was originally due and the Per Share Market
Price as of the holder's written demand for conversion, or (ii) invalidate
ab initio such redemption, notwithstanding anything herein contained to the
contrary. If 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 Common
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Stock issuable upon conversion of the Unpaid Redemption Shares subject to
such holder conversion demand and otherwise perform its obligations
hereunder with respect thereto; or, if 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 Redemption Shares.
Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"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.
"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.
"Conversion Ratio" means, at any time, a fraction, of which the
numerator is Stated Value plus accrued but unpaid dividends (including any
accrued but unpaid interest thereon) but only to the extent not paid in
shares of Common Stock in accordance with the terms hereof, and of which the
denominator is the Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation
preference to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers
of any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other 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 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
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<PAGE>
determined by an Appraiser selected in good faith by the holders of a
majority in interest of the shares of the Preferred Stock; provided,
however, that the Company, after receipt of the determination by such
Appraiser, shall have the right 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.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase and Exchange Agreement, dated as of October 24, 1997, between the
Company and the original holder of the Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of October 24, 1997, between the Company and the
original holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market or other stock exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq National 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); provided, however, that in the event that the Common
Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the State
of New York are authorized or required by law or other government action to
close.
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof
and the Purchase Agreement.
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series [ ]
Convertible Preferred Stock indicated below, into shares of Common Stock,
par value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
__________________________________________________
Date to effect conversion
__________________________________________________
Number of shares of Preferred Stock to be converted
_________________________________________________
Number of shares of Common Stock to be issued
__________________________________________________
Applicable conversion price
__________________________________________________
Name of Holder
____________________________________________________
Address of Holder
__________________________________
Authorized Signature
<PAGE>
Exhibit B
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of October 24, 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") and amends and restates in its
entirety all of the terms of the Registration Rights Agreement between the
parties dated June 18, 1997 with respect to the certain Series B 5%
Convertible Debentures.
This Agreement is made pursuant to the Amended and Restated
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.
<PAGE>
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the Company's Common Stock, par value
$.0001 per share.
"Effectiveness Date" means December 23, 1997.
"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 November 13, 1997.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Shares" means the shares of Series B Preferred Stock,
par value $.0001 per share of the Company issued to the Purchaser on the
Closing Date.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
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"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion in full of the Preferred Shares, (b) upon
exercise in full of the Warrants and (c) as payment in full of dividends on
the Preferred Shares; provided, however that in order to account for the
fact that the number of shares of Common Stock that are issuable upon
conversion of Preferred Shares is determined in part upon the market price
of the Common Stock at the time of conversion, Registrable Securities 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
(i) into which the Preferred Shares are convertible and (ii) issuable as
payment in full of dividends on the Preferred Shares, assuming such
conversion occurred on the Closing Date and (2) the number of shares of
Common Stock issuable upon exercise in full of the Warrants, or such other
number of shares of Common Stock as agreed to by the parties to the Purchase
Agreement. Notwithstanding anything herein contained to the contrary, if
the actual number of shares of Common Stock into which the Preferred Shares
are convertible exceeds twice the number of shares of Common Stock into
which Preferred Shares are convertible based upon a computation as of the
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 Preferred Shares are convertible, plus shares
issuable upon payment of dividends as described above and shares issuable
upon exercise of the Warrants exceeds the number of shares of Common Stock
initially registered, 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.
"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.
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<PAGE>
"Special Counsel" means any special counsel to the Holders, for
which the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering"
means a registration in connection with which securities of the Company are
sold to an underwriter for reoffering to the public pursuant to an effective
registration statement.
"Warrants" means the Common Stock purchase warrants to be issued
and sold to the Purchaser on the Closing Date.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering 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
effective under the Securities Act until the date which is three years after
the date that such Registration Statement is declared effective by the
Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144 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
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<PAGE>
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 approve such arrangements and (ii) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such
arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement 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
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<PAGE>
Effectiveness Period and prepare and file with the Commission such
additional Registration Statements in order to register for resale under the
Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule
424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond as promptly as practicable to any comments
received from the Commission with respect to the Registration Statement or
any amendment thereto and promptly provide the Holders true and complete
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods 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.
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(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness
of the Registration Statement or (ii) any suspension of the qualification
(or exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority 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
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders and any underwriters in
connection with the offering and sale of the Registrable Securities covered
by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions 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
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<PAGE>
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 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
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<PAGE>
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), 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.
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<PAGE>
(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 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 recommendation by such Holder of the investment quality of the
Company's securities covered thereby and that such ownership does not imply
that such Holder will assist in meeting any future financial requirements of
the Company, or (ii) if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force, the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
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
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<PAGE>
the Registration Statement is filed or becomes effective and whether or not
any Registrable Securities are sold pursuant to the Registration Statement.
The fees and expenses referred to in the foregoing sentence shall include,
without limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be
made with the Nasdaq Stock Market and each other securities 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.
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<PAGE>
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as
to time, indemnify and hold harmless each Holder, the officers, directors,
agents (including any underwriters retained by such Holder in connection
with the offer and sale of Registrable Securities), brokers (including
brokers who offer and sell Registrable Securities as principal as a result
of a pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls
any such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses (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, attorneys, 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, attorneys, 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
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<PAGE>
Statement, such Prospectus or such form of prospectus or to the extent that
such information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in the Registration
Statement, such Prospectus or such form of Prospectus. In no event shall
the liability of any selling Holder hereunder be greater in amount than the
dollar amount of the net proceeds received by such Holder upon the sale of
the Registrable Securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity
hereunder (an "Indemnified Party"), such Indemnified Party promptly shall
notify the Person from whom indemnity is sought (the "Indemnifying Party")
in writing, and the Indemnifying Party shall assume the 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
Indemnified 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 (regard
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<PAGE>
less of whether it is ultimately determined that an Indemnified Party is not
entitled to indemnification hereunder; provided, that the Indemnifying Party
may require such Indemnified Party to undertake to reimburse all such fees
and expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).
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 paragraph. 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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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 or in the Purchase Agreement,
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.
(c) No Piggyback on Registrations. Except as and to the
extent specifically set forth on Schedule 7(c) attached hereto or in the
Purchase Agreement, neither the Company nor
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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
effet 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 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,
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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, Esq.
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: Kenneth L. Henderson, Esq.
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 Preferred Shares, the
Warrants 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 signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
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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.
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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: /S/ ROGER D. DUDLEY
------------------------------
Name: Roger D. Dudley
Title: Executive Vice President
SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD.
By: /s/ KENNETH L. HENDERSON
-------------------------------
Kenneth L. Henderson
Assistant Secretary
<PAGE>
EXHIBIT C
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
Warrant No. 1 Dated October 24, 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 175,000
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 $7.48 per share (as adjusted
from time to time as provided in Section 9 (the "Exercise Price"), at any
time and from time to time from and after the date hereof and through and
including October 24, 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.
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
<PAGE>
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) This Warrant shall be exercisable by the registered
Holder on any business day before 4:30 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 4:30 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 three (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.
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)
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<PAGE>
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 Kenneth L. Henderson, 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 Company or any governmental authority to sell
Warrant Shares under such registration statement shall not count towards
such 360 day period.
-3-<PAGE>
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 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
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<PAGE>
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 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
-5-
<PAGE>
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
(iii) the Company shall authorize the granting
to all holders of the Common Stock rights
or warrants to subscribe
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<PAGE>
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 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
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<PAGE>
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.
(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
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<PAGE>
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.
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SIGNATURE PAGE FOLLOWS]
<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: /S/ ROGER D. DUDLEY
---------------------------------------
Name: Roger D. Dudley
Title: Executive Vice President
<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:
__________________________
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of
October 24, 1997 (this "Agreement"), among fonix corporation, a Delaware
corporation (the "Company"), JNC Opportunity Fund Ltd., a Cayman Islands
corporation ("JNC"), and Diversified Strategies Fund, L.P., an Illinois
limited partnership ("DSF"). JNC and DSF are each a "Purchaser" and are
collectively, the "Purchasers."
WHEREAS, subject to the terms and conditions set forth herein,
the Company desires to issue and sell to the Purchasers and the Purchasers
desire to acquire shares of the Company's Series C Convertible Preferred
Stock, $.0001 par value per share (the "Preferred Stock").
IN CONSIDERATION of the mutual covenants and agreements set
forth herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 Certain Definitions. As used in this Agreement,
unless the context requires a different meaning, the following terms have
the meanings indicated in this Section 1.1:
"Affiliate" means, with respect to any Person, any Person that,
directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with") shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by
contract or otherwise.
"Agreement" shall have the meaning set forth in the recitals
hereto.
"Average Price" as at any date means the average Per Share Market
Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a Federal legal holiday or a day on which banking
institutions in the State of Delaware are authorized or required by law or
other government actions to close.
"Certificate of Designation" shall have the meaning set forth in
Section 2.1(a).
"Closing" shall have the meaning set forth in Section 2.1(b).
<PAGE>
"Closing Date" shall have the meaning set forth in Section
2.1(b).
"Code" means the Internal Revenue Code of 1986, as amended, and
the rules and regulations thereunder as in effect on the date hereof.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, par value $.0001
per share.
"Company" shall have the meaning set forth in the recitals
hereto.
"Conversion Price" shall have the meaning set forth in the
Certificate of Designation.
"Conversion Ratio" shall have the meaning set forth in the
Certificate of Designation.
"Disclosure Materials" means, collectively, the SEC Documents and
the Schedules to this Agreement and all other information furnished by or on
behalf of the Company relating to or concerning the Company and provided to
the Purchasers or their respective agents and counsel in connection with the
transactions contemplated by this Agreement.
"DSF Warrant" shall have the meaning set forth in Section 4.15.
"Encore" means Encore Capital Management, L.L.C.
"Escrow Agent" means Robinson Silverman Pearce Aronsohn & Berman
LLP.
"Escrow Agreement" means the escrow agreement, dated as of the
date hereof, among the Company, the Purchasers and the Escrow Agent, in the
form of Exhibit D, as the same may be amended, supplemented or otherwise
modified in accordance with its terms.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Initial Reserve" shall have the meaning set forth in Section
3.1(d).
"Intellectual Property Rights" shall have the meaning set forth
in Section 3.1(q).
"JNC Warrant" shall have the meaning set forth in Section 4.15.
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<PAGE>
"Legal Opinion" means the legal opinion letter of Durham, Evans,
Jones & Pinegar, P.C., outside counsel to the Company, addressed to the
Purchasers, dated the Closing Date and in form and substance acceptable to
the Purchasers.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, right of first refusal, charge, security interest or encumbrance of
any kind in or on such asset or the revenues or income thereon or therefrom.
"Material Adverse Effect" shall have the meaning set forth in
Section 3.1(a).
"Original Issue Date" shall mean the first issuance of any
Shares, regardless of the number of transfers of any particular Share and
regardless of the number of certificates which may be issued to evidence any
particular Share.
"Per Share Market Value" shall have the meaning set forth in the
Certificate of Designation.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Stock" shall have the meaning set forth in the
recitals hereto.
"Purchaser(s)" shall have the meaning set forth in the recitals
hereto.
"Put Agreement" means the Preferred Stock Put Option Agreement,
dated as of the date hereof, between the Purchasers and SMD, L.L.C. as the
same may be amended, supplemented or otherwise modified in accordance with
its terms.
"Registration Rights Agreement" means the registration rights
agreement, dated as of the date hereof, among the Company and the
Purchasers, in the form of Exhibit B, as the same may be amended,
supplemented or otherwise modified in accordance with its terms.
"Required Approvals" shall have the meaning set forth in Section
3.1(f).
"SEC Documents" shall have the meaning set forth in Section
3.1(k).
"Securities" means, collectively, the Shares, the Warrants and
the Underlying Shares.
"Securities Act" means the Securities Act of 1933, as amended.
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<PAGE>
"Shares" means the shares of Preferred Stock to be purchased
pursuant to this Agreement.
"Stated Value" means $20.
"Subsequent Financing" shall have the meaning set forth in
Section 4.9.
"Subsequent Financing Notice" shall have the meaning set forth in
Section 4.9.
"Subsidiaries" shall have the meaning set forth in Section
3.1(a).
"Trading Day" shall have the meaning set forth in the Certificate
of Designation.
"Transaction Documents" means collectively, this Agreement, the
Registration Rights Agreement, the Warrants, the Certificate of Designation
and the Escrow Agreement.
"Underlying Shares" means the shares of Common Stock issuable
upon conversion of the Shares and as payment of dividends thereon in
accordance with the terms of the Certificate of Designation, and upon
exercise of the Warrants in accordance with the terms thereof.
"Underlying Securities Registration Statement" means a
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights
Agreement, covering the resale of the Underlying Shares and naming the
holder or holders of such Underlying Shares as "selling stockholders"
thereunder.
"Warrants" shall have the meaning set forth in Section 4.15.
ARTICLE II
PURCHASE OF SHARES
Section 2.1 Purchase of Shares; Closing.
(a) Subject to the terms and conditions set forth in this
Agreement, the Company shall issue and sell to the Purchasers and the
Purchasers severally and not jointly shall purchase the Shares and the
Warrants in such number as is set forth in Section 2.1(c) for an aggregate
purchase price of $3,750,000. The Shares shall have the respective rights,
preferences and privileges set forth in Exhibit A (the "Certificate of
Designation").
(b) The closing of the purchase and sale of the Shares and the
Warrants (the "Closing") shall take place at the offices of the Escrow
Agent, 1290 Avenue of the Americas,
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<PAGE>
New York, New York 10104, in accordance with the Escrow Agreement on such
date as the parties shall agree. The date of the Closing is hereinafter
referred to as the "Closing Date."
(c) Prior to the Closing the parties shall deliver to the Escrow
Agent such items as are required to be delivered by them in accordance with
and subject to the terms and conditions of the Escrow Agreement, including,
the following: (i) the Company shall deliver or cause to be delivered (A)
stock certificates representing 37,500 Shares, registered in the name of
DSF, (B) the Warrants, (C) Legal Opinions addressed to each Purchaser and
(D) stock certificates representing 150,000 Shares, registered in the name
of JNC; (ii) JNC shall deliver or cause to be delivered $3,000,000 in United
States dollars; (iii) DSF shall deliver or cause to be delivered $750,000 in
United States dollars; and (iv) each party hereto shall deliver or cause to
be delivered all other executed instruments, agreements and certificates as
are required to be delivered by or on their behalf at the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company. The
Company hereby represents and warrants to the Purchasers as follows:
(a) Organization and Qualification. The Company is a
corporation, duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, with the requisite
corporate power and authority to own and use its properties and assets and
to carry on its business as currently conducted. The Company has no
subsidiaries other than as set forth in Schedule 3.1(a) (collectively, the
"Subsidiaries"). Each of the Subsidiaries is a corporation, duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the requisite corporate power and
authority to own and use its properties and assets and to carry on its
business as currently conducted. Each of the Company and the Subsidiaries
is duly qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary, except
where the failure to be so qualified or in good standing, as the case may
be, could not, individually or in the aggregate, (x) adversely affect the
legality, validity or enforceability of the Shares, Warrants or any
Transaction Document, (y) have a material adverse effect on the results of
operations, assets, prospects, or condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole or (z) adversely impair the
Company's ability to perform fully on a timely basis its obligations under
any Transaction Document (a "Material Adverse Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and to otherwise
carry out its obligations thereunder. The execution and
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<PAGE>
delivery of each Transaction Document by the Company and the consummation by
it of the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company. Each Transaction Document has
been duly executed by the Company and, when delivered in accordance with the
terms hereof and of the Escrow Agreement, each Transaction Document shall
constitute the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application. Neither the Company nor
any Subsidiary is in violation of any provision of its respective
certificate of incorporation, bylaws or other charter documents.
(c) Capitalization. The authorized, issued and outstanding
capital stock of the Company and each of the Subsidiaries is set forth in
Schedule 3.1(c). No shares of Common Stock are entitled to preemptive or
similar rights. Except as specifically disclosed in Schedule 3.1(c), there
are no outstanding options, warrants, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or, except as a result
of the purchase and sale of the Shares and the Warrants hereunder,
securities, rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of
Common Stock, or contracts, commitments, understandings, or arrangements by
which the Company or any Subsidiary is or may become bound to issue
additional shares of Common Stock or securities or rights convertible or
exchangeable into shares of Common Stock. To the knowledge of the Company,
except as specifically disclosed in the SEC Documents or Schedule 3.1(c), no
Person or group of Persons beneficially owns (as determined pursuant to Rule
13d-3 promulgated under the Exchange Act) or has the right to acquire by
agreement with or by obligation binding upon the Company beneficial
ownership of in excess of 5% of the Common Stock.
(d) Issuance of Securities. The Shares and the Warrants are
duly authorized and, when issued in accordance with the terms hereof, shall
be validly issued, fully paid and nonassessable, free and clear of all
Liens. The Company has and at all times while any Shares or Warrants are
outstanding will maintain an adequate reserve of duly authorized shares of
Common Stock to enable it to perform its conversion, exercise and other
obligations under this Agreement, the Certificate of Designation and the
Warrants, which reserve shall be no less than the sum of (i) 200% of (A) the
number of shares of Common Stock as would be issuable upon conversion in
full of the Shares, were such conversion effected on the Original Issue Date
or the Filing Date (as defined in the Registration Rights Agreement),
whichever yields a lower Conversion Price, and (B) the number of shares of
Common Stock as are issuable as payment of dividends on the Shares (assuming
such dividends are to be paid in Common Stock) and (ii) the number of shares
of Common Stock as are issuable upon the exercise in full of the Warrants
(such sum, the "Initial Reserve"). If at any time the sum of the number of
shares of Common Stock issuable (a) upon conversion in full of the then
outstanding Shares, (b) as the payment of dividends on the Shares (assuming
all such dividends are to be paid in Common Stock) and (c) upon exercise in
full of the Warrants exceeds 85% of the Initial Reserve, then the Company
shall duly reserve 200% of the number of shares of Common Stock equal to
such excess to fulfill such obligations. This obligation shall similarly
apply to successive excesses. When issued in accordance with the
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Certificate of Designation and the Warrants, the Underlying Shares will be
duly authorized, validly issued, fully paid and nonassessable, and free and
clear of all Liens.
(e) No Conflicts. The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company
of the transactions contemplated thereby do not and will not (i) conflict
with or violate any provision of its certificate of incorporation, bylaws or
other charter documents (each as amended through the date hereof),
(ii) subject to obtaining the consents referred to in Section 3.1(f),
conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument (evidencing a Company debt or otherwise)
to which the Company is a party or by which any property or asset of the
Company is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction
of any court or governmental authority to which the Company is subject
(including federal and state securities laws and regulations), or by which
any property or asset of the Company is bound or affected; except in the
case of each of clauses (ii) and (iii), as could not, individually or in the
aggregate, have or result in a Material Adverse Effect. The business of the
Company is not being conducted in violation of any law, ordinance or
regulation of any governmental authority, except for violations which,
individually and in the aggregate, could not have or result in a Material
Adverse Effect.
(f) Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order
of, or make any filing or registration with, any court or other federal,
state, local, foreign or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of
the Transaction Documents, other than (i) the filing of the Certificate of
Designation with the Secretary of State of Delaware, (ii) the filing of one
or more Underlying Securities Registration Statements with the Commission
and the making of applicable blue-sky filings under state securities laws
with respect to the Securities and the transactions contemplated hereby,
each as contemplated hereby and by the Registration Rights Agreement, (iii)
the application for the listing of the Underlying Shares on the Nasdaq
SmallCap Market (and on each other national securities exchange, market or
trading facility on which the Common Stock is then listed), and (iv) other
than, in all other cases, where the failure to obtain such consent, waiver,
authorization or order, or to give or make such notice or filing, could not,
individually or in the aggregate, have or result in a Material Adverse
Effect (the "Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed
in the Disclosure Materials, there is no action, suit, notice of violation,
proceeding or investigation pending or, to the best knowledge of the
Company, threatened against or affecting the Company or any of its
Subsidiaries or any of their respective properties before or by any court,
governmental or administrative agency or regulatory authority (federal,
state, county, local or foreign) which (i) adversely affects or challenges
the legality, validity or enforceability of any Transaction Document or the
Securities or (ii) could, individually or in the aggregate, have or result
in a Material Adverse Effect.
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<PAGE>
(h) No Default or Violation. Neither the Company nor any
Subsidiary (i) is in default under or in violation of (or has received
notice of a claim that it is in default under or that it is in violation of)
any indenture, loan or credit agreement or any other agreement or instrument
to which it is a party or by which it or any of its properties is bound,
(ii) is in violation of any order of any court, arbitrator or governmental
body, or (iii) is in violation of any statute, rule or regulation of any
governmental authority, except as could not, individually or in the
aggregate, have or result in a Material Adverse Effect or, except in the
case of clause (i) above, as has not been waived pursuant to an effective
waiver.
(i) Private Offering. Assuming the accuracy of the
representations and warranties of the Purchasers contained in Sections
3.2(b)-3.2(f), the offering, issuance or sale of the Securities as
contemplated hereunder are exempt from the registration requirements of the
Securities Act.
(j) Certain Fees. Except for fees payable to Allied Capital
International, Inc. and Tuscan Finance & Trade Establishment, no fees or
commissions will be payable by the Company to any broker, financial advisor,
finder, investment banker, placement agent, or bank with respect to the
transactions contemplated hereby. The Purchasers shall have no obligation
with respect to such fees or with respect to any claims made by or on behalf
of other Persons for fees of a type contemplated in this Section that may be
due in connection with the transactions contemplated hereby. The Company
shall indemnify and hold harmless each Purchaser, its respective employees,
officers, directors, agents, and partners, and their respective Affiliates,
from and against all claims, losses, damages, costs (including the costs of
preparation and attorney's fees) and expenses suffered in respect of any
such claimed or existing fees, as and when incurred.
(k) SEC Documents; Financial Statements; No Adverse Change. The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the three
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the "SEC Documents") on a timely basis or
has received a valid extension of such time of filing and has filed any such
SEC Documents prior to the expiration of any such extension. As of their
respective dates, the SEC Documents complied in all material respects with
the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the
SEC Documents, when filed, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply in all
material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto. Such financial
statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved, except as may be otherwise specified in such financial statements
or the notes thereto, and fairly present in all material respects the
financial position of the Company as of and for the dates thereof and the
results of operations, retained earnings and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal year-end
audit adjustments. Since the date of the financial
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statements included in the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1997, as amended to the date hereof, (a) there has
been no event, occurrence or development that has had or that could have or
result in a Material Adverse Effect, (b) there has been no material change
in the Company's accounting principals, practices or methods and (c) the
Company has conducted its business only in the ordinary course of such
business. The Company last filed audited financial statements with the
Commission on September 8, 1997, and has not received any comments from the
Commission in respect thereof.
(l) Seniority. Except for the Company's Series A Preferred
Stock, no class of equity securities of the Company is senior to the Shares
in right of payment, whether with respect to dividends or upon liquidation,
dissolution or otherwise.
(m) Form S-3 Eligibility. The Company is, and at the Closing
Date will be, eligible to register securities for resale with the Commission
under Form S-3 promulgated under the Securities Act.
(n) Investment Company. The Company is not, and is not an
"Affiliate person" of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(o) Exclusivity. The Company shall not issue or sell Preferred
Stock to any Person other than the Purchasers.
(p) Listing and Maintenance Requirements Compliance. Other than
as specifically disclosed in the Disclosure Materials, the Company has not
in the two years prior to the date hereof received written notice from any
stock exchange, market or trading facility on which the Common Stock is or
has been listed (or on which it is or has been quoted) to the effect that
the Company is not in compliance with the listing or maintenance
requirements of such exchange, market or trading facility. The Company has
provided to the Purchasers true and complete copies of all such notices
contemplated by this Section.
(q) Patents and Trademarks. The Company has, or has rights to
use, all patents, patent applications, trademarks, trademark applications,
service marks, trade names, copyrights, licenses, trade secrets and other
intellectual property rights which are necessary for use in connection with
its business or which the failure to so have would have a Material Adverse
Effect (collectively, the "Intellectual Property Rights"). To the best
knowledge of the Company, none of the Intellectual Property Rights infringe
on any rights of any other Person, and the Company either owns or has duly
licensed or otherwise acquired all necessary rights with respect to the
Intellectual Property Rights. The Company has not received any notice from
any third party of any claim of infringement by the Company of any of the
Intellectual Property Rights, and has no reason to believe there is any
basis for any such claim. To the best knowledge of the Company, there is no
existing infringement by another Person on any of the Intellectual Property
Rights.
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(r) Disclosure. All information relating to or concerning the
Company set forth in the Transaction Documents or the Disclosure Materials
(other than the SEC Documents) is true and correct in all material respects
and does not fail to state any material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading. The Company confirms that it has not provided to
any of the Purchasers or any of their representatives, agents or counsel any
information that constitutes or might constitute material nonpublic
information. The Company understands and confirms that the Purchasers shall
be relying on the foregoing representation in effecting transactions in
securities of the Company.
Section 3.2 Representations and Warranties of the Purchasers.
Each Purchaser hereby severally and not jointly represents and warrants to
the Company as follows:
(a) Organization; Authority. Such Purchaser is an entity
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite power and authority to
enter into and to consummate the transactions contemplated by the
Transaction Documents and to carry out its obligations thereunder. The
acquisition of the Securities to be acquired hereunder and the payment of
the purchase price therefor by such Purchaser have been duly authorized by
all necessary action on the part of such Purchaser. Each of this Agreement,
the Registration Rights Agreement and the Escrow Agreement has been duly
executed by such Purchaser and, when delivered by such Purchaser in
accordance with the terms hereof and of the Escrow Agreement, shall
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights
generally and to general principles of equity.
(b) Investment Intent. Such Purchaser is acquiring the
Securities to be acquired hereunder by such Purchaser for its own account
for investment purposes only and not with a view to or for distributing or
reselling such Securities or any part thereof or interest therein, without
prejudice, however, to such Purchaser's right, subject to the provisions of
this Agreement and the Registration Rights Agreement, at all times to sell
or otherwise dispose of all or any part of such Securities pursuant to an
effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration.
(c) Purchaser Status. At the time such Purchaser was offered
the Securities to be acquired hereunder by such Purchaser, it was, at the
date hereof, it is, and at the Closing Date, it will be, an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
(d) Experience of Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.
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(e) Ability of Purchaser to Bear Risk of Investment. Such
Purchaser acknowledges that an investment in the Securities is speculative
and involves a high degree of risk. Such Purchaser is able to bear the
economic risk of an investment in the Securities to be acquired hereunder by
such Purchaser, and, at the present time, is able to afford a complete loss
of such investment.
(f) Access to Information. Such Purchaser acknowledges receipt
of the Disclosure Materials and further acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Securities, and
the merits and risks of investing in the Securities, (ii) access to
information about the Company and the Company's financial condition, results
of operations, business, properties, management and prospects sufficient to
enable it to evaluate its investment and (iii) the opportunity to obtain
such additional information which the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed
investment decision with respect to the investment and to verify the
accuracy and completeness of the information contained in the Disclosure
Materials. Neither such inquiries nor any other investigation conducted by
or on behalf of such Purchaser or its representatives, agents or counsel
shall modify, amend or affect such Purchaser's right to rely on the truth,
accuracy and completeness of the Disclosure Materials and the Company's
representations and warranties contained in the Transaction Documents.
(g) Reliance. Such Purchaser understands and acknowledges that
(i) the Securities to be acquired by it hereunder are being offered and sold
to it without registration under the Securities Act in a private placement
that is exempt from the registration provisions of the Securities Act and
(ii) the availability of such exemption, depends in part on, and the Company
will rely upon the accuracy and truthfulness of, the foregoing
representations and such Purchaser hereby consents to such reliance.
The Company acknowledges and agrees that the Purchasers make no
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
Section 4.1 Transfer Restrictions. (a) The Securities may only
be disposed of pursuant to an effective registration statement under the
Securities Act, to the Company or pursuant to an available exemption from or
in a transaction not subject to the registration requirements thereof. In
connection with any transfer of any Securities other than pursuant to an
effective registration statement or to the Company, the Company may require
the transferor thereof to provide to the Company an opinion of counsel
selected by the transferor, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer
does not require registration under the Securities Act. Notwithstanding the
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foregoing, the Company hereby consents to and agrees to register (i) any
transfer of Securities by one Purchaser to another Purchaser, and agrees
that no documentation other than executed transfer documents shall be
required for any such transfer, and (ii) any transfer by any Purchaser to an
Affiliate of such Purchaser or to an Affiliate of another Purchaser, or any
transfers among any such Affiliates provided in each case of clauses (i) and
(ii) the transferee certifies to the Company that it is an "accredited
investor" as defined in Rule 501(a) under the Securities Act. Any such
Purchaser or Affiliate transferee shall have the rights of a Purchaser under
this Agreement and the Registration Rights Agreement.
(b) The Purchasers agree to the imprinting, so long as is
required by this Section 4.1(b), of the following legend (or such
substantially similar legend as is acceptable to the Purchasers and their
respective counsel, the parties agreeing that any unacceptable legended
Securities shall be replaced promptly by and at the Company's cost) on the
Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF
ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.
[FOR SHARES ONLY] THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS ON CONVERSION SET FORTH IN SECTION 4.8
OF THE CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, DATED AS OF
OCTOBER 24, 1997, AMONG fonix corporation (THE "COMPANY") AND THE
ORIGINAL HOLDER HEREOF. A COPY OF THAT AGREEMENT IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY.
Underlying Shares shall not contain the legend set forth above or
any other restrictive legend if the conversion of Shares, exercise of
Warrants or other issuances of Underlying Shares, as the case may be, occurs
at any time while an Underlying Securities Registration Statement is
effective under the Securities Act or, in the event there is not an
effective Underlying Securities Registration Statement at such time, if in
the opinion of counsel to the Company such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission).
The Company agrees that it will provide each Purchaser, upon request, with a
certificate or certificates representing Underlying Shares, free from such
legend at such time as such legend is no longer required hereunder. The
Company may not make any notation on its records or give
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instructions to any transfer agent of the Company which enlarge the
restrictions of transfer set forth in this Section 4.1(b).
Section 4.2 Acknowledgement of Dilution. The Company
acknowledges that the issuance of Underlying Shares upon (i) conversion of
the Shares and as payment of dividends thereon and (ii) exercise of the
Warrants may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market conditions. The
Company further acknowledges that its obligation to issue Underlying Shares
in accordance with the Certificate of Designation and the Warrants is
unconditional and absolute regardless of the effect of any such dilution.
Section 4.3 Furnishing of Information. As long as the
Purchasers own Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period)
all reports required to be filed by the Company after the date hereof
pursuant to Section 13(a) or 15(d) of the Exchange Act. If at any time
prior to the date on which the Purchasers may resell all of their Underlying
Shares without volume restrictions pursuant to Rule 144(k) promulgated under
the Securities Act (as determined by counsel to the Company pursuant to a
written opinion letter to such effect, addressed and acceptable to the
Company's transfer agent for the benefit of and enforceable by the
Purchasers) the Company is not required to file reports pursuant to such
sections, it will prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c) promulgated under the Securities
Act annual and quarterly financial statements, together with a discussion
and analysis of such financial statements in form and substance
substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the Exchange Act
in the time period that such filings would have been required to have been
made under the Exchange Act. The Company further covenants that it will
take such further action as any holder of Securities may reasonably request,
all to the extent required from time to time to enable such Person to sell
Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144 promulgated under the
Securities Act, including the legal opinion referenced above in this
Section. Upon the request of any such Person, the Company shall deliver to
such Person a written certification of a duly authorized officer as to
whether it has complied with such requirements.
Section 4.4 Use of Disclosure Materials. The Company consents
to the use of the Disclosure Materials and any information provided by or on
behalf of the Company pursuant to Section 4.3, and any amendments and
supplements thereto, by the Purchasers in connection with resales of the
Securities other than pursuant to an effective registration statement.
Section 4.5 Blue Sky Laws. In accordance with the Registration
Rights Agreement, the Company shall qualify the Underlying Shares under the
securities or Blue Sky laws of such jurisdictions as the Purchasers may
reasonably request and shall continue such qualification at all times until
the Purchasers notify the Company in writing that they no longer own
Securities; provided, however, that neither the Company nor its Subsidiaries
shall be required in connection therewith to qualify as a foreign
corporation where they are not now so qualified or
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to take any action that would subject the Company to general service of
process in any such jurisdiction where it is not then so subject.
Section 4.6 Integration. The Company shall not and shall use
its best efforts to ensure that no Affiliate shall sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the issue, offer or sale of the
Securities to the Purchasers.
Section 4.7 Increase in Authorized Shares. At such time as the
Company would be, if a notice of conversion or exercise (as the case may be)
were to be delivered on such date, precluded from (a) converting in full all
of the Shares that remain unconverted at such date (and paying any accrued
but unpaid dividends in respect thereof in shares of Common Stock) or (b)
honoring the exercise in full of the Warrants, due to the unavailability of
a sufficient number of shares of authorized but unissued or re-acquired
Common Stock, the Board of Directors of the Company shall promptly (and in
any case within 30 Business Days from such date) prepare and mail to the
shareholders of the Company proxy materials requesting authorization to
amend the Company's certificate of incorporation to increase the number of
shares of Common Stock which the Company is authorized to issue to at least
a number of shares equal to the sum of (i) all shares of Common Stock then
outstanding, (ii) the number of shares of Common Stock issuable on account
of all outstanding warrants, options and convertible securities (other than
the Preferred Stock and the Warrants) and on account of all shares reserved
under any stock option, stock purchase, warrant or similar plan, (iii) 200%
of the number of Underlying Shares as would then be issuable upon a
conversion in full of the then outstanding Shares and as payment of all
future dividends thereon in shares of Common Stock in accordance with the
terms of this Agreement and the Certificate of Designation and (iv) such
number of Underlying Shares as would then be issuable upon the exercise in
full of the Warrants. In connection therewith, the Board of Directors
shall (x) adopt proper resolutions authorizing such increase, (y) recommend
to and otherwise use its best efforts to promptly and duly obtain
shareholder approval to carry out such resolutions (and hold a special
meeting of the shareholders no later than the 60th day after delivery of the
proxy materials relating to such meeting) and (z) within 5 Business Days of
obtaining such shareholder authorization, file an appropriate amendment to
the Company's certificate of incorporation to evidence such increase. If
the shareholders fail to approve such increase, the Company does not receive
shareholder approval for such increase or the Company fails to file an
appropriate amendment in the time provided therefor by the immediately
preceding sentence, then the provisions of Section 5(e) of the Certificate
of Designation shall apply.
Section 4.8 Purchaser Ownership of Common Stock. In no event
shall a Purchaser be permitted to use its ability to convert Shares or
exercise its Warrant to the extent such conversion or exercise would result
in such Purchaser beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act and the rules thereunder) in excess of
4.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of the Shares held by such Purchaser after
application of this Section. To the extent that the limitation contained in
this Section applies, the determination of whether Shares are convertible
(in relation to other securities owned by a Purchaser) and of which Shares
are
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convertible shall be in the sole discretion of such Purchaser, and the
submission of Shares for conversion shall be deemed to be such Purchaser's
determination of whether such Shares are convertible (in relation to other
securities owned by a Purchaser) and of which Shares are convertible, in
each case subject to such aggregate percentage limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the
right of a Purchaser to convert Shares at such time as such conversion will
not violate the provisions of this Section. The provisions of this Section
may be waived by a Purchaser as to itself (and solely as to itself) upon not
less than 75 days prior notice to the Company, and the provisions of this
Section shall continue to apply until such 75th day (or later, if stated in
the notice of waiver).
Section 4.9 Right of First Refusal; Subsequent Registrations.
(a) the Company shall not, directly or indirectly, without the prior written
consent of Encore, offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any offer, sale, grant or any option to purchase or
other disposition) any of its or its Affiliates' equity or equity-equivalent
securities or any instrument that permits the holder thereof to acquire
Common Stock at any time over the life of the security or investment at a
price that is less than the market price of the Common Stock at the time of
issuance of such security or investment (a "Subsequent Financing") for a
period of 100 days after the Closing Date, except (i) the granting of
options or warrants to employees, officers and directors, and the issuance
of shares upon exercise of options granted, under any stock option plan
heretofore or hereinafter duly adopted by the Company, (ii) shares issued
upon exercise of any currently outstanding warrants and upon conversion of
any currently outstanding convertible preferred stock in each case disclosed
in Schedule 3.1(c), (iii) shares of Common Stock issued upon conversion of
the Shares, as payment of dividends in respect thereof, or upon exercise of
the Warrants in accordance with their respective terms, (iv) shares issued
in connection with the capitalization or creation of a joint venture with a
strategic partner (a Person whose business is primarily that of investing
and selling of securities shall not be deemed a strategic partner), (v)
shares issued to pay part or all of the purchase price for the acquisition
by the Company of a Person (which, for purposes of this clause (v), shall
not include an individual or group of individuals) and (vi) shares issued in
a bona fide public offering by the Company of its (and not of any of its
stockholders') securities, unless (A) the Company delivers to Encore a
written notice (the "Subsequent Financing Notice") of its intention effect
such Subsequent Financing, which Subsequent Financing Notice shall describe
in reasonable detail the proposed terms of such Subsequent Financing, the
amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing shall be affected, and attached to which shall be
a term sheet or similar document relating thereto and (B) Encore shall not
have notified the Company by 5:00 p.m. (Salt Lake City time) on the tenth
(10th) Trading Day after its receipt of the Subsequent Financing Notice of
its willingness to cause either or both of the Purchasers to provide (or to
cause its sole designee to provide), subject to completion of mutually
acceptable documentation, financing to the Company on substantially the
terms set forth in the Subsequent Financing Notice. If Encore shall fail to
notify the Company of its intention to enter into such negotiations within
such time period, the Company may effect the Subsequent Financing
substantially upon the terms and to the Persons (or Affiliates of such
Persons) set forth in the Subsequent Financing Notice; provided, that the
Company shall provide Encore with a second Subsequent Financing Notice, and
Encore shall again have the right of first refusal set forth above in this
paragraph (a), if the
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Subsequent Financing subject to the initial Subsequent Financing Notice
shall not have been consummated for any reason on the terms set forth in
such Subsequent Financing Notice within thirty (30) Trading Days after the
date of the initial Subsequent Financing Notice with the Person (or an
Affiliate of such Person) identified in the Subsequent Financing Notice.
The rights granted to Encore in this Section 4.9(a) are subject to the prior
right of first refusal granted to Southbrook International Investments, Ltd.
as and to the extent such rights, if any, exist on the date hereof, but not
subject to any modifications, extensions or assignments of such rights of
Southbrook International Investments, Ltd.
(b) Except Underlying Shares, and other "Registrable Securities"
(as such term is defined in the Registration Rights Agreement) to be
registered in accordance with the Registration Rights Agreement and except
as set forth on Schedule 6(c) to the Registration Rights Agreement (which
securities may not be registered prior to the time the Registrable
Securities are registered), the Company shall not, for a period of not less
than 90 Trading Days after the date that the Underlying Securities
Registration Statement is declared effective by the Commission, without the
prior written consent of Encore on behalf of the Purchasers, (i) issue or
sell any of its or any of its Affiliates' equity or equity-equivalent
securities pursuant to Regulation S promulgated under the Securities Act, or
(ii) register for resale any securities of the Company. Any days that a
Purchaser is not permitted to sell Underlying Shares under the Underlying
Securities Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
Section 4.10 Listing of Underlying Shares. The Company shall
(a) not later than the fifth Business Day following the Closing Date prepare
and file with the Nasdaq SmallCap Market (as well as any other national
securities exchange, market or trading facility on which the Common Stock is
then listed) an additional shares listing application covering at least the
sum of (i) two times the number of Underlying Shares as would be issuable
upon a conversion in full of (and as payment of dividends in respect of) the
Shares, assuming such conversion occurred on the Original Issue Date or the
Filing Date (whichever yields a lower Conversion Price) and (ii) the
Underlying Shares issuable upon exercise in full of the Warrants (b) take
all steps necessary to cause the such shares to be approved for listing on
the Nasdaq SmallCap Market (as well as on any other national securities
exchange, market or trading facility on which the Common Stock is then
listed) as soon as possible thereafter, and (c) provide to the Purchasers
evidence of such listing, and the Company shall maintain the listing of its
Common Stock on such exchange or market. In addition, if at any time the
number of shares of Common Stock issuable on conversion of all then
outstanding Shares, on account of accrued and unpaid dividends thereon and
upon exercise in full of the Warrants is greater than the number of shares
of Common Stock theretofore listed with the Nasdaq SmallCap Market (and any
such other national securities exchange, market or trading facility), the
Company shall promptly take such action (including the actions described in
the preceding sentence) to file an additional shares listing application
with the Nasdaq SmallCap Market (and any such other national securities
exchange, market or trading facility) covering at least a number of shares
equal to the sum of (x) 200% of (A) the number of Underlying Shares as would
then be issuable upon a conversion in full of the Shares and (B) the number
of Underlying Shares as would be issuable as payment of dividends on the
Shares and (y) the number of Underlying Shares as would be issuable upon
exercise in full of the Warrants.
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Section 4.11 Notice of Breaches. Each of the Company and each
Purchaser shall give prompt written notice to the other of any breach by it
of any representation, warranty or other agreement contained in any
Transaction Document, as well as any events or occurrences arising after the
date hereof, which would reasonably be likely to cause any representation or
warranty or other agreement of such party, as the case may be, contained in
the Transaction Document to be incorrect or breached as of such Closing
Date. However, no disclosure by either party pursuant to this Section shall
be deemed to cure any breach of any representation, warranty or other
agreement contained in any Transaction Document.
Notwithstanding the generality of the foregoing, the Company shall
promptly notify the Purchasers of any notice or claim (written or oral) that
it receives from any lender of the Company to the effect that the
consummation of the transactions contemplated by the Transaction Documents
violates or would violate any written agreement or understanding between
such lender and the Company, and the Company shall promptly furnish by
facsimile to the Purchasers a copy of any written statement in support of or
relating to such claim or notice.
Section 4.12 Conversion Procedures. Exhibit E sets forth all
procedures, required information and instructions that are required to be
followed in order to permit the holders of Shares to smoothly and
expeditiously exercise their rights to convert Shares and which are not
specifically set forth in the Certificate of Designation, including the form
of legal opinion, if necessary, that shall be rendered to the Company's
transfer agent to effect the delivery of Underlying Shares in compliance
with the terms hereof and of the Certificate of Designation.
Section 4.13 Conversion and Exercise Obligations of the Company.
The Company shall honor conversions of the Shares and exercises of the
Warrants and shall deliver Underlying Shares upon such conversions and
exercises in accordance with the respective terms and conditions and time
periods set forth in the Certificate of Designation and the Warrants.
Section 4.14 Use of Proceeds. The Company shall use all of the
proceeds from the sale of the Securities for working capital purposes and
not for the satisfaction of any portion of Company debt in excess of an
aggregate of $1,000,000 or to redeem any Company equity or equity-equivalent
securities. Pending application of the proceeds of this placement in the
manner permitted hereby the Company will invest such proceeds in interest
bearing accounts and/or short-term, investment grade interest bearing
securities.
Section 4.15 The Warrants. Prior to the Closing, the Company
shall deliver to the Escrow Agent for issuance and delivery at the Closing
(a) Common Stock purchase warrant, in the form of Exhibit C (the "JNC
Warrant"), in the name of JNC pursuant to which JNC shall have the right at
any time and from time to time thereafter through the third anniversary of
the date of issuance thereof, to acquire 160,000 shares of Common Stock at
an exercise price per share equal to 120% of the Average Price on the
Closing Date and (b) a Common Stock purchase warrant, in the form of Exhibit
C (the "DSF Warrant," and, collectively with the JNC Warrant, the
"Warrants"), in the name of DSF pursuant to which DSF shall have the right
at any time and from time to time thereafter through the third anniversary
of the date of issuance thereof, to acquire
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40,000 shares of Common Stock at an exercise price per share equal to 120%
of the Average Price on the Closing Date.
Section 4.16 Transfer of Intellectual Property Rights. Except
in the ordinary course of the Compnay's business consistent with past
practice or in connection with the sale of all or substantially all of the
assets of the Company, the Company shall not transfer, sell or otherwise
dispose of, any Intellectual Property Rights, or allow the Intellectual
Property Rights to become subject to any Liens, or fail to renew such
Intellectual Property Rights (if renewable and would otherwise expire).
Section 4.17 Certain Put Rights. The Purchasers shall have
certain put rights with respect to the Shares as set forth in the Put
Agreement, which the Company agrees shall be on terms no less favorable to
the Purchasers than any other such or similar understandings and benefits
granted to holders of the Company's Series B Convertible Preferred Stock.
ARTICLE V
CONDITIONS; TERMINATION
Section 5.1 Conditions Precedent.
(a) Conditions Precedent to the Obligation of the Company to
Sell the Shares and Warrants. The obligation of the Company to sell the
Shares and Warrants hereunder to a Purchaser is subject to the satisfaction
or waiver by the Company, at or before the Closing, of each of the following
conditions:
(i) Accuracy of the Purchaser's Representations and
Warranties. The representations and warranties of such Purchaser shall be
true and correct in all material respects as of the date when made and as of
the Closing Date, as though made on and as of such date;
(ii) Performance by the Purchaser. Such Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by it at or prior to the
Closing;
(iii) Required Approvals. All Required Approvals shall
have been obtained.
(b) Conditions Precedent to the Obligation of a Purchaser to
Purchase the Shares and Warrants. The obligation of a Purchaser to acquire
and pay for the Shares and the Warrant to be acquired by it hereunder is
subject to the satisfaction or waiver by such Purchaser, at or before the
Closing, of each of the following conditions:
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(i) Accuracy of the Company's Representations and
Warranties. The representations and warranties of the Company set forth
herein shall be true and correct in all material respects as of the date
when made and as of the Closing Date as though made on and as of such date;
(ii) Performance by the Company. The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to
the Closing;
(iii) Other Financings. Between the date hereof and the
Closing, the Company shall have completed financings aggregating not less
than $2,250,000 (exclusive of the financing contemplated by this Agreement)
and shall have booked on its balance sheet not less than $2,250,000 in
equity as a result therefrom (as set forth in a financial statement of the
Compnay filed, or to be filed at Closing, with the Commission);
(iv) No Prohibitions. The purchase of and payment for the
Shares and the Warrant to be purchased by such Purchaser (and upon
conversion thereof, the Underlying Shares) hereunder (i) shall not be
prohibited or enjoined (temporarily or permanently) by any applicable law or
governmental regulation and (ii) shall not subject such Purchaser to any
penalty, or in its judgement, other onerous condition under or pursuant to
any applicable law or governmental regulation that would materially reduce
the benefits to such Purchaser of the purchase of the Shares, such Warrant
or the Underlying Shares (provided, however, that such regulation, law or
onerous condition was not in effect in such form at the date of this
Agreement);
(v) Adverse Changes. No event or series of events which,
individually or in the aggregate, could have or result in a Material Adverse
Effect shall have occurred between the date of execution hereof and the
Closing;
(vi) No Suspensions of Trading in Common Stock. Trading
in the Common Stock shall not have been suspended from trading on the Nasdaq
SmallCap Market at any time between the date hereof and the Closing;
(vii) Listing of Common Stock. (1) The Common Stock
shall have at all times between the date hereof and the Closing Date been
listed for trading on the Nasdaq SmallCap Market and (2) such Purchaser
shall have received evidence satisfactory to it that the Common Stock will
continue to be listed for trading on the Nasdaq SmallCap Market for the
foreseeable future;
(viii) Deliveries. The Company shall have delivered or
caused to be delivered to the Escrow Agent the "Consideration" (as defined
in the Escrow Agreement) required to have been delivered by or on its behalf
pursuant to the terms and conditions of the Escrow Agreement, including an
executed Put Agreement;
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(ix) Required Approvals. All Required Approvals shall
have been obtained; and
(x) Certificate of Designation. The Certificate of
Designation shall have been duly filed with the Secretary of State of
Delaware, and the Company shall have delivered a copy thereof to the Escrow
Agreement certified as filed by the office of the Secretary of State of
Delaware.
Section 5.2 Termination.
(a) Termination by Mutual Consent. This Agreement and the
transactions contemplated hereby may be terminated at any time prior to
Closing by the mutual consent of the Company and the Purchasers.
(b) Termination by the Company or a Purchaser. This Agreement
and the transactions contemplated hereby with respect to a Purchaser hereby
may be terminated prior to Closing by either the Company or such Purchaser,
by giving written notice of such termination to the other party, if:
(i) there shall be in effect any statute, rule, law or
regulation that prohibits the consummation of the Closing or the
transaction contemplated by the Transaction Documents or if the
consummation of the Closing Documents would violate any non-appealable
final judgment, order, decree, ruling or injunction of any court of or
governmental authority having competent jurisdiction; or
(ii) there shall have been an amendment to Regulation D
promulgated under the Securities Act or an interpretive release
promulgated or issued thereunder, which, in the judgment of the
terminating party, could have or result in a Material Adverse Effect.
(c) Termination by the Company. This Agreement and the
transactions contemplated hereby may be terminated prior to Closing as to
one or more of the Purchasers by the Company, by giving written notice of
such termination to such Purchaser or Purchasers, if such Purchaser or
Purchasers have breached in any material respect any representation,
warranty, covenant or agreement contained in any Transaction Document and
such breach is not cured within one (1) Business Day following receipt by
such Purchaser or Purchasers (as the case may be) of notice of such breach.
(d) Termination by a Purchaser. This Agreement and the
transactions contemplated hereby may be terminated as to a Purchaser prior
to Closing by such Purchaser, by giving written notice of such termination
to the Company, if:
(i) the Company has breached in any material respects any
representation, warranty, covenant or agreement contained in any
Transaction Document
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and such breach is not cured within one (1) Business Day following
receipt by the Company of notice of such breach;
(ii) there has occurred an event or series of events
which, individually or in the aggregate, could have or result in a
Material Adverse Effect which is not disclosed fully in the Disclosure
Materials;
(iii) trading in the Common Stock has been suspended or
the Common Stock has failed to be listed for trading on the Nasdaq
SmallCap Market; or
(iv) the conditions to Closing set forth in Sections
5.1(b)(iii) and 5.1(b)(vii)(2) shall not have been satisfied or waived
by such Purchaser prior to October 31, 1997.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Fees and Expenses. The Company shall pay the
Purchasers at the Closing (i) $15,000 for their legal fees and disbursements
in connection with the preparation and negotiation of the Transaction
Documents and (ii) $7,000 for their due diligence expenses and disbursements
in connection with the transactions contemplated hereby. Other than the
amounts contemplated by the immediately preceding sentence, and except as
set forth in the Registration Rights Agreement, each party shall pay the
fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties
levied in connection with the issuance of the Shares pursuant hereto. The
Purchasers shall be responsible for their own respective tax liability that
may arise as a result of the investment hereunder or the transactions
contemplated by this Agreement.
Section 6.2 Entire Agreement; Amendments, Exhibits and
Schedules. This Agreement, together with the Exhibits and Schedules hereto,
the Certificate of Designation, the Warrants, the Escrow Agreement, the
Registration Rights Agreement and the Put Agreement contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with
respect to such matters. The Exhibits and Schedules to this Agreement are
hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
Section 6.3 Notices. Any and all notices or other
communications or deliveries required or permitted to be provided hereunder
shall be in writing and shall be deemed given and effective on the earliest
of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 5:00 p.m. (Salt Lake City time) on a Business Day, (ii) the
Business Day after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number
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specified in the Purchase Agreement later than 5:00 p.m. (Salt Lake City
time) on any date and earlier than 11:59 p.m. (Salt Lake City time) on such
date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt
by the party to whom such notice is required to be given. The address for
such notices and communications shall be as follows:
If to the Company: fonix corporation
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, P.C.
Suite 850 Key Bank Tower
50 South Main Street
Salt Lake City, Utah 84144
Facsimile No.: (801) 538-2425
Attn: Jeffrey M. Jones, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
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With copies to (for Encore Capital Management, L.L.C.
communications to 1207 Sunrise Valley Drive
either Purchaser): Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
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.
Section 6.4 Amendments; Waivers. No provision of this Agreement
may be waived or amended except in a written instrument signed, in the case
of an amendment, by both the Company and the Purchasers, or, in the case of
a waiver, by the party against whom enforcement of any such waiver is
sought. No waiver of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver
in the future or a waiver of any other provision, condition or requirement
hereof, nor shall any delay or omission of either party to exercise any
right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
Section 6.5 Headings. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 6.6 Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the parties and their successors
and permitted assigns, including any Persons to whom any Purchaser transfers
Shares or Warrants. The assignment by a party of this Agreement or any
rights hereunder shall not affect the obligations of such party under this
Agreement.
Section 6.7 No Third-Party Beneficiaries. This Agreement is
intended for the benefit of the parties hereto and their respective
permitted successors and assigns and, other than with respect to permitted
assignees under Section 6.6 and with respect to Section 4.9, which is
intended for the benefit of and which may be enforced by Encore, is not for
the benefit of, nor may any provision hereof be enforced by, any other
Person. The obligations of the Purchasers under the Agreement and the other
Transaction Documents are several and not joint and no Purchaser shall be
responsible for any obligations of any other Purchaser.
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<PAGE>
Section 6.8 Governing Law. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State
of Delaware without regard to the principles of conflicts of law thereof.
Section 6.9 Survival. The representations, warranties,
agreements and covenants contained in this Agreement shall survive the
Closing and the and conversion of the Shares and exercise of the Warrants.
Section 6.10 Execution. This Agreement may be executed in two
or more counterparts, all of which when taken together shall be considered
one and the same agreement, and shall become effective when counterparts
have been signed by each party and delivered to the other parties, it being
understood that all parties need not sign the same counterpart. In the
event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature page were an original thereof.
Section 6.11 Publicity. The Company and the Purchasers shall
consult with each other in issuing any press releases or otherwise making
public statements with respect to the transactions contemplated hereby and
no party shall issue any such press release or otherwise make any such
public statement without the prior written consent of the other parties,
which consent shall not be unreasonably withheld or delayed, except that no
prior consent shall be required if such disclosure is required by law, in
which such case the disclosing party shall provide the other parties with
prior notice of such public statement. Notwithstanding the foregoing, the
Company shall not publicly disclose the name of any Purchaser without the
prior written consent of such Purchaser, except to the extent required by
law, in which case the Company shall provide such Purchaser with prior
written notice of such public disclosure.
Section 6.12 Severability. In case any one or more of the
provisions of this Agreement shall be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and
provisions of this Agreement shall not in any way be affected or impaired
thereby and the parties will attempt to agree upon a valid and enforceable
provision which shall be a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.
Section 6.13 Remedies. Each of the parties to this Agreement
acknowledges and agrees that the other parties would be damaged irreparably
in the event any of the provisions of this Agreement are not performed in
accordance with their specific terms or otherwise are breached.
Accordingly, each of the parties hereto agrees that the other parties shall
be entitled to an injunction or injunctions to prevent breaches of the
provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions of this Agreement in any action instituted in any
court of the United States of America or any state thereof having
jurisdiction over the parties to this Agreement and the matter, in addition
to any other remedy to which they may be entitled, at law or in equity.
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<PAGE>
Section 6.14 Edgar. The Purchasers agree to use their
reasonable efforts to provide to the Company upon request therefor
electronic copies of this Agreement and all exhibits hereto, including any
subsequent amendments or modifications thereof to the extent such documents
are under the control of the Purchaser.
Section 6.15 Effective Date. Notwithstanding anything to the
contrary in this Agreement, Purchaser and the Company expressly agree that
the transactions contemplated by this Agreement are in furtherance of the
transactions contemplated by that certain Memorandum of Understanding by and
between Purchaser and the Company and dated as of September 30, 1997 (the
"MOU"). Furthermore, Purchaser agrees that, for purposes of financial
accounting, the Company may record the transactions contemplated by this
Agreement as if they occurred on September 30, 1997 in furtherance of the
MOU, although Purchaser's agreement in such regard shall have no effect on
the substance of this Agreement or any document or instrument executed in
connection with this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK,
SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Convertible Preferred Stock Purchase Agreement to be duly executed as of the
date first indicated above.
fonix corporation
By: /S/ DOUGLAS L. REX
------------------------------------
Name: Douglas L. Rex
Title: Chief Financial Officer
JNC OPPORTUNITY FUND LTD.
By: /s/ ALAN BROWN
-------------------------------------
Alan Brown
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: Encore Capital Management, L.L.C.
By: /s/ NEIL T. CHAU
----------------------------------
Neil T. Chau
Director
<PAGE>
SCHEDULE 3.1 (a)
Subsidiaries
1. fonix systems corporation, a Utah corporation, wholly owned by the
Company.
<PAGE>
SCHEDULE 3.1 (c)
Capitalization
1. Authorized Common Stock - 100,000,000 shares, $.0001 per share
2. Authorized Preferred Stock - 20,000,000 shares, $.0001 per share
3. Issued Common Stock - 42,723,989 shares at October 24, 1997
4. Issued Preferred Stock -
Series A Preferred Stock, 166,667 shares authorized for
issuance, 166,667 shares issued and outstanding (certificate of
designation of rights and preferences of which is attached
hereto)
Series B Preferred Stock, 350,000 shares authorized for
issuance, 125,000 shares issued and outstanding (certificate of
designation of rights and preferences of which is attached
hereto)
5. Outstanding Options, Warrants and Similar Rights at October 24, 1997-
(a) Total Warrants-600,000 Warrants granted (1)
(b) Total Options-9,075,000 Options granted (2)
_________________________
(1) Excludes the 200,000 Warrants to be issued under the Purchase
Agreement
(2) Estimate. Actual number of warrants issued as of October 24,
1997 could be as much as 200,000 shares lower, depending on the
outcome of pending negotiations with and deliberations about
employee stock option grants.
<PAGE> SCHEDULE 3.1 (j)
Recent Sales of Unregistered Securities
1. Southbrook International Investments, Ltd. On June 18, 1997, the
Company entered into a Convertible Debenture Purchase Agreement with
Southbrook International Investments, Ltd. (the "Investor") pursuant to
which the Investor agreed to purchase up to an aggregate principal
amount of $10,000,000 of the Company's Series B 5% Convertible
Debentures ("Debentures") convertible into shares of the Company's common
stock. In connection with that transaction, the Company also agreed to
issue to the Investor a warrant (the "Warrant") to purchase shares of the
Company's common stock at the exercise price of $8.28 per share. On
June 18, 1997, the Investor paid $3,000,000 in return for which the
Company issued Debentures in that principal amount. On October 24,
1997, the Company and the Investor entered into a Modification and
Amendment Agreement to the June 18 purchase agreement pursuant to which
the Investor acquired 125,000 shares of the Company's Series B Preferred
Stock (the "Series B Preferred"). The Debentures, the Warrant and the
Series B Preferred issued to date to the Investor have been issued by
the Company without registration under the Securities Act of 1933, as
amended (the "Act"), in reliance on the exemption from registration
afforded by Section 4(2) of the Act and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
<PAGE> SCHEDULE 3.1 (l)
Senior Equity Securities
Series A Preferred Stock, 166,667 shares authorized for issuance,
166,667 shares issued and outstanding (certificate of designation of
rights and preferences of which is attached to Schedule 3.1(c))
<PAGE>
EXHIBIT A
SERIES C TERMS
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as the 5% Series C Convertible Preferred
Stock (the "Preferred Stock"), and the number of shares so designated and
authorized shall be 187,500. Each share of Preferred Stock shall have a par
value of $.0001 per share and a stated value of $20 per share (the "Stated
Value").
Section 2. Dividends.
(a) Holders of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors out of funds legally
available therefor, and the Company shall pay, quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing December
31, 1997, and on each Conversion Date (as hereinafter defined), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of
the Stated Value per share) equal to 5% per annum, payable in cash or shares
of Common Stock (as defined in Section 7) at the option of the Company. The
number of shares of Common Stock issuable as payment of dividends hereunder
shall equal the aggregate dollar amount of dividends then being paid,
divided by the Conversion Price (as defined in Section 5(c)(i)) then in
effect. Dividends on the Preferred Stock shall be calculated on the basis
of a 360-day year, shall accrue daily commencing the Original Issue Date (as
defined in Section 7), and shall be deemed to accrue on such date whether or
not earned or declared and whether or not there are profits, surplus or
other funds of the Company legally available for the payment of dividends.
The party that holds the Preferred Stock on an applicable record date for
any dividend payment will be entitled to receive such dividend payment and
any other accrued and unpaid dividends which accrued prior to such dividend
payment date, without regard to any sale or disposition of such Preferred
Stock subsequent to the applicable record date but prior to the applicable
dividend payment date. Except as otherwise provided herein, if at any time
the Company pays less than the total amount of dividends then accrued on
account of the Preferred Stock, such payment shall be distributed ratably
among the holders of the Preferred Stock based upon the number of shares
then held by each holder. In order for the Company to exercise its right to
pay dividends in shares of Common Stock, the Company shall, no less than two
(2) Trading Days prior to the first day of the calendar quarter in which a
dividend payment date (other than a Conversion Date) occurs, provide the
holders of the Preferred Stock written notice of its intention to pay
dividends in shares of Common Stock. In order for the Company to exercise
its right to pay dividends in shares of Common Stock on any Conversion Date,
the Company must provide written notice to the holders of Preferred Stock at
least one Trading Day prior to the issuance of shares of Common Stock as
payment therefor, which notice will remain in effect for subsequent
Conversion Notices until rescinded by the Company in a written notice to
such effect that is addressed to the holders of the Preferred Stock.
Notwithstanding the foregoing, if any such holder shall deliver a Conversion
Notice (as hereinafter defined) within five (5) Trading Days after receipt
of such rescinding notice from the Company, such holder shall be entitled to
receive payment of dividends in shares of Common Stock.
(b) Notwithstanding anything to the contrary contained herein,
the Company may not issue shares of Common Stock in payment of dividends on
the Preferred Stock (and must deliver cash in respect thereof) if: ( the
number of shares of Common Stock at the time authorized, unissued
<PAGE>
and unreserved for all purposes, or held as treasury stock, is either
insufficient to issue such dividends in shares of Common Stock or the
Company has not duly reserved for issuance in respect of such dividends a
sufficient number of shares of Common Stock, ( such shares are not
registered for resale pursuant to an effective Underlying Securities
Registration Statement (as defined in Section 7) and may not be sold without
volume restrictions pursuant to Rule 144(k) promulgated under the Securities
Act of 1933, as amended (the "Securities Act"), as determined by counsel to
the Company pursuant to a written opinion letter, addressed and acceptable
to the Company's transfer agent or other Person performing functions similar
thereto, ( such shares are not listed for trading on the Nasdaq SmallCap
Market, Nasdaq National Market, The New York Stock Exchange ("NYSE") or the
American Stock Exchange (the "AMEX") (and any other exchange, market or
trading facility in which the Common Stock is then listed for trading), (
the issuance of such shares would result in the recipient thereof
beneficially owning, determined in accordance with Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended, more than 4.999% of
the then issued and outstanding shares of Common Stock, unless the issuance
of shares of Common Stock in excess of such amount is then permitted by
Section 3.8 of the Purchase Agreement, or (v) the Company shall have failed
to timely satisfy its obligations pursuant to any Conversion Notice.
Payment of dividends in shares of Common Stock is further subject to
the provision of Section 5(a)(ii).
(c) So long as any shares of Preferred Stock remain
outstanding, neither the Company nor any subsidiary thereof shall, without
the consent of the holders of 66 2/3% of the shares of Preferred Stock then
outstanding, redeem, repurchase or otherwise acquire directly or indirectly
any Junior Securities (as defined in Section 7), nor shall the Company
directly or indirectly pay or declare any dividend or make any distribution
(other than a dividend or distribution described in Section 5) upon, nor
shall any distribution be made in respect of, any Junior Securities, nor
shall any monies be set aside for or applied to the purchase or redemption
(through a sinking fund or otherwise) of any Junior Securities.
Notwithstanding the foregoing, the Company may redeem, repurchase or
otherwise acquire shares of the Company's Series B Convertible Preferred
Stock, provided that any such redemption, repurchase or acquisition is
carried out pro rata with the Preferred Stock.
Section 3. Voting Rights; Protective Provisions. Except as
otherwise provided herein and as otherwise required by law, the Preferred
Stock shall have no voting rights. However, so long as any shares of
Preferred Stock are outstanding, the Company shall not and shall cause its
subsidiaries not to, without the affirmative vote of each of the holders of
the Preferred Stock then outstanding, alter or change adversely the powers,
preferences or rights given to the Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation (as
defined in Section 4) or otherwise senior to or pari passu with the
Preferred Stock (other than the Company's Series B Convertible Preferred
Stock, which shall rank pari passu with the Preferred Stock), (d) amend its
certificate of incorporation, bylaws or other charter documents so as to
affect adversely any rights of any holders of the Preferred Stock, (e)
increase the authorized or designated number of shares of Preferred Stock,
(f) issue any additional shares of Preferred Stock or (g) enter into any
agreement with respect to the foregoing.
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<PAGE>
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"Liquidation"), the holders of the Preferred Stock shall be entitled to
receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid dividends per share, whether declared or
not, and all other amounts in respect thereof (including liquidated damages,
if any) then due and payable before any distribution or payment shall be
made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the holders of Preferred Stock shall be
distributed among the holders of Preferred Stock ratably in accordance with
the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. A sale, conveyance or disposition of all
or substantially all of the assets of the Company or the effectuation by the
Company of a transaction or series of related transactions in which more
than 50% of the voting power of the Company is disposed of, or a
consolidation or merger of the Company with or into any other company or
companies shall not be treated as a Liquidation, but instead shall be
subject to the provisions of Section 5. The Company shall mail written
notice of any such Liquidation, not less than 45 days prior to the payment
date stated therein, to each record holder of Preferred Stock.
Section 5. Conversion.
(a)(i) Each share of Preferred Stock is convertible at the
option of the holder in whole or in part at any time after the Original
Issue Date into shares of Common Stock (subject to reduction pursuant to
Section 5(a)(ii) hereof and Section 3.8 of the Purchase Agreement) at the
Conversion Ratio (as defined in Section 7). A holder shall effect
conversions by surrendering the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with the
form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice"). Each Conversion Notice shall specify the number of shares of
Preferred Stock to be converted and the date on which such conversion is to
be effected, which date may not be prior to the date the holder delivers
such Conversion Notice by facsimile (the "Conversion Date"). If no
Conversion Date is specified in a Conversion Notice, the Conversion Date
shall be the date that the Conversion Notice is deemed delivered pursuant to
Section 5(i). Subject to Sections 5(b) and 5(a)(ii) hereof and Section 3.8
of the Purchase Agreement, each Conversion Notice, once given, shall be
irrevocable. If the holder is converting less than all of the shares of
Preferred Stock represented by the certificate or certificates tendered by
the holder with the Conversion Notice, or if a conversion hereunder cannot
be effected in full for any reason, the Company shall promptly deliver to
such holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) Certain Regulatory Approval. If on any Conversion
Date (A) the Common Stock is listed for trading on the Nasdaq National
Market, Nasdaq SmallCap Market, the NYSE or the AMEX, (B) the Conversion
Price then in effect is such that the aggregate number of shares of the
Common Stock that would then be issuable upon conversion in full of all of
the shares of Preferred Stock then outstanding, together with any shares of
the Common Stock previously issued upon conversion of Preferred Stock and as
payment of dividends thereon would equal or exceed 20% of the number of
shares of the Common Stock outstanding on the Original Issue Date
-3-
<PAGE>
(such maximum number of shares as would not equal or exceed such 20% limit,
the "Issuable Maximum"), and (C) the Company shall not have previously
obtained the vote of shareholders, if any, as may be required by the rules
and regulations of The Nasdaq Stock Market, the NYSE or the AMEX (as
applicable) applicable to approve the issuance of Common Stock in excess of
the Issuable Maximum in a private placement for less than the greater of
book or fair market value of the Common Stock (as applicable, the
"Shareholder Approval"), then the Company shall issue to the holder so
requesting a conversion of Preferred Stock its pro rata portion of the
Issuable Maximum in the same ratio that the number of shares of Preferred
Stock then outstanding and held by such holder bears to the aggregate number
of shares of Preferred Stock then outstanding and, with respect to the
remainder of the shares of Preferred Stock then held by such holder for
which a conversion in accordance with the Conversion Price would result in
an issuance of Common Stock in excess of such holder's pro rata portion of
the Issuable Maximum, the converting holder shall have the option to require
the Company to either (1) use its best efforts to obtain the Shareholder
Approval applicable to such issuance as soon as is possible, but in any
event not later than the 60th day after such request, or (2)(i) issue and
deliver to such holder a number of shares of Common Stock as equals (x) the
number of shares of Preferred Stock (or such portions thereof) tendered for
conversion in respect of the Conversion Notice at issue but for which a
conversion in accordance with the other terms hereof would result in an
issuance of Common Stock in excess of such holder's pro rata portion of the
Issuable Maximum, divided by (y) the Initial Conversion Price (as defined in
Section 5(c)(i)), and (ii) cash in an amount equal to the product of (x) the
Per Share Market Value on the Conversion Date and (y) the number of shares
of Common Stock in excess of such holder's pro rata portion of the Issuable
Maximum that would have otherwise been issuable to the holder in respect of
such conversion but for the provisions of this Section (such amount of cash
being hereinafter referred to as the "Discount Equivalent"). If the Company
fails to pay the Discount Equivalent in full pursuant to this Section within
seven (7) days after the date payable, the Company will pay interest thereon
at a rate of 18% per annum to the converting holder, accruing daily from the
Conversion Date until such amount, plus all such interest thereon, is paid
in full. The entire Discount Equivalent, including interest thereon, shall
be paid in cash.
(b) Not later than three (3) Trading Days after a Conversion
Date, the Company will deliver to the holder (i) a certificate or
certificates which shall be free of restrictive legends and trading
restrictions (other than those required by Section 4.1(b) of the Purchase
Agreement) representing the number of shares of Common Stock being issued
upon the conversion of shares of Preferred Stock (subject to reduction
pursuant to Section 5(a)(ii) hereof and Section 3.8 of the Purchase
Agreement), (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay accrued and unpaid dividends in cash) and (iv) if the Company has
elected and is permitted hereunder to pay accrued dividends in shares of
Common Stock, certificates, which shall be free of restrictive legends and
trading restrictions (other than those required by Section 4.1(b) of the
Purchase Agreement), representing such number of shares of Common Stock as
are issuable on account of accrued dividends in such number as determined in
accordance with Section 2(a). Notwithstanding the foregoing, the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion of any shares of Preferred Stock until
certificates evidencing such shares of Preferred Stock are either delivered
for conversion to the Company or any transfer agent for the Preferred Stock
or Common Stock, or the
-4-
<PAGE>
holder of such Preferred Stock notifies the Company that such certificates
have been lost, stolen or destroyed and provides a bond (or other adequate
security) reasonably satisfactory to the Company to indemnify the Company
from any loss incurred by it in connection therewith. The Company shall,
upon request of the holder, use its best efforts to deliver any certificate
or certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another
established clearing corporation performing similar functions. If in the
case of any Conversion Notice such certificate or certificates, including
for purposes hereof, any shares of Common Stock to be issued on the
Conversion Date on account of accrued but unpaid dividends hereunder, are
not delivered to or as directed by the applicable holder by the third
Trading Day after the Conversion Date, the holder shall be entitled by
written notice to the Company at any time on or before its receipt of such
certificate or certificates, to rescind such conversion, in which event the
Company shall immediately return the certificates representing the shares of
Preferred Stock tendered for conversion. If the Company fails to deliver to
the holder such certificate or certificates pursuant to this Section,
including for purposes hereof, any shares of Common Stock to be issued on
the Conversion Date on account of accrued but unpaid dividends hereunder,
prior to the fifth (5th) Trading Day after the Conversion Date, the Company
shall pay to such holder, in cash, as liquidated damages and not as a
penalty, $2,500 for each day after such fifth (5th) Trading Day until such
certificates are delivered. If the Company fails to deliver to the holder
such certificate or certificates pursuant to this Section prior to the
twelfth (12th) day after the Conversion Date, the Company shall, at the
holder's option (i) redeem, from funds legally available therefor at the
time of such redemption, such number of shares of Preferred Stock then held
by such holder, as requested by such holder, and (ii) pay all accrued but
unpaid dividends and all other amounts then owing on account of the
Preferred Stock for which the Company shall have failed to issue Common
Stock certificates hereunder, in cash. The redemption price for the shares
of Preferred Stock to be redeemed in accordance with this Section shall be
the Redemption Price (as defined in Section 7). If the holder has requested
redemption pursuant to this Section and the Company fails for any reason to
pay the Redemption Price under this Section within seven (7) days after such
notice is given pursuant to Section 5(i), the Company will pay interest on
the unpaid portion of the Redemption Price at a rate of 18% per annum,
accruing from such seventh day until the Redemption Price and any accrued
interest thereon is paid in full. Nothing herein shall limit a holder's
right to pursue actual damages for the Company's failure to deliver
certificates representing shares of Common upon conversion within the period
specified herein (including, without limitation, damages relating to any
purchase of shares of Common Stock by such holder to make delivery on a sale
effected in anticipation of receiving certificates representing shares of
Common Stock upon conversion, such damages to be in an amount equal to (A)
the aggregate amount paid by such holder for the shares of Common Stock so
purchased minus (B) the aggregate amount of net proceeds, if any, received
by such holder from the sale of the shares of Common Stock issued by the
Company pursuant to such conversion), and such holder shall have the right
to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive
relief).
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") on any Conversion Date shall be the lesser of (A)
the Average Price on the Original Issue Date (the "Initial Conversion
Price") and (B) the Applicable Percentage (as defined in Section 7)
multiplied by the average of the five (5) lowest Per Share Market Values
during the fifteen (15) Trading Days immediately preceding the Conversion
Date; provided that, (a) if an Underlying Securities
-5-
<PAGE>
Registration Statement is not filed on or prior to the Filing Date (as such
term is defined in the Registration Rights Agreement), or (b) if the Company
fails to file with the Commission a request for acceleration in accordance
with Rule 461 promulgated under the Securities Act within five (5) days of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that an Underlying Securities Registration
Statement will not be "reviewed" or is not subject to further review or
comment by the Commission, or (c) if the Underlying Securities Registration
Statement is not declared effective by the Commission on or prior to the
75th day after the Original Issue Date, or (d) if such Underlying Securities
Registration Statement is filed with and declared effective by the
Commission but thereafter ceases to be effective as to all Registrable
Securities (as such term is defined in the Registration Rights Agreement) at
any time prior to the expiration of the Effectiveness Period (as such term
as defined in the Registration Rights Agreement), without being succeeded by
a subsequent Underlying Securities Registration Statement filed with and
declared effective by the Commission within ten (10) days, or (e) if trading
in the Common Stock shall be suspended, or if the Common Stock shall be
delisted from trading, on the Nasdaq SmallCap Market or on any other
national securities market, exchange or trading facility on which the Common
Stock is then listed or quoted for trading for any reason for more than
three (3) Trading Days, or (f) if the conversion rights of any holder of
Preferred Stock are suspended for any reason or if any holder is not
permitted to resell Registrable Securities under the Underlying Securities
Registration Statement, or (g) if an amendment to the Underlying Securities
Registration Statement is not filed by the Company with the Commission
within ten (10) days after notification by the Commission that such
amendment is required in order for the Underlying Securities Registration
Statement to remain effective (any such failure being referred to as an
"Event," and for purposes of clauses (a), (c) and (f) the date on which such
Event occurs, or for purposes of clause (b) the date on which such five (5)
days period is exceeded, or for purposes of clauses (d) and (g) the date
which such ten (10) day period is exceeded, or for purposes of clause (e)
the date on which such three (3) Trading Day period is exceeded, being
referred to as "Event Date"), the Conversion Price shall be decreased by
2.5% each month (i.e., the Conversion Price would decrease by 2.5% as of the
Event Date and additional 2.5% as of each monthly anniversary of the Event
Date) until the earlier to occur of the second month anniversary after the
Event Date and such time as the applicable Event is cured. Commencing the
second month anniversary after the Event Date, the Company shall pay to each
holder of Preferred Stock the product of 2.5% and the aggregate of the
Stated Values for the shares of Preferred Stock then held by such holder, in
cash as liquidated damages, and not as a penalty on the first day of each
monthly anniversary of the Event Date until such time as the applicable
Event, is cured. Any decrease in the Conversion Price pursuant to this
Section shall continue notwithstanding the fact that the Event causing such
decrease has been subsequently cured. The provisions of this Section are
not exclusive and shall in no way limit the Company's obligations under the
Registration Rights Agreement.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise
make a distribution on account of or to holders of Junior Securities payable
in shares of Common Stock, (b) subdivide outstanding shares of Common Stock
into a larger number of shares, or (c) combine outstanding shares of Common
Stock into a smaller number of shares, then the Initial Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and the denominator of which shall be the
number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this Section 5(c)(ii)
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shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights or warrants to all
holders of Common Stock entitling them to subscribe for or purchase shares
of Common Stock at a price per share less than the Per Share Market Value of
Common Stock at the record date mentioned below, the Initial Conversion
Price shall be multiplied by a fraction, the denominator of which shall be
the number of shares of Common Stock (excluding treasury shares, if any)
outstanding on the date of issuance of such rights or warrants plus the
number of additional shares of Common Stock offered for subscription or
purchase, and the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such rights or warrants. However, upon the expiration
of any right or warrant to purchase Common Stock the issuance of which
resulted in an adjustment in the Initial Conversion Price pursuant to this
Section 5(c)(iii), if any such right or warrant shall expire and shall not
have been exercised, the Initial Conversion Price shall immediately upon
such expiration be recomputed and effective immediately upon such expiration
be increased to the price which it would have been (but reflecting any other
adjustments in the Initial Conversion Price made pursuant to the provisions
of this Section 5 after the issuance of such rights or warrants) had the
adjustment of the Initial Conversion Price made upon the issuance of such
rights or warrants been made on the basis of offering for subscription or
purchase only that number of shares of Common Stock actually purchased upon
the exercise of such rights or warrants actually exercised.
(iv) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common
Stock (and not to holders of Preferred Stock) evidences of its indebtedness
or assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Sections 5(c)(ii) and (iii) above), then in
each such case the Initial Conversion Price at which each share of Preferred
Stock shall thereafter be convertible shall be determined by multiplying the
Initial Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value of Common Stock determined as of the record date mentioned
above, and of which the numerator shall be such Per Share Market Value of
the Common Stock on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of Common Stock as
determined by the Board of Directors in good faith; provided, however, that
in the event of a distribution exceeding ten percent (10%) of the net assets
of the Company, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") selected in good faith by the holders of a majority in interest
of the shares of Preferred Stock then outstanding; and provided, further,
that the Company, after receipt of the determination by such Appraiser shall
have the right
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to select an additional Appraiser, in good faith, in which case the fair
market value shall be equal to the average of the determinations by each
such Appraiser. In either case the adjustments shall be described in a
statement provided to the holders of Preferred Stock of the portion of
assets or evidences of indebtedness so distributed or such subscription
rights applicable to one share of Common Stock. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another Person
pursuant to which the Company will not be the surviving entity, the sale or
transfer of all or substantially all of the assets of the Company or any
compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (collectively, a "Business
Combination"), the holders of the Preferred Stock then outstanding shall
have the right thereafter to, at their option, (A) convert such shares of
Preferred Stock, together with all accrued and unpaid dividends thereon,
only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following
such reclassification, consolidation, merger, sale, transfer or share
exchange, and the holders of the Preferred Stock shall be entitled upon such
event to receive such amount of securities, cash or property as the shares
of the Common Stock of the Company into which such shares of Preferred
Stock, together with all accrued and unpaid dividends thereon could have
been converted immediately prior to such reclassification, consolidation,
merger, sale, transfer or share exchange would have been entitled, (B)
require the Company to redeem its shares of Preferred Stock then outstanding
at the Redemption Price, but only if the Business Combination was the
voluntary act of the Company (i.e. not a tender offer) or (C) to require
that the Person with whom such consolidation, merger, sale or transfer or
share exchange takes place issue and deliver to the holders of the Preferred
Stock shares of convertible preferred stock or convertible debentures of
such Person which newly issued shares or debentures (as the case may be)
shall have terms substantially similar in all material respects to the terms
of the Preferred Stock (including with respect to conversion) and shall be
entitled to all of the rights and privileges of a holder of Preferred Stock
set forth herein, in the Registration Rights Agreement and in the Purchase
Agreement (including without limitation, such rights as relates to the
acquisition, transferability, registration and listing of the stock or other
securities issuable upon conversion of such convertible preferred stock or
convertible debentures). In such case, the conversion price for such newly
issued convertible securities shall be based upon the amount of securities,
cash or property that each share of Common Stock would receive in the
transaction giving rise to the obligation to issue such securities, the
Conversion Ratio immediately prior to the effective or closing date for such
transaction and the Conversion Price stated herein. The terms of any such
consolidation, merger, sale, transfer or share exchange shall include such
terms so as to continue to give to the holders of Preferred Stock the right
to receive the securities, cash or property set forth in this Section upon
any conversion following such consolidation, merger, sale, transfer or share
exchange. This provision shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges. If the holder has requested redemption pursuant to this Section
and the Company fails for any reason to pay the Redemption Price under this
Section within seven (7) days after such notice is given pursuant to Section
5(i), the Company will pay interest on the unpaid portion of the Redemption
Price at a rate of 18% per annum, accruing from such seventh day until the
Redemption Price and any accrued interest thereon is paid in full.
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(vi) All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Initial Conversion Price is adjusted
pursuant to Section 5(c)(ii), (iii), (iv) or (v) the Company shall promptly
mail to each holder of Preferred Stock, a notice setting forth the Initial
Conversion Price after such adjustment and setting forth a brief statement
of the facts requiring such adjustment.
(viii) If:
A. the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
B. the Company shall declare a special
nonrecurring cash dividend on or a redemption
of its Common Stock; or
C. the Company shall authorize the granting to
all holders of the Common Stock rights or
warrants to subscribe for or purchase any
shares of capital stock of any class or of any
rights; or
D. the approval of any stockholders of the
Company shall be required in connection with
any reclassification of the Common Stock of
the Company, any consolidation or merger to
which the Company is a party, any sale or
transfer of all or substantially all of the
assets of the Company, or any compulsory share
or exchange whereby the Common Stock is
converted into other securities, cash or
property; or
E. the Company shall authorize the voluntary or
involuntary dissolution, liquidation or
winding up of the affairs of the Company;
then the Company shall cause to be filed at each office or agency maintained
for the purpose of conversion of Preferred Stock, and shall cause to be
mailed to the holders of Preferred Stock at their last addresses as they
shall appear upon the stock books of the Company, at least 45 calendar days
prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose
of such dividend, distribution, redemption, rights or warrants, or if a
record is not to be taken, the date as of which the holders of Common Stock
of record to be entitled to such dividend, distributions, redemption, rights
or warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail such
notice or any defect therein or in the mailing thereof shall not affect the
validity of the corporate action required to be
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specified in such notice. Holders are entitled to convert shares of
Preferred Stock during the 30-day period commencing the date of such notice
to the effective date of the event triggering such notice.
(ix) If the Company (i) makes a public announcement that
it intends to enter into a Change of Control Transaction (as defined below)
or (ii) any Person or group of Persons (including the Company, but excluding
a holder or any affiliate of a holder) publicly announces a bona fide tender
offer, exchange offer or other transaction to purchase 50% or more of the
Common Stock (such announcement being referred to herein as a "Major
Announcement" and the date on which a Major Announcement is made, the
"Announcement Date"), then, in the event that a holder of Preferred Stock
seeks to convert shares of Preferred Stock on or following the Announcement
Date, the Conversion Price shall, effective upon the Announcement Date and
continuing through the earlier to occur of the consummation of the proposed
transaction or tender offer, exchange offer or other transaction and the
Abandonment Date (as defined below), be equal to the lower of (x) the
Conversion Price measured on the Announcement Date and (y) the Conversion
Price in effect on the Conversion Date for such Preferred Stock.
"Abandonment Date" means with respect to any proposed transaction or tender
offer, exchange offer or other transaction for which a public announcement
as contemplated by this paragraph has been made, the date upon which the
Company (in the case of clause (i) above) or the person, group or entity (in
the case of clause (ii) above) publicly announces the termination or
abandonment of the proposed transaction or tender offer, exchange offer or
another transaction which caused this paragraph to become operative.
(d) If at any time conditions shall arise by reason of action
taken by the Company which in the opinion of the Board of Directors are not
adequately covered by the other provisions hereof and which might materially
and adversely affect the rights of the holders of Preferred Stock (different
than or distinguished from the effect generally on rights of holders of any
class of the Company's capital stock) or if at any time any such conditions
are expected to arise by reason of any action contemplated by the Company,
the Company shall mail a written notice briefly describing the action
contemplated and the material adverse effects of such action on the rights
of the holders of Preferred Stock at least 30 calendar days prior to the
effective date of such action, and an Appraiser selected by the holders of
majority in interest of the Preferred Stock shall give its opinion as to the
adjustment, if any (not inconsistent with the standards established in this
Section 5), of the Conversion Price (including, if necessary, any adjustment
as to the securities into which shares of Preferred Stock may thereafter be
convertible) and any distribution which is or would be required to preserve
without diluting the rights of the holders of shares of Preferred Stock;
provided, however, that the Company, after receipt of the determination by
such Appraiser, shall have the right to select an additional Appraiser, in
good faith, in which case the adjustment shall be equal to the average of
the adjustments recommended by each such Appraiser. The Board of Directors
shall make the adjustment recommended forthwith upon the receipt of such
opinion or opinions or the taking of any such action contemplated, as the
case may be; provided, however, that no such adjustment of the Conversion
Price shall be made which in the opinion of the Appraiser(s) giving the
aforesaid opinion or opinions would result in an increase of the Conversion
Price to more than the Conversion Price then in effect.
(e) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued Common Stock solely for
the purpose of issuance upon conversion of
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Preferred Stock and payment of dividends on Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the holders of Preferred Stock, not
less than such number of shares of Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5(c)) upon the conversion of all
outstanding shares of Preferred Stock and payment of dividends hereunder.
The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized, issued and fully
paid, nonassessable and freely tradeable.
(f) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect
of any final fraction of a share based on the Per Share Market Value at such
time. If the Company elects not, or is unable, to make such a cash payment,
the holder of a share of Preferred Stock shall be entitled to receive, in
lieu of the final fraction of a share, one whole share of Common Stock.
(g) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect
of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the holder of such
shares of Preferred Stock so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
(h) Shares of Preferred Stock converted into Common Stock shall
be canceled and shall have the status of authorized but unissued shares of
undesignated stock.
(i) Any and all notices or other communications or deliveries
to be provided by the holders of the Preferred Stock hereunder, including,
without limitation, any Conversion Notice, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service or sent by certified or registered mail, postage prepaid, addressed
to the attention of the Chief Financial Officer of the Company at the
facsimile telephone number or address of the principal place of business of
the Company as set forth in the Purchase Agreement. Any and all notices or
other communications or deliveries to be provided by the Company hereunder
shall be in writing and delivered personally, by facsimile, sent by a
nationally recognized overnight courier service or sent by certified or
registered mail, postage prepaid, addressed to each holder of Preferred
Stock at the facsimile telephone number or address of such holder appearing
on the books of the Company, or if no such facsimile telephone number or
address appears, at the principal place of business of the holder. Any
notice or other communication or deliveries hereunder shall be deemed given
and effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:00 p.m. (Salt Lake
City time), (ii) the date after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section later than 5:00 p.m. (Salt Lake
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City time) on any date and earlier than 11:59 p.m. (Salt Lake City time) on
such date, (iii) four days after deposit in the United States mails, (iv)
the Business Day following the date of mailing, if send by nationally
recognized overnight courier service, or (v) upon actual receipt by the
party to whom such notice is required to be given. For purposes of Section
5(c)(i), if a Conversion Notice is delivered by facsimile prior to 5:00 p.m.
(Salt Lake City time) on any date, then the day prior to such date shall be
the last Trading Day calculated to determine the Conversion Price applicable
to such Conversion Notice, and the date of such delivery shall commence the
counting of days for purposes of Section 5(b).
Section 6. Optional Redemption.
(a) The Company shall have the right, exercisable at any time,
to redeem from funds legally available therefor all or any portion of the
then outstanding and unconverted shares of Preferred Stock at a price equal
to the Redemption Price. Any redemptions pursuant to this Section shall be
effected by the delivery of a notice to each holder of Preferred Stock to be
redeemed, which notice shall indicate the number of shares of Preferred
Stock of each holder to be redeemed and the date that such redemption is to
be effected, which shall be the 20th Trading Day after the date such notice
is deemed delivered pursuant to Section 5(i) (the "Optional Redemption
Date"). All redeemed shares of Preferred Stock shall cease to be
outstanding and shall have the status of authorized but undesignated stock,
but may not be reissued as Preferred Stock. The entire Redemption Price
under this Section shall be paid in cash by the Optional Redemption Date.
The holders of the Preferred Stock shall have the right to tender, and the
Company shall honor, Conversion Notices for shares of Preferred Stock,
including shares subject to the notice of redemption described in this
Section, at any time through the 19th Trading Day after receipt of such
notice of redemption.
(b) If any portion of the Redemption Price under this section
is not paid by the Company on or prior to the Optional Redemption Date,
interest shall accrue thereon at the rate of 18% per annum thereafter until
such Redemption Price plus all such interest is paid in full (which amount
shall be paid as liquidated damages and not as a penalty). In addition, if
any portion of such Redemption Price remains unpaid for more than five (5)
calendar days after the date due, each holder of the Preferred Stock subject
to such redemption may elect, by written notice to the Company, to either
(i) demand conversion in accordance with the formula and the time frame
therefor set forth in Section 5 of all of the shares of Preferred Stock for
which such Redemption Price has not been paid in full (the "Unpaid
Redemption Shares"), in which event the Per Share Market Price for such
shares shall be the lower of the Per Share Market Price calculated on the
date such Redemption Price was originally due and the Per Share Market Price
as of the holder's written demand for conversion, or (ii) invalidate ab
initio such redemption, notwithstanding anything herein contained to the
contrary. If a holder elects option (i) above, the Company shall within
three (3) Trading Days of its receipt of such election deliver to such
holder the shares of Common Stock issuable upon conversion of the Unpaid
Redemption Shares subject to such holder conversion demand and otherwise
perform its obligations hereunder with respect thereto; or, if such holder
elects option (ii) above, the Company shall promptly, and in any event not
later than three (3) Trading Days from receipt of the holder's notice of
such election, return to the holder all of the Unpaid Redemption Shares.
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Section 7. Definitions. For the purposes hereof, the following
terms shall have the following meanings:
"Applicable Percentage" means (i) 91% for any conversion honored
prior to the 120th day after the Original Issue Date, (ii) 90% for any
conversion honored on or after the 120th and prior to the 180th after the
Original Date and (iii) 88% for any conversion honored thereafter.
"Average Price" as at any date means the average Per Share
Market Value for the five (5) Trading Days immediately preceding such date.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of Delaware are authorized or required by law or other government
action to close.
"Common Stock" means the common stock, $.0001 par value per
share, of the Company, and stock of any other class into which such shares
may hereafter have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value plus accrued but unpaid dividends to the extent to
be paid in shares of Common Stock and the denominator of which is the
Conversion Price at such time.
"Junior Securities" means the Common Stock and all other equity
securities of the Company.
"Original Issue Date" means the date of the first issuance of
any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
closing bid price per share of the Common Stock on such date on the Nasdaq
SmallCap Market or other principal stock exchange or quotation system on
which the Common Stock is then listed or quoted or if there is no such price
on such date, then the closing bid price on such exchange or quotation
system on the date nearest preceding such date, or (b) if the Common Stock
is not listed then on the Nasdaq SmallCap Market or any stock exchange or
quotation system, the closing bid price for a share of Common Stock in the
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated or similar organization or agency succeeding
to its functions of reporting prices, then the average of the "Pink Sheet"
quotes for the relevant conversion period, as determined in good faith by
the holder, or (d) if the Common Stock is not then publicly traded the fair
market value of a share of Common Stock as determined by an Appraiser
selected in good faith by the holders of a majority in interest of the
shares of the Preferred Stock; provided, however, that the Company, after
receipt of the determination by such Appraiser, shall have the right
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to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such Appraiser.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, between the Company
and the original holders of the Preferred Stock.
"Redemption Price" shall be equal to the sum of (a) the number
of shares of Preferred Stock to be redeemed (including for purposes of any
redemption pursuant to Section 5(b), the number of shares of Preferred Stock
tendered for conversion but for which the Company shall have failed to issue
and deliver shares of Common Stock in respect thereof), multiplied by the
product of (i) the sum of $20 plus all accrued and unpaid dividends, divided
by the Conversion Price on (x) the date the Redemption Price is demanded (in
the case of a redemption pursuant to Section 5(b)) or the date such
Redemption Price is due (in the case of a redemption pursuant to Section 6)
or (y) the date the Redemption Price is paid in full, whichever is less,
multiplied by (ii) the average Per Share Market Value for the five (5)
Trading Days immediately preceding (x) the date that such Redemption Price
is demanded or due, as the case may be, or (y) the date the Redemption Price
is paid in full, whichever is greater, and (b) all other amounts, costs,
expenses and liquidated damages due in respect of such shares of Preferred
Stock to be redeemed.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated the Original Issue Date, between the Company and the
original holder of Preferred Stock.
"Trading Day" means (a) a day on which the Common Stock is
traded on the Nasdaq SmallCap Market or other stock exchange or market on
which the Common Stock has been listed, or (b) if the Common Stock is not
listed on the Nasdaq SmallCap Market or any stock exchange or market, a day
on which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted
on the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions
of reporting prices).
"Underlying Shares" means the number of shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof
and the Purchase Agreement and shares of Common Stock issuable on account of
dividends on or with respect to the Preferred Stock.
"Underlying Securities Registration Statement" shall mean a
registration statement under the Securities Act prepared by the Company and
filed with the Commission in accordance with the Registration Rights
Agreement, covering the resale of the Underlying Shares and naming the
holders of the Preferred Stock as "selling stockholders" thereunder.
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EXHIBIT A
NOTICE OF CONVERSION
(To be executed by the registered holder
in order to convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of Common Stock,
par value $.0001 per share (the "Common Stock"), of fonix corporation (the
"Company") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to
the holder for any conversion, except for such transfer taxes, if any.
Conversion calculations:
_____________________________________________
Date to effect conversion
_____________________________________________
Number of shares of Preferred Stock to be converted
______________________________________________
Number of shares of Common Stock to be issued
_____________________________________________
Applicable conversion price
_____________________________________________
Name of Holder
_____________________________________________
______________________________________________
Address of Holder
__________________________________
Authorized Signature
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of October 24, 1997, by and among fonix corporation, a
Delaware corporation (the "Company"), JNC Opportunity Fund Ltd., a Cayman
Islands corporation ("JNC"), and Diversified Strategies Fund, L.P., an
Illinois limited partnership ("DSF"). JNC and DSF are each a "Purchaser"
and are, collectively the "Purchasers."
This Agreement is made pursuant to the Convertible Stock
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement, the following terms
shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(o).
"Affiliate" means, with respect to any Person, any other Person
that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control,"
when used with respect to any Person, means the possession, direct or
indirect, of the power to direct or cause the direction of the management
and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "affiliated,"
"controlling" and "controlled" have meanings correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
state of Delaware generally are authorized or required by law or other
government actions to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.0001 per share.
<PAGE>
"Effectiveness Date" means the 75th day following the Closing
Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a)."Exchange Act" means the Securities Exchange Act of
1934, as amended.
"Filing Date" means the 20th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case
may be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or
political subdivision thereof) or other entity of any kind.
"Preferred Shares" means the shares of Series C Preferred Stock,
par value $.0001 per share, of the Company issued to the Purchasers on the
Closing Date.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an
effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"Registrable Securities" means the shares of Common Stock
issuable (a) upon conversion in full of the Preferred Shares, (b) upon
exercise in full of the Warrants and (c) as payment in full of dividends on
the Preferred Shares; provided, however that in order to account for the
fact that the number of shares of Common Stock that are issuable upon
conversion of Preferred Shares is determined in part upon the market price
of the Common Stock at the time of conversion, Registrable Securities
contemplated by clause (a) of this definition shall be deemed to include not
less than 200% of the number of shares of Common
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Stock into which the Preferred Shares are convertible, assuming such
conversion occurred on the Closing Date or the Filing Date (whichever date
yields a lower Conversion Price, as such term is defined in the Certificate
of Designation for the Preferred Shares). The initial Registration
Statement shall cover at least such number of shares of Common Stock as
equals the sum of (x) 200% of the number of shares of Common Stock into
which the Preferred Shares are convertible, assuming such conversion
occurred on the Closing Date or the Filing Date (whichever date yields a
lower Conversion Price) and (y) such number of shares of Common Stock as are
contemplated by clauses (b) and (c) above in this definition. The Company
shall be required to file additional Registration Statements to the extent
the actual number of shares of Common Stock into which the Preferred Shares
are convertible (together with dividends thereon) and Warrants are
exercisable exceeds the number of shares of Common Stock initially
registered in accordance with the immediately prior sentence (the Company
shall have 20 days to file such additional Registration Statement after
notice of the requirement thereof, which the Holders may give at such time
when the number of shares of Common Stock as are issuable upon conversion of
the Preferred Shares exceeds 175% of the number of shares of Common Stock
into which the Preferred Shares are convertible, assuming such conversion
occurred on the Closing Date or the Filing Date (whichever yields a lower
Conversion Price).
"Registration Statement" means the registration statement
contemplated by Section 2(a) (covering such number of Registrable Securities
and any additional Registration Statements contemplated in the definition of
Registrable Securities), including (in each case) the Prospectus, amendments
and supplements to such registration statement or Prospectus, including pre-
and post-effective amendments, all exhibits thereto, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.
"Rule 158" means Rule 158 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant
to the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Counsel" means the law firm acting as counsel to the
Holders, for which the Holders will be reimbursed by the Company pursuant to
Section 4.
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"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to
an underwriter for reoffering to the public pursuant to an effective
registration statement.
"Warrants" means the Common Stock purchase warrants issued to
the Purchasers on the Closing Date.
2. Shelf Registration
(a) On or prior to the Filing Date the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415. The Registration Statement shall be on Form S-3
promulgated under the Securities Act (or, if the Company is not permitted to
register the resale of the Registrable Securities on Form S-3, the
Registration Statement shall be on such other appropriate form in accordance
herewith as the Holders of a majority in interest of the Registrable
Securities may consent). The Company shall use its best efforts to cause
the Registration Statement to be declared effective under the Securities Act
as promptly as possible after the filing thereof, but in any event prior to
the Effectiveness Date, and shall use its best efforts to keep such
Registration Statement continuously effective under the Securities Act until
the date which is three years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when
all Registrable Securities covered by such Registration Statement have been
sold or may be sold without volume restrictions pursuant to Rule 144(k)
promulgated under the Securities Act, as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company's transfer agent (the "Effectiveness Period").
The Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able
to sell all of the Registrable Securities covered by such Registration
Statement during the Effectiveness Period, unless such action is required
under applicable law or the Company has filed a post-effective amendment to
the Registration Statement and the Commission has not declared it effective.
(b) If the Holders of a majority of the Registrable Securities
so elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, the investment banker that will administer the offering will be
selected by the Holders of a majority of the Registrable Securities to be
included in such offering. In connection with any Underwritten Offering, if
the managing underwriters advise the Company and the participating Holders
in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering,
there shall be included in such Underwritten Offering the amount of such
Registrable Securities which in the opinion of such managing underwriters
can be sold, and such amount shall be allocated pro rata among the Holders
proposing to sell Registrable Securities in such Underwritten Offering. No
Holder may participate in any
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Underwritten Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and
(ii) completes and executes all questionnaires, powers of attorney,
indemnities, underwriting agreements and other documents required under the
terms of such arrangements.
3. Registration Procedures
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission on or prior to the
Filing Date, a Registration Statement (and any additional Registration
Statements as may be required hereunder) in accordance with Section 2(a),
and cause the Registration Statement to become effective and remain
effective as provided herein; provided, however, that not less than five (5)
Business Days prior to the filing of the Registration Statement or any
related Prospectus or any amendment or supplement thereto (including any
document that would be incorporated or deemed to be incorporated therein by
reference), the Company shall (i) furnish to the Holders, their Special
Counsel and any managing underwriters, copies of all such documents proposed
to be filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders,
their Special Counsel and such managing underwriters, and (ii) cause its
officers and directors, counsel and independent certified public accountants
to respond to such inquiries as shall be necessary, in the opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act. The
Company shall not file the Registration Statement or any such Prospectus or
any amendments or supplements thereto if the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to
all Registrable Securities for the Effectiveness Period and prepare and file
with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented
by any required Prospectus supplement, and as so supplemented or amended to
be filed pursuant to Rule 424 (or any similar provisions then in force)
promulgated under the Securities Act; (iii) respond as promptly as
practicable to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and promptly provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by the Registration
Statement during the applicable period in accordance with the intended
methods
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of disposition by the Holders thereof set forth in the Registration
Statement as so amended or in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold,
their Special Counsel and any managing underwriters immediately (and, in the
case of (i)(A) below, not less than five (5) days prior to such filing) and
(if requested by any such Person) confirm such notice in writing no later
than one (1) Business Day following the day (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment to the Registration
Statement is proposed to be filed; (B) whenever the Commission notifies the
Company whether there will be a "review" of such Registration Statement; (C)
whenever the Company receives (or representatives of the Compnay receive on
its behalf) any oral or written comments from the Commission in respect of a
Registration Statement (copies or, in the case of oral comments, summaries
of such comments shall be promptly furnished by the Company to the Holders);
and (D) with respect to the Registration Statement or any post-effective
amendment, when the same has become effective; (ii) of any request by the
Commission or any other Federal or state governmental authority for
amendments or supplements to the Registration Statement or Prospectus or for
additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering
any or all of the Registrable Securities or the initiation of any
Proceedings for that purpose; (iv) if at any time any of the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated hereby ceases to be true and correct in
all material respects; (v) of the receipt by the Company of any notification
with respect to the suspension of the qualification or exemption from
qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event that to the best knowledge
of the Company makes any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein
by reference untrue in any material respect or that requires any revisions
to the Registration Statement, Prospectus or other documents so that, in the
case of the Registration Statement or the Prospectus, as the case may be, it
will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. In addition, the Company shall furnish the Holders
with copies of all intended written responses to the comments contemplated
in clause (C) of this Section 3(c) not later than one (1) Business Day in
advance of the filing of such responses with the Commission so that the
Holders shall have the opportunity to comment thereon.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of (i) any order suspending the effectiveness
of the Registration Statement or (ii) any suspension of the qualification
(or exemption from qualification) of any of the Registrable Securities for
sale in any jurisdiction, at the earliest practicable moment.
(e) If requested by any managing underwriter or the Holders of
a majority in interest of the Registrable Securities to be sold in
connection with an Underwritten
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<PAGE>
Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as
such managing underwriters and such Holders reasonably agree should be
included therein and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment as soon as practicable after the
Company has received notification of the matters to be incorporated in such
Prospectus supplement or post-effective amendment; provided, however, that
the Company shall not be required to take any action pursuant to this
Section 3(e) that would, in the opinion of counsel for the Company, violate
applicable law or be materially detrimental to the business prospects of the
Company.
(f) Furnish to each Holder, their Special Counsel and any
managing underwriters, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested
by such Person (including those previously furnished or incorporated by
reference) promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder, their Special Counsel, and
any underwriters, without charge, as many copies of the Prospectus or
Prospectuses (including each form of prospectus) and each amendment or
supplement thereto as such Persons may reasonably request; and the Company
hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders and any underwriters in
connection with the offering and sale of the Registrable Securities covered
by such Prospectus and any amendment or supplement thereto.
(h) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the selling
Holders, any underwriters and their Special Counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as any Holder or
underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by a Registration Statement; provided, however, that the Company
shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not then so subject or subject the Company to any material tax
in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold pursuant to a Registration Statement,
which certificates shall be free of all restrictive legends, and to enable
such Registrable Securities to be in such denominations and registered
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in such names as any such managing underwriters or Holders may request at
least three Business Days prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as practicable, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed
to be incorporated therein by reference, and file any other required
document so that, as thereafter delivered, neither the Registration
Statement nor such Prospectus will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq SmallCap
Market and any other securities exchange, quotation system, market or over-
the-counter bulletin board, if any, on which similar securities issued by
the Company are then listed as and when required pursuant to the Purchase
Agreement.
(l) In the case of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance
as is customary in Underwritten Offerings) and take all such other actions
in connection therewith (including those reasonably requested by any
managing underwriters and the Holders of a majority of the Registrable
Securities being sold) in order to expedite or facilitate the disposition of
such Registrable Securities, and whether or not an underwriting agreement is
entered into, (i) make such representations and warranties to such Holders
and such underwriters as are customarily made by issuers to underwriters in
underwritten public offerings, and confirm the same if and when requested;
(ii) obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates
thereof addressed to each selling Holder and each such underwriter, in form,
scope and substance reasonably satisfactory to any such managing
underwriters and Special Counsel to the selling Holders covering the matters
customarily covered in opinions requested in Underwritten Offerings and such
other matters as may be reasonably requested by such Special Counsel and
underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement or at the time of delivery of any Registrable
Securities sold pursuant thereto (at the option of the underwriters), obtain
and deliver copies to the Holders and the managing underwriters, if any, of
"cold comfort" letters and updates thereof from the independent certified
public accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data is, or is required to be, included in the Registration
Statement), addressed to each Person and in such form and substance as are
customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions
and procedures no less favorable to the selling Holders and the
underwriters, if any, than those set forth in Section 7 (or such other
provisions and procedures acceptable to the managing underwriters, if any,
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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) The Company may require each selling Holder to furnish to
the Company such information regarding the distribution of such Registrable
Securities as is required by law to be disclosed in the Registration
Statement and the Company may exclude from such registration the Registrable
Securities of any such Holder who unreasonably fails to furnish such
information within a reasonable time after receiving such request.
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If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (i) the inclusion therein of language, in
form and substance reasonably satisfactory to such Holder, to the effect
that the ownership by such Holder of such securities is not to be construed
as a recommendation by such Holder of the investment quality of the
Company's securities covered thereby and that such ownership does not imply
that such Holder will assist in meeting any future financial requirements of
the Company, or (ii) if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force, the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder agrees by its acquisition of such Registrable
Securities that (i) it will not offer or sell any Registrable Securities
under the Registration Statement until it has received copies of the
Prospectus as then amended or supplemented as contemplated in Section 3(g)
and notice from the Company that such Registration Statement and any post-
effective amendments thereto have become effective as contemplated by
Section 3(c) and (ii) it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with
sales of Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence
of any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of
such Registrable Securities until such Holder's receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated
by Section 3(j), or until it is advised in writing (the "Advice") by the
Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall, except as and to the
extent specified in Section 4(b), be borne by the Company whether or not
pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be
made with The Nasdaq Stock Market, Inc. and Nasdaq SmallCap Market and each
other securities exchange or market or over-the-counter bulletin board on
which Registrable Securities are required hereunder to be listed and (B) in
compliance with state securities or Blue Sky laws (including, without
limitation, fees and disbursements of counsel for the underwriters or
Holders in connection with Blue Sky qualifications of the
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Registrable Securities and determination of the eligibility of the
Registrable Securities for investment under the laws of such jurisdictions
as the managing underwriters, if any, or the Holders of a majority of
Registrable Securities may designate)), (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable
Securities and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriters, if any, or by the holders of a
majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company and Special Counsel for the
Holders, in the case of the Special Counsel, to a maximum amount of $10,000,
(v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated
by this Agreement. In addition, the Company shall be responsible for all of
its internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to
the terms hereof, the Company shall be responsible for all costs, fees and
expenses in connection therewith, except for the fees and disbursements of
the Underwriters (including any underwriting commissions and discounts) and
their legal counsel and accountants, which shall be borne by the Holders and
the Underwriters. By way of illustration which is not intended to diminish
from the provisions of Section 4(a), the Holders shall not be responsible
for, and the Company shall be required to pay the fees or disbursements
incurred by the Company (including by its legal counsel and accountants) in
connection with, the preparation and filing of a Registration Statement and
related Prospectus for such offering, the maintenance of such Registration
Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and
printing expenses incurred to comply with the requirements hereof.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement and without limitation as
to time, indemnify and hold harmless each Holder, the officers, directors,
agents (including any underwriters retained by such Holder in connection
with the offer and sale of Registrable Securities), brokers (including
brokers who offer and sell Registrable Securities as principal as a result
of a pledge or any failure to perform under a margin call of Common Stock),
investment advisors and employees of each of them, each Person who controls
any such Holder (within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) and the officers, directors, agents and
employees of each such controlling Person, to the fullest extent permitted
by applicable law, from and against any and all losses, claims, damages,
liabilities, costs (including, without limitation, costs of preparation and
attorneys' fees) and expenses
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(collectively, "Losses"), as incurred, arising out of or relating to any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto,
in light of the circumstances under which they were made) not misleading,
except to the extent, but only to the extent, that such untrue statements or
omissions are based solely upon information regarding such Holder furnished
in writing to the Company by or on behalf of such Holder expressly for use
therein, which information was reasonably relied on by the Company for use
therein or to the extent that such information relates to such Holder or
such Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for
use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto. The Company shall
notify the Holders promptly of the institution, threat or assertion of any
Proceeding of which the Company is aware in connection with the transactions
contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within
the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act), and the directors, officers, agents or employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses (as determined by a court of competent jurisdiction
in a final judgment not subject to appeal or review) arising solely out of
or based solely upon any untrue statement of a material fact or alleged
untrue statement of material fact contained in the Registration Statement,
any Prospectus, or any form of prospectus, or arising solely out of or based
solely upon any omission or alleged omission of a material fact required to
be stated therein or necessary to make the statements therein not misleading
to the extent, but only to the extent, that such untrue statement or
omission is contained in any information so furnished in writing by such
Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus and that such information was reasonably relied
upon by the Company for use in the Registration Statement, such Prospectus
or such form of prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such
form of Prospectus. In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the net proceeds
received by such Holder upon the sale of the Registrable Securities giving
rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity
hereunder (an "Indemnified Party"), such Indemnified Party promptly shall
notify the Person from whom indemnity is sought (the "Indemnifying Party")
in writing, and the Indemnifying Party shall assume the
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defense thereof, including the employment of independent outside counsel
reasonably satisfactory to the Indemnified Party and the payment of all fees
and expenses incurred in connection with defense thereof; provided, that the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this
Agreement, except (and only) to the extent that it shall be finally
determined by a court of competent jurisdiction (which determination is not
subject to appeal or further review) that such failure shall have
proximately and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate
counsel in any such Proceeding and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed
in writing to pay such fees and expenses; or (2) the Indemnifying Party
shall have failed promptly to assume the defense of such Proceeding and to
employ counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall have been advised by counsel that a
conflict of interest is likely to exist if the same counsel were to
represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party,
the Indemnifying Party shall not have the right to assume the defense
thereof and such counsel shall be at the expense of the Indemnifying Party).
The Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party,
unless such settlement includes an unconditional release of such Indemnified
Party from all liability on claims that are the subject matter of such
Proceeding.
All fees and expenses of the Indemnified Party (including
reasonable fees and expenses to the extent incurred in connection with
investigating or preparing to defend such Proceeding in a manner not
inconsistent with this Section) shall be paid to the Indemnified Party, as
incurred, within 10 Business Days of written notice thereof to the
Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder; provided,
that the Indemnifying Party may require such Indemnified Party to undertake
to reimburse all such fees and expenses to the extent it is finally
judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified Party as
a result of
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<PAGE>
such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference
to, among other things, whether any action in question, including any untrue
or alleged untrue statement of a material fact or omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed
to include, subject to the limitations set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have
been indemnified for such fees or expenses if the indemnification provided
for in this Section was available to such party in accordance with its
terms.
The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately
preceding paragraph. Notwithstanding the provisions of this Section 5(d),
the Purchasers shall not be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received by
the Purchasers from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that the Purchasers have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any Person who was not guilty of
such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this
Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.
6. Other Company Registration Obligations; Piggy-Back
Registration.
(a) No Inconsistent Agreements. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its subsidiaries has, as of the date hereof, nor shall the
Company or any of its subsidiaries, on or after the date of this Agreement,
enter into any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to
any Person. Without limiting the generality of the foregoing, without the
written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right
to request the Company to register any securities of the
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<PAGE>
Company under the Securities Act unless the rights so granted are subject in
all respects to the prior rights in full of the Holders set forth herein,
and are not otherwise in conflict or inconsistent with the provisions of
this Agreement.
(b) No Piggyback on Registrations. Except as and to the extent
specifically set forth in Schedule 6(a) attached hereto, neither the Company
nor any of its security holders (other than the Holders in such capacity
pursuant hereto) may include securities of the Company in the Registration
Statement other than the Registrable Securities, and the Company shall not
enter into any agreement providing any such right to any of its
securityholders.
(c) Piggy-Back Registrations. If at any time during the
Effectiveness Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall determine
to prepare and file with the Commission a registration statement relating to
an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or
Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection
with any acquisition of any entity or business or equity securities issuable
in connection with stock option or other employee benefit plans, then the
Company shall send to each holder of Registrable Securities written notice
of such determination and, if within twenty (20) days after receipt of such
notice, any such holder shall so request in writing, the Company shall
include in such registration statement all or any part of the Registrable
Securities such holder requests to be registered. No right to registration
of Registrable Securities under this Section shall be construed to limit any
registration otherwise required hereunder.
7. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. The Company and each Holder agree that monetary damages would
not provide adequate compensation for any losses incurred by reason of a
breach by it of any of the provisions of this Agreement and hereby further
agrees that, in the event of any action for specific performance in respect
of such breach, it shall waive the defense that a remedy at law would be
adequate.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by
the Company and the Holders of at least a majority of the then outstanding
Registrable Securities; provided, however, that, for the purposes of this
sentence, Registrable Securities that are owned, directly or indirectly, by
the
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<PAGE>
Company, or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights
of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended, modified,
or supplemented except in accordance with the provisions of the immediately
preceding sentence.
(c) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior
to 5:00 p.m. (Salt Lake City time) on a Business Day, (ii) the Business Day
after the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile telephone number specified in the Purchase
Agreement later than 5:00 p.m. (Salt Lake City time) on any date and earlier
than 11:59 p.m. (Salt Lake City time) on such date, (iii) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given. The address for such notices and
communications shall be as follows:
If to the Company: fonix corporation
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, P.C.
Suite 850 Key Bank Tower
50 South Main Street
Salt Lake City, Utah 84144
Facsimile No.: (801) 538-2425
Attn: Jeffrey M. Jones, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
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<PAGE>
If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
With copies to (for Encore Capital Management, L.L.C.
communications to 1207 Sunrise Valley Drive
either Purchaser): Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-and-
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears
in the stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder. The Company
may not assign its rights or obligations hereunder without the prior written
consent of each Holder. The Purchasers may assign their respective rights
hereunder in the manner and to the Persons as permitted under the Purchase
Agreement.
(e) Assignment of Registration Rights. The rights of any
Purchaser hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this
Agreement, shall be automatically assignable by such Purchaser to any
assignee or transferee of all or a portion of the Preferred Shares held by
such Purchaser, the Warrant held by such Purchaser or Registrable Securities
without the
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<PAGE>
consent of the Company if: (i) such Purchaser agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment,
(ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of
such transferee or assignee, and (b) the securities with respect to such
registration rights are being transferred or assigned, (iii) at or before
the time the Company receives the written notice contemplated by clause (ii)
of this Section, the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions of this Agreement, and (iv)
such transfer shall have been made in accordance with the applicable
requirements of the Purchase Agreement. The rights to assignment shall
apply to the Purchasers (and to subsequent) successors and assigns.
(f) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile signature were the
original thereof.
(g) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of law.
(h) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(i) Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction
to be invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated,
and the parties hereto shall use their reasonable efforts to find and employ
an alternative means to achieve the same or substantially the same result as
that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.
(j) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(k) Shares Held by The Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company
or its Affiliates (other than the Purchasers or transferees or successors or
assigns thereof if such Persons are deemed to be
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<PAGE>
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 Registration
Rights Agreement as of the date first written above.
fonix corporation
By: /S/ DOUGLAS L. REX
___________________________
Name: Douglas L. Rex
Title: Chief Financial Officer
JNC OPPORTUNITY FUND LTD.
By: /s/ ALAN BROWN
___________________________
Alan Brown
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: ENCORE CAPITAL MANAGEMENT, L.L.C.
By: /S/ NEIL T. CHAU
___________________________
Neil T. Chau
Director
<PAGE>
EXHIBIT C
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
fonix corporation
WARRANT
Warrant No. [__] Dated October 24, 1997
fonix corporation, a Delaware corporation (the "Company"), hereby
certifies that, for value received, [____________________], or its
registered assigns ("Holder"), is entitled, subject to the terms set forth
below, to purchase from the Company up to a total of [ ] shares of Common
Stock, $.0001 par value per share (the "Common Stock"), of the Company (each
such share, a "Warrant Share" and all such shares, the "Warrant Shares") at
an exercise price equal to $[____] (1) per share (as adjusted from time to
time as provided in Section 8, the "Exercise Price"), at any time and from
time to time from and after the date hereof and through and including
October 24, 2000 (the "Expiration Date"), and subject to the following terms
and conditions:
1. Registration of Warrant. The Company shall register this
Warrant, upon records to be maintained by the Company for that purpose (the
"Warrant Register"), in the name of the record Holder hereof from time to
time. The Company may deem and treat the registered Holder of this Warrant
as the absolute owner hereof for the purpose of any exercise hereof or any
distribution to the Holder, and for all other purposes, and the Company
shall not be affected by notice to the contrary.
____________________
(1) Exercise price equal to 120% of the average of the closing bid
price of the Common Stock for the five (5) trading days
immediately preceding the issue date hereof.
<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 Company at the office specified in or pursuant to Section
3(b). Upon any such registration or transfer, a new warrant to purchase
Common Stock, in substantially the form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant evidencing
the remaining portion of this Warrant not so transferred, if any, shall be
issued to the transferring Holder. The acceptance of the New Warrant by the
transferee thereof shall be deemed the acceptance of such transferee of all
of the rights and obligations of a holder of a Warrant.
(b) This Warrant is exchangeable, upon the surrender
hereof by the Holder to the office of the Company specified in or pursuant
to Section 3(b) for one or more New Warrants, evidencing in the aggregate
the right to purchase the number of Warrant Shares which may then be
purchased hereunder. Any such New Warrant will be dated the date of such
exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered
Holder on any business day before 5:30 P.M., Salt Lake City time, at any
time and from time to time on or after the date hereof to and including the
Expiration Date. At 5:30 P.M., Salt Lake City time on the Expiration Date,
the portion of this Warrant not exercised prior thereto shall be and become
void and of no value. This Warrant may not be redeemed by the Company.
(b) Subject to Sections 2(b), 6 and 11, upon surrender of
this Warrant, with the Form of Election to Purchase attached hereto duly
completed and signed, to the Company at its address for notice set forth in
Section 11 and upon payment of the Exercise Price multiplied by the number
of Warrant Shares that the Holder intends to purchase hereunder, in lawful
money of the United States of America, in cash or by certified or official
bank check or checks, all as specified by the Holder in the Form of Election
to Purchase, the Company shall promptly (but in no event later than 3
business days after the Date of Exercise (as defined herein)) issue or cause
to be issued and cause to be delivered to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate
for the Warrant Shares issuable upon such exercise, free of restrictive
legends other than as required by the Purchase Agreement of even date
herewith between the Holder and the Company. Any person so designated by
the Holder to receive Warrant Shares shall be deemed to have become holder
of record of such Warrant Shares as of the Date of Exercise of this Warrant.
A "Date of Exercise" means the date on which the Company
shall have received (i) this Warrant (or any New Warrant, as applicable),
with the Form of Election to Purchase attached hereto (or attached to such
New Warrant) appropriately completed and duly signed, and (ii) payment of
the Exercise Price for the number of Warrant Shares so indicated by the
holder hereof to be purchased.
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<PAGE>
(c) This Warrant shall be exercisable, either in its
entirety or, from time to time, for a portion of the number of Warrant
Shares. If less than all of the Warrant Shares which may be purchased under
this Warrant are exercised at any time, the Company shall issue or cause to
be issued, at its expense, a New Warrant evidencing the right to purchase
the remaining number of Warrant Shares for which no exercise has been
evidenced by this Warrant.
4. Piggyback Registration Rights. During the term of this
Warrant, the Company may not file any registration statement with the
Securities and Exchange Commission (other than registration statements of
the Company filed on Form S-8 or Form S-4, each as promulgated under the
Securities Act of 1933, as amended, pursuant to which the Company is
registering securities pursuant to a Company employee benefit plan or
pursuant to a merger, acquisition or similar transaction including
supplements thereto, but not additionally filed registration statements in
respect of such securities) at any time when there is not an effective
registration statement covering the resale of the Warrant Shares and naming
the Holder as a selling stockholder thereunder, unless the Company provides
the Holder with not less than 20 days notice to each of the Holder and
Robinson Silverman Peace Aronsohn & Berman LLP, attention Eric L. Cohen,
notice of its intention to file such registration statement and provides the
Holder the option to include any or all of the applicable Warrant Shares
therein. The piggyback registration rights granted to the Holder pursuant
to this Section shall continue until all of the Holder's Warrant Shares have
been sold in accordance with an effective registration statement or upon the
expiration of this Warrant. The Company will pay all registration expenses
in connection therewith.
5. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the issuance of Warrant Shares upon the exercise
of this Warrant; provided, however, that the Company shall not be required
to pay any tax which may be payable in respect of any transfer involved in
the registration of any certificates for Warrant Shares or Warrants in a
name other than that of the Holder, and the Company shall not be required to
issue or cause to be issued or deliver or cause to be delivered the
certificates for Warrant Shares unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such tax has been paid. The Holder shall be responsible for all other tax
liability that may arise as a result of holding or transferring this Warrant
or receiving Warrant Shares upon exercise hereof.
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in
exchange and substitution for and upon cancellation hereof, or in lieu of
and substitution for this Warrant, a New Warrant, but only upon receipt of
evidence reasonably satisfactory to the Company of such loss, theft or
destruction and indemnity, if reasonably satisfactory to it. Applicants for
a New Warrant under such circumstances shall also comply with such other
reasonable regulations and procedures and pay such other reasonable charges
as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that
it will at all times reserve and keep available out of the aggregate of its
authorized but unissued Common Stock, solely for the purpose of enabling it
to issue Warrant Shares upon exercise of this Warrant as herein
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<PAGE>
provided, the number of Warrant Shares which are then issuable and
deliverable upon the exercise of this entire Warrant, free from preemptive
rights or any other actual contingent purchase rights of persons other than
the Holders (taking into account the adjustments and restrictions of Section
8). The Company covenants that all Warrant Shares that shall be so issuable
and deliverable shall, upon issuance and the payment of the applicable
Exercise Price in accordance with the terms hereof, be duly and validly
authorized, issued and fully paid and nonassessable.
8. Certain Adjustments. The Exercise Price and number of
Warrant Shares issuable upon exercise of this Warrant are subject to
adjustment from time to time as set forth in this Section 8. Upon each such
adjustment of the Exercise Price pursuant to this Section 8, the Holder
shall thereafter prior to the Expiration Date be entitled to purchase, at
the Exercise Price resulting from such adjustment, the number of Warrant
Shares obtained by multiplying the Exercise Price in effect immediately
prior to such adjustment by the number of Warrant Shares issuable upon
exercise of this Warrant immediately prior to such adjustment and dividing
the product thereof by the Exercise Price resulting from such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock (as defined below) or on any
other class of capital stock (and not the Common Stock) payable in shares of
Common Stock, (ii) subdivide outstanding shares of Common Stock into a
larger number of shares, or (iii) combine outstanding shares of Common Stock
into a smaller number of shares, the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding after such event. Any
adjustment made pursuant to this Section shall become effective immediately
after the record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision or combination, and
shall apply to successive subdivisions and combinations.
(b) In case of any reclassification of the Common Stock,
any consolidation or merger of the Company with or into another person, the
sale or transfer of all or substantially all of the assets of the Company in
which the consideration therefor is equity or equity equivalent securities
or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities or property, then the Holder shall have the
right thereafter to exercise this Warrant only into the shares of stock and
other securities and property receivable upon or deemed to be held by
holders of Common Stock following such reclassification, consolidation,
merger, sale, transfer or share exchange, and the Holder shall be entitled
upon such event to receive such amount of securities or property of the
Company's business combination partner equal to the amount of Warrant Shares
such Holder would have been entitled to had such Holder exercised this
Warrant immediately prior to such reclassification, consolidation, merger,
sale, transfer or share exchange. The terms of any such consolidation,
merger, sale, transfer or share exchange shall include such terms so as to
continue to give to the Holder the right to receive the securities or
property set forth in this Section 8(b) upon any exercise following any such
reclassification, consolidation, merger, sale, transfer or share exchange.
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<PAGE>
(c) If the Company, at any time while this Warrant is
outstanding, shall distribute to all holders of Common Stock (and not to
holders of this Warrant) evidences of its indebtedness or assets or rights
or warrants to subscribe for or purchase any security (excluding those
referred to in Sections 8(a), (b) and (d)), then in each such case the
Exercise Price shall be determined by multiplying the Exercise Price in
effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the Exercise Price determined as of the record date
mentioned above, and of which the numerator shall be such Exercise Price on
such record date less the then fair market value at such record date of the
portion of such assets or evidence of indebtedness so distributed applicable
to one outstanding share of Common Stock as determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm
that regularly examines the financial statements of the Company) (an
"Appraiser") mutually selected in good faith by the holders of a majority in
interest of the Warrants then outstanding and the Company. Any
determination made by the Appraiser shall be final.
(d) If, at any time while this Warrant is outstanding,
the Company shall issue or cause to be issued rights or warrants to acquire
or otherwise sell or distribute shares of Common Stock to all holders of
Common Stock for a consideration per share less than the Exercise Price then
in effect, then, forthwith upon such issue or sale, the Exercise Price shall
be reduced to the price (calculated to the nearest cent) determined by
dividing (i) an amount equal to the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such issue or sale multiplied
by the Exercise Price, and (B) the consideration, if any, received or
receivable by the Company upon such issue or sale by (ii) the total number
of shares of Common Stock outstanding immediately after such issue or sale.
(e) For the purposes of this Section 8, the following
clauses shall also be applicable:
(i) Record Date. In case the Company shall take a
record of the holders of its Common Stock for the purpose of entitling them
(A) to receive a dividend or other distribution payable in Common Stock or
in securities convertible or exchangeable into shares of Common Stock, or
(B) to subscribe for or purchase Common Stock or securities convertible or
exchangeable into shares of Common Stock, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(ii) Treasury Shares. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, and the disposition of any such
shares shall be considered an issue or sale of Common Stock.
(f) All calculations under this Section 8 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
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<PAGE>
(g) If:
(i) the Company shall declare a dividend (or
any other distribution) on its Common
Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a
redemption of its Common Stock; or
(iii) the Company shall authorize the granting
to all holders of the Common Stock
rights or warrants to subscribe for or
purchase any shares of capital stock of
any class or of any rights; or
(iv) the approval of any stockholders of the
Company shall be required in connection
with any reclassification of the Common
Stock of the Company, any consolidation
or merger to which the Company is a
party, any sale or transfer of all or
substantially all of the assets of the
Company, or any compulsory share
exchange whereby the Common Stock is
converted into other securities, cash or
property; or
(v) the Company shall authorize the
voluntary dissolution, liquidation or
winding up of the affairs of the
Company,
then the Company shall cause to be mailed to each Holder at their last
addresses as they shall appear upon the Warrant Register, at least 30
calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating (x) the date on which a record is to be taken
for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y)
the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of Common Stock of record shall
be entitled to exchange their shares of Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding
up; provided, however, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the
corporate action required to be specified in such notice.
9. Payment of Exercise Price. The Holder may pay the Exercise
Price in cash or, in the event that a registration statement covering the
resale of the Warrant Shares and naming the holder thereof as a selling
stockholder thereunder is not effective for the resale of the Warrant Shares
at any time during the term of this Warrant, pursuant to a cashless
exercise, as follows:
-6-
<PAGE>
(a) Cash Exercise. The Holder shall deliver immediately
available funds;
(b) Cashless Exercise. The Holder shall surrender this
Warrant to the Company together with a notice of cashless exercise, in which
event the Company shall issue to the Holder the number of Warrant Shares
determined as follows:
X = Y (A-B)/A
where:
X = the number of Warrant Shares to be issued to the
Holder.
Y = the number of Warrant Shares with respect to which
this Warrant is being exercised.
A = the average of the closing sale prices of the Common
Stock for the five (5) Trading Days immediately prior to
(but not including) the Date of Exercise.
B = the Exercise Price.
For purposes of Rule 144 promulgated under the Securities Act, it is
intended, understood and acknowledged that the Warrant Shares issued in a
cashless exercise transaction shall be deemed to have been acquired by the
Holder, and the holding period for the Warrant Shares shall be deemed to
have been commenced, on the issue date.
10. Fractional Shares. The Company shall not be required to
issue or cause to be issued fractional Warrant Shares on the exercise of
this Warrant. The number of full Warrant Shares which shall be issuable
upon the exercise of this Warrant shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of this Warrant
so presented. If any fraction of a Warrant Share would, except for the
provisions of this Section 10, be issuable on the exercise of this Warrant,
the Company shall, at its option, (i) pay an amount in cash equal to the
Exercise Price multiplied by such fraction or (ii) round the number of
Warrant Shares issuable, up to the next whole number.
11. Notices. Any and all notices or other communications or
deliveries hereunder shall be in writing and shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section, (ii) the business day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iii) upon actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be: (1) if to the
Company, to fonix corporation, 60 East South Temple Street, Suite 1225, Salt
Lake City, Utah 84111, or to Facsimile No.: (801) 328-8778 Attention: Chief
Financial Officer, or (ii) if to the Holder, to the Holder at the address or
facsimile number appearing on the Warrant Register or such other address or
facsimile number as the Holder may provide to the Company in accordance with
this Section 11.
-7-
<PAGE>
12. Warrant Agent.
(a) The Company shall serve as warrant agent under this
Warrant. Upon thirty (30) days' notice to the Holder, the Company may
appoint a new warrant agent.
(b) Any corporation into which the Company or any new
warrant agent may be merged or any corporation resulting from any
consolidation to which the Company or any new warrant agent shall be a party
or any corporation to which the Company or any new warrant agent transfers
substantially all of its corporate trust or shareholders services business
shall be a successor warrant agent under this Warrant without any further
act. Any such successor warrant agent shall promptly cause notice of its
succession as warrant agent to be mailed (by first class mail, postage
prepaid) to the Holder at the Holder's last address as shown on the Warrant
Register.
13. Miscellaneous.
(a) This Warrant shall be binding on and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. This Warrant may be amended only in writing signed by the Company
and the Holder.
(b) Subject to Section 13(a), above, nothing in this
Warrant shall be construed to give to any person or corporation other than
the Company and the Holder any legal or equitable right, remedy or cause
under this Warrant; this Warrant shall be for the sole and exclusive benefit
of the Company and the Holder.
(c) This Warrant shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware
without regard to the principles of conflicts of law thereof.
(d) The headings herein are for convenience only, do not
constitute a part of this Warrant and shall not be deemed to limit or affect
any of the provisions hereof.
(e) In case any one or more of the provisions of this
Warrant shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Warrant shall
not in any way be affected or impaired thereby and the parties will attempt
in good faith to agree upon a valid and enforceable provision which shall be
a commercially reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Warrant.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
-8-
<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 or
certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of
shares of Common Stock to which this Form of Election to Purchase relates,
together with any applicable taxes payable by the undersigned pursuant to
the Warrant.
The undersigned requests that certificates for the shares of Common
Stock issuable upon this exercise be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
________________________________
____________________________________________________________________________
(Please print name and address)
- ----------------------------------------------------------------------------
If the number of shares of Common Stock issuable upon this exercise
shall not be all of the shares of Common Stock which the undersigned is
entitled to purchase in accordance with the enclosed Warrant, the
undersigned requests that a New Warrant (as defined in the Warrant)
evidencing the right to purchase the shares of Common Stock not issuable
pursuant to the exercise evidenced hereby be issued in the name of and
delivered to:
____________________________________________________________________________
(Please print name and address)
- ----------------------------------------------------------------------------
____________________________________________________________________________
Dated:______________ Name of Holder:
(Print)___________________________________
(By:)_____________________________________
(Name:)
(Title:)
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
<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:
__________________________
<PAGE>
EXHIBIT D
ESCROW AGREEMENT
ESCROW AGREEMENT (this "Agreement"), dated as of October 24,
1997, by and among fonix corporation (the "Company"), JNC Opportunity Fund
Ltd. ("JNC"), Diversified Strategies Fund, L.P. ("DSF"), and Robinson
Silverman Pearce Aronsohn & Berman LLP (the "Escrow Agent"). DSF and JNC
are each sometimes hereinafter referred to as a "Purchaser" and collectively
as the "Purchasers."
Recitals
A. Simultaneously with the execution of this Agreement, the
Company and the Purchasers have entered into a Convertible Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Purchase Agreement"),
pursuant to which the Company is issuing and selling to the Purchasers
certain of its Series C Convertible Preferred Stock (the "Preferred Stock")
and certain common stock purchase warrants (the "Warrants"). Capitalized
terms that are used but not defined in this Agreement that are defined in
the Purchase Agreement shall have the meanings set forth in the Purchase
Agreement.
B. The Escrow Agent is willing to act as escrow agent pursuant
to the terms of this Agreement with respect to the receipt and then delivery
of the aggregate purchase price (as described in Section 2.1(a) of the
Purchase Agreement) to be paid by the Purchasers for the Preferred Stock and
the Warrants (the "Purchase Price") and the receipt and then delivery of the
Preferred Stock and the Warrants, together with the Ancillary Closing
Documents (as defined below) and the Purchase Price (collectively, the
"Consideration").
C. Upon the closing of the transaction contemplated by the
Purchase Agreement (the "Closing") and the occurrence of an event described
in Section 2 below, the Escrow Agent shall cause the distribution of the
Consideration in accordance with the terms of this Agreement.
NOW, THEREFORE, IT IS AGREED:
1. Deposit of Consideration.
a. Concurrently with the execution hereof, each Purchaser
shall deposit with the Escrow Agent the portion of the Purchase Price due
for the Preferred Stock and Warrant to be purchased by it at the Closing in
accordance with Section 2.1(c) of the Purchase Agreement, and the Company
shall deliver to the Escrow Agent the Preferred Stock and the Warrants in
accordance with Section 2.1(c) of the Purchase Agreement, and wiring
instructions for the transfer of amounts to be paid to the Company in
accordance with Section 2(b). In addition, the Purchasers and the Company
shall each deposit with the Escrow Agent all other certificates and
<PAGE>
other documents and agreements required under the Purchase Agreement to be
delivered by them at the Closing (such certificates and other documents
being hereinafter referred to as the "Ancillary Closing Documents").
(i) The Purchase Price shall be delivered by the
Purchasers to the Escrow Agent by wire transfer to the following account:
Citibank, N.A.
153 East 53rd Street
New York, NY 10043
ABA No.: 021-000-089
For the Account of
Robinson Silverman Pearce Aronsohn
& Berman LLP
Attorney Business Account
Account No.: 37-204-162
Attention: Alexis Laurenceau
Reference: fonix corporation (10849-8)
(ii) The Preferred Stock, Warrants and the Ancillary
Documents shall be delivered to the Escrow Agent at its address for notice
indicated in Section 5(a).
b. Until termination of this Agreement as set forth in
Section 2, all additional Consideration paid by or which becomes payable
between the Company and the Purchasers shall be deposited with the Escrow
Agent.
c. The Purchasers and the Company understand that all
Consideration delivered to the Escrow Agent pursuant to Section 1(a) shall
be held in escrow in the Escrow Agent's interest bearing business account
until the Closing. After the Purchase Price has been received by the Escrow
Agent and all other conditions of Closing are met, the parties hereto hereby
authorize and instruct the Escrow Agent to promptly effect the Closing.
d. At the Closing, the Escrow Agent is authorized and
directed to deduct from the Purchase Price (i) $15,000 which will be
retained by the Escrow Agent pursuant to Section 6.1 of the Purchase
Agreement and (ii) $7,000, which will be remitted to or as directed by
Encore pursuant to Section 6.1 of the Purchase Agreement. In addition, the
portion of the Purchase Price released to the Company hereunder shall be
reduced by all wire transfer fees incurred thereupon.
2. Terms of Escrow.
a. The Escrow Agent shall hold the Consideration in
escrow until the earlier to occur of (i) the receipt by the Escrow Agent of
the Purchase Price, the Preferred Stock,
-2-
<PAGE>
the Warrants and the Ancillary Closing Documents and a writing instructing
the Closing and (ii) the receipt by the Escrow Agent of a written notice,
executed by the Company or one or more of the Purchasers, stating that the
Purchase Agreement has been terminated in accordance with its terms and
instructing the Escrow Agent with respect to the Purchase Price, the
Preferred Stock, the Warrants and the Ancillary Closing Documents.
b. If the Escrow Agent receives the items referenced in
clause (i) of Section 2(a) prior to its receipt of the notice referenced in
clause (ii) of Section 2(a), then, promptly thereafter, the Escrow Agent
shall deliver (i) to JNC (A) 150,000 shares of Preferred Stock, (B) the JNC
Warrant and (C) any interest earned on account of the portion of the
Purchase Price paid by JNC that shall have accrued through the Closing; (ii)
to DSF (A) 37,500 shares of Preferred Stock, (B) the DSF Warrant and (C) any
interest earned on account of the portion of the Purchase Price paid by DSF
that shall have accrued through the Closing; (iii) to the Company (A) the
Purchase Price (net of amounts described under Section 1(d)) to the Company;
(iv) to or as directed by Encore, $7,000 in accordance with Section 1(d);
and (iv) the Ancillary Closing Documents to the party entitled to receive
the same. In addition, the Escrow Agent shall retain $15,000 of the
Purchase Price on account of its fees pursuant to the Purchase Agreement and
Section 1(d).
c. If the Escrow Agent receives the notice referenced in
clause (ii) of Section 2(a) prior to its receipt of the items referenced in
clause (i) of Section 2(a), then the Escrow Agent shall promptly upon
receipt of such notice return (i) the Purchase Price (together with any
interest earned thereon through such date) to the Purchasers in such amounts
as shall have been delivered to and received by prior thereto, (ii) the
Preferred Stock and Warrants to the Company and (iii) the Ancillary Closing
Documents to the party that delivered the same.
d. If the Escrow Agent, prior to delivering or causing to
be delivered the Consideration in accordance herewith, receives notice of
objection, dispute, or other assertion in accordance with any of the
provisions of this Agreement, the Escrow Agent shall continue to hold the
Consideration until such time as the Escrow Agent shall receive (i) written
instructions jointly executed by the Purchasers and the Company, directing
distribution of such Consideration, or (ii) a certified copy of a judgment,
order or decree of a court of competent jurisdiction, final beyond the right
of appeal, directing the Escrow Agent to distribute said Consideration to
any party hereto or as such judgment, order or decree shall otherwise
specify (including any such order directing the Escrow Agent to deposit the
Consideration into the court rendering such order, pending determination of
any dispute between any of the parties). In addition, the Escrow Agent
shall have the right to deposit any of the Consideration with a court of
competent jurisdiction pursuant to Section 1006 of the New York Civil
Practice Law and Rules without liability to any party if said dispute is not
resolved within 30 days of receipt of any such notice of objection, dispute
or otherwise.
-3-
<PAGE>
3. Duties and Obligations of the Escrow Agent.
a. The parties hereto agree that the duties and
obligations of the Escrow Agent are only such as are herein specifically
provided and no other. The Escrow Agent's duties are as a depositary only,
and the Escrow Agent shall incur no liability whatsoever, except as a direct
result of its willful misconduct.
b. The Escrow Agent may consult with counsel of its
choice, and shall not be liable for any action taken, suffered or omitted by
it in accordance with the advice of such counsel.
c. The Escrow Agent shall not be bound in any way by the
terms of any other agreement to which the Purchasers and the Company are
parties, whether or not it has knowledge thereof, and the Escrow Agent shall
not in any way be required to determine whether or not any other agreement
has been complied with by the Purchasers and the Company, or any other party
thereto. The Escrow Agent shall not be bound by any modification,
amendment, termination, cancellation, rescission or supersession of this
Agreement unless the same shall be in writing and signed by each of the
Purchasers and the Company, and agreed to in writing by the Escrow Agent.
d. In the event that the Escrow Agent shall be uncertain
as to its duties or rights hereunder or shall receive instructions, claims
or demands which, in its opinion, are in conflict with any of the provisions
of this Agreement, it shall be entitled to refrain from taking any action,
other than to keep safely, all Considerations held in escrow until it shall
jointly be directed otherwise in writing by the Purchasers and the Company
or by a final judgment of a court of competent jurisdiction.
e. The Escrow Agent shall be fully protected in relying
upon any written notice, demand, certificate or document which it, in good
faith, believes to be genuine. The Escrow Agent shall not be responsible
for the sufficiency or accuracy of the form, execution, validity or
genuineness of documents or securities now or hereafter deposited hereunder,
or of any endorsement thereon, or for any lack of endorsement thereon, or
for any description therein; nor shall the Escrow Agent be responsible or
liable in any respect on account of the identity, authority or rights of the
persons executing or delivering or purporting to execute or deliver any such
document, security or endorsement.
f. The Escrow Agent shall not be required to institute
legal proceedings of any kind and shall not be required to defend any legal
proceedings which may be instituted against it or in respect of the
Consideration.
g. If the Escrow Agent at any time, in its sole
discretion, deems it necessary or advisable to relinquish custody of the
Consideration, it may do so by giving five (5)
-4-
<PAGE>
days written notice to the parties of its intention and thereafter
delivering the consideration to any other escrow agent mutually agreeable to
the Purchasers and the Company and, if no such escrow agent shall be
selected within three days of the Escrow Agent's notification to the
Purchasers and the Company of its desire to so relinquish custody of the
Consideration, then the Escrow Agent may do so by delivering the
Consideration (a) to any bank or trust company in the Borough of Manhattan,
City and State of New York, which is willing to act as escrow agent
thereunder in place and instead of the Escrow Agent, or (b) to the clerk or
other proper officer of a court of competent jurisdiction as may be
permitted by law within the State, County and City of New York. The fee of
any such bank or trust company or court officer shall be borne one-half by
the Purchasers and one-half by the Company. Upon such delivery, the Escrow
Agent shall be discharged from any and all responsibility or liability with
respect to the Consideration and the Company and the Purchasers shall
promptly pay to the Escrow Agent all monies which may be owed it for its
services hereunder, including, but not limited to, reimbursement of its out-
of-pocket expenses pursuant to paragraph (i) below.
h. This Agreement shall not create any fiduciary duty on
the Escrow Agent's part to the Purchasers or the Company, nor disqualify the
Escrow Agent from representing either party hereto in any dispute with the
other, including any dispute with respect to the Consideration. The Company
understands that the Escrow Agent has acted and will continue to act as
counsel to the Purchasers.
i. The reasonable out-of-pocket expenses paid or incurred
by the Escrow Agent in the administration of its duties hereunder,
including, but not limited to, all counsel and advisors' and agents' fees
and all taxes or other governmental charges, if any, shall be paid by one-
half by the Purchasers and one-half by the Company.
4. Indemnification. The Purchasers and the Company, jointly
and severally, hereby indemnify and hold the Escrow Agent harmless from and
against any and all losses, damages, taxes, liabilities and expenses that
may be incurred, directly or indirectly, by the Escrow Agent, arising out of
or in connection with its acceptance of appointment as the Escrow Agent
hereunder and/or the performance of its duties pursuant to this Agreement,
including, but not limited to, all legal costs and expenses of the Escrow
Agent incurred defending itself against any claim or liability in connection
with its performance hereunder and the costs of recovery of amounts pursuant
to this Section 4.
5. Miscellaneous.
a. All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the other
parties hereto, and shall be deemed to have been duly given when (i) if
delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of
proof of sending thereof, (iii) if sent by nationally recognized overnight
delivery service (receipt requested), the next business day or (iv) if
mailed by first-class registered or certified mail, return
-5-
<PAGE>
receipt requested, postage prepaid, four days after posting in the U.S.
mails, in each case if delivered to the following addresses:
If to the Company: fonix corporation
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, P.C.
Suite 850 Key Bank Tower
50 South Main Street
Salt Lake City, Utah 84144
Facsimile No.: (801) 538-2425
Attn: Jeffrey M. Jones, Esq.
If to JNC: JNC Opportunity Fund Ltd.
Olympia Capital (Cayman) Ltd.
c/o Olympia Capital (Bermuda) Ltd.
Williams House
20 Reid Street
Hamilton HM11
Bermuda
Facsimile No.: (441) 295-2305
Attn: Alan Brown
If to DSF: Diversified Strategies Fund, L.P.
c/o Encore Capital Management, L.L.C.
12007 Sunrise Valley Drive
Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
With copies to (for Encore Capital Management, L.L.C.
communications to 12007 Sunrise Valley Drive
either Purchaser): Suite 460
Reston, VA 20191
Facsimile No.: (703) 476-7711
Attn: Neil T. Chau
-6-
<PAGE>
If to the Escrow Agent Robinson Silverman Pearce Aronsohn &
(the Escrow Agent shall Berman LLP
receive copies of all 1290 Avenue of the Americas
communications under New York, NY 10104 this Agreement)
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen, Esq.
or at such other address as any of the parties to this Agreement may
hereafter designate in the manner set forth above to the others.
(b) This Agreement shall be construed and enforced in
accordance with the law of the State of New York applicable to contracts
entered into and performed entirely within New York.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be signed the day and year first above written.
fonix corporation
By:_____________________________________
Name:
Title:
JNC OPPORTUNITY FUND LTD.
By: ___________________________
Alan Brown
Director
DIVERSIFIED STRATEGIES FUND, L.P.
By: Encore Capital Management, L.L.C.
By:___________________________
Neil T. Chau
Director
ROBINSON SILVERMAN PEARCE
ARONSOHN & BERMAN LLP
By:____________________________________
A Member of the Firm
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 19,967,309
<SECURITIES> 0
<RECEIVABLES> 250,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,168,670
<PP&E> 1,985,575
<DEPRECIATION> 315,727
<TOTAL-ASSETS> 26,013,605
<CURRENT-LIABILITIES> 22,056,642
<BONDS> 0
0
46
<COMMON> 4,229
<OTHER-SE> 3,952,688
<TOTAL-LIABILITY-AND-EQUITY> 26,013,605
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,463,988
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,203,735
<INCOME-PRETAX> (13,854,991)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,854,991)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,069,364)
<CHANGES> 0
<NET-INCOME> (13,854,991)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> 0
</TABLE>
